Saturday, July 8, 2006

MOSCOW — When President Vladimir Putin calls a staff meeting, the heads of some of Russia’s most prominent companies are at his beck and call.

Alongside his drive to re-establish Kremlin control over the nation’s political life, Mr. Putin aggressively has reasserted state domination over major economic sectors — in part by installing members of his own team, many dating back to his days in St. Petersburg, into key positions in some major state-controlled companies.

Deputy Prime Minister Dmitry Medvedev, a Putin protege, chairs the board of Gazprom, the world’s largest gas company. A Kremlin deputy chief of staff, Igor Sechin, is chairman of the board of the Rosneft oil company, which plans a high-profile, $10 billion initial public offering on the London Stock Exchange this summer.

And Mr. Putin’s chief of staff, Sergei Sobyanin, recently was named chairman of the nuclear fuel company TVEL, the springboard for what the Kremlin hopes will be a renaissance of the Russian nuclear industry.

The list of government officials doubling as captains of industry goes on, reflecting deeply intertwined state and business interests. Mr. Putin’s influence in so many industries raises questions about whether politics won’t trump economics in the end when business decisions are made.

“We’re at a stage where in order to get control … President Putin wants to make sure the person he has confidence in is overseeing all this stuff,” says Andrew Somers, head of the American Chamber of Commerce in Moscow. “But we do think in the long run it’s inefficient, it raises questions on how decisions are made and complicates the negotiation process.”

It also means Russia is out of step with the developed countries that make up the Group of Eight, the elite club of nations to which Mr. Putin plays host this year.

Russia’s G-8 partners have expressed concern about the state’s growing role — especially the Kremlin’s influence in the volatile energy market, where many European countries fear they could become hostage to a Russian monopoly.

Mr. Putin also has come under criticism from other G-8 leaders for the government-sanctioned carving up of one-time tycoon Mikhail Khodorkovsky’s Yukos oil company.

Khodorkovsky, who sponsored opposition parties in the run-up to parliamentary elections in 2003, now is in prison in Siberia, while the remainder of his company — once the nation’s largest — is in receivership. Rosneft snapped up the choicest pieces after a murky state auction.

The Yukos example made clear how far the Kremlin is prepared to go to press Mr. Putin’s campaign to tighten not just economic but also political control in Russia. It is a topic that G-8 leaders likely will raise — if gingerly — at the three-day summit in St. Petersburg that opens Saturday.

Mr. Putin’s approach is more than the instinctive retreat from free markets of a Soviet-trained former bureaucrat. It is also a reaction to Russia’s 1998 financial crisis, when the state was forced to write off $40 billion in debt and sharply devalue its currency — a humiliating comedown for a one-time superpower and a lesson for Mr. Putin’s circle of the perils of lax state involvement in the economy.

“We’ve heard from the government several times over the past five, six years that they believe one of the reasons Russia ran into the crisis of 1998 was not only because the oil price went down but simply because the government had removed itself from an active role in managing the economy,” says Chris Weafer, chief strategist with Moscow’s Alfa Bank.

So Mr. Putin’s administration has consolidated control over strategic industries, such as oil and natural gas, and worked to cobble together “national champion” companies in sectors such as aviation and nuclear power.

“We are talking about the creation of major international private corporations and promoting them on the world market,” says Arkady Dvorkovich, Mr. Putin’s economic adviser.

“Yes, part of these companies are under state control and this is because the period we are living in — the transitional period from one model of economic development to another,” he says. “These companies would be expected to adhere to standards of efficiency and transparency associated with privately run corporations.”

But economists say state involvement is fraught with negative consequences, including increased bureaucratic red tape and discouragement of entrepreneurship — with a resulting slowdown in growth.

No company better illustrates those pitfalls than Gazprom, the natural-gas giant.

“Gazprom is one of the most inefficient companies in the country, because it survives due to two things: tax subsidies and continual borrowing,” says Georgy Satarov, a former aide to Mr. Putin’s predecessor, Boris Yeltsin, and head of the Indem think tank.

In a letter to minority shareholders last year, Vadim Kleiner, research director for the Hermitage Capital Management fund, said some of the worst mismanagement at Gazprom had ended, but significant inefficiencies and soaring operating costs remained.

“Operating and capital expenditures continue to rise alarmingly, apparently untethered to any notions of fiscal restraint,” Mr. Kleiner wrote.

The company, with 330,000 employees on its payroll, has played a critical role not only in economic affairs but in Mr. Putin’s political maneuvering.

Gazprom’s media arm was used during Mr. Putin’s first term to eliminate several critical newspapers and television channels, leading to a near-state monopoly on the airwaves. The Kremlin has wielded it as an instrument of pressure against former Soviet republics, most notably Ukraine, to which it cut gas supplies in an ugly price dispute that led to brief but alarming supply disruptions to Europe.

Gazprom is also the Russian partner in one of the biggest gas development tenders in decades, the 131 trillion-cubic-foot Shtokman field in the Barents Sea. Gazprom last year shortlisted U.S.-based Chevron Corp., ConocoPhillips, Norway’s Statoil ASA and Norsk Hydro ASA, and France’s Total SA as potential partners. A decision was expected in April, but Gazprom has dragged its feet.

The Kremlin’s harshest critics contend that much as in the Yeltsin era, when a class of Kremlin-connected magnates amassed enormous wealth out of state assets, Mr. Putin and his circle are motivated less by patriotism than by the desire to spin power into personal wealth.

Many critics speculate that Mr. Putin himself has his eyes on the helm of the Gazprom behemoth after 2008, when he constitutionally is required to step down from the presidency after two terms.

“His wish is to become a super-oligarch,” Mr. Satarov says.

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