Out of favor.

Photographer: Artyom GeodakyanTASS via Getty Images

Why Putin Sacrificed His Economy Minister

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Russian President Vladimir Putin has been rather consistent lately in making it clear that senior officials were not immune from corruption charges. Yet Economy Minister Alexei Ulyukayev's arrest in the wee hours of Tuesday still stands out. It raises questions about the future of Putin's highly professional, technocratic economic team as well as one of the president's closest associates, Igor Sechin, who runs the state-owned oil behemoth, Rosneft.

In the last two years, three regional governors and the officials charged with fighting corruption at the Interior Ministry and the Investigative Committee (the Russian counterpart of the Federal Bureau of Investigation) have been arrested and jailed on corruption charges. As recently as Monday, three top officials from the Kemerovo region, Russia's biggest coal-producing area, were charged with extortion, prompting the region's powerful, long-serving governor, Aman Tuleev, to wonder aloud if he was the target of the investigation. 

Putin hasn't really done much to dismantle the corrupt system that has flourished in Russia under his rule -- probably because graft is the glue that has held it together all these years. Yet he has appeared impatient with it since the 2014 Crimea land grab and the simultaneous oil price drop. No longer happy (or perhaps no longer able to comfortably afford) the crony capitalism of the 2000s, he wants a mobilized, militarized, patriotic nation that would circle its wagons against a perceived threat from the West and the economic difficulties that go with it. 

Putin needed major corruption investigations to flag the change. Governors and top law enforcement officials were good chess pieces to sacrifice: They had impressive titles, but they were replaceable. 

At the same time, Putin needed to put some of his especially entitled cronies in their place, but since loyalty to friends is one of his cornerstone principles, Putin's old KGB colleagues and friends Vladimir Yakunin (the former railroad chief) and Sergei Ivanov (the former Kremlin chief of staff) were pushed into sinecures, or retirement, rather than strung up. Still, these moves were a message to the elite: This is almost wartime, Putin was signaling, so be helpful or get out of the way.

Ulyukayev's arrest -- allegedly for demanding $2 million in cash to facilitate the purchase of the oil company Bashneft by Rosneft -- doesn't quite fit the pattern. Putin has been careful not to threaten the economic team in Dmitry Medvedev's government and the central bank. Russia, deprived of more than half of its oil revenues by the commodity bust and shunned by foreign investors due to Western sanctions, needs competent economic management. The finance ministry under Anton Siluanov, the economy ministry under Ulyukayev and the central bank under Elvira Nabiullina have provided it, tightening spending, putting out conservative forecasts, shaping a flexible exchange rate and lending rate policy.

In the third quarter of 2016, Russia's economic output shrank 0.4 percent -- less than expected, but Russia is still struggling economically, and growth can't be boosted without structural reforms. Ulyukayev, a liberal economist who started his government career during the radical reforms of the early 1990s, is one of the few people available to Putin who have the experience, knowledge and stamina to effect change or hold the fort when that's not an option. Ulyukayev's arrest signals that nobody is off limits, but it also sends a worrying message about potential instability in Putin's economic team at a precarious time. It's clear that Putin was the one who sanctioned the arrest: The Investigative Committee let it be known that the FSB, the domestic intelligence service, had been tapping Ulyukayev's phone since last summer, and that Putin has been receiving reports about the covert investigation.

The story behind the arrest is stranger still. The re-privatization of Bashneft -- wrested in 2014 from oligarch Vladimir Yevtushenkov, who had acquired it five years before -- was meant to help reduce Russia's fiscal deficit. Sechin, the Rosneft boss, had long targeted the company. Though he denied having anything to do with its confiscation from Yevtushenkov, there were strong suspicions of his involvement at the time. 

Those suspicions were borne out this year when Rosneft declared it planned to bid for Bashneft. Though Rosneft is majority owned by a government-controlled holding company, it's publicly traded and technically allowed to take part in privatizations. Many analysts and government officials felt, however, that buying state property with what is essentially government money is not a great idea. The officials included Energy Minister Alexander Novak and Ulyukayev.

"I believe Rosneft is essentially a state company," the economy minister said in August. "That means its participation in privatization is not appropriate."

Yet nobody else submitted a bid: Sechin, one of Putin's oldest friends, is such a powerful figure no one wanted to compete with him. So in October, the government, including the energy and economy ministries, decided to let the deal go ahead. Rosneft paid 329.7 billion rubles ($5.1 billion) for 60 percent of the company. It immediately fired the entire top management and replaced it with Sechin appointees.

Putin, who admitted after the Bashneft takeover that he'd been "a little surprised" about the government's position, may be having second thoughts. The Investigative Committee said on Tuesday that Ulyukayev had "threatened" Rosneft officials as he extorted the bribe. Nobody with any knowledge of how Russia works today can believe this story. Alexander Shokhin, head of the Union of Industrialists and Entrepreneurs, Russia's big business lobby, was one of many who have been openly incredulous. 

"One has to be insane to threaten Rosneft a month after the deal received the formal, legal and political approval, and to extort $2 million from Igor Ivanovich Sechin, de facto one of the most powerful people in this country," he said, adding that if this as the case, Ulyukayev should have been "detained not by the Investigative Committee but by representatives of Kaschenko," a famous Moscow mental hospital.

Though the investigators have not accused Rosneft or Sechin of any wrongdoing, or questioned the legality of the takeover, a former Rosneft insider told me Sechin might be the ultimate target of the probe. His tireless efforts to nationalize the oil industry have long worried the remaining independent oil producers, the biggest of which is Lukoil. At the same time, Putin has been pruning his inner circle, and Sechin's outsized influence might bother the president. Besides, Rosneft itself is now the only bidder for the 19.5 percent of itself earmarked for privatization this year. The idea is that it can help the government plug the budget hole and then sell the stake to a real investor, but it's certainly not the kind of outcome Putin wants for the year's biggest government property sell-off.

If the Ulyukayev arrest is a step toward Sechin's fall from grace, there is at least some logic to it. Yet Putin's oil czar won't go without a fight. If Sechin wins out and keeps control over Rosneft, Putin's consent to Ulyukayev's arrest may simply leave him with a weakened economic team in exchange for the dubious public relations benefits of a fig-leaf anti-corruption campaign.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net