Welcome continued

Right now, it is unclear who the main candidates may actually be. President Putin is constitutionally permitted to run for his final six-year term, but has been more than usually coy about his intentions and has still not confirmed his candidacy. In the meantime opposition leader Alexey Navalny, who has declared his candidacy, will be prevented to run due to a much-criticised five year suspended sentence he received for fraud. We will discuss in this edition of our newsletter the impact of some of Navalny’s large-scale anti-corruption protests.

As author of this Russia/CIS RiskWatch, I am delighted to introduce Nabi Abdullaev. Nabi has recently joined Control Risks after a long and distinguished career in journalism, beginning as a news agency stringer during the first Chechen war of the 1990s, and culminating in chief editorial positions at The Moscow Times and RIA Novosti. Nabi examines for us some of the key issues to look out for over the coming months, including the sustainability of the protest movements and the extent and resonance of the anti-corruption message across society.

In the run-up to March’s election, we will be running a series of webinars examining these and other issues, and what they mean for our clients and the wider business community, so stay tuned for more information in due course. As always, we welcome your comments and feedback, and may I take this opportunity to wish you an excellent summer.
 

With all best wishes,

Tim Stanley, Senior Partner

Things you should know about the recent protests in Russia

Thanks to the media machine in the US, it would be hard to find someone who didn’t know about allegations that Russia interfered in the US electoral process. But understanding the scope of Russia’s other most dramatic development – the series of nationwide anti-corruption protests – is another matter. What do they mean for Russia’s political future? How serious are they? What do they mean for the business community?

So to cut through the media noise, here is our assessment of what you really need to know about these protests:

• The protests will not threaten Vladimir Putin’s re-election. In the unlikely scenario that Putin should not decide to run, the protests also would not disrupt the election of a hand-picked successor (see article number one in this edition). The country’s leadership fully controls the national election machinery and can mobilise many more people for street rallies in support of Putin than the opposition can ever mobilise against his administration.
  What the recent protests did achieve, though, was to thwart the Kremlin’s vision of its candidate returning to office on a wave of international geopolitical success. The protests poked large holes in the narrative that the March 2018 vote will be a confirmation of the nation’s confidence in Putin. The Kremlin will now have to fight at home to protect the legitimacy of the next presidency, as it did six years ago.
• Putin still does not seem to understand the genuine grievances behind the protests. President Putin, at least in his public remarks on the topic, continues to explain away street protests as triggered by external, foreign actors. Many lower-ranking officials follow this line themselves in how they deal with public protest. Even the most apolitical protests are attacked by the authorities as attempts on state order and national sovereignty, accusations that invite brutal police crackdowns. This, in turn, radicalises the protests: those coming out onto the streets are prepared to be beaten and, perhaps, even jailed, and, as such, are as well prepared to raise the stakes to make the authorities hear them.
• Larger numbers of protests do not mean a higher impact. Russian public protests to date have been largely divided, with different protesting constituencies seeking to achieve objectives relating to local interests that have little resonance with the broader public (e.g. truckers’ rallies outside Moscow and in Dagestan, clashes of factory workers with Russian Guard officers in the Jewish Autonomous Region, Moscow residents protesting against the razing of their apartment buildings).
  While the number of protests is rising, they have so far failed to reach a critical mass and are unlikely to do so before the elections. There is no organisational infrastructure to turn these mass protests into political capital, lock in success and build on further.
  The response of the authorities to the various protesting groups is designed to undermine them. Among those tactics are pitting different groups against each other, co-opting their leaders, intimidating them with heavy-handed policing or lawsuits or paralysing them with overwhelming bureaucratic red tape.
• The protests will not help the opposition obtain power any time soon, but they will be instrumental in returning public politics to Russia. Anti-corruption whistleblower Alexey Navalny, the last remaining major protest leader and the only self-declared presidential candidate so far, is seeking to create an organisational infrastructure. He is doing this physically, by opening a network of ‘regional headquarters’ for his presidential campaign, and electronically, by building a significant and robust following on the internet.
  But Navalny will be unable to utilise the protests as part of his presidential campaign. His recent conviction for fraud by a regional court bars him from being officially registered as a candidate, barring some unforeseen deus ex machina event. That said, the protests have made him the best-known public politician in Russia, and the authorities do have to cave in to him, at least by allowing his activists to rally in Moscow and other major Russian cities.

Pay less attention, then, to the growth of street protest activity – it will not prevent international companies from doing business in Russia. Think instead of whether the authorities will allow broader public participation in politics and will engage in dialogue. There have been some positive indications lately, including the public demonstrations against changes around the housing conflict in Moscow.

Russia’s Corruption Snapshot: Three Days in May

The Russian government has made numerous attempts to snatch back the anti-corruption agenda from Putin’s critics, using the arrest and prosecution of high-profile officials as proof that the state is cracking down. These moves have had little effect on the ‘entrepreneurial climate’ here; global anti-corruption watchdog Transparency International ranks Russia 131 out of 176 countries for businesses’ perceptions of corruption, alongside Iran but below Sierra Leone and Paraguay. The arrests of government officials, governors and mayors, followed by bombastic media campaigns displaying their shocking ill-gotten gains, have not reassured the business community. Observers who follow these issues closely instead see that the anti-corruption crackdowns are inconsistent, often politically driven, stem from personal vendettas and regularly ensnare the law enforcement and security officials tasked with fighting corruption. Control Risks looks at this activity on several levels – from regulatory to institutional to political – and helps our clients navigate real and perceived corruption risks. A media snapshot below, from three randomly chosen consecutive days last month, is a good example of how controversial and inconsistent the government’s anti-corruption effort is.

22 May

• In a spat between ‘official’ and ‘popular’ warriors against corruption, Vasily Piskarev, the head of the State Duma (lower house of parliament) Committee on Security and Countering Corruption, asked the prosecutor general’s office to investigate Ilya Shumanov, the head of the Russian branch of Transparency International, on allegations of blackmailing and threatening Piskarev’s Duma colleague, Natalya Poklonskaya. Shumanov had tweeted that he would consider investigating Polonskaya, a former prosecutor in Crimea, after she called for a corruption probe into the TI branch in Russia and Alexey Navalny’s Fund to Fight Corruption (known by its Russian acronym, FBK). The two groups consistently expose corruption among top Russian officials.
• On the same day, the same Duma Committee recommended that lawmakers reject a bill allowing the confiscation of property of relatives of those convicted of crimes of corruption.

23 May

• Ivan Karnilin, mayor of Nizhny Novgorod, Russia’s fifth-largest city, stepped down from his post. In December 2016, Navalny’s FBK had disclosed that Karnilin’s family owned two apartments in Miami, Florida, worth a total of $1.9m. Karnilin had not listed these apartments in his property declarations as required by law. In April, Russian business daily Kommersant reported that Karnilin had met with the top federal officials in Moscow to “discuss his future.” Shortly after that meeting, he resigned.
• A court in central Russia’s Voronezh region refused to dismiss the head of a local district administration, Pavel Ponomaryov, from his post, despite a request to do so filed by the Investigative Committee (a Russian analogue of the FBI). Ponomaryov confessed to pressing a local businessman to donate $8,000 for repair works on a local church. When the businessman refused, Ponomaryov ordered that the street entrance to his shop be blocked by concrete blocks until the businessman paid.
• A Moscow district court ordered the arrest of all property belonging to Viktor Zakharchenko, the father of Dmitry Zakharchenko, a former head of the anti-corruption department in the federal interior ministry. In September 2016, Dmitry Zakharchenko was arrested on suspicion of receiving a $800,000 bribe. Over $150,000,000 in cash was found in his sister’s Moscow apartment.

24 May

• Moscow police chief Oleg Baranov fired four top commanders of the department that investigates crime at so-called ‘sensitive sites’, including space industry facilities, in the Russian capital. The purge was triggered by a Federal Security Service (FSB) probe into the fifth-highest ranking officer of the department, Maxim Rybkin, who is suspected of extorting $400,000 from a company investigated by his department in exchange for closing the investigation. Every officer in the police department has been subjected to a polygraph test since Rybkin’s arrest in April.
• Russia’s interior ministry announced it had reviewed corruption allegations against Prime Minister Dmitry Medvedev that the FBK published in a video. The video, ‘On vam ne Dimon’ (‘He’s not your Dima’), which has been viewed over 20 million times on YouTube alone and triggered nationwide protests at the end of March. The FBK claimed that Medvedev and his associates had built a private fortune, including mansions, estates and even a Tuscan winery, using a network of fake charitable organisations backed by donations from business tycoons. According to the ministry, none of the facts reported in the investigation constitutes corruption. Last month, a Communist State Duma deputy, Valery Rashkin, had requested that the FSB investigate claims made in Navalny’s investigation. The FSB gave a classified response that has not been published.
• A criminal case was launched by the Investigative Committee against a former senior police investigator serving in the anti-corruption unit in the city of Krasnodar in southern Russia. The officer is alleged to have initiated an investigation into a local company and then demanded a bribe of $7,000 to close the investigation. The head of the company complained to the FSB and the anti-corruption investigator was arrested in April.
  And finally, in a critical second reading, the State Duma unanimously voted for a bill to create an official, publicly available list of former officials dismissed from jobs for corruption. People from this list will not get government jobs, according to the bill.

Russia’s Scenarios: Sure Things and Uncertainties

There was a deluge of predictions in recent weeks around what will happen to Vladimir Putin’s Russia when his current term in power expires in March 2018. Let’s try to analyse how several important uncertainties might shape Russia’s future by focusing for now on factors we know with a reasonable amount of certainty.

What we (almost) know for sure:

• The Russian economy will stagnate, or at best, show faint growth for another year or two. There is growing consensus that Putin will not initiate any structural reforms of the Russian economy, no matter how often the topic is publicly discussed. Last year, the Russian president ordered three such draft programmes at once – from former Finance Minister Alexei Kudrin’s liberal Center for Strategic Research, from the conservative Stolypin Club together with business ombudsman Boris Titov, and from the Russian Ministry of Economic Development. After each of these very different programmes were presented to him earlier in June, Putin ordered them merged into one, a move that only reinforced the doubts that he was at all serious about reforming Russia’s economy and governance system. What’s more, Russia’s political and business elite does not seem to want economic reforms. After all, 70% of Russian GDP is created by the state and state-run companies, according to the 2016 estimate by the Federal Antimonopoly Service, and any attempt to dismantle this model bears serious risks to its influential beneficiaries. Instead, top public officials compete in coining contentious and sometimes non-legal bills and regulations aimed at expanding and cementing state control.
  The Russian commentariat agrees: When it comes to the economy, most Russians’ outlook is pessimistic. Putin’s persistently high approval ratings stem either from apathy, or from the knowledge that things could actually be a lot worse.
• Vladimir Putin will be re-elected in March 2018.
  As has been the case in previous elections, attempts to challenge the incumbent order will be demonised by the government and its loyal media outlets. Official moves to quash the protests will be presented as protective of national sovereignty and security. Anti-corruption whistleblower Alexei Navalny would have won only 1% of the vote if the presidential election were held “the next weekend” in April 2017, according to a May 2017 poll by the Levada-Center, an independent Russian think tank. 48% of respondents said they will vote for Putin.
  Navalny is cast in the public eye as an enemy of the state; he was even likened to Hitler in a recent online video on a pro-government media website. Political analysts agree that while Navalny has proven adept at bringing thousands of protestors into streets across Moscow, he will not be able to mount a successful campaign if authorities block official recognition of his political party.
• Russia’s stance on Ukraine and Syria will not change in the near future.
  With sluggish economic growth forecast for the foreseeable future, foreign policy achievements – or what the Russian leadership describes as such – become instrumental in helping maintain the domestic legitimacy of the Putin administration. In Ukraine, the Kremlin argues, it prevented NATO from coming closer to the Russian border. In Syria, Moscow is demonstrating, even if in a limited manner, the geopolitical ambitions of a proper superpower, interfering in conflicts far from home.
  For Putin, there is no turning back in Ukraine – that would negate the red line he drew and on which he staked his foreign and domestic policies for the past three years.  What’s more, there’s no pressure to backtrack – Russia has absorbed the world’s disapproval (e.g. sanctions) without any damage to his presidency. In Syria, Moscow can change its stance, but not without a quid pro quo from the West. For now, there is none, and there won’t be for a while, particularly in light of US sentiments toward Russia. Moreover, the cost of maintaining the status quo in Syria is negligible for the Kremlin: the death toll among Russian servicemen is low, as is the cost.
• Western sanctions against Russia will continue as US President Donald Trump avoids provoking another round of damaging questions about his alleged ties to Russia and aggravating his shaky position at home. The truth of the matter is that Russian-US ties – while important – are not important enough to merit much outrage from the business community in the US. Contrast this with the much louder frustration from the European business community, which would like to see the sanctions eased. But European countries are governed by pro-EU leaders who are ostensibly not Putin sympathisers.

So much for what we already know. The challenge is to identify and explore gaps between and beyond these factors – the critical uncertainties. This is where risk genuinely resides.

The main uncertainties:

• A domestic power vacuum. Putin recently has been demonstrating much more interest in international affairs. He is disengaging from the management of the country’s internal matters. This loosening of the so-called power vertical (the system of strict top-down control) creates opportunities for what can be described as informal ‘pockets of power’ in federal and regional governments. Most often, these newly emboldened players are controlled by people from the law enforcement and security services, but this is not always necessarily so. So the question is: How competent, active and strategic will the actors be who fill the void, and to what extent will their agendas be helpful or harmful for business?
• Provocation/distraction? In the run-up to his re-election, Putin may make a bold public gesture to send a clear message to his national and international audiences and to reverse what he sees as the domestic trend toward apathy. Putin’s international audience is already accustomed to his periodic piques. But this time, if Putin once again decides to raise stakes in the confrontation with the West, what will it look like? Will it be limited to rhetoric, or will it result in new policies? Who will implement these policies, and how? And what response would we need to expect? 
• And perhaps the murkiest of all: Putin’s social contract with the Russian people might crumble. This uncertainty foresees the collapse of the agreement made with the Russian people at the outset of the Putin presidency: “I’ll make you wealthier and stay out of your private lives. In exchange, you stay out of politics.” When oil prices plummeted in 2014, the deal was tweaked: “I may not make you as wealthy as I initially promised, but you will live in a global superpower.” But the state started to inject itself increasingly into private lives, from injecting ideology into school programmes to intimidating theatres and exhibitions. So the question now is, how long will the population endure this and how will they react once it is “too much”? Will these conflicts inflate to an extent that threatens local, regional and even national stability?

The final challenge – particularly acutely for the international business community – is to answer these questions in a way that is durable and robust. This may not be possible. Russia faces a dynamic political and economic environment influenced by factors of varying intensity. Control Risks is closely monitoring these developments, analysing them through several sets of lenses (including the ones described above), and is well prepared to provide critical counsel on these topics to clients in a variety of formats at any time.