The Man With the Plan for Russia Inc.

Posted in Russia | 06-Jun-06 | Author: Stephen Boykewich| Source: Moscow Times

Vladimir Litvinenko gesturing toward a map showing Russia's mineral deposits in his office at the mining institute.
Vladimir Litvinenko gesturing toward a map showing Russia's mineral deposits in his office at the mining institute.
ST. PETERSBURG -- Using natural resources for geopolitical gain may upset the West, but for the man who was helping shape President Vladimir Putin's energy strategy years before he took office, it's merely common sense.

"There was a time when salt was the most important resource in the world. Then it was metal of any kind, then later it became gold," said Vladimir Litvinenko, rector of the St. Petersburg State Mining Institute, in an interview last week in his luxuriously appointed office.

"In the specific circumstances the world finds itself in today, the most important resources are hydrocarbons," he said. "They're the main instrument in our hands -- particularly in Putin's -- and our strongest argument in geopolitics."

As though to emphasize the point, a 2-meter-wide map on the wall of the office displayed every known mineral and hydrocarbon deposit in the country. Behind Litvinenko hung a hand-painted portrait of a young Putin, who consulted with the rector while writing his 1997 dissertation on state management of natural resources at the institute.

The 51-year-old rector, dressed in the institute's gold-trimmed, military-style uniform, was by turns intense and expansive over the course of a 90-minute interview.

"When Vladimir Vladimirovich was working on his dissertation, he was also working on the creation of free economic zones in St. Petersburg" during his 1994-96 tenure as the city's deputy mayor, Litvinenko said. "He came to understand then that the success of these zones directly depended on how effectively mineral resources were managed in the region. His work at that time very clearly set the course for his current strategy."

'A Truly Russian Monster'

The state's increasingly assertive control over so-called strategic sectors during Putin's second term -- the natural resources sector foremost among them, but also metals, automotive, aviation and other industries -- has rattled foreign investors and governments alike.

While investors lament lost opportunities and charge that state control brings inefficiency and corruption, the European Union and United States say the Kremlin is wielding energy supplies as a political weapon -- especially via state monopoly Gazprom.

Litvinenko said Russia was simply securing its national interests. "Gazprom is our monster, there's no question. It does have its problems: There are questions as to why its market capitalization is so high given its relatively low turnover," as well as problems of opaque and inefficient management, he said. "But it's a truly Russian monster, and we need to do all we can to make sure it is a serious player on world markets."

For opponents of Russia's current course, Gazprom crystallizes the hazards of Russia's transformation to a corporate state with Putin at the helm. Including subsidiaries, 38 percent of the company's assets are outside the energy sector, including holdings in construction, banking, media, agriculture and other sectors.

The company employs over 300,000 people, and critics say that many of its noncore acquisitions have been politically motivated and are a drag on profits.

Gazprom also drew fire for cutting gas supplies to Ukraine during a price dispute in January, leading to supply shortfalls in Europe and doubts about Russia's reliability as an energy supplier.

Still, a rush to buy Gazprom stock this year has made the company the world's third-largest by market capitalization, at $250 billion. The monopoly continues to expand its reach by acquiring pipeline infrastructure and storage capacity in its European markets, and electricity generation facilities at home -- precisely the path Litvinenko recommended several years ago.

"A dramatic change has taken place in the world in major energy companies' strategy and understanding, and there is an analogous situation in Russia," Litvinenko said. "Instead of simply extracting resources and selling them at the highest possible price," he said, modern energy giants ought to invest in every link of the energy chain, from geological surveys to electricity generation.

Gazprom also controls the fate of long-frustrated U.S. hopes for a major energy deal with Russia. U.S. majors Chevron and ConocoPhilips are among five foreign companies short-listed as possible partners to develop the huge Shtokman gas field in the Barents Sea, which could be a key supplier of liquefied natural gas to the United States and Europe.

Foreign companies have privately expressed frustration over a lack of clear criteria for Gazprom's choice and repeated delays in the announcement, currently expected in August.

Litvinenko said they should be in no hurry. "Today, Russia can fill its domestic needs and export contracts entirely using its continental gas resources. That's a fact," he said.

"The Barents Sea is a special region for our interests," Litvinenko said. "What do we need pressure from foreign companies for? We need to perfect the conception of the entire project, and only then should foreign partners be announced."

Putin, then Boris Yeltsin's deputy chief of staff, posing with friends at a party in St. Petersburg in 1997. From…
Putin, then Boris Yeltsin's deputy chief of staff, posing with friends at a party in St. Petersburg in 1997. From right, Alexander Bespalov, local newspaper editors Anna Manilova and Natalya Chaplina, and an unidentified man.
The Inner Circle

There are numerous indications that Litvinenko's opinions carry more weight than the average academic's.

Aside from his personal friendship with Putin -- and chairmanship of both his presidential campaigns in St. Petersburg -- Litvinenko is a member of the government's recently formed energy policy committee, which meets monthly to advise Prime Minister Mikhail Fradkov. Litvinenko also led a successful campaign last year to have a subsoil resources bill withdrawn from the State Duma for further revision.

Vladimir Milov, a former deputy energy minister who heads the independent Institute of Energy Policy, said there was one major reason not to overestimate Litvinenko's role in Kremlin energy strategy.

"I doubt that what's happening now can be called a strategy," Milov said. "It's difficult to say that an academic can have influence over asset transfers that benefit a small number of people in government and business and are leading to stagnating production and other problems developing the sector."

Litvinenko's recommendations that Gazprom buy downstream assets in Europe, Milov said, "were brought into force not because he recommended them, but because they were beneficial for a few people doing business in Putin's inner circle."

Gazprom CEO Alexei Miller worked with Putin in the St. Petersburg mayor's office during the 1990s, as did Gazprom chairman and First Deputy Prime Minister Dmitry Medvedev and Rosneft chairman and presidential aide Igor Sechin. Sechin wrote a doctoral dissertation at Litvinenko's institute a year after Putin did.

The predominance of the St. Petersburg circle in the current power elite has fueled on ongoing debate about the motives behind increasing state control of strategic sectors, but the trend itself is hard to miss.

"It's the key part of the government's planned industrial policy," said Chris Weafer, chief strategist at Alfa Bank. "Instead of putting wealth into the broader economy, the government is putting together strategic industries. It is over these that they will exercise a significant amount of political control, putting in the financial and administrative resources needed to support or build on current growth."

The three main categories of strategic industries, Weafer said, are high-profit natural resources; key infrastructure such as banks, pipelines, and electricity generation; and sectors of perceived strategic advantage, such as nuclear power, technology and aviation.

One rapidly growing state giant is secretive arms trader Rosoboronexport, headed by Sergei Chemezov, a longtime Putin ally. Last year, the firm took control of AvtoVAZ, the country's largest carmaker. It is now reportedly in talks to acquire a stake in VSMPO-Avisma, the world's largest titanium maker, and St. Petersburg's two military shipyards.

News that Kremlin-friendly oligarch Roman Abramovich is seeking a major stake in steelmaker Evraz has led to speculation of Kremlin plans for a state steel giant with Abramovich at the helm.

The Chukotka governor has already demonstrated his loyalty to the state's new strategy, selling his Sibneft oil company to Gazprom for $13 billion last September.

Alexei Miller and Viktor Khristenko with Putin at Novo-Ogaryovo on Jan. 4 after the Ukraine gas deal was signed.
Alexei Miller and Viktor Khristenko with Putin at Novo-Ogaryovo on Jan. 4 after the Ukraine gas deal was signed.
Blueprint for Russia Inc.

Litvinenko traces the roots of the state corporatist policy to Putin's dissertation -- as do Clifford Gaddy and Igor Danchenko, scholars at the Brookings Institution, a Washington think tank.

"In very general terms, according to Putin, effectiveness or strategy is set by the state -- with him as CEO of Russia, Inc. -- and efficiency is up to private companies and the market to figure out," Danchenko said.

The scholars' work set off a scandal in the Western media earlier this year when they discovered that 16 of the dissertation's 218 pages coincided virtually word for word with a Russian translation of a U.S. economics textbook.

"The research [we] conducted was not about accusing Putin of plagiarism," Danchenko said. "Our research focused on convergence, the subject with which the Soviet planners were preoccupied since the 1970s: How can we make our system more effective without turning it into the Western system?"

Danchenko said the roots of Putin's strategy stretched back to fascist leader Benito Mussolini's policy of state corporatism, which revived the Italian economy in the 1930s by forming 22 corporations that worked in close coordination with the state.

"From the point of view of theory, government control over key sectors is sensible and correct. The problem is that there's no government," said Mikhail Delyagin, a left-leaning economist at the Institute for Globalization Studies.

"Government is something that serves the interests of society. When people in government are working only for themselves and their own profit ... there is a strong suspicion that the motivation is not modernization, but corruption," Delyagin said.

Milov expressed skepticism about the importance of Putin's dissertation.

"I don't rule out that Putin really thinks mineral resources are truly important for the country's development, but you don't need a doctorate to think that. Many people on the street will tell you the same thing," Milov said.

"I think Putin acts mostly according to his instincts. It's entirely possible that while he was writing his dissertation, he came to this conviction. But the instinct is the primary thing. The dissertation is purely secondary."

If so, Putin's instincts were also on display in early 1999, when the then-chief of the Federal Security Service published an article in the Mining Institute's journal arguing "the stable development of the Russian economy in the coming years needs to be based on the planned growth of its component parts, including above all mineral resources."

Kremlin-connected analyst Sergei Markov said that much criticism was driven by "elementary jealousy."

Domestic advocates of radical free-market reforms in the 1990s "bear the responsibility for terrible economic losses. They naturally want to justify themselves now," Markov said.

Foreign critics, Markov said, "fear the revival of Russia not only as a great country, but as an economic power. Competition has become another reason for criticism."

Litvinenko emphasized what he said was Russia's immense potential.

"Given the amount of resource wealth we have per capita, Russia theoretically ought to be 17 times as rich as Europe, and seven or eight times as rich as the United States," he said.

Russia has a long way to go in terms of increasing energy efficiency, improving its business climate and modernizing infrastructure before it can take full advantage of its wealth, Litvinenko said.

"But in principle, if these resources are developed effectively, there won't be any limits," he said.