MOSCOW BLOG: Liberals take off gloves in first clash with Kremlin old guard

(Business New Europe – bne.eu – October 24 ,2012) It was the first head-to-head clash between the young liberal team in Russia’s cabinet and the old guard Siloviki faction in the presidential administration. On balance, the liberals are seen as having sneaked a win.

The battle lines have been drawn since Russian Prime Minister Dmitry Medvedev appointed a surprisingly reform-minded government in May, led by several fresh faces with established pro-market credentials. At the same time, Putin took in the fleeing Siloviki (those with ties to the security/military service) that dominated his last government when he was PM, giving many vague “consultant to the president” jobs or putting them in charge of big state-owned companies.

The make-up of the government has left Russia watchers confused. There is something for everyone there: the “rah rah Russia” crowd (as Russia-optimists were famously dubbed by Economist correspondent Ed Lucas) were buoyed by the youthful ministers, such as First deputy Prime Minister Arkardy Dvorkovich and Finance Minister Anton Siluanov, who are seen as professional and competent. The Russia-bashers could point to the concentration of former spies surrounding Putin, where the real power is thought to lie, and argue that nothing has changed.

It’s a government that suffers from bipolar disorder good on some days and downright scary on others, depending on who is in front of the cameras. Putin seems to have been in a rush to reassert his authority and took a leaf out of former president Boris Yeltsin’s playbook. A consensus-builder during his first two terms as president, Putin has consciously appointed people to the cabinet and his own team with explicitly overlapping jobs. Yeltsin used the same tactic, which guarantees the machinery will seize up after the inevitable turf wars break out, only for him to descend Deus ex machina and break the deadlock, making himself indispensible in the process.

Seconds out. Round one

It was only a matter of time before Dvorkovich came to loggerheads with Igor Sechin, Russia’s “Siloviki-in-chief” and a close personal friend of Putin.

Dvorkovich’s job is to oversee great swathes of the economy, and the oil sector in particular. Sechin, a former spy, is CEO of Russia’s state-owned oil major Rosneft, as well as being in control of the Rosneftegaz holding company that formally holds the government shares in Rosneft and gas giant Gazprom, amongst other things. Sechin’s power was further bolstered in June when Putin set up the Presidential Commission for the strategic development of the oil and gas industry and ecological protection, with himself as chairman and Sechin as secretary-in-charge. This think-tank more or less replicates Dvorkovich’s responsibility to make policy for the oil sector.

Tensions between Putin and Medvedev were already rising in the spring as the government got its first budget together. Putin publicly chewed out several minsters as well as Medvedev at televised cabinet meetings. Medvedev lost his cool, snapping back at an irate Putin: “When I worked as president, I never liked [the budget] either. But I always remembered and realised how difficult it was to glue together a budget, especially in the conditions of a crisis.”

The first actual shots were fired in September when Finance Minister Siluanov insisted that Rosneftegaz pay out 95% of its RUB132bn ($4.3bn) cash pile to the government as dividends to plug a hole in the budget. The state has already ordered all state-owned companies to pay out 25% of their profits as dividends, but Siluanov’s suggestion was regarded as an aggressive attack on Sechin. Medvedev backed the idea and Dvorkovich picked up the baton, personally leaking a letter to the press saying Rosneftegaz doesn’t need so much money to run its business, but the budget does. The letter brought the whole fight into the public arena another aggressive move, as Sechin prefers to operate in the shadows.

The liberals’ beef with the cash pile is that it was clear Sechin never intended to spend the money on Rosneft. Since the start of the year, Sechin has been making a play to consolidate the entire energy sector under the umbrella of a new national energy champion Rosneftegaz, using this money to buy up stakes in some of Russia’s most attractive utilities.

Sechin has got better at play-acting in front of the cameras and jovially admitted during the Sochi Investment Forum in mid-September that the cabinet has every right to distribute government assets as it deems fit, before delivering the zinger: “but only if there is a directive approved by the country’s president.”

Horse trading

And there’s the rub. Most Russia-watchers outside of the country interviewed for this piece assumed that Putin would back Sechin up. But many bankers who live and work in Russia said Dvorkovich was probably going to win which is testament to how confused politics in Russia at the moment.

As the weather closed in and the leaves began to fall, everything went quiet for a few weeks while the serious horse-trading started. The outcome of this fight is key, as it will say a lot about the power of the liberal cabinet and indicate the direction that Russia will follow over the coming years. The crucial point is that whatever Sechin says, Putin has no actual formal power to decide anything in this case. “About the Rosneftegaz dividends… they do not demand formal approval by the presidential administration,” Dvorkovich told reporters at the same investment conference. “But the government is conducting such consultations.”

Ironically, Medvedev holds all the cards in this game. Veteran Russia-watchers will remember that despite changing the constitution in 1993 to give the president vastly increased powers, Yeltsin spent the rest of the 1990s battling an irascible Duma. Medvedev could have chosen to confront Putin and cause a political crisis.

On October 8, the results of the backroom deal began to emerge. Dvorkovich wrote an order to Rosneftegaz to pay RUB50.5bn ($1.6bn) of dividends, or some 38% of its cash pile. This is still a lot more than the 25% the other state-owned companies have to pay, but a lot less than 95%; Sechin was left with RUB82bn ($2.6bn) of the cash.

As bne went to press, it seems that Sechin has got his national champion after all, albeit in a different from. On October 23, Rosneft announced that it would buy out both BP and the Russian partners in the TNK-BP joint venture, at a total cost of $45.1bn in cash and 12.84% of Rosneft shares, though will get back $4.88bn from BP in return for selling it a further 5.66% stake. Sechin estimated the total value of the deal at $61bn. However, the financing of the $40bn in cash needed for this deal has yet to be worked out. Rosneft will become the largest listed oil company in the world and the merged companies will produce just under half of Russia’s daily oil output.

But the decision on the key issue of the power sector consolidation, bankers in Moscow believe Sechin has been persuaded to drop his bid to take over the utilities sector. “Dvorkovich has won,” says Roland Nash, chief strategist at Verno Capital. “Sechin is not going to buy in and instead there is an investment boom going on there. More generating capacity is coming on line in the next few years, paid for mainly by private investors, than Russia has seen since the last boom in the 1970s.”

“Round one goes to the liberals,” he concludes.