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Medvedev's Plan to Oust Putin Allies Tests Limits of Power

April 1 (Bloomberg) -- Russian President Dmitry Medvedev may be risking a power struggle with Vladimir Putin after an aide announced plans to oust Putin allies from some of the biggest state-owned companies a year before elections.

Medvedev this week will submit orders to dismiss several government officials from state enterprises, including Deputy Prime Minister Igor Sechin as chairman of OAO Rosneft, the largest Russian oil company, Arkady Dvorkovich, his chief economic aide, said yesterday. Sechin has worked with Prime Minister Putin in several capacities since the two were colleagues at the St. Petersburg mayor's office in the first half of the 1990s.

Putin, 58, a former KGB colonel, kept power as prime minister after selecting Medvedev, 45, in 2008 to succeed him as president because of a constitutional ban on three consecutive terms. With 12 months left before the next presidential vote, it's still uncertain which of the two men will run and Medvedev's move may cause the biggest rift between them yet.

"This risks triggering a war between the elites," said Alexei Mukhin, director of the Moscow-based Center for Political Information, a research group. "It will mean a real conflict with Putin."

Aside from Sechin, Finance Minister Alexei Kudrin should also give up his post as chairman of the supervisory board of VTB Bank, Russia's second-largest bank, Dvorkovich said.

St. Petersburg Connection

Transportation Minister Igor Levitin should be replaced at the biggest Russian airline OAO Aeroflot and Moscow's Sheremetyevo airport, while First Deputy Prime Minister Viktor Zubkov should leave his job at Russian Agricultural Bank, known as Rosselkhozbank, he said. Kudrin and Zubkov are also associates of Putin from his hometown St. Petersburg.

There's "no conflict" between Medvedev and Putin, who agree on the need to "improve the efficiency of governance," according to Dmitry Peskov, Putin's spokesman.

"The subject of replacing officials with independent directors has long been on the agenda," he said by phone yesterday. "It is another matter, in the context of carrying out the instructions of the head of state, how we'll monitor the implementation of state directives in those companies where the government is the majority shareholder."

Medvedev first advocated the idea during his presidential election campaign in February 2008. The president's move now to confront Putin allies who remain dominant in the government shows that he has decided to assert himself, said Dmitry Oreshkin, an independent political analyst in Moscow.

'First Independent Move'

"This is a major development which marks the first independent move by Medvedev touching the interests of influential members of Putin's team," he said.

Medvedev and Putin showed public discord last week over the U.N.-sanctioned military intervention in Libya. The president, who has spearheaded Russia's efforts to improve ties with the U.S. and Europe, rebuked the prime minister for likening the allied campaign to a "crusade."

A lawyer also from St. Petersburg, Medvedev has tried to widen Russia's investment appeal beyond energy to help accelerate economic growth to 10 percent from last year's 4 percent rate and match the pace of its BRIC rivals.

The president on March 30 announced that independent directors may replace ministers and other officials in industries they regulate by mid-year as part of a plan to improve the investment climate. A proposal to cut a social tax for businesses, also part of Medvedev's 10-point program, may cost the budget as much as 800 billion rubles ($28 billion) of revenue, Putin said yesterday.

'No Textbook Solutions'

"There are no textbook solutions and we will have to labor quite a bit to find" any, Peskov said. "We don't yet know from which sources" to make up for the lost revenue.

Foreign direct investment is at an "unacceptably low level," the president said on March 21. He has sought to lure capital by promoting Moscow as a financial center and creating a private equity fund to allow the government to share risks with foreign investors and help "modernize" the economy.

"Minority investors should see Medvedev's move as a positive if there is a sweeping change at Rosneft and if these state companies become better managed and more transparent as a result," said Dmitri Kryukov, founder of Moscow-based hedge fund Verno Capital, which manages about $140 million.

Financial Opportunities

Sechin and the other officials will fight to keep their state company jobs, which give them financial opportunities beyond those provided by government salaries, said Mukhin of the Center for Political Information.

Some of the ministers might prefer to leave the government and follow the example of German Gref, OAO Sberbank's chief executive officer and Putin's former economy minister, Charles Robertson, Renaissance Capital's chief global economist in London, said by e-mail.

Searching for clashes within Russia's elite is like "looking for a nonexistent black cat in a dark room," said Peskov, Putin's spokesman.

This "has become a favorite pastime for analysts," he said. "Replacing officials with independent directors and lowering the social tax are coordinated positions."

Medvedev wants to win a second term in 2012, Dvorkovich said last year. Putin also hasn't ruled out running for the top position again.

Independent Politician

If the decision to remove Putin's allies from state companies is implemented, it would show that Medvedev intends to carry out his free-market policies and is an independent politician, said Masha Lipman, an analyst at the Carnegie Moscow Center.

"This can be interpreted as an attempt to show his authority," she said. "This would be a very important step weakening people who are very strong players, who are powerful by virtue of being close to Putin."

Medvedev, who in his first year in office pushed through a constitutional change extending the presidential term to six years from four, and his team would be able to challenge the political and economic interests of Putin's associates, said Oreshkin.

"He could show a completely different side," he said. "The closer the elections come, the more aggressively he is acting."

Article ©2011 BLOOMBERG L.P. ALL RIGHTS RESERVED; article originally appeared at http://www.bloomberg.com/news/2011-03-31/medvedev-tests-limits-of-power-with-plan-to-oust-putin-allies.html

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