Medvedev’s message in a bottle

photo_helmer

The crisis’ fangs and the Russia’s economy, or about the traps of sovereign democracy – In dialogue with John Helmer

John Helmer is the longest continuously serving foreign correspondent in Russia, and the only western journalist to direct his own bureau independent of single national or commercial ties. He first set up his bureau in 1989, making him today the doyen of the foreign press corps in Russia. Born and educated in Australia, then at Harvard University, Helmer has also been a professor of political science, and an advisor to government heads in Greece (Andreas Papandreou), the United States (Jimmy Carter), and Sri Lanka (J.R.Jayewardene). Before Russia, Helmer published several books in the US on military and political topics. Essays on the American presidency and on urban policy in the US followed in book compilations in 1981 and 1982; essays on Greek and Middle Eastern politics between 1986 and 1989. Since 1989 he has published almost exclusively on Russian topics. Today,  Helmer is one of the most widely read  specialists in the business world for his news-breaking stories on Russian oil and gas, base and precious metals, diamonds, mining, shipping, insurance,  and business policy.

- Recently, President Medvedev urged Russian oligarchs to pay their “moral debt”? What does this mean in concrete terms?
– Moral debt in Russia is a case of the three monkeys who see, hear, and speak no evil. In theory, the Russian President means that men who seized most of Russia’s natural resource wealth more than a decade ago by a combination of corrupt and fraudulent means, and then generated vast fortunes abroad by manipulating Rus­sia’s weak tax and capital controls, have an enormous debt to repay to the state and the economy. In practice, Medvedev does not intend to name names, let alone take any action to collect that debt, whether moral or fiscal.
Indeed, Medvedev is going to unusual lengths to protect one of the oligarchs, Oleg Deripaska, from having to honour the loan obligations he has to Russia’s state banks, as well as to a group of more than 70 commercial banks, some Russian,  most foreign. If anyone in Russia carries the largest moral, as well as money debt today, it is Deripaska. Consider then why Medvedev said, at a regional confe­ren­ce in Irkutsk on February 20, in Deripaska’s presence: “I fully agree with what Oleg Vladimirovich [Deri­pa­s­ka] said about situations when the crisis leads to settling scores… There should be no situations when different  structures’ rivalry can lead to the collapse of  an entire group of com­panies… Such actions should get adequate reaction from the state. For that purpose we have one serious institution, the government of the Russian Federation… There are situations when power must be used.”
In case anyone was in doubt that Medvedev meant to reach up, and put his arm around Deripaska, he repeated the message at a Kremlin meeting on March 17. On that occasion, the presi­dent was meeting with Mikhail Frid­man, controlling shareholder of the Alfa Bank group. Alfa, to whom Deri­paska is overdue in repaying between $650 million and $1 billion, has led the commercial banks in launching court action in Moscow, and also in Jersey (where Deripaska registers some of his companies). Medvedev the lawyer appeared to be telling Fridman the banker: “We cannot sacrifice entire companies with many thousands of staff to meet the ambitions of certain credit organizations.”
It is one thing for a politician not to mean what he says, or to mean different things to different audiences. It is quite another thing for a politician to say things he has no power to do, with  the purpose of intending to do in secret what he would not dare ack­nowledge in public. In Medvedev’s case, he has been attempting to save Deripaska from the folly of the latter’s actions, many of them grave violations of Russian law; and save him from the very same bankruptcy procedures in the Russian courts by means of which Deripaska took control of many of his Russian properties. With debts owed by United Company Rusal and the companies of the Basic Element exceeding $20 billion; with an obligation to the founding shareholder and former partner, Mikhail Chernoy, of more than $6 billion; and with cash-out obligations to other shareholders of at least another $15 billion, noone is more indebted in Russia than Deripaska. Some even claim that he has lost a personal fortune of more than $10 billion in cash taken out of the Russian businesses, and either invested with the Rothschilds, or spent on luxury real estate in London, New York, France, India, and Japan. If the­re’s a moral in oligarch debt, Medvedev doesn’t need his secret agents to tell him how big that moral is in Deri­pas­ka’s case. But the president is doing more than covering his eyes.  Medvedev has authorized two of his subordinates – his economic advisor, Arkady Dvorkovich, and the head of his anti-crisis committee, Igor Shuvalov – to write letters, call meetings, and make announcements to the banks with the intention of saving Deripaska from forfeiting his assets. Not a word has been said about the notorious tax evasion schemes that have been documented in the UK, demonstrating how Deripaska looted Russian resour­ce wealth and hid it abroad. Not a word about Deripaska’s record of deceiving business partners, violating share­hol­der agreements, blackening rivals’ names – all evidenced in the records and rulings of the courts of the UK, Switzerland, and the US.
In the traditional Japanese maxim of the Three Monkeys, there’s actually a fourth monkey. He is meant to signify: “Do no evil”; he is usually depicted with his hand on his crotch. In Moscow today, the president has adapted this maxim for Deripaska, and added a variant of the Hippocratic Oath for doc­tors. Medvedev’s message for Deri­paska is – “you do the evil, I’ll do you no harm”.

- “It is time that the Russian Ruble to become a regional exchange currency stable against the global financial instability”, said President Dmitry Medvedev in last summer. In turn, Minister Kudrin spoke about the fact that Russian Ruble regional currencies will become the next 5 years. How realistic are these goals in the context of this global crisis that Ruble has proved to be quite weak ?
– When the Soviet Union collapsed, and Russia was seized by Boris Yeltsin, the destruction of the rouble was one of the priority targets of three Washing­ton administrations – US President Bill Clinton, the International Monetary Fund, and the World Bank. The reason was simple. As the reserve currency for the Soviet states, the rouble gave enormous monetary policy power to the Central Bank of Russia. Prising these states away from Moscow, and subordinating Russian monetary policy to Washington, required replacing the rouble with the dollar. This was a great success. Within five years, out of the territory of the old Union popped the somoni, tenge, manta, sum, dram, hyrvnia, lats, lari, kroon, and litas. If you can’t readily pin which name to what country these currencies repre­sent, never mind – all of these eco­nomies have remained dollarized.
But the Russian rouble has been able to revive. That is due in part to the poten­cy of Chinese demand for imported resources to support that country’s economic growth. In large measure also, the rouble has revived becau­se of the catastrophic policies pursued by Clinton and his successor George Bush, including their several failed wars, the last of which was Georgia’s August 2008 invasion of Ossetia. The cost of these American wars, however, hasn’t been as disas­trous for the dollar as the global boom in oil, gas, and other commodities.
The huge money surpluses gene­rated by this boom for Russian state and commercial organizations com­pel­led the Kremlin — indeed every Rus­sian with cash on his hands —  to find hedges against the loss of dollar value. It was thus inevitable that Russian strategy would begin to focus on methods for protecting Russian asset value from the dollar risks. The higher oil, gas, nickel, and other Russian expor­ts rose in dollar-denominated price, the plainer and more urgent the policy imperative became to deal with dollar risk. The crash of the US banks, followed by the bankruptcy of US credit organizations, and the exposure of unprecedented failure by the US market regulators has triggered rouble weakness, but only because demand for commodities and trade collapsed first. This is how Prime Minister Vladi­mir Putin publicly analyzed the situation at Davos recently. Calling the dollar “virtual money”, backed by “made-up reports and doubtful ra­tings”, Putin did what is rare at Davos. He said the obvious: “excessive dependence on what is basically the only reserve currency is dangerous for the world economy… most countries keep their international reserves in foreign currencies. And they would want to be confident of their security. In their turn, the emitters of the reserve and accounting currencies are objectively interested to see that their money is in demand in other coun­tries.”
Even more recently, the Chinese Central Bank Governor, Zhou Xiao­chuan, said the same thing, obliging the US Secretary of the Treasury, Tim Geithner,  to stumble embarrassingly, and with immediate impact on the dol­lar, also over the obvious. Commenting on the Chinese proposal to expand use of special drawing rights (SDRs), ins­tead of the dollar, Geithner said: “we are quite open to that”. As the dollar dropped 1.3% in a flash, Geithner was obliged to clarify his remark by saying: “I think the dollar remains the world’s dominant reserve currency.” If that wasn’t a nano-second demonstration of the weakness of the dollar, I’ll eat my roubles. But the fact is, as Putin, Zhou, and Geithner agree, there is mutual currency weakness right now. The cure for that is also mutuality and interdependency. So far as Russia is concerned, Yeltsin tried burying                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               rou­­ble, because the Americans told him to do what was good for them. Now Yeltsin is buried, and the rouble is once again alive. But Russian currency policy is no longer in the hands of simpletons and puppets.
- Western analysts have expressed serious doubts when Prime Minister Putin said that the strategy in 2020 will not undergo major adjustments. How to view these adjustments now, in the 2009 budget recalculation, of expected decreases in the rate of economic growth, massive withdrawals of capital on the Russian market and increasing unemployment, volatile exchange rate ?
– Western analysts on Russia are about as useful as three-ply toilet paper. When Russian hotel-rooms were short of toilet paper, visitors with sensitive arses were obliged to bring rolls of their own in their suitcases. Nowadays, the Russian arse can choose, and the western quality isn’t any longer the best for the cost. There’s nothing especially Russian about this — arses of all nationalities are being obliged to undergo what you call “major adjustments”.
It isn’t much of an over-simplication to say that Russian economic recovery now depends on the rate of China’s growth. But that amounts to an acknowledgement that the Kremlin has defaulted and failed on the one foundation of its economic policy everyone believed in, a year ago. This was that, no matter how severely the global economy contracted in demand for energy and raw materials, there was so much latent demand in the domestic Russian economy, and so much surplus in state cash reserves, Russian industry and GDP could, and definitely would, continue to grow. As policy doctrine goes, this was pure Keynesian demand stimulus strategy. But it has been failing for the very thing Putin thought he had sewn up over the past eight years – the POWER VERTICAL.
That is the structure of political and administrative power. It is supposed to work. But it doesn’t. The Kremlin hasn’t been able to drive its money stimulus through the banking system, and into sustaining consumer demand and domestic investment. The car and home builders couldn’t find buyers, so they stopped ordering materials. The steelmakers  turned off their furnaces. Factories switched off their lights. The electricity plants told Gazprom and the steam-coal mines to stop deliveries. Trucks, trains and container ships stop­ped running. And everyone stopped paying their bills. Instead of lending the roubles the state’s bailout bankers were handing over to resuscitate working capital, the banks converted the funds into dollars – and maximized profit that was hoarded on the balance-sheet against the rising sum of provisions for loan writeoffs and asset writedowns.
This is how it has been proved that Putin doesn’t control his economy. His embarrassment in front of the much more effective performance of his Chinese counterpart is sharp. But Putin is hardly alone in the world on this score, is he? And  Chinese misery is not so transparent that the relative command and control of the Beijing leadership can be measured reliably.
- The last file Russia versus Ukraina from series „Gas crisis” born of numerous controversies on both sides of his: economic and political. To speak of a clear win on Russia’s media war. And a relative economic gain. But Russia has gained something in relation with the European Union ? Not like, beyond the European diplomacy, Russia lost to Chapter Credibility?
– What short memories we all suffer from. Why are Europeans so forgetful that it was the Germans who pioneered the use of gas as a weapon of war?
It was also the 19th century German politician Otto von Bis­mar­ck, who famously claimed that politics is the art of the possible — before he sent his armies to invade westwards.
To judge the outcome of January’s purported  “gas war”, initially between Russia and Ukraine, but then involving many of the East European states as well, Russia’s prime minister and his Ukrainian counterpart, Yulia Tymo­shenko, ended up devising the politics of the impossible, thereby warming Ukrainian stoves for less cost, whi­le earning Gazprom, Russia’s principal enterprise, more profit, at least on paper. For the first time, it is possible to read the text of the gas agreement, signed on January 19 by Gazprom and Naftogas Ukrainy, and judge the outcome yourself, for the papers were  released to the press in Kiev, even though Gazprom officials refused to answer questions about the terms of the contract, and their impact on Gaz­prom’s revenues, as well as on East European gas prices for con­sumers.
The Russian position ended up being focused on defining the price of gas at Ukraine’s eastern frontier; establishing a formula for quarterly adjustments to this price for the remain­der of this year; fixing the volumes of new gas to be delivered to Ukrainian consumers and to European customers for the quarter, and for the year;  and to exclude commercial inter­me­diaries  upstream, between Gaz­prom and Naftogas, while allowing them downstream, between Naftogas and end-users in Ukraine.
Accordingly, Gazprom was careful to avoid stepping into the highly politicized Ukrainian debate over the internal terms of supply, mix of new and old gas, and price at consumption. Since January, it has been obvious that the clash between Tymoshenko and Ukrainian President Victor Yushchenko has continued over those terms. This confirms Moscow’s contention from the start of the conflict that the cause of the gas stoppage to Europe was Ukrainian in origin and motive, not Russian. If that is accepted, there is no substance to the Anglo-American com­plaint that Russia is an unreliable energy supplier, wielding its gas and oil as weapons against its adversaries. Put this in the Romanian context, and ask whether you, who hardly sell or buy anything at all from the Ukraine, would choose Yushchenko and Tymoshenko as preferred partners and clients, if you had a choice?

- In this context, mass media of Romania has alternated between believing proposal / agreement for the inclusion of Romania in South Stream and purchase gas without intermediaries as ironic Prime Minister Putin, or as is a serious proposal. The fact is that the authorities in Bucharest have been screened to make an official point of view in this regard. How see you these issues ?

J.H. – Personal, I think that South Stream is a serious gas supply project, and the political and commercial agreements required for the construction to start, and for the gas to flow, are being put into place. But from the Russian perspective, the priority of South Stream is lower than the North Stream project, which is being completed under the Baltic Sea to Germany. So, for the time being – a time of falling gas demand in Europe, shrinking  capital availability, and lower gas exports from Russia and Central Asia – implementation of South Stream is bound to slow down. I believe that any speculation is unnecessary at this time.

- Let’s all talk a little of manageried democracy of Russia, about, were told that the only viable solution taking into account the structure and mentality of Russian culture. Believe that Western democracy is incompatible with what the Russian people want ?

J.H. – Right now, in purely domestic terms, the destruction of parliament which Yeltsin began – to great acclaim from the West — and which Putin completed, means that the normal bargaining between regions, interest groups, and people of competing views, which parliaments have evolved historically to arrange, has no outlet – except for the Kremlin itself. That is the reason you continually hear about faction-fighting between supporters of Medvedev and those of Putin; between the siloviki and the liberals, etc., etc. Let’s be clear – there’s nothing unusual about faction-fighting, and nothing undemocratic about it either. If there is no legislature to resolve it into policymaking and budget spending, then it must flow upward to the executive branch.

There’s also nothing especially Russian in the fear politicians have of being voted out of office, and of not making themselves rich before that happens. Corruption, the premium imposed on the users of state services for getting what they want ahead of others, is democratic – in the democracy of money. And if cash is king, then the king of kings must surely be the man who spent more than anyone to get elected – Barack Obama. Right now, isn’t a little more difficult to be confident that corruption is worse in Moscow than in, say, the City of London, Wall Street, or Zurich?

When the Soviet Union disintegrated, and the Communist system was abandoned in 1991, Russian society accelerated backwards into its 19th century condition.  For some, that was an exhilarating liberation. For most, it was something else.

That is why you can understand much that is necessary to understand about Russian society, and its governance, from the book, “Letters from Russia” written by Astolphe de Custine. A Frenchman, who had narrowly escaped losing his life, family,  and property during the French Revolution, de Custine visited Russia in 1839. His book, secreted out of the country, and published in Paris in 1843, was banned in Russia until 1910, and then from 1919 until 1996.

There is one thing de Custine was in little position to evaluate when he was writing – and that was what the Russian people want. If you study carefully what happened to the demonstrations of what they wanted between 1986 to 1996, you are bound to discover  that what they wanted, and what they got, were two very different things. Yeltsin didn’t introduce choice to the Russian people. He introduced chaos,  and larceny on a scale never seen before in modern Europe.

The Russian people aren’t fools. Even before Yeltsin brought up the tanks to open fire on the parliament, they knew he wasn’t delivering democracy. And when the salvos stopped, they knew he wasn’t delivering law and order either.

Since then, the mentality of the Russian people has been to wait and see. The mentality of the minority, the liberal minority, has been to take and see. The Russian constitution, whose text Yeltsin rigged as crudely as the vote to enact it, requires the approach of fake and see. And so, observing these realities for what they are, the Russian people, among whom I am grateful to be allowed to live, come back to the position of the Three Monkeys. And to their friend and mine, the fourth monkey, whose hand may be in the only place these days that will give satisfaction.

interview by Gabriela Ionita

Published in Cadran Politic Review, no. 65, april/2009

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9 responses to “Medvedev’s message in a bottle

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  2. Hi, good post. I have been thinking about this topic,so thanks for writing. I’ll definitely be coming back to your blog.

  3. hay ! think that russian president learned much in firs year mandat…but it isn’t suficiently

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  7. west_trader

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  8. Подтверждаю. Я согласен со всем выше сказанным.

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