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. Last Updated: 07/27/2016

Blurring Public and Private

Just a year ago, those supporting Russia's transition to democracy and market economics were heartened by the downfall of the "party of war" -- the Kremlin cabal led by then-presidential security service chief Alexander Korzhakov. Many hoped the ouster of Korzhakov and his hardline, Soviet-era cronies, which had been engineered by a group of liberals led by Anatoly Chubais, meant that Russia had finally closed the books on palace intrigues and embraced the goal of open government.

While Korzhakov and company have long since left the stage, there is little reason to believe that Russian power politics have changed a bit.

The latest evidence for this came during a July 2 press conference by Sergei Dubinin, chief of Russia's Central Bank, when he told reporters he knew of two instances in which banks had essentially embezzled government funds, in each case costing the state around $200 million.

Dubinin did not name names. The following day, however, various Russian media outlets, including Kommersant Weekly, received documents from an anonymous source detailing one of the cases.

According to these documents, last February, the MAPO company, which produces MiG aircraft, asked the Finance Ministry for a $231 million advance to fulfill a Russian government contract to supply India with MiG-29 fighters. Andrei Vavilov, then a deputy finance minister in charge of foreign economic operations, agreed to the request. But Vavilov, rather than providing the money directly to MAPO, allegedly ordered the ministry to buy $237 million in veksels, or promissory notes, from MFK, an affiliate of the powerful Uneximbank.

The veksels were then to be deposited into the aircraft company's account in yet another commercial bank, Unikombank. However, according to the anonymous documents, Dubinin believes the veksels were never deposited, and Unikombank refused to allow the Central Bank to take a look at MAPO's account. Dubinin reportedly sent a letter to Prime Minister Viktor Chernomyrdin and Chubais, a first deputy prime minister, on June 27, urging them to order MFK, MAPO and Unikombank to return the $237 million, and asking that all documents concerning the MiG deal be turned over to the prosecutor general.

The MiG affair, along with several other alleged questionable operations leaked to the press, may help explain why Vavilov felt it necessary to leave the Finance Ministry this past spring.

The weekly magazine Profil not long ago quoted another anonymous "analytical document," this one circulated last year, alleging that Vavilov made $120 million during his nearly five years in the Finance Ministry.

Vavilov's controversial reputation, however, did not prevent him from finding rewarding work in the "private" sector -- in fact, as MFK's president.

The affair is interesting not just because it suggests further evidence of the corrupt symbiosis between Russia's private and public sectors. Dubinin's d?marche, followed just a day later by anonymous leaks to the press, implies a concerted effort to damage MFK, Uneximbank and their chief, former first deputy prime minister Vladimir Potanin.

Taken together, Uneximbank and MFK are Russia's largest commercial bank, and Wednesday's announcement that MFK plans to merge with Renaissance Capital, the powerful Western investment company, can only heighten the fears of competing financial-industrial groups. There have been indications for some time that rivals, particularly the financial empire run by Security Council Deputy Secretary Boris Berezovsky, would like to cut Potanin down to size.

Earlier this year, Berezovsky allegedly prevented Uneximbank from grabbing a controlling share in the oil giant Sibneft. More recently, Uneximbank-MFK failed to ensure that Vavilov would keep his seat on the board of directors of the natural gas giant Gazprom. According to one version, Berezovsky went so far as to fly to Beijing, where Chernomyrdin was on an official visit, to convince the prime minister to keep Vavilov off the board.

Some media speculated this week that Berezovsky was behind the leak of details concerning the scandalous MiG deal. But the fact that the head of Russia's Central Bank also seems to have played a role in the anti-Uneximbank campaign suggests that many in Russia's banking community have decided that "the aggressive behavior of one of the largest financial-industrial groups in the country will have destructive results," as Kommersant Daily put it.