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. Last Updated: 07/27/2016

The Money Tree




Russia, as so many of its creditors have discovered to their discomfort, is so short of cash that it is unable to service its foreign debts.


Its 1999 budget projects revenues of just 473.7 billion rubles (about $20 billion at current exchange rates), compared to expenditures of 575 billion rubles ($23.5 billion) and maturing debt commitments of $17.5 billion.


However, the frantic grab in recent weeks for certain government posts - and the accompanying storm of media speculation that this grab is all about gaining access to state cash flows - belies the idea that Russia hasn't got two spare kopeks to rub together.


The rise of new First Deputy Prime Minister Nikolai Aksyonenko has been accompanied by howls of protest from some media outlets claiming that he has been put forward by a Kremlin clique that wants him to place state cash flows within their reach.


With President Boris Yeltsin's second term just over a year away from its scheduled end, the Kremlin "family" is said to be busy accumulating money, power and influence to make sure that June 2000 does not spell the end of their time ruling the Russian roost.


NTV television program "Itogi" and others have claimed that Aksyonenko is working on behalf of a clique centering on Yeltsin's favorite daughter Tatyana Dyachenko, who also holds an official post as the president's official PR adviser. The other members of this group are said to be Valentin Yumashev, former Kremlin chief-of-staff and the ghost writer for Yeltsin's memoirs, current Kremlin chief of staff Alexander Voloshin and publicity-shy businessman Roman Abramovich, a director at Sibneft who has been accused of being the Kremlin cashier.


Many of the media organizations making these allegations are themselves run by powerful business figures with their own agendas, but that doesn't mean there is no substance to their claims.


Control Points


When Aksyonenko was promoted to first deputy prime minister, the move caused some disquiet, especially after he started talking about overseeing "everything." But it was only when his rise was followed by the appointments of new heads at the customs service and the State Pension Fund that opinion-formers such as "Itogi" began portraying Aksyonenko as the front man for a Kremlin grab at government cash flows.


Other areas that soon came under scrutiny were the Railways Ministry that Aksyonenko used to run, the Fuel and Energy Ministry, especially its role in supervising access to the oil export pipelines run by Transneft, the state oil pipelines monopoly, weapons exporter Rosvooruzheniye and the state's 37.5 percent stake in Gazprom.


New Fuel and Energy Minister Viktor Kalyuzhny fed the flames by handing Sibneft 6 million barrels of Iraqi crude almost as soon as he was appointed.


Finally, soon after Prime Minister Sergei Stepashin succeeded - at the third attempt - in getting a second first deputy prime minister appointed to run the financial side of government, Aksyonenko began pushing for a stabilization fund. Apparently concerned that the new man - Viktor Khristenko - might limit his access to funding, Aksyonenko has said several times that Russia needs to set up a fund into which every Russian enterprise would pay the equivalent of 2 percent of their gross output.


While no one is sure how - or even if - such a fund would work, various economists and political analysts have said that it could bring in as much as 100 billion rubles (a shade over $4 billion).


Rolling On In


Leaving to one side the question of whether or not these maneuverings are part of a grand money-grabbing plot, let's take a look at what's up for grabs, keeping in mind that Russia's lax controls on government money flows make it easy for such funds to go missing.


For a start, eight years into this round of its existence as a sovereign state Russia still does not possess a proper treasury system. Instead of channeling state funds through state entities, the government uses so-called upolnomochenny, or authorized banks, to handle its accounts. This system has seen many government departments' accounts treated as slush funds for favored banks.


The prevalence of barter further complicates matters, making revenues and taxes hard to assess and opening the door ever wider to the corruption that pervades Russia's economy.


The one independent body that does attempt to scrutinize public spending - the State Duma's audit chamber - has found plenty of evidence of corruption and waste. Set up by parliament as a public spending watch dog, the chamber is in effect toothless because it must rely on the Prosecutor General's Office to indict offenders.


The audit chamber has reported finding misappropriations at almost all government institutions and state-owned companies that it has investigated. However, prosecutors have rarely filed any charges over these matters.


As a result, the cash that sloshes through state coffers is open only to toothless scrutiny - there is no danger of top officials actually being brought to account.


Customs and Pensions


Turning first to the two appointments that started people pointing fingers in Aksyonenko's direction, the customs service and the State Pension Fund between them can count on more than $18 billion passing through their hands this year - almost the equivalent of projected federal budget revenues.


Last year, the State Customs Committee collected 28 percent of federal budget revenues, some $10 billion. Even though Russia's shrinking economy has resulted in a big decrease in the country's trade figures, this year customs expects to collect about $8 billion.


The man now supervising these cash flows is Mikhail Vanin. He was suspended - placed on reserve duty - last June during a crack down at the customs service that saw 700 officers dismissed or demoted for suspicions of corruption.


While no cloud of corruption allegations surrounded his predecessor, Nikolai Bordyuzha, the two previous customs chiefs were both dogged by allegations of graft aired in the media and the Duma.


Meanwhile, the State Pension Fund has an annual budget projected at 244.5 billion rubles ($10 billion). The fund is supposed to invest this money in order to generate sufficient returns to meet pension commitments. However, it has not always been a particularly wise investor.


While a fund spokesman recently insisted that only minor "shortfalls" have been revealed in regular audits, the State Duma's audit chamber concluded earlier this year that between 1995 and 1998 the fund lost more than $1 billion when surplus pension fund money was unwisely invested or disappeared into state bonds that were not accounted for.


It also reported that in 1997 the pension fund invested 157 billion rubles ($25.5 million) in equity of commercial banks, failed to control expenditures on construction works and gave out non-performing loans to commercial banks without any reasonable excuse.


For 1997, the chamber determined that $174 million of pension fund money was embezzled. A further $615 million were paid out to different legal entities in dubious deals, most of which were illegal according to the chamber's report.


Black Gold


Oil. It's the most important business in Russia - positive developments in the nation's currency and equity markets this year have overwhelmingly been driven by increases in world oil prices. The government played a major role earlier this decade in handing out huge chunks of Russia's oil industry to well-connected insiders, and the oil business remains as opaque and dirty as the substance it extracts from the ground.


The audit chamber found that dealings at the Fuel and Energy Ministry were almost as questionable as those at the pension fund.


In a report released in March of this year, the chamber revealed that the ministry had set up a currency reserve worth $545 million, using proceeds from Zarubezhneft and Vietsovpetro, Russia's joint venture with Vietnam.


Out of this money some $8 million was used in 1997 for extra remunerations at the ministry, meaning that the ministry's payroll payouts were in excess of the amount earmarked by the budget law.


However, the bulk of the currency reserve - $400 million - was simply parked at Bank Imperial, which paid minimal interest on these amounts of money at irregular intervals.


The fund was used to finance operating activities of commercial entities and $184 million was simply given away, the report concluded.


But the state's best single means of tapping into oil wealth remains its control of the nation's oil pipes: its 100 percent ownership of Transneft.


To make this part of the tale even murkier, the important factor here is not the revenues that Transneft earns directly - estimated 1998 revenues were a mere 16.1 billion rubles - it is the sheer power it possesses as the main source of those precious export revenues.


Judicious use of this power can make, or break, oil companies, analysts said.


"Transneft can delay shipments for some companies when prices go down and increase supplies on their behalf when they are up," said Sergei Markov, head of Institute of Political Studies.


"It can also give a large grace period for payments and distribute orders among various construction companies at its own choice," he added.


And bureaucrats paid according to Russia's parlous civil service wage scales are more interested in exercising this kind of power than in earning money for the state or acting to ensure a level playing field, analysts said.


"It is much more important for civil servants to be able to distribute benefits in kind rather than receive any money in form of cash," said Andrei Piontkovsky, head of the Center for Strategic Studies.


Gaseous Dealings


Russia's single most powerful entity, Gazprom, looms as the next battlefield in the struggle to control the purse strings. The Russian state holds a 37.5 percent stake in Gazprom, but this stake has been managed for many years by Gazprom chief executive Rem Vyakhirev, who has long maintained excellent contacts with the government.


In 1995 the Finance Ministry gave a loan worth $45 million to Bank Natsionalny Kredit at the request of Vyakhirev and of Oleg Boiko, then head of the OLBI company. The money disappeared after Natsionalny Kredit went bust but OLBI's subsidiary bank - National Reserve Bank - soon became one of Gazprom's major banks and was recapitalized after additional capital was plowed in.


Andrei Vavilov, the first deputy finance minister who signed off on the $45 million loan to Natsionalny Kredit, left the government not long after. He took up a job as Vyakhirev's financial adviser.


These days, Vyakhirev's position at Gazprom is under siege. With the annual shareholders meeting looming, Fuel and Energy Minister Kalyuzhny has floated the idea of rewriting the agreement between the state and Vyakhirev under which he manages the state's stake.


"Vyakhirev's position is very vulnerable in current circumstances," said Nikonov.


At a news conference Friday, Vyakhirev said he suspected the coming elections were behind the moves against him. He also held out the possibility of cutting a deal of some sort with Kalyuzhny, saying they would "have a talk" this week.


In addition to its billion-dollar revenues, Gazprom can wield enormous power through its status as monopoly supplier to many power stations and to households.


Whether or not Vyakhirev stays in place, Kalyuzhny is obviously determined that the man running Gazprom should be a team player.


Guns and Butter


Two other targets are weapons wholesaler Rosvooruzheniye and aircraft producer Sukhoi.


The two companies account for the bulk of Russia's arms exports, which amounted to $2 billion last year, down from $2.6 billion in 1997. Sukhoi - which makes the Su-30 fighter that has become the industry benchmark - traditionally accounts for half of arms exports.The company was put under new management 10 days ago when Mikhail Pogosyan was nominated as director general. Pogosyan is close to the president's family, the influential financial newspaper Kommersant reported last week.


Some media are reporting that the post of director general at Rosvooruzheniye might well be the next one to be filled by a trusted hanger-on to the family's entourage. The company would be an especially lucrative prize, because its status as the state's weapons dealer makes it well nigh sacrosanct. Even its accounts are classified, meaning that no outsiders can look at its books.


Rolling Stocks


The Railways Ministry - until very recently Aksyonenko's fiefdom - is one of Russia's three so-called natural monopolies, along with Gazprom and Unified Energy Systems, the power grid. The ministry had revenues last year of $16 billion, even more than Gazprom.


Insiders describe the Railways Ministry as "a state within a state," which operates on its own rules and shuns outsiders. Relatives of ministry officials - including Aksyonenko - reportedly hold key posts in companies that have or had financial dealings with the ministry. It has been run as a mixture of full state firms and state-private joint ventures - with the latter effectively getting the lion's share of the cash through transfer pricing. One of those ventures, Swiss-based TransRail, has recently gained notoriety.


TransRail is 50 percent owned by the ministry and was set up in 1989 to serve as a middleman between the ministry and foreign clients who transport freight on Russia's railways. The other 50 percent is held by Militzer & Munch, a leading international freight forwarder based in Switzerland.


Last fall, the weekly business magazine Expert quoted First Deputy Railways Minister Valery Kovalyov as saying that TransRail brings the ministry more than $1 billion a year in cash, equal to 48 percent of the ministry's hard-currency receipts.


People involved in the freight business say TransRail has gained an unfair advantage on the market thanks to tremendous discounts it receives from the ministry on use of the railroads.


"TransRail is a monopolist. I don't know a company that could compete with them," said the director of one shipping company.


Officials at TransRail have refused to comment.


Officially, discounts are given based on volume. And while now TransRail may undoubtedly have greater volumes, as a semi-state structure it had an advantage in getting to that position.


Railways Ministry spokesmen have insisted that TransRail receives no unfair advantages.


Those who speculate that ministry money is being redirected through the TransRail scheme can offer no real proof, but the fact that the company is located in Switzerland has raised eyebrows.


"It's very difficult to control transfers [of hard currency from abroad]," said a former ministry employee, who declined to be identified.


Aksyonenko has vehemently denied persistent media reports that his son works in TransRail or other companies connected with rail transport.


Family Man


He and others have also denied that he is a figurehead for "the family," but this theory has become a commonplace for most Russian politicians.


"Some people call it the gang of four - Dyachenko, Voloshin, Yumashev and Abramovich," said Alexander Shokhin, centrist Duma member and former deputy prime minister.


"Aksyonenko is fully trusted by members of the family and is close to both [Boris] Berezovsky and Abramovich," said Vyacheslav Nikonov, head of Politika Fund.


Aksyonenko has been reported by NTV, Kommersant and others to be connected to Berezovsky through Abramovich. Novaya Gazeta reported that in 1997 and 1998 Sibneft received preferential rates for transporting oil products.


Whatever Aksyonenko's connections, he obviously feels very free to throw his weight around, barging in on meetings between premier and president and barely troubling to hide his conviction that he is the real leader of the government.


Introducing his successor at the Railways Ministry, Aksyonenko carelessly remarked that it is a rare occasion when "the prime minister gives flowers" to a minister. He immediately back-pedaled, saying "deputy prime minister" and attempted to laugh off his own absentmindedness.


Last week saw Stepashin mount a counter-offensive that has made Aksyonenko's grip on state cash flows more tenuous than it might have been. The more dangerous Mikhail Zadornov has been squeezed out into the lightweight role of negotiator with international lenders - a post that carries no real power to oversee spending - but new First Deputy Prime Minister Khristenko will be no pushover. Neither will Finance Minister Mikhail Kasyanov.


Stepashin called these three his team and Russian media have reported that this grouping will attempt to balance the Yeltsin family's influence and fight to keep at least some of the state's money in the till.