Fathers, Sons, and Russian Power Games

In early April, Russian President Dmitry Medvedev announced that top government officials—many of them allies of Prime Minister Vladimir Putin—had to relinquish their board seats at Russia's state-controlled companies. It seemed like a shrewd way to improve corporate governance in one stroke. Putin, the former President and possible candidate for the presidency in 2012, said nothing in public about the order, which the Prime Minister has to carry out.

The friends of Putin, it turns out, have adult children who can fill in for their fathers and their allies. Sergei Ivanov is Deputy Prime Minister under Putin and a member of Putin's inner circle. His son, Sergei Jr., was until April a top executive at Gazprombank, an arm of the state-controlled energy giant. Sergei Jr. is now Putin's candidate to replace First Deputy Prime Minister Viktor Zubkov as head of the Russian Agricultural Bank's supervisory board. Zubkov, another close associate of Putin's, was one of the eight top officials ordered by Medvedev to vacate their board seats.

The Kremlin is "not satisfied" with all the candidates to replace the eight top officials in the 17 board positions, says Arkady Dvorkovich, the President's economic aide. He declined to endorse Ivanov's appointment. According to Putin's spokesman, Dmitry Peskov, however, Sergei Jr.'s appointment has been approved by Putin's Cabinet. All the offspring mentioned in this story declined to comment.

The Ivanov episode is a reminder of how close-knit the ruling class is. "There are 50 families that rule Russia," says Marina Litvinovich, a political activist who formed a think tank that reports on family connections in the power structure. "These are families of Putin administration officials, Putin's friends, presidential administration officials, and some businessmen."

Putin's move angers Alexei Navalny, a minority shareholder activist who campaigns for better governance at state companies. "This problem is extremely serious because it creates a feudal regime," says Navalny. "I'm skeptical that this decision to remove officials from state company boards will have an effect because all these companies under state control are turning into the personal property of these officials through their children." Navalny himself is under investigation for allegedly causing losses at a state company, a probe he says is meant to discredit him.

At the Russian Agricultural Bank, the 31-year-old Ivanov would be working with Chief Executive Officer Dmitry Patrushev, whose father leads Russia's Security Council. The older Patrushev once worked as a director of the Federal Security Service (FSB), the main successor agency to the Soviet-era KGB, while Sergei Ivanov Sr. was a colleague of Putin in the KGB itself. Sergei Jr.'s brother, Alexander, is the head of structured and credit financing at Vnesheconombank, a state-controlled development bank. Their father sits on the bank's supervisory board.

There are other examples. The son of the head of the FSB holds a top job at Russia's No. 2 bank. Pyotr Fradkov, the deputy chairman of Vnesheconombank, is the son of the head of the Foreign Intelligence Service, which replaced the KGB's foreign intelligence department.

Medvedev, a 45-year-old former corporate lawyer, is trying to improve business practices and turn Moscow into an international financial hub. If he could weaken the 50-family structure, he would push Russia further toward a more transparent system that would appeal to investors, says Litvinovich. Putin spokesman Peskov says the number of state company officials related to government members is small and no worse than elsewhere. Besides, he adds, "They all have to prove themselves from a professional point of view."

Medvedev has powerful associates, too. Dvorkovich's wife, Zumrud Rustamova, sits on the board of state-run Sheremetyevo airport and is an executive at Polymetal, a gold producer. Rustamova says she earned her status through "hard work and luck" and built her career before she met her husband.

The President's struggle to block Ivanov's appointment is an indication of the limits to his authority, says Alexei Mukhin, director of the Moscow-based Center for Political Information. "Dmitry Medvedev, according to the constitution, is an independent politician, but he doesn't have real autonomous power," he says. Putin, who stepped down as President in 2008 because of a ban on serving more than two consecutive terms, earlier this month formed a nationwide coalition of supporters who will field candidates in December parliamentary elections. Both he and Medvedev say they may run for President.

The sons of the elite are not necessarily ill qualified. Sergei Ivanov Jr. is "a smart guy, and he's got a good track record," says Michael Kart, a managing partner at Moscow-based Marshall Spectrum, an emerging markets equity manager. Yet Kart adds: "It would definitely be a great advantage to promote somebody else outside of the inner circle. A state company shouldn't be regarded as a family business."

Russian politicians' clans play a role similar to those in Asia, Africa, and Latin America, says Yelena Panfilova, the head of Berlin-based Transparency International's local office. One comparison, Panfilova says, is Indonesia under Suharto, who ruled for three decades until street protests ousted him in 1998 and whose family had extensive business activities. In Russia, the practice extends to the regions, where children of governors often dominate local enterprises. Says Panfilova: "It's a serious problem, and it's very harmful to the economy."

The bottom line: The sons of Putin's allies have started to assume important positions in Russia's corporate power structure.

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