Putin May Be Tiring of His Cronies

File Photo of Kremlin Tower, St. Basil's, Red Square at Night

(Bloomberg – bloomberg.com – Leonid Bershidsky – August 18, 2015)

Vladimir Yakunin seemed eternal: Nothing he could do appeared to undermine his standing in the system President Vladimir Putin has built to run Russia. Yet now he is leaving the top job at the national railroad monopoly, after 10 years of mismanaging it.

Putin may be realizing that tough economic times require better managers than his buddies, and that to remain in power he needs to distance himself from the oligarchy he has created.

Yakunin, who served for 22 years as a Soviet intelligence officer, wasn’t friends with Putin when both were in the KGB. Yakunin’s career as a spy went rather better than his future boss’s: He ended up in New York at the Soviet mission to the United Nations, whereas Putin achieved only a modest position in East Germany. They became friends in the 1990s, when Putin was deputy mayor of St. Petersburg. In 1996, both men joined Ozero, a cooperative that built a small compound of lakeside country houses near St. Petersburg and is widely considered the chrysalis from which Putin’s close circle emerged.

After Putin became president, Yakunin quickly rose in the Russian transport industry. By 2005, he was at the helm of Russian Railways, known by its Russian acronym RZD, the nation’s biggest employer (it had 841,745 workers at the end of last year) and operator of Russia’s entire sprawling railroad network. In terms of influence and access to funds, the job is bigger than any ministerial post. It also rivals the importance of being chief executive in Russia’s other major state-owned companies: natural gas producer Gazprom and oil giant Rosneft, both of which are headed by Putin’s friends from his St. Petersburg days.

The network of state companies under Kremlin-friendly management has been the backbone of Corporation Russia, Putin’s version of capitalism under which the country’s economy is run in the interests of the state — and, of course, the men who have the nation’s best interests at heart. None of the state-owned corporations will ever be studied in business schools as examples of stellar management. Gazprom has seen its market capitalization shrink after wasting billions on unnecessary, politically motivated expansion. Heavily indebted Rosneft faces shrinking production as its chief executive, Igor Sechin, begs his friend Putin to help him out by dipping into Russia’s depleted reserve funds.

The railroads under Yakunin have been no exception. The network barely expanded during his 10 years in charge, but the average speed at which freight trains traverse it dropped 5 percent between 2004 and 2014, suggesting poor maintenance. Last year, RZD lost 99 billion rubles ($1.5 billion at today’s exchange rate). Yakunin blamed a government decision to freeze rail tariffs for oil companies, which benefited Rosneft and Gazprom, but the real problem was that he had allowed the company’s operating costs to almost triple during his tenure, increasing faster than revenue.

The money didn’t just go down the drain. Anti-corruption activist Alexei Navalny documented the construction of an enormous estate for Yakunin near Moscow, including a special facility to store fur coats (the Russian name for it, shubokhranilischche, became a popular meme to describe Putin-era corruption). Though Yakunin later denied the existence of the fur storage annex and said he’d sold the house, Navalny continued his pursuit and showed that Yakunin’s son, a wealthy hotelier, was doing lucrative business with the railroad monopoly. Again, official denials followed, but plausible explanations of Navalny’s facts didn’t.

Both Yakunin and Rosneft’s Sechin refused to declare their incomes and property last year, after the government demanded that managers of state companies do so. Yakunin even threatened earlier this year to leave RZD for the private sector if the demands persisted. In March, he, Sechin and Gazprom chief Alexei Miller were officially allowed not to publish their income and property declarations, but two months later Yakunin revealed that his salary ranged between 4 million to 5.5 million rubles per month ($61,000 and $83,000) — not enough for the lavish lifestyle Navalny described.

At the same time, Yakunin is one of the most vocal proponents of anti-Western conspiracy theories that underpin Putin’s foreign policy, but which Putin himself is careful to moderate in his public statements. In a recent article on an obscure website, Yakunin denounced globalization as the evil master plan of a supranational financial oligarchy, explaining that lower oil prices were “an element of global financial war recognized by the American establishment.” According to Yakunin:

“The global financial system is a tool of the global financial oligarchy to rob developing nations and create a system of global U.S. dominance.”

The rambling text went viral and the website promptly crashed as bloggers ridiculed Yakunin.

The final straw may have come from an embarrassment earlier this month, when Latvia’s anti-corruption bureau detained the head of its national railroad company, Ugis Magonis, who is married to Yakunin’s niece. RZD said soon afterwards that it was stopping cargo transit to Latvian ports, allegedly due to the poor condition of the Baltic nation’s rail network. Latvian Prime Minister Laimdota Straujuma said in an interview that she considered the move a response to Magonis’s detention.

In any case, Putin’s old friend had become a liability and will now retire gracefully. Yakunin’s plan, clearly sanctioned from on high, is to become a member of Russia’s do-nothing upper house of parliament.

The choice of a new chief for Russia’s rail system will answer an important question: Is Putin still aiming for loyalty first, or has he begun to stress competence? Russia needs to dig in for a long period of low energy prices, which means that tighter cost controls — including a clampdown on corruption — will be necessary in the all-important state companies. If Yakunin is replaced by a technocrat without personal ties to Putin, changes at Gazprom and Rosneft will probably be imminent, too. If another crony steps into Yakunin’s shoes, that will mean Putin is still cruising without a compass, hoping his propaganda machine will be sufficient to keep him in power, no matter what.

Article ©2015 Bloomberg L.P. All Rights Reserved. Article also appeared at bloombergview.com/articles/2015-08-18/putin-may-be-tiring-of-his-cronies