Global Policy Forum

It was an encounter with Russian President Vladimir V. Putin that Moscow investment fund manager Mattias Westman will not forget. Westman, the Swedish-born director of Prosperity Capital Management, met with Putin in the Kremlin in July to object to the restructuring of Unified Energy System, Russia's electricity monopoly. Westman feared that UES Chief Executive Anatoly B. Chubais could use the plan's terms to sell assets on the cheap to political cronies, thus damaging minority shareholders like Prosperity.

Not to worry, Putin replied--the Kremlin had decided to rewrite the plan to block any such transactions. When a Westman aide asked what Chubais' managers had received in return for accepting this change, Putin answered in a deadpan tone: "I have agreed that they can keep their jobs." With that, Westman recalled, Russia's President nearly fell off his chair laughing.

Jokes aside, Putin is serious about cleaning up Russia. He realizes the entrepreneurial sector can never achieve its potential without a full-scale battle against corruption. What's more, Putin wants closer ties to the West--an initiative that has prompted Putin's cooperation with the U.S. in the fight against terrorism and his resistance to OPEC's call for big cuts in oil exports. But Putin knows that Western investment will not pour in without a major improvement in corporate governance.

So Putin is leading the Kremlin's biggest crackdown on corruption since the Soviet Union's collapse. A high-profile probe of suspect bureaucrats--as seen in the charges pending against Railways Minister Nikolai Aksyonenko for illegally spending Ministry funds--is making headlines. But a second, less-sensational effort is the heart of this campaign: the drive to limit the myriad opportunities for bribery and pilferage that plague business and government.

Putin's rewrite of the UES restructuring plan is just one example of this so-called structural approach. Another is a new package of reforms, enacted on Dec. 17, that aims to cut down on courtroom bribes by increasing judges' woeful salaries fivefold. The new law also bans the intervention of state prosecutors in private litigation between contending business parties.

The Kremlin wants to rein in other bureaucrats, too. New rules demanded by Putin sharply restrict discounts that railroad regulators can give shippers. The discounts often reward customers who cough up the biggest bribes. Another law reduces the number of business activities that require a license from 2,000 to 100: Fewer licenses mean fewer chances for a bureaucrat to get his palm greased. "This will help," says Alexei N. Mamakov, 27, owner of Neon Art, an outdoor-advertising business in the central Russian city of Kazan. Graft affects "everything and everybody" in Russia, Mamakov says.

The cost of such graft is huge. Russia's reputation as a place where CEOs routinely violate the rights of minority shareholders wipes about $45 billion off the value of the Russian stock market, estimates Moscow brokerage Troika Dialog. A cleanup could attract an additional $10 billion annually in foreign direct investment, figures PricewaterhouseCoopers. Only $5 billion a year trickles in now.

Putin has assembled a diverse group of allies in his anticorruption drive and has given each a direct line to his office. The coalition includes Western shareholders' rights activists such as Prosperity's Westman; a crew of liberal policy advisers including Economics Minister German O. Gref and top economic adviser Andrei N. Illarionov; and the so-called control freaks--law-enforcement leaders including ex-Prime Minister Sergei V. Stepashin, who now heads the Duma's watchdog Audit Chamber. "Putin's style is to let others fight and bloody themselves," says William Browder, director of Hermitage Capital Management in Moscow. "It is smart politics."

For minority investors, the lure of the anticorruption effort is the prospect of higher share prices. That's why Browder earlier this year assisted the Kremlin's efforts to expose shady financial deals at Gazprom, which is 38%-owned by the state. With Gazprom management under fire from shareholders and the press, Putin fired Soviet-era CEO Rem Vyakhirev in May. On Dec. 17, the new management decided to reclaim a valuable asset, the Purgaz gas field, which had been pawned off on Vyakhirev cronies. Since Vyakhirev's ouster, Gazprom shares have risen 44%.

For the young liberal policymakers, the payoff is enhanced clout. Take 43-year-old St. Petersburg lawyer Dmitri N. Kozak. Backed by Putin, Kozak got the Duma to ban the involvement of prosecutors in private litigation and limit judges' immunity against corruption charges. "We are trying to create a transparent judicial system," he says.

For the control freaks, a cadre dominated by ex-KGB officials, the campaign is a way to restore the proper powers of the state in law enforcement--powers these officials believe President Boris N. Yeltsin abandoned during Russia's free-for-all transition to a market economy. Thus Nikolai D. Kovalev, a former head of the Federal Security Service, firmly backs Duma Audit Chamber chief Stepashin's probe into alleged budget fraud in the administration of Mikhail N. Kasyanov, Russia's Prime Minister. Kasyanov would not comment, but an aide maintains the probe is interfering with the work of government.

The crackdown poses several risks. One is that overzealous investigators will trample on civil liberties. Another is that the public, so far squarely behind Putin, turns cynical if it appears that the targeting of rogue officials is selective. Putin, for example, has yet to address charges by Swiss prosecutors that Pavel Borodin, Putin's former boss in the Kremlin Property Dept., laundered $25 million in bribes: Russian prosecutors refuse to cooperate. On another front, even Kremlin sources say there is an element of political warfare to the corruption probes, as obscure policymakers who knew Putin from his St. Petersburg years target officials held over from the Yeltsin era.

Wary foreign investors also want to know how stringently the new laws will be enforced. Executives at Sawyer Research Products Inc., an Eastlake (Ohio) maker of electronic-grade quartz, are still reeling from the takeover of Sawyer's facility in the Vladimir region. Two Russian companies seized the facility in July after gaining the support of local prosecutors and judges. Sawyer is appealing its case but is not optimistic. "Kozak's plan to increase judges' accountability is on the right track," says Sawyer CEO Gary R. Johnson. "But it's a question of how fast he can implement it."

As ambitious as Putin's agenda is, there remains a big missing item: the Central Bank of Russia, an institution that combines state regulatory powers with for-profit activities through its stake in Sberbank, Russia's largest commercial bank. "This conflict of interest creates a huge field for corruption," says Dmitri V. Vasilyev, a former head of Russia's Federal Securities Commission. The Central Bank's refuses to disclose just how much it earns from commercial activities, including its treasury bill and foreign exchange operations. Fearful of the bank's political clout, the Duma may not push for reform until the term of the bank's powerful chairman, Viktor V. Gerashchenko, expires in September, 2002. "The Central Bank could be Putin's toughest task," says Vasilyev.

For all the problems, the markets are betting on positive change. Since Putin's election in March, 2000, government bonds have strengthened sharply. Rising oil prices have helped. But bond prices have also picked up because investors figure "Putin has an agenda for cleaning up Russia," says Christopher Weafer, head of research at Troika Dialog. On Dec. 19, Standard & Poor's upgraded Russia's long-term sovereign credit ratings from B to B+, citing such factors as Kozak's legal-sector overhaul. This cleanup will take years. But at least it's starting.

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.