Putin’s crackdown on state sector proves to be more show than substance

By Jason Bush ,Reuters

MOSCOW — Vladimir Putin has ordered Russia’s state firms to clean up their act, but without fundamental reforms he may only scratch the surface of endemic graft and conflicts of interest that tar the country’s bloated national champions. Such reforms would require Putin to dismantle an entrenched system of corruption, patronage and cronyism, in which many of his own allies are enmeshed through their ties with the state-owned giants that are the focus of the crackdown. “The problem is that all these state companies are very well-connected, and not well controlled,” said Elena Panfilova, the head of the Moscow office of anti-corruption body Transparency International. The prime minister has his eyes on a triumphant return to the presidency in a March 4 election. As well as rhetorical swipes at unpopular oligarchs, Putin has taken aim at the state giants that dominate energy, infrastructure and banking. “Of course it’s a pre-election move, to show an effective program against corruption,” said political consultant Dmitry Orlov, who advises the pro-Putin All-Russia People’s Front movement. “But this isn’t just a PR move: It’s a real move that affects thousands of managers at these companies and their suppliers.” In a bid to prevent state-appointed managers from rewarding themselves or their relatives with lucrative contracts, Putin has instructed all state companies to furnish details about the ownership of every firm with which they do business. He has also told state auditors to investigate the biggest state-owned firms, including gas producer Gazprom, oil pipeline operator Transneft, railway company RZhD, and banks Sberbank and VTB. The initiatives followed mass protests against alleged fraud in December’s parliamentary election that also illustrate public frustration at Putin’s failure to tackle business corruption. The most popular opposition leader, blogger and shareholder activist Alexei Navalny, first gained fame by exposing dubious financial dealings at major state companies. Navalny caused a public outcry in 2010 by leaking a confidential government report detailing massive cost overruns, which he said totaled US$4 billion, in the construction of an oil export pipeline to the Pacific coast by Transneft. While Putin has an electoral interest in preventing further such scandals — or at least being seen to do so — skeptics doubt he is serious about taking on vested interests with which he is himself closely entwined.

‘Serious corruption risks’ Corruption is widely acknowledged as one of the biggest deterrents to foreign investment. Russia saw a net capital outflow of US$84 billion last year, while capital investment as a share of gross domestic product — at around 20 percent — is significantly below most other emerging markets. The prime minister is talking tough. At a meeting with senior power-sector officials in December, he blasted managers for abusing their positions to line their own pockets. Putin cited a government probe which showed that out of 352 state-appointed managers in the sector who were investigated, no fewer than 169 were involved in private businesses on the side. These “pocket” companies — typically suppliers, contractors or intermediaries — had taken hundreds of millions of dollars offshore, he said. “It’s no secret that this creates serious corruption risks, or at a minimum conflicts of interests,” Putin fumed. “We need to bring order here.” Several officials singled out by Putin have since resigned, including regional power chiefs, two deputy general directors of the federal grid company FSK, and a deputy general director of MRSK Holding, which owns government stakes in 11 regional power distributors.