Who runs Russia? It is the question that plagued Russia under Boris Yeltsin, who was manipulated by powerful businessmen and gave away Russia's priceless assets for pennies. With the accession of tough-man president Vladimir Putin it looked as if the Kremlin had taken back the reins of power. But in July the question could be heard again. Prime minister Mikhail Kasyanov ended a tussle between two of Russia's most powerful businessmen for control of Slavneft, one of the last big state-owned oil companies, with a controversial decision.
Over the past three years Russia's business groups have been racing to buy up attractive enterprises and move into new sectors. Oleg Deripaska, chairman of Russia Aluminium and probably the most powerful businessman in Russia, started the ball rolling with the purchase of the PAZ bus factory at the end of 1998. Unlike before, industrialists have been spending real money to buy shares on the open market.
What concerned analysts and investors were the methods used to settle this particular dispute. Slavneft chairman Mikhail Gutseriev took control of the company under Yeltsin and is backed by, among others, Deripaska. But up-and-coming oligarch Sergei Pugachev, the head of Mezhprombank, has had his eye on the company for a while.
Mezhprombank is a top-10 Russian bank and Pugachev boasts of having the closest relations with Putin of all Russia's businessmen. When French daily Le Monde published an article in June accusing him of money laundering, he arranged a public meeting with Putin within a few days to bolster his image.
Pugachev made his move on Slavneft in June. Kasyanov signed an order to replace Gutseriev with Yuri Sukhanov - a Mezhprombank loyalist - in the top job at the company. A huge row broke out and Gutseriev refused to give up his post, barricading himself into the building supported by armed guards.
Both sides went to the courts and both got rulings supporting their claims. However, an emergency shareholder meeting was held and Sukhanov was elected Slavneft's president. He is now in control and it looks as if Pugachev has won the battle - for the time being.
The whole affair smacks strongly of the Yeltsin-era power-peddling by government officials that enriched the oligarchs and handed them priceless state-owned assets for peanuts.
The whole sordid scandal has raised doubts about Putin's claim to have pushed the oligarchs out of the Kremlin. However, unsettling as the battle for Slavneft is, Kremlin-sponsored takeovers have become the exception rather than the rule. Kasyanov's excuse is that Slavneft needed new management that could push through reforms ahead of its privatization slated for later this year.
Analysts believe that Pugachev is maybe the last "old-style" oligarch operating on a national level: one, that is, who relies on connections to the government more than his wealth to acquire companies. They point out that his successes have been limited.
The Kremlin rules
Underlying the run-in between these two tycoons is the fact that little or no progress has been made in reforming Russia's venal judicial system.
Business remains rough - even perilous for foreign investors - and the Kremlin is the only real authority in the country. Both sides in the Slavneft fracas managed to get court decisions to back up their positions, but it was Kasyanov's signature that decided the outcome. Disagreements concerning nationally important companies such as Slavneft will always involve the Kremlin and for this reason relations between it and business still remain close.
However, the relationship has changed since Yeltsin stepped down. Then, there was no law at all and little distinction between public and private funds. Uber-oligarch Boris Berezovsky parlayed his close relations with the Yeltsin family into an enormous fortune not by privatizing state-owned companies but, as he puts it, by "privatizing their profits".
Putin's biggest achievement has been to reintroduce a distinction between public and private funds and to put an end to most of the panhandling in the Kremlin's corridors. "The people are the same but the mechanisms are different," says Tom Adshead a political analyst with Russian broker Troika Dialog. "The businessmen's interaction with government is more like the normal lobbying process we see in the west."
The most obvious change is big companies' use of their banks. Before the 1998 financial crisis all the industrial groups set up large banks that grew fat on handling the state's funds and were the core of what were known as financial-industrial groups.
These days all the industrial groups still own banks, though they are now much smaller and over the past two years have become increasingly commercial. Leaving them largely in the hands of professional managers, the oligarchs have turned their attention to investment banks.
Corporate governance
Mikhail Fridman's Alfa Group always had Alfa Bank, one of the leading commercial banks in Russia, and Vladimir Potanin's Interros already owned MFK, an investment bank that was in the process of merging with Renaissance Capital when the crisis hit. Mikhail Khodorkovsky, the CEO of Yukos, Russia's second-largest oil company, set up Trade and Investment Bank, which claims to be Russia's first ever pure investment bank. And more recently Deripaska bought a large stake in Troika Dialog, probably Russia's leading broker/dealer.
"The function of banks has changed for big business," says Richard Hainsworth, the CEO of RusRatings, Russian bank rating agency. "Before the crisis banks were a way of bleeding money from the state. Now big business is interested in the skills these bankers have - they want to be able to assess the value of companies they are thinking about buying and an assessment of how much they need to invest to turn a company around."
There has been tangible progress since Putin took over but Russia is still a long way from being a normal country. Two types of company have emerged over the past two years, which can be broadly divided into public and private corporations, although it is still too early to divide up the Russian corporate universe cleanly into the good guys and the bad. Even the progressive companies are not beyond manipulating their share prices or making use of government connections.