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Moscow Times
April 11, 2005
Putin Facing a Backlash From Business
By Catherine Belton
Staff Writer

President Vladimir Putin is facing a growing backlash from leading businessmen over what they see as increasing state interference in the economy, a rising tide of state corruption, paralysis in policymaking and mounting jitters over whether political stability can be maintained.

Even though Putin has attempted to reassure business leaders in recent weeks with promises of improvements to the investment climate, including drawing a line under the controversial privatizations of the 1990s, businessmen interviewed last week said his overtures fell short of what was needed.

"The state is not being managed, no decisions are being made. There is no team managing the economy," said one leading businessman, speaking on condition of anonymity. "We are working from one day to the next. But business is not happy. There are not equal conditions for all. ... We need to see long-term prognoses. Business is tired of promises that are not being kept.

"The state is like a big corporation and the management of it has just gotten worse. When management gets worse, normally the shareholders try to change the leadership," he said.

After spending most of his five years in power unchallenged and foot-sure on the economy amid high oil prices that have filled state coffers to record levels, suddenly Putin is starting to look isolated and weak. Economic reforms have stalled amid badly snarled social benefit reforms and infighting between the statist and liberal wings of the government. Even though oil prices are soaring at around $50 per barrel, economic growth is predicted to slow this year as the state increases its clout over strategic sectors of the economy, such as oil, where growth rates are expected to fall by roughly half this year. Officials at state energy companies Gazprom and Rosneft, meanwhile, have been openly bickering over control of the spoils of the state's takeover of Yukos' biggest production unit.

Although Putin has spent much of his presidency consolidating control over all levers of power, this strategy has only served to isolate him and might not be enough to shield him from the kind of popular uprisings that led to regime change in Ukraine and Kyrgyzstan, Kremlin insiders, opposition politicians and some businessmen say.

The Kremlin has been attempting to mend the rift. In an unprecedented interview in Expert magazine last week, chief of staff Dmitry Medvedev warned of the "monstrous" consequences if the country should collapse, which he said could occur if the elites did not join in supporting Putin's regime.

But amid rising fears of political instability coming from new sources of opposition, such as socialist and nationalist forces, and an arbitrary investment climate caused in large part by scares over a slew of tax probes, some major businesses appear to be sending their money to safer climes.

Most big investments undertaken by big business in recent times have been channeled into acquisitions in other countries. Although that is part of a natural global expansion process, it is also a sign of jitters over the business climate at home, analysts say. Most recently, Mikhail Fridman's Alfa Group spent more than $3 billion for a 27 percent stake in Turkey's biggest mobile phone firm, Turkcell.

Meanwhile, capital flight tripled to nearly $8 billion last year, and fixed investment growth in the local economy slowed down sharply from 12.9 percent in 2003 to less than 10 percent. The investment drop is already evident in a much-decried dearth of goods to supply growing consumer demand, a factor that is contributing to growing inflation.

Some major businesses such as Alfa Group are increasingly focused on making investments in other former Soviet states, including Ukraine and Kazakhstan, amid increasing uncertainty over how long Putin can maintain political stability and a lack of a clear economic program, according to one source close to the group.

There are signs of panic over future stability from the Kremlin itself, including the Medvedev interview, said Stanislav Belkovsky, the head of the Council for National Strategy, who said he was called just last week by a Kremlin spin doctor in a scrape over what to do next. "They're frightened everything could blow up at any minute," he said. "They still don't understand the Ukrainian revolution. They were 100 percent certain [Kremlin-backed candidate Viktor Yanukovych] would win and the people would leave the streets because it was freezing cold. It was a tragic misunderstanding of the situation. Now they are afraid of everything. They are even afraid of their own shadow. They have lost the key to understanding the political situation.

"The Kremlin has gathered huge financial resources and administrative resources, but it might not be enough," Belkovsky said.

Some businessmen say the Kremlin needs to move faster on social problems or eventually face similar unrest at home. Tens of thousands of pensioners took to the streets this winter in demonstrations over botched social benefit reforms that were eventually quelled when Putin signed off on pension hikes.

"Macroeconomic success has to be translated into improving the lives of the people," said Alexander Lebedev, the billionaire owner of the National Reserve Corporation, which has holdings in aviation, construction and banking. "There will never be any threat of any tulip, green, cucumber, tomato or orange revolutions ... if the social problems of the people are decided."

But the Kremlin's takeover of alternative sources of power such as the parliament and the media could slow down its reaction time, he said in an interview last week. "The government is just resting on the laurels of high oil prices. They don't have to do anything."

A former KGB man, Lebedev was once considered a stalwart backer of Putin's government policies. But recently he has moved into politics, launching an unsuccessful bid for Moscow mayor in 2003. Even though he is a member of the pro-Kremlin Duma faction United Russia, this year he has moved from battling on a regional level to openly criticizing federal policies.

"Before 2004, everything that was being done by the Kremlin was without doubt the right thing," he said. "They were stabilizing the political situation; there was tax reform, [moves toward] administrative reform and pension reform. All this was correct.

"But somewhere along the line a year and a half ago, we reached the point where we needed to stop strengthening the power vertical and get busy with social reforms," he said. "But look what happened: Pension reform collapsed, administrative reforms collapsed, and with tax -- you see for yourself -- now the problem is with tax administration. No one believes the tax authorities anymore. And the monetization of benefits, you see how terrible this was, while the cancellation of elections for governors was the wrong move."

In the meantime, he said, state officials are too busy lining their own pockets, and are starting to challenge the oligarchs who won property in the 1990s for their ability to toss money to the wind.

"Name me just one official of a state corporation who is not a multi- multimillionaire," Lebedev said. "This is a new phenomenon we have to fight. We have already beaten the private oligarchy. They have either run away or they are trembling with fear. But now there are state oligarchs who are spending billions of dollars abroad. ... The residents of European countries see the yachts they are sailing in, they see the hotels they are staying in, which planes they fly in and which jewelry boutiques they frequent and what they buy.

"We are disgracing ourselves all over again," he said, identifying the state officials only involved as the heads of major state-owned corporations but declining to give names. "Of course we will not go far with such state officials. They don't care about the rest of the people who live in this country."

Other businessmen agree that what they see is a new carve-up for control of financial flows. "This reminds me very much of what was happening at the beginning of the 1990s," said the other businessman. "For a number of people working for the state, all the limits have been lifted. These people are trying to redistribute financial flows in their favor and are trying to use the levers of the state for their own gain.

"This is the East. There is a new clan, and for this clan all is forgiven," he said.

But as fears grow over where things are heading, the worsening situation could prove to be a powerful motivation for the Kremlin to wake up and make efforts to rectify the situation, he said.

During his meeting with big business under the auspices of the Russian Union of Industrialists and Entrepreneurs just over two weeks ago, Putin adopted the friendliest tone he has in years, businessmen and analysts say. Before that meeting his comments to businesses mainly concentrated on the need for greater tax discipline, and this time he vowed to improve the administration of taxes and cut down the number of tax checks.

He also said the Civil Code would be changed to lower the statute of limitations on privatization deals from 10 years to three in a signal to businesses that they should no longer fear attacks on the property they gained in the wild deals of the 1990s. Many commentators, however, have pointed out that the 10-year statute of limitations for property won in the controversial loans-for-shares auctions of 1995 and 1996 is about to run out soon anyway.

"Putin is beginning to understand that businesses could start to leave and find another lover. But this is not enough. I hope this is not the only step," said the businessman.

Vladimir Potanin, president of Interros holding group, which controls Norilsk Nickel, also has appeared to indicate that Putin's moves have not been enough. In a speech to the Association of Russian Managers last week, he continued to criticize the state's growing role in the economy. "I am not sure the economy needs a strengthening of the state's role -- rather the opposite," he said.

Amid continuing fears among big businesses that they could face retribution for political activities, it is not clear yet whether they will take organized moves to try to fight back. "Big business is very disparate. It's every man for himself. They've always been that way," Lebedev said. "They are still afraid."

But slowly and silently, parts of big business appear to be seeking out opposition political groups.

"We do have contacts," said Grigory Yavlinsky, leader of the opposition liberal party Yabloko. "But they are very afraid of pressure from the authorities. ... I think they are ready to fight, but they are frightened to say this."

Others could coalesce around former Prime Minister Mikhail Kasyanov, who recently returned to the political stage by criticizing government rollbacks on democracy and liberal reform, and indicating he might run for the presidency in 2008. But so far only Unified Energy Systems chief Anatoly Chubais, a founder of the Union of Right Forces, and oligarchs-in-exile Boris Berezovsky and Leonid Nevzlin, who are openly spearheading opposition drives, have publicly said they back Kasyanov.

People are still living better than they have at any time over the past 15 years, Lebedev said. "We have a good macroeconomic situation, but we need to make it better."