The Kremlin Wars (Special Series), Part 2: The Combatants

October 23, 2009 | 2047 GMT



Summary

Former Russian president and current Prime Minister Vladimir Putin is the indisputable executive power in Russia. His strength comes largely from his ability to control Russia's opposing political clans. Those two clans, which have been fighting for influence for most of the past eight years, are about to see fresh conflict as a new force, the civiliki, attempt to use Russia's economic crisis as an opportunity to reshape the country.

Executive power in Russia indisputably rests with former president and current Prime Minister Vladimir Putin. Putin emerged as the supreme political force in Russia following the chaos that defined the 1990s precisely because he stepped outside of the fray and acted effectively as an arbiter for the disparate power structures. Although Putin's background is in the KGB (now called the Federal Security Service, or FSB) and he used these links in intelligence and security services to initially consolidate his reign, his power does not rest on those foundations alone. Putin's power comes from his ability to control Russia's opposing clans through favors and fear that he will give one clan the tools and authority to destroy the other.

The two main clans within the Kremlin are the Sechin clan led by Deputy Prime Minister Igor Sechin and the Surkov clan led by Russian President Dmitri Medvedev's First Deputy Chief of Staff Vladislav Surkov. These clans have been involved in almost continual competition for power for the past eight years. The group that may tip the balance in the coming clan wars is a newly defined class that is part of the Surkov clan: the civiliki. Putin's balance of power is intertwined with economic reform, and the civiliki -- a group of lawyers and economic technocrats -- want to use the economic crisis to reform Russia.





Sechin and the FSB and Siloviki

Sechin has deep roots within the FSB and the siloviki (a term which translates as "the strongmen") who are either directly linked to the FSB or are former security officers who have tried their hand at business or politics or both during their "retirement." Sechin and his group generally have a comparatively Soviet frame of mind, but without any ideological nostalgia for communism. They do, however, long for the powerful Soviet Union, which acted forcefully on the world stage, was respected by its foes and allies, was suspicious of the West and was led by a firm (bordering on brutal) hand at home. The economic system Sechin favors is one that harnesses Russia's plentiful natural resources to fund champions of industry and military technology, and essentially depends on high commodity prices to sustain itself.

Sechin's main source of power is undoubtedly the FSB. Although the FSB is fully loyal to Putin, this does not mean that it would not side with Sechin in a showdown against its opponents. Sechin uses the FSB as a talent pool from which to fill various positions under his command, including the chairmanships of various state-owned companies. This naturally irks the civiliki, who abhor the thought of intelligence operatives running Russian companies.

Aside from the FSB, Sechin's other pillars of power are the state-owned oil giant Rosneft and the interior, energy and defense ministries. The distribution of assets between the Sechin and Surkov clans is not random; Putin coordinated it precisely so that neither clan becomes too powerful. Sechin's control of Rosneft is therefore balanced by Surkov's control of Gazprom, the state-owned natural gas company. While Sechin gets control of the energy ministry, Surkov is in charge of the natural resources ministry and so on.

Surkov and the GRU

Surkov rose through the ranks by proving himself invaluable in two key episodes of Russian state consolidation: the Chechen insurgency and the collapse of the largest Russian private energy firm, Yukos. Originally from Chechnya, Surkov played a role in eliminating a major thorn in the Kremlin's side: Chechen President Dzhokhar Dudayev. He also helped mastermind Moscow's win in the Second Chechen War by creating a strategy that divided the insurgency between the nationalist Chechens and the Islamists. His role in bringing down Yukos oligarch Mikhail Khodorkovsky began the all-important consolidation of those economic resources pillaged during the 1990s by disparate business interests.

Surkov's power base is the Russian Foreign Military Intelligence Directorate (GRU). The GRU represents both military intelligence and the military. Throughout Soviet and post-Soviet history, it has been the counterbalance to the KGB/FSB. The GRU is larger than the FSB and has a longer reach abroad, although it its accomplishments are not as well known as those of the FSB.

Also under Surkov's control are Gazprom; the ministries of finance, economics and natural resources; and the Russian prosecutor general. However, Surkov's rival Sechin controls the interior and defense ministries -- which have most of Russia's armed forces under their command. This limits the GRU's ability to control the military.

Surkov has sought to weaken Sechin and the FSB's position by constantly looking for potential allies to add to his group. In 2003, he formed an alliance with the heads of the reformist camp -- previously known as the St. Petersburgers -- that has proven to be invaluable in the context of the financial crisis. It is this group, the civiliki, that will help Surkov in his attempt to defeat Sechin, possibly for the last time.

The Civiliki

The civiliki are rooted in two camps. The first is the St. Petersburgers group of legal experts and economists that coalesced around Anatoly Sobchak, mayor of St. Petersburg from 1991-1996. Many of Russia's power players -- from Putin to Medvedev to key civiliki figures like Finance Minister Alexei Kudrin and German Gref, the former trade and economics minister and current head of Sberbank -- either worked directly under Sobchak or were somehow related to his administration. The second is the somewhat younger group of Western-leaning businessmen and economists that eventually joined the reformists from St. Petersburg.

The civiliki primarily want economic stability and believe Russia has to reform its economic system and move past state intervention in the economy that depends largely on natural resources for output. They try to be non-ideological and are for the most part uninterested in political intrigue. In their mind, economic stability is to be founded on a strong business relationship with the West that would provide Russia with access to capital with which to fund economic reforms. From their perspective, funding from the West has to go to rational and efficient companies that seek to maximize profit, not political power.

The first grouping of economic experts and Western leaning businessmen was led by Anatoly Chubais, who led the St. Petersburg group and was essentially in charge of various privatization efforts in the 1990s under former Russian President Boris Yeltsin. However, most of the St. Petersburg group was sidelined by the general failure of economic reforms enacted during this period. They were then almost snuffed out by the siloviki during the commodities boom from 2005 onward, leaving only Kudrin in a position of some power.

However, Surkov rescued the civiliki and incorporated them, giving them the powerful protector they lacked. Part of Surkov's plan was to turn one of the more prominent civiliki -- Medvedev -- into a superstar at the Kremlin. In Surkov's mind Medvedev was the correct choice since he was neither FSB nor GRU, though Surkov still felt he could influence him. This move helped Medvedev become president. Since Medvedev's ascendance to the presidency, and with Surkov's support, the other civiliki leaders -- Kudrin and Gref -- have been given even greater liberty to run the economy without fear of being replaced. Kudrin is handling the economy while Gref essentially is masterminding the banking system reform. The two of them work very well together, and with their allies Economic Minister Elvira Nabiullina and Natural Resources Minister Yuri Trutnev.

There is a rapidly brewing Surkov-backed conflict between the civiliki and Sechin. The strife is rooted in the simple issue of efficiency: The civiliki argument is that the Sechin clan wasted the good years of high commodity prices, crashed the Russian economy and weakened the state. This forces Putin to look at the conflict differently from previous clan battles. The Surkov-Sechin arguments typically are "just" about power, and thus about maintaining a balance. But the civiliki see Sechin's group not so much as a threat to them but as a threat to Russia. This is an argument that Putin has been able to ignore, but the latest economic crisis could have changed this.

The civiliki have a ready-made solution for the inherent problems in the Russian economy. Surkov's support for the civiliki, along with the financial crisis, has given Putin pause and he is giving their proposals consideration. However, the implementation of such reforms could reignite the feud between the clans and thus completely destabilize the delicate balance Putin has attempted to keep in the Kremlin.

The Kremlin Wars (Special Series), Part 1: The Crash

October 22, 2009 | 2025 GMT

Summary

Russia was hit particularly hard by the global economic crisis. The crisis and its aftermath have given rise to a force that wants to use the economic crisis as an opportunity to reshape Russia. This force is led by the civiliki, a group of lawyers and technocrats including Russian President Dmitri Medvedev. As the civiliki attempt to carry out their plans, a new round of conflict between Russia's two political clans will erupt.


The global economic crisis has hit Russia particularly hard. In the second quarter of 2009, Russia experienced a 10.9 percent gross domestic product (GDP) decline as measured from a year earlier and is expected to have its GDP decline by 8.5 percent overall in 2009. The budget surplus gained during the years of strong commodity prices has been replaced by an 8 percent budget deficit in 2009, which is expected to decrease only slightly to 7.5 percent in 2010. The state has been forced to spend a lot of its money on bailing out companies and private banks indebted to the West and has seen its hoard of foreign reserves amassed during the commodity boom decline from the pre-crisis peak of $599 billion to the current $417 billion. This economic situation has spurred the Kremlin to plan destabilizing changes that will remake Russia's internal political scene and prompt a fresh round of conflict between the Kremlin's powerful clans.

To understand the coming evolution in the Kremlin, STRATFOR is taking an in-depth look at the effects of the economic crisis on Russia thus far and the current power structures inside the Kremlin.

Origins of the Economic Crisis

The geography of the Russian steppe is dominated by vast distances and a shortage of rivers suitable for transport. Therefore, to achieve basic economic development, Russia had to build an extensive transportation network across this territory -- a task that is gargantuan in scope and cost. Furthermore, since Russia has no natural boundaries to serve as defenses, it had to expand outward from its core to establish buffer regions in order to maintain security. This exacerbated the scope and cost of the development effort. No state can achieve such development cheaply or efficiently without firm direction from above -- hence Russia's inclination toward a centralized economy.


Central planning is not perfect, however. It can ensure that a large proportion of state resources are thrown at a problem, but due to the vast need and the low efficiency, there is never enough capital. Capital is therefore Russia's most critical import because not only is it scarce domestically, it is also hoarded by the state during times of plenty, like the recent commodity boom. To overcome its lack of capital, Russia has traditionally turned to the West. Prior to the global financial crisis, Russian private banks and corporations gorged on cheap and readily available credit.

The August 2008 Russo-Georgian war, Moscow's increasing tendencies to nationalize portions of the economy and the onset of the global financial crisis in mid-September 2008 combined to bring Russia's credit excesses to an end. With investors terrified of emerging markets, Russian markets were almost completely liquidated. This resulted in not only the flight of foreign capital from Russia, but also market collapse and ruble depreciation. The latter was a double blow -- the Russian economy had to deal with both the inflationary effects of a weaker ruble and the reality that Russian corporations and banks still owed some $400 billion in foreign loans, the servicing of which only became more expensive as the ruble declined. The Kremlin spent at least $216 billion of its reserves to manage the ruble's depreciation.



Having already spent more than $200 billion to blunt the effects of the crisis, the Kremlin felt confident enough to step in and consolidate both the banking and corporate sectors which were so heavily leveraged abroad. It achieved this by issuing short-term, high-interest loans to Russian corporations and banks -- loans that it was not clear could ever be repaid. As the banks and corporations faltered, terms of the loans gave shares to the Russian state, quickly granting it considerable control over them. As of June, the Russian state held 12 percent of all bank liabilities, making the state the banking industry's largest creditor.

The Russian Economy Today

As of July, the latest data point available from the Central Bank of Russia, non-performing loans (NPL) in the Russian banking system stood at 5.4 percent, up from 1 percent in July 2008. The fear that the NPLs will rise is still prevalent -- at one point the assessment was that they could rise to a whopping 20 percent -- and that fear is motivating Russian banks to hoard cash. Despite some improvements since the worst of the global recession in March, bank lending in Russia remains firmly in the negative.

However, there is mounting evidence that investors' confidence in the Russian economy is returning. First, the ruble has rebounded and has appreciated around 19 percent against the U.S. dollar from its low of 36 rubles per dollar in February/March to its current rate of 29.28. Second, the precipitous capital flight that characterized the third and fourth quarters of 2008 has slowed dramatically. Net capital outflow from Russia has recovered from $55 billion last October to just $6 billion in September, and it even turned positive briefly in June. Third, interest in the Russian stock market has returned, particularly as investors abandon low-yielding U.S. sovereign debt and seek riskier assets that offer greater returns. Between higher oil prices (at the current $78 per barrel, oil is at more than double its February lows) and a greater appetite for risk, investors are trickling back.

With the return of some semblance of stability in the Russian economy, the question now is what Russia has learned from the crisis. The state has become much more involved in both the corporate and banking sectors. Since July, state-owned Vnesheconombank has provided approximately $10.93 billion in financing to various firms in need of funding to refinance their foreign loans. However, Russian corporations' current foreign-held loans still constitute an enormous liability -- at $237 billion ($75 billion of which is due in 2010) their levels are practically unchanged since December 2008.

Setting the Stage for a Clan War

Prompted by the global financial crisis and the economic disaster that followed, a force has emerged within Russia's power structures that seeks to use the crisis as an opportunity to reshape Russia. This force is led by the civiliki, a new term for a group of lawyers and technocrats whose main figures are Russian President Dmitri Medvedev, Finance Minister Alexei Kudrin and German Gref, former minister of economics and CEO of Sberbank, Russia's largest state-owned bank. In theory, the civiliki attempt to be apolitical and want to use the crisis to reform the Russian economy.

The civiliki exist under the aegis of the Surkov clan, the powerful Kremlin clan led by Medvedev's Deputy Chief of Staff Vladislav Surkov. Surkov intends to use economic reforms enacted by the civiliki to purge the influence of his archnemesis -- Deputy Prime Minister Igor Sechin, whose political clan is backed by the Federal Security Service (FSB) -- in the Kremlin's corridors of power. To do so, Surkov and the civiliki intend to go after the Sechin clan's business interests directly and blame those interests for the economic crisis.

While all businesses were guilty of gorging on foreign loans, the civiliki are zeroing in on those firms controlled by a specific set of businessmen in Russia that they see as better suited for non-business positions: those from the Sechin clan and the FSB. Their argument is that these companies are guilty of inefficiency in both their spending and management. Kudrin is particularly irked by the fact that the Russian state spent more than $200 billion protecting the ruble due to the mismanagement of companies whose CEOs are former intelligence officers instead of experienced businessmen.

With return of foreign interest in Russia, and with credit again available, the civiliki are concerned that the Russian corporate and banking sectors will once again overindulge in foreign capital. In the third quarter, Russian companies borrowed about $16 billion from abroad. Because locally-sourced credit will continue to be scarce, any Russian entity that cannot directly access the state's coffers will have to rely on foreign borrowing. However, the civiliki want to make sure that the companies borrowing abroad are led by people they believe to be competent individuals.

The civiliki therefore believe that there is opportunity in the effects of the economic crisis. The state stepped in forcefully during the crisis to consolidate the banking sector and to finish reining in various oligarchs, a process that began in 2004. Oligarchs have essentially ceased to exist as an independent source of power inside Russia. Their wealth has decreased precipitously, and those who were offered government bailouts are now little more than employees of the state.




But the civiliki cannot implement their plan on their own. They will need the support of their clan leader, Surkov, to help purge Sechin's forces.

The question in the Kremlin is what to do next. Having sidelined the oligarchs and tightened its grip on the Russian economy, the Kremlin can either move to establish a firm state-directed economic system or begin to compensate for some of the Russian economy's fundamental weaknesses by attracting investment and capital from abroad. To choose one over the other means a war among the Kremlin's power clans.

The Kremlin Wars (Special Series Introduction): The War Begins

October 22, 2009 | 1954 GMT



Strange things are happening inside Russia these days. Pro-Kremlin political parties have boycotted the parliament, our sources say lawsuits are about to be filed against some of the state's favorite companies, and rumors are circulating high within the Kremlin that the Russian economy is destined to be liberalized.

When looked at separately, each of these currents can be rationalized, for Russia has just recently completed elections and the global financial crisis is still hammering its economy. But a deeper look reveals instability inside what is normally a consolidated, stable and politically-locked Russia. Something much bigger and more fundamental is afoot: a war among the most powerful men of the Kremlin is coming.

Though Russian Prime Minister Vladimir Putin undoubtedly rules the country, he does not rule it alone. Over the past decade he has carefully crafted a balanced structure of power. Beneath him on the Kremlin's organizational chart are two very ambitious men: Deputy Prime Minister Igor Sechin and Deputy Chief of Staff Vladislav Surkov. Both of these men control vast swaths of the government bureaucracy, state companies and levers of power throughout the Russian system -- including the powerful Federal Security Service (FSB) and Military Intelligence Directorate (GRU).

It is the classic balance-of-power arrangement. So long as these two clans scheme against each other, Putin's position as the ultimate power is not threatened and the state itself remains strong -- and not in the hands of one power-hungry clan or another.

But having all major parts of Russia's government and economy fall under the two clans creates a certain structural weakness, a problem exacerbated over the past few years by the effects on the Russian economy of chronic mismanagement, falling oil prices and, most recently, the global financial crisis. All have weakened the state. Economic problems have become so acute that Putin, for the first time since his rise to power in Russia, has had to step back and reassess whether his system of balanced power is the best way to run the country.

The first to plant this seed of doubt were the liberal-leaning economists (known as the civiliki) within Surkov's clan, who went to Putin over the summer and told him the Russian economy had to be fixed and that they knew how to achieve that. As it happened, their plan called for excluding Sechin's clan -- especially those in the FSB -- from any involvement in economic matters. The plan presents, of course, a good opportunity for Surkov to grab hold of a critical issue in Russia and twist it to weaken his rival clan.

And it presents Putin with a pivotal dilemma. He likes the idea of fixing the Russian economy and making it work like a real economy, but it would mean throwing off the balance of power in the country -- the equilibrium he has worked all these years to achieve. And should this balance be thrown off, the effects could ripple throughout every part of Russia -- all levels of government, influential security institutions and even the country's powerful state-owned companies.

When these issues came to our attention some months ago, our first thought was that they were merely the machinations of just another high-level Russian source hoping we would promote his agenda. So we sought confirmation with a number of unrelated sources -- and we received it. The final convincing event in our minds was Putin's Sept. 29 declaration that some heavy economic reforms are indeed necessary. We cannot rule out that this could all be a disinformation campaign -- those are as Russian as vodka and purges -- but we cannot ignore our intelligence from such a broad array of sources, especially when it's combined with signs of political and economic instability now cropping up inside Russia.

So, herewith, STRATFOR presents The Kremlin Wars, a five-part series on the civiliki's ambitious plan to repair the Russian economy, the impact of that plan on the equilibrium of Russian power and the dilemma Putin now faces in trying to keep Russia politically stable as well as economically sound.

EU and the Lisbon Treaty, Part 2: The Coming Institutional Changes

The Lisbon Treaty introduces institutional changes that will increase the European Union’s federal powers and reduce the number of policy issues for which member states will retain a veto. The changes almost guarantee tensions between members favoring a strong union and those wary of losing sovereignty on key issues of national interest.

The main change brought by the Lisbon Treaty — which will take effect immediately upon ratification — is that several policy issues will be subject to qualified majority voting (QMV) rather than the unanimous vote now required. The QMV is a voting mechanism used by the Council, the highest decision-making body in the European Union. The list of issues that can no longer be vetoed by a single country includes immigration, financing foreign policy and security initiatives, and energy (To see the complete list included in the European Commission’s official document on the voting change, click on the link above.)

The treaty includes a passerelle clause that expands an existing procedure by which even more policy issues — including essentially everything that does not have military implications — could be shifted from unanimity voting to QMV. In short, the Lisbon Treaty allows the European Union to amend its constitution with very little fuss once the heads of government reach an agreement. If the leaders of all 27 member states agree to shift taxation matters to QMV, for example, they will be able to do so without an intergovernmental conference or more referendums in individual countries — essentially, without another treaty that could take years to negotiate and ratify.

Although national parliaments would have six months to lodge a complaint against such a voting shift, the fact that most heads of government in Europe are leaders of respective parliaments would make such complaints unlikely.

Although it might seem nearly impossible to get all 27 EU members to give up sovereignty on an issue, they have agreed on this through the Lisbon Treaty. Furthermore, governments rise and fall; if the European Council (which represents all 27 heads of government) wants to make a raft of voting changes, it can wait for a particularly pro-European constellation of governments to emerge.

However, STRATFOR does not expect France and Germany to immediately force legislation upon the union’s smaller member states. The European Union traditionally has favored incremental changes that avoid pushing any member state to its limit on an important issue. Therefore, Paris and Berlin will likely wait to move any new issues from unanimity voting to QMV, and will seek to limit the number of controversial measures that are passed without a veto.

The Lisbon Treaty also amends the QMV procedure. The current Nice Treaty QMV — under which votes are distributed in a way that over-represents small and medium-sized member states — will be used until 2014. Then, there will be a transition period until 2017, during which member states can call upon the Nice Treaty QMV. The delay in adopting the Lisbon procedure is meant to appease the states that are threatened by QMV and are wary of a powerful union dominated by the large member countries.

The key change in the QMV procedure under Lisbon is that a member state’s population will determine its voting share. The approval of legislation under the Lisbon QMV procedure will require the support of 15 out of 27 states that collectively represent 65 percent of the union’s population. More importantly, to block legislation, the Lisbon Treaty requires that four countries representing more than 35 percent of the EU population must oppose it. This gives populous member states that tend to work together on strengthening the European Union — such as Germany, France and Italy — an advantage. The ability to secure a blocking minority will be a vital negotiation strategy, as most EU decisions are made in negotiations before voting takes place. Other countries would have to take the blocking minority into consideration and ask for the proposal to be redrafted to the blocking countries’ liking if they wanted it to pass.

The Lisbon Treaty introduces two positions that should increase the union’s internal coherence and visibility on the world stage: the president of the European Council (unofficially referred to as the president of the European Union), and the high representative of the union for foreign affairs and security policy (unofficially referred to as the foreign minister of the European Union). U.S. Secretary of State Henry Kissinger once asked, “If I want to call Europe, who do I call?” The EU members in favor of a strong union hope that the two positions will answer that question and give the union greater force internationally, but it is not certain that they will overcome resistance from those member states that are skeptical or even suspicious of a strong union.

Of the two new posts, the foreign minister will be the most important. The foreign minister will carry out EU foreign policy on behalf of the European Council, which will continue to decide on foreign and defense policy matters through unanimity. This person will have the 10-year track record of Javier Solana — Europe’s unofficial foreign minister — to build on and will also have a diplomatic corps (called the External Action Service) with which to build a bureaucracy independent of the European Commission. Therefore, while the foreign minister will technically still be part of the Commission as its vice president, he or she will also stand apart from it. This will allow Berlin and Paris to slowly remove foreign affairs from the European Commission’s purview.

The presidential position has thus far received the most attention, but the position is poorly endowed with institutional powers. Member states like Poland and even the European Commission have already come out against the post, arguing that the president will have to stick to the literal reading of the treaty, which only allows him to chair the European Council. However, the president’s two-and-a-half-year mandate will replace the main functions of the current six-month rotating member state presidency, which allows every country in the union its time in the spotlight (though the six-month presidency will remain, as more of a consultative role). This means that smaller countries like the Czech Republic and Denmark will no longer get to set the agenda for the European Council — a change that powerful states like France will welcome.

In part three of this series, STRATFOR will look at how the new decision-making rules of the Lisbon Treaty could affect the balance of power within the European Union.