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. Last Updated: 07/27/2016

THE ANALYST: Regional Governors Aping Kremlin's Ugly Asset Grab




The fight for economic power in Russia is heating up, and the boiling point is not far away. Last week's industrial showdown in Kemerovo was the latest alarm that the newest round of asset redistribution - primarily driven by regional governors and ignored by an indifferent Moscow - is reaching full speed. And getting ugly. Should this process continue uninterrupted, it will dramatically change the course of Russian politics in the first decade of the 21st century.


Less than two weeks ago, Sergei Kuznetsov, director of Novokuznetsk Metallurgical Combine, was arrested after refusing to acknowledge the decision of a regional court that ruled his appointment as external manager a year earlier was illegal. He was being accused of running the factory into the ground by regional Governor Aman Tuleyev. According to Kuznetsov, who represented the interests of a Moscow financial company, the court's decision was made under pressure from the governor.


So when Kuznetsov refused to budge, the governor ordered the troops to take control of the factory. A new director has been appointed, Tuleyev personally has promised factory workers a pay raise, and Kuznetsov is now sitting in jail.


This is not necessarily new. The speed with which Krasnoyarsk region governor, Alexander Lebed, managed to resuscitate a couple unsolved murders in his region and have them pinned on his enemy, former director of Krasnoyarsk Aluminum Anatoly Bykov, is indicative. Bykov is now in custody in Hungary waiting to be extradited to Russia, while Lebed has taken up the struggle for control over a related plant in his region, Achinsk Alumina.


The Far East, which has always lived by its own rules, is also exemplary. Under xenophobic Governor Yevgeny Nazdratenko, investors have been fleeing the region en masse, as the governor has openly stated his intentions to "nationalize" (read: "regionalize") regional stalwarts such as Dalenergo, Primorskelektrosvyaz, Far East Shipping and Vostoktransflot. The intensity reached a high point last July, when Nazdratenko openly threatened to imprison Andrew Fox, chairman of Tiger Securities and a leading foreign investor in the region, should the latter fail to cave in to the governor's demands to take the helm at Far East Shipping.


Western Siberia offers a pair of scary tales as well. First, the governor of Yamal-Nenetsk, which controls over 90 percent of Russia's natural gas, composed a draft law that would re-privatize Tyumenenergo and redistribute shares among the three West Siberian regional governments and company workers. Second, though it is speculative, investors have suggested Leonid Roketsky, governor of Tyumen region and chairman of the board at Tyumen Oil Co., applied pressure on regional courts during key hearings on Sidanko that effectively ended in favor of the oil company he chairs.


What's the federal government - you may ask - doing about this? That's precisely the catch. The Kremlin is running its own campaign of asset grabbing, setting the tone for executives in the regions. The obvious example was with Transneft, when the government illegally removed the company's president after a bogus board meeting held surreptitiously by the Fuel and Energy Ministry. The other, more frightening precedent, involved the reversal of the privatization of Lomonosov Porcelain Factory in St. Petersburg on the basis of erroneous documentation. This was outright de-privatization, led by the federal government itself. Thus, if Moscow has got its hand in the cookie jar, can we actually expect anyone to intervene and cool governors' appetite?


The plain fact is that the above mentioned examples are just the tip of the iceberg. There are hundreds of prize enterprises - ranging from refineries to chicken farms - that are in governors' sights. Most of them are low-key cases and never earn a line in Moscow newsprint. But as we have seen, there is a series of means to the same end: a change in management by court order (Novokuznetsk Metal and Sidanko); by de-privatization (Lomonosov Porcelain); by midnight board meeting (Transneft); or just by brute force (Far East Shipping).


In a sense, this process in perfectly logical. To remain in power, politicians - legislators and governors - need cash. Rather than breaking their necks trying to raise finance through door-to-door campaigning, governors will find it easier to seize their industrial tax base from its previous managers and owners. The precedents are there; the rest is a matter of will.


Should this process continue unabated, and there is every reason to expect it will, at best Russia will witness a further drop in investment credibility in the foreign community. At worst, the country will undergo a profound political transformation with a greater emphasis on anti-federalism (in the classic sense of the word). Regional governors, buttressed by increased financial flows, will concentrate more power into their own hands at the expense of the federal center, and further fortify their political position in their own fiefdoms.


An oligarchy of bankers will be supplanted by an oligarchy of governors, a remarkably worse state of affairs given the concentration of executive and legislative power with the latter.