Russia's wheels of power are grinding to a halt.
That's the assessment of five officials close to President Vladimir Putin, who say that a struggle at the heart of his inner circle is slowing decision making as sanctions squeeze the economy. With Putin focused on foreign policy, rival factions are battling for influence, said the people, who declined to be identified discussing internal issues.
One group, centered on Prime Minister Dmitry Medvedev, is concerned about Russia's increasing alienation from the global financial system, said the officials. The other, which includes heads of state companies such as Igor Sechin of OAO Rosneft (ROSN) and veterans of the security services, favors greater state control over the economy, they said.
Russia's ruling elite is convulsing as the economy careens toward recession, the ruble hovers near a record low and the conflict in Ukraine pushes the country deeper into a standoff with the U.S and its allies. With oil, Russia's largest export, at a 27-month low and banks increasingly turning to the state for funding, there's less money to go around.
"The long-running conflict between rival pro-Putin camps has elevated to war," said Stanislav Belkovsky, a Kremlin adviser during Putin's first term who heads Moscow's Institute for National Strategy. "The elite are fighting for a shrinking pool of assets."
The president's spokesman, Dmitry Peskov, said the disputes among officials don't affect the efficiency of governing and it's "untrue" to say that Putin is too busy to address urgent economic issues.
"There have always been disputes," Peskov said by phone. "There are disputes and there will be. But to say that there's an escalation is absolutely wrong."
Heightening the feud between the rival groups is the arrest of billionaire Vladimir Evtushenkov and the legal campaign by prosecutors to nationalize his oil company, OAO Bashneft (BANE), according to the officials.
Evtushenkov, confined to his Moscow mansion since Sept. 16 on allegations of money laundering, is closely aligned with Medvedev and his allies, according to the people. They are at odds with the "siloviki," a group of powerful policymakers that includes men like Putin's chief of staff, Sergei Ivanov, who share a security service background and have worked with the president for decades.
Evtushenkov, whose OAO AFK Sistema (SSA) holds stakes in companies ranging from Bashneft to cellular operator OAO Mobile TeleSystems (MBT), is the richest Russian to face criminal charges since Mikhail Khodorkovsky. That prosecution led to more than 10 years of jail time and the dismantling of his Yukos Oil Co., which once had a market value of more than $36 billion.
"Medvedev will lose this battle and Bashneft will go the way of Yukos," Belkovsky said.
Medvedev's spokeswoman, Natalya Timakova, declined to comment on the Evtushenkov case or on relations between top officials. Sistema's press service declined to comment.
Khodorkovsky, speaking at the Council on Foreign Relations in New York today, said the continued use of the court system as a political tool demoralizes Russians. He also said that it's hard to imagine Putin, after 15 years in power, stepping aside in a peaceful transition.
Evtushenkov's legal troubles, like Khodorkovsky's before him, show how damaging the conflict within the power structure can be for the losing side, said Olga Kryshtanovskaya, a sociologist studying the country's elite at the Russian Academy of Sciences. His fortune has tumbled 70 percent since January to $3.1 billion, according to the Bloomberg Billionaires Index.
"State corporations are on the offensive against private business," Kryshtanovskaya said. "There is a deficit of resources. They need resources and Putin needs loyalty and controllability."
Officials, already divided over Ukraine, are now keeping their heads down, waiting to see how the case against Evtushenkov plays out and who might be next, the people said.
Lawyers for Evtushenkov, 66, say he's innocent of the charges, which relate to the privatization of Bashneft. Sistema completed its acquisition of the oil producer in 2009, when Medvedev was president, from companies controlled by the son of the former leader of Russia's Bashkortostan region, where Bashneft is based.
Putin tried to assuage investors concerned that the case may be a prelude to a wider campaign to regain state assets, saying at a forum in Moscow on Oct. 2 that there won't be a "mass review" of privatization.
The five officials, who spoke after Evtushenkov's arrest and before Putin's comments on asset sales, said the gridlock has made it almost impossible to implement policies needed to steer the economy away from recession and adjust to sanctions. The U.S. and the EU have all but closed their debt markets to Russian companies, which has stoked capital outflows and driven stocks, bonds and the ruble lower.
The ruble sank 14 percent against the dollar in the three months ended Sept. 30, the worst quarter since 1999 and the biggest drop among global currencies monitored by Bloomberg. The dollar-measured RTS Index of stocks fared even worse in the period, falling 18 percent for the worst quarter in three years.
The benchmark Micex Index (INDEXCF) of 50 stocks rose 2.6 percent as of 6 p.m. in Moscow, heading for the biggest gain in a month. The ruble strengthened 0.1 percent to 39.91 per dollar.
Russia may be slow to react to economic issues because Putin is preoccupied with foreign policy and Medvedev, a former corporate lawyer, has become indecisive, two officials said.
That leaves room for the power brokers to maneuver.
Sechin, one of Putin's closest allies, was his deputy chief of staff and Rosneft's chairman when most of Yukos's assets were seized and sold off, helping turn the company he now runs into the world's largest traded oil producer by output.
Sechin, a Soviet military translator in Angola in the 1980s, denied reports including in the Vedomosti newspaper that he orchestrated the Evtushenkov case in a bid to gain control over Bashneft, one of the country's fastest-growing oil companies. Sistema had planned to raise $1 billion or more selling Bashneft shares before prosecutors froze the company's stock and filed suit to return them to the government.
"It's a myth" Sechin, 54, said in a Sept. 26 interview on a research ship in the Arctic, where Rosneft just struck oil. "Some agencies have a method: distraction with a red herring, and in this case the red herring is me."
Sechin drew a parallel between the Bashneft investigation and one involving Croatia's largest energy company, INA Industrija Nafte d.d. That resulted in several criminal cases, including against a former de facto head of state, Ivo Sanader, who was convicted of bribery and abuse of power.
"No one is saying that this situation has destroyed the investment climate in Croatia," Sechin said. "Just the opposite, some heads of state bodies are held, investigations are continuing. And this market is considered highly transparent, lawful and safe for business. I think it's necessary to treat this situation this way."
As for Medvedev, Sechin said "the government is headed by a respected prime minister with immense experience."
Yevgeny Yasin, a former economy minister who is now an academic adviser at the Higher School of Economics in Moscow, said the infighting is being fueled by the sanctions and the "overall crisis" in the economy.
"This is creating a dire financial situation, particularly for state companies friendly to Putin, which are now vying for shrinking state resources," Yasin said.
At the top of that list is Sechin's Rosneft, which in August asked the state for as much as 1.5 trillion rubles ($38 billion) of aid, a senior official with direct knowledge of the request said at the time. The company, which pumps 40 percent of Russia's oil, is heavily indebted and sanctions bar it from western markets for all but short-term debt.
With issues related to Ukraine taking up most of Putin's time, Sechin and the other Putin loyalists who run major state holdings, such as Rostec, OAO Sberbank (SBER) and VTB Group, are compensating themselves for being hit with sanctions by extending their dominance over key areas of the economy, said Yevgeny Minchenko, director of the International Institute of Political Expertise in Moscow.
When Putin came to power at the end of 1999, state companies accounted for about 30 percent of the economy, according to BNP Paribas SA. (BNP) Now the share is more than half.
Unlike Putin's first two terms as president, when Medvedev and other "economic rationalists" had more freedom and growth averaged 7 percent, this cabinet is dominated by "statists" who want to expand the state's role in the economy, according to Masha Lipman, an independent political analyst in Moscow.
"When there's a clash between economic efficiency and rationalism and control and sovereignty, Putin always opts for the latter," Lipman said. "The desire of the statists to be fully in charge has intensified. This trend has become irreversible. Medvedev is at risk and removing him as premier would take away the last defense of the rationalists."
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