The Russia Monitor

As I mentioned in my previous post on this issue, the Commission on Foreign Investment was scheduled to meet for the third time in late-May, but it ultimately was pushed back to early-June. On June 8 the Committee met, and though eleven applications were on the agenda, they only made decisions on five, while the other six were given an extension. At the meeting, Putin acknowledged that FDI into Russia has fallen off a cliff since last year, and it makes me wonder whether they just held on to the other six applications so they wouldn't run out.

One of the applications approved was Suleiman Kerimov's formal acquisition of Polyus Zoloto (Полюс Золото) - he essentially owned it already and only had to go through the approval process because he used his off-shore investment vehicle to purchase it. Interestingly, the Commission again put off making a decision on Russneft and Basic Element.

Finally, the Commission actually allowed itself to be captured on camera for a brief, albeit scripted, moment. Still, as compared to the insane secrecy that surrounds meetings of the Committee on Foreign Investment in the United States (CFIUS), it's a mature step. Below is video of Putin briefly addressing the group:

In a series of posts a few months ago, I argued that Pres. Medvedev is in the process of building his own independent power base, personally supported by his classmates from the St. Pete law faculty in the name of A.A. Zhdanova, and institutionally supported by both the Prosecutor General's office and the Federal Bailiff's Service (FBS) (Федеральная служба судебных приставов, ФССП). The posts even received some rare outside attention, including a shout-out from The Power Vertical at RFE/RL. And while the FBS has been in the news since then, I think that significant developments might be brewing in the prosecutor's office, or procuracy as Russians call it. And again, you will see that the war on corruption is a consistent backdrop or theme, even if it has not yet emerged as the precise vehicle aimed at consolidating Medvedev's power.

The Dovgy Case

Last month, Dmitry Dovgy (Дмитрий Довгий), a former high-ranking official at the General Prosecutor's Investigatory Committee, was convicted and sentenced to nine years in prison for allegedly taking a 750k-euro bribe. Now, I would bet that, more likely than not, Dovgy is guilty, though the sentence may be disproportionate. The best part, though, is that just to be sure, Dovgy's antagonists ensured that Juror No. 10 was stopped by traffic police on her way to the court on the day of the verdict. Despite having immunity juror documents, the policeman insisted on checking whether the juror's car was stolen. And this might have tilted the balance as the jury was not unanimous, and No. 10 later revealed that she would have voted for acquittal. When I look at Russian blogs and the follow-up comments on this case, I notice a trend where people acknowledge the trial as a sham, but assume Dovgy is guilty, and yet still end up asking, what is different between him and any other number of corrupt public servants. Ekho Moskvy discussed Dovgy during a call in show, and reflected this attitude ("They charged him with bribery, but there is an impression that he suffered not for bribery, but as a representative of the losing clan.").

Fall 2007

You might remember Dovgy from way back in 2007, when he led the prosecutorial onslaught against then-Deputy Finance Minister Sergei Storchak. In September 2007, still in the aftermath of the Tri Kita scandal, Pres. Putin created the Investigative Committee (Следственный Комитет), headed then and now by supposed-friend Aleksandr Bastrykin as a parallel prosecutorial organ alongside the prosecutor's office. As was argued then, and then repeated by others after, Putin fomred the IC as a counterweight to certain siloviki clans that were amassing too much power.

The culmination of the IC's quick ascent was its arrest of Storchak in November 2007, which everyone interpreted to be a signal to Min. of Fin. Kudrin. The official accusations were, naturally, corruption, and Dovgy headed up the case. Nothing really ever came of it, and then let Storchak go last year, and then finally charged with fraud this April. Hilariously, Dovgy himself was under investigation and then arrested by the time Storchak was released.

The facts of Dovgy's case are not crystal clear, but apparently he is accused of receiving a bribe from businessman Ruslan Valitov in exchange for stopping an investigation into whether Valitov embezzled 1.2 million tons of oil from Tomskneft oil (of Yukos fame) in 2005-06. Dovgy goes on to assert that Valitov used this money to buy a stake in InvesCotsBank (ИнвестСоцБанк), which he claims is under the Foreign Intelligence Service's (SVR) control. Dovgy has also variously claimed that he was targeted because he did not want to go after Storchak, and because he wanted to release Vasily Aleksanyan. But pretty much everyone has concluded that he is a casualty in a siloviki war.

The Rumblings

The only reason why this case is interesting is because some of the same characters involved are popping up in stories about upcoming purges (and they aren't on the winning side). For example, Yuri Chaika and Aleksandr Bastrykin are, respectively, still heading the Prosecutor General and Investigatory Committee's offices. Aleksandr Konovalov, the Minister of Justice, is currently getting rid of all of his predecessor, Vladimir Ustinov's people. Not only that, but Vedomosti reports that Konovalov might be headed to the Prosecutor General's office, where he will replace Chaika. At the same time, other sources are reporting that Aleksandr Gutsan, the former FBS official and current deputy prosecutor who I covered here, will go to the Investigatory Committee and replace Bastrykin, who will likely be sent to the Justice Ministry to take Konovalov's vacant position (I assume Chaika is done - perhaps presidential 'adviser'). Minister Konovalov's response to the media is priceless: "On this matter, there's only one thing to say: this information belongs to a category of rumors or, better yet, gossip. It's sort of a Russian national game, in which I don't participate." Other outlets have reported that Bastrykin's move to the Justice Ministry will in fact enable Konovalov to replace SPB Gov. Valentina Matvienko, which Konovalov has also denied.

Even if Konovalov goes to SPB, Medvedev still has a cadre of lawyer friends lurking in the background, ready to fill these key posts. Konstantin Chuichenko - who gets extra credit for having been both a classmate of Medvedev and was a KGB officer (and worked at Gazprom) - is currently working as an adviser to Medvedev and sits on the Anti-Corruption Committee. Another Medvedev classmate, Nikolai Vinnichenko was the Chief Prosecutor in SPB and then Head of the Federal Bailiff's Service until an untimely death forced Medvedev to name him the Presidential Envoy to the Urals. Lastly, there's the current head of the FBS, Artur Parfenchikov, whose promotion from Deputy Director was prompted by Vinnichenko's departure.

Possible Impacts

In order to understand the impact this would have, you need to recognize that Konovalov and Gutsan are Medvedev's people. Gutsan and Medvedev were in the same law school class, and Konovalov is also a lawyer from St. Pete, though a few years younger. More important, control of the entire Prosecutor General's office implicates an exponential increase in Medvedev's power. Also, this will be the first time in a decade that the siloviki do not have any representation at the top of the country's prosecutorial agencies. This matters because Russia is not like some African and Latin American countries with a long history of military coups (1993 is the closest it's come recently). Instead, Russia's strange hybrid of legal formalism and open elite warfare means that controlling the prosecutorial system is a key source of power.

Update: and today Konovalov is in the news talking about delegating some of the Federal Bailiffs Service's more mundane powers - specifically the collection of court judgments - to private agencies. This would bring Russia's system into conformity with American (and I presume other Western) standards, under which a victorious plaintiff is free to enforce a judgment on his own. Currently, Russian law requires the use of the FBS for the enforcement of any judgment. Konovalov was quick to stress, however, that they do not mean to replace the FBS entirely. Indeed, this would contradict efforts by first Pres. Putin and now Pres. Medvedev to strengthen the FBS and expand its mandate, most recently in April of this year.

One possible explanation for this move is that freeing up the FBS' portfolio could make it more useful to Medvedev, as I hypothesized earlier. Another possible route they could take is to merge the FBS into a new, federal law enforcement agency. This has actually been put on and taken off the table multiple times, most recently in the form of a proposed Federal Investigation Service (Федеральная Служба Расследований), which was supposed to be a Russian version of our FBI.

And now here's Medvedev - allowing the FBI to come over and work with the Investigative Committee on Paul Klebnikov's 5-year-old murder, against the backdrop journalists and human rights activists being murdered with impunity and never a conviction. In this context, I think he could make a compelling argument for his new law enforcement body.

The Center for International Private Enterprise released a report today by the Russia-US Joint Working Group on Investment and Institutional Integrity. In it, they make many recommendations to both Presidents Obama and Medvedev regarding cooperation in anticorruption and business/investment issues. The report does a very good job of identifying what legal and political steps need to be taken next in Russia's 'war/battle with corruption'. The suggestions range from adjusting Russia's corruption laws to making institutional changes for enforcement. All in all, it's well worth skimming if you have time. You can learn more about CIPE's anticorruption programs here.

One note worth pointing out - Pres. Obama attended the meeting that CIPE, Transparency International and others put on in Moscow. Some legal commentators were speculating as to whether Obama would make anticorruption a priority in his administration and at his DOJ, specifically whether he would pursue strict enforcement of the Foreign Corrupt Practices Act (FCPA). I think based on his public statements and actions so far, the answer is probably yes.

I really couldn't wait for this publication to be released, and I've been checking the OECD site every day to see if they accidentally posted it before the scheduled July 15 release. The OECD's conclusions and recommendations in such reports are important because Russia is currently moving towards membership negotiations. Thus, issues identified in the report will likely recur in negotiations. And though I haven't had time to read it cover to cover, so far I have to say I'm a little disappointed based on how great the previous report was.

The Nov. 2006 OECD Report

The last OECD Economic Survey of the Russian Federation was released in November 2006. Back then, the OECD rightly noted that, while Russia's economic growth was certainly impressive, it was largely a product of a few discrete factors. More important, the OECD wrote that some of these factors (e.g., the underutilized capacity from the Soviet era) were factually incapable of continuing to sustain economic growth, while others (e.g., high prices for extractive resources) were both unreliable and do not clearly yield a net benefit to Russia. The report ultimately recommended (i) improving public administration, (ii) encouraging innovation, and (iii) reforming health care.

The July 2009 OECD Report

So I was fully expecting a new report that would not only revisit Russia's progress in the areas raised by the last report, but also amplify on how these issues exacerbated the effects of the crisis in Russia. But the new report is somewhat disappointing.

The three impacts of the crisis that the new report focuses one are (1) collapsing oil prices, (2) drying up of international sources of credit, and (3) exchange rate volatility related to the oil price fluctuations. The OECD's proposed remedies include (1) reforming the tax structure for the energy sector to 'enhance economic efficiency', (2) a 'switch to inflation targeting' monetary policy that would complement Russia's fiscal policy and [purportedly] ward off Dutch disease, (3) making the banking system 'more efficient and less crisis-prone', and (4) reduce regulation/state involvement in the economy.

I think the OECD kind of dropped the ball with this report. First, we all know that Russia is overreliant on oil, and that when prices fall it messes up their growth, exchange rate, etc. Second, Russia's major problem over this last boom period was not specifically the failures of its banking system, but rather its overreliance on a Western banking system that collapsed without warning. What model should the Russians follow?

But the most disappointing part of this Survey is that it abandons the structural critique from the last report in favor of an IMF-like approach that is limited to fiscal, monetary, and tax policy. Russia has already expressed its desire to implement the policies that the 2006 Survey recommended, and I think the OECD is the best-suited institution for assessing and encouraging their progress. Perhaps the OECD decided to declaw its report due to the imminent negotiations with the Russians. Still, even if this is the case, it is a mistake to divert attention from the structural issues that are what most distinguish Russia from OECD member countries.