A Corruption Trial Splits the Kremlin; The former economy minister got caught in a sting, and no one knows where Putin stands.

(Bloomberg – bloomberg.com – Evgenia Pismennaya, Ilya Arkhipov, Henry Meyer, Irina Reznik – October 11, 2017)

The first prosecution of a minister for graft under Russian President Vladimir Putin contains the kind of details you’d expect in a spy novel, from hidden microphones and coded hand signals to homemade sausages and a bag stuffed with cash. The case against former Economy Minister Alexei Ulyukayev, who’s accused of taking a bribe from Igor Sechin, the powerful head of state-run oil giant Rosneft Oil Co., is keeping rival camps off balance as Putin prepares for what will likely be his final election in March.

With Putin limited by the constitution to one more six-year term, the covert jockeying to succeed him has already begun-and warring camps are on edge because Putin has yet to show his hand. “There’s a struggle for power in Putin’s politburo,” says Evgeny Minchenko, a political consultant whose clients include the government. “It’s getting more intense because we’re gearing up for a potential changing of the guard.”

The state’s case against Ulyukayev starts in a hotel in India and ends with a sting that Sechin, a veteran of military intelligence who’s worked for Putin since the 1990s, organized at Rosneft’s Moscow headquarters. The trial, which started in August, resumes on Oct. 12 and may run into November. Sechin set the operation in motion last October, when prosecutors say Ulyukayev demanded $2 million for dropping his opposition to Rosneft’s buying Bashneft PJSC, an oil company Russia seized from billionaire Vladimir Yevtushenkov after he was hit with money-laundering charges that were later dropped. Prosecutors allege that Ulyukayev indicated the amount of money he wanted by flashing a “double-finger gesture” while Sechin was playing billiards at their hotel during an international summit in Goa, India.

Back in Moscow a month later, Ulyukayev arrived at Sechin’s office, where their conversation was secretly taped. The transcript has Sechin presenting Ulyukayev with two “gifts”-a basket of sausages made from the meat of animals Sechin hunted and a locked bag Ulyukayev says he thought held fine wine. The bag turned out to be full of dollars. Federal Security Service agents were waiting to arrest Ulyukayev as he tried to leave Rosneft’s headquarters.

Afterward, presidential spokesman Dmitry Peskov said Putin had been aware of the sting from the start. Two people familiar with the matter say Putin also supported-if not ordered-the surprise decision by the judge to allow the transcripts to be read into the public record. The transcripts have been damaging to Sechin, who’s built Rosneft into a colossus by snapping up once-private producers, often with the help of law enforcement. He railed against the decision to read parts of the transcript in court, telling the Kommersant newspaper it amounted to “professional cretinism” because state secrets were revealed.

Sechin was recorded in November complaining that “the Chinese and the Indians,” two key Rosneft partners, are less desirable to work with than the Japanese and the South Koreans. He also griped about paying more taxes than Exxon Mobil Corp. and seemed to criticize Putin’s deal with OPEC to try to lift oil prices by cutting output, saying the pact would aid the incoming Trump administration’s goal of achieving energy independence for the U.S. Ulyukayev has repeatedly maintained his innocence, telling the court that his case was “fabricated” by Sechin. The Rosneft chief declined to comment on the trial, as did Peskov.

Political tensions are coming to a head in Moscow because Putin will have to dissolve his cabinet after the election. He’ll then have two weeks to submit for approval a candidate for premier to the lower house of parliament, the Duma, offering a clue as to who he wants to rule after him. Prime Minister Dmitry Medvedev has called the case against Ulyukayev, a longtime ally, “beyond my comprehension.” Both men support a free market, but Medvedev has faced criticism from business owners over his inability to ease the hold that Sechin and other heads of Russia’s sprawling state-run enterprises have over the economy.

Several people in Putin’s inner circle say there’s been a flurry of lobbying to replace Medvedev after the election with a more forceful manager who can do more to rev up the sputtering economy. They say potential replacements include central bank Governor Elvira Nabiullina, Moscow Mayor Sergei Sobyanin, and Industry Minister Denis Manturov. Prominent business leaders and their allies in government are even starting to consider possible presidential contenders for 2024, though that decision remains far off.

Putin has spent 17 years playing various interest groups off each other, including the siloviki, as the security services veterans such as Sechin who promote economic nationalism are called, against advocates of less state control like Ulyukayev and Medvedev. The siloviki clearly have the upper hand now, in part because sanctions and cheaper oil have led the government to take measures more beneficial to state companies than the private sector.

With Putin apparently keeping his own counsel, it’s not clear if he wants this trend to continue. Everyone is waiting to see how the trial turns out, hoping the verdict will offer hints about his intentions. A conviction would deal a blow to the already beleaguered economic technocrats. Until then, the infighting will only intensify, according to Minchenko, the political consultant. “When a conflict between the head of a major state company and a key minister is resolved through a sting operation and then a trial, you know there’s a serious crisis,” he says.

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