Russia Inc.'s Love-Hate Thing for Putin

Russian business’s love-hate thing for the Prime Minister

Sergey Petrov, founder of Russian auto dealer ROLF Group, was among tens of thousands of Muscovites who braved police lines and near-freezing temperatures on Dec. 10 to denounce election fraud and keep alive the anger that led to a major reverse for Vladimir V. Putin’s ruling party in parliamentary elections a week before. “When you get waves of protests, of course markets are unstable and stock prices fall, and business suffers most of all,” says Petrov. “But in the long term, business benefits from change and reform.”

Prime Minister Putin’s decision to reclaim the Presidency, and allegations of vote-rigging in the Dec. 4 elections, have galvanized some in the business community—though not exactly to action. Billionaire Alexander Lebedev, who owns the London Evening Standard and Independent newspapers, warns that in 10 years Russia will become an economic backwater like Zimbabwe and Putin will be another Robert Mugabe, Zimbabwe’s isolated leader. Russia needs an independent court system, prosecutors who fight corruption, and a genuine Parliament to keep control of government and ensure that elections are free of fraud, argues Lebedev. Still, he’s not calling for revolution. “I’m a believer in evolutionary change,” explains Lebedev. And he says he can’t see progress without Putin in charge, at least for a while longer.

Fellow billionaire Mikhail Prokhorov, who clashed with the Kremlin in September over his leadership of a pro-business party, said in a blog post on Dec. 8 that “like it or not,” he still sees Putin as the only person who can effectively govern the country. Then, on Dec. 12, Prokhorov announced plans to run against Putin for the Presidency. Many Russian commentators including Sergei Markov, a former lawmaker in Putin’s party who heads the Institute of Political Studies in Moscow, described Prokhorov’s move as a ploy by Putin to lend the election legitimacy. Prokhorov says he’s in it for real.

The attitudes of Russian business toward Putin are, to put it mildly, confused. Business is far less conflicted in its feelings about the Communists, who want to nationalize natural resources and companies in strategic sectors. The same can be said for the Just Russia party, whose calls for more social spending would lead to higher taxes. The Communists got 92 seats in the 450-member lower house, while Just Russia received 64, vs. 238 for Putin’s United Russia party, down from 315. In another blog post, Prokhorov said the Communists and Just Russia have such populist policies they make Putin’s party a model of conservatism. The tycoon added that if the country adopted the policies of both Just Russia and Putin’s party, “We are consigning business in Russia to the grave.”

Faced with these unappetizing choices, business has been voting with its feet. Capital flight is expected to reach $80 billion this year, Deputy Economy Minister Andrei Klepach said on Nov. 30. That would be the second-biggest outflow since the central bank began keeping records in 1994. Russian companies, including the country’s largest gold miner, Polyus Gold International, which Prokhorov co-owns, are moving their primary listings to London. “It’s hard to see what would turn that around,” says Charles Robertson, global chief economist at Renaissance Capital in London.

A common practice in Russia is raiderstvo, or raiding, in which state officials prosecute businessmen to seize their companies, says Yana Yakovleva, head of Business Solidarity, a Moscow lobbying group. She estimates that more than 100,000 businesspeople are in Russian jails, and one in six entrepreneurs have faced criminal proceedings. The co-owner of Moscow chemical distributor Sofex, she spent seven months in jail awaiting trial in 2006 and 2007 before her acquittal of trafficking in dangerous substances. She’s back in business.

Boris Titov, head of the main lobbying group for small and medium-size businesses, has been a public critic of raiderstvo. Still, at the Nov. 27 United Russia congress, he endorsed Putin as the party’s candidate for the presidential election. “Like many businessmen, I am a person of liberal inclinations,” he said, criticizing the bureaucracy, the corruption, and the dominance of “often ineffective, large state companies.” Still, Titov’s association had decided to support Putin because he is a “strong, high-class, and effective manager.”

Petrov, a lawmaker in the Just Russia party, says continued rule by Putin’s party will lead to a worsening of the business climate. “It’s not a party but a trade union of bureaucrats who listen to their leader, who has the brains of a former secret service officer and will pile more and more pressure on business,” he says. (Putin served in the Soviet-era KGB.)

Even if Russia embraced the social spending goals of the Just Russia and Communist parties, the financial burden on business would be lighter than the burden of corruption, which adds 40 percent to the price of goods and services, says Petrov. “As long as business takes one step forward and two steps back, the business climate will deteriorate until a major collapse.”

Before it's here, it's on the Bloomberg Terminal.