Bloomberg News

Russian Power Tandem Wobbles as Medvedev Spars With Putin

December 13, 2012

Russia's President Putin

Vladimir Putin, Russia's president. Photographer: Andrey Rudakov/Bloomberg

Vladimir Putin’s return to the Kremlin cemented his position atop Russia’s pecking order. Dmitry Medvedev, the protege he pushed aside, is having difficulty accepting that.

“It’s not the easiest thing to do, when you become prime minister after serving as president,” Prime Minister Medvedev said in an interview with French media including Le Figaro on Nov. 26. He left open the possibility of seeking re-election as head of state if he has public support. He last week repeated in an interview broadcast on five Russian television channels that he may run for the Kremlin.

While Putin as president has the legal authority to banish Medvedev from the government, the premier’s dismissal would risk turning him into a rallying figure for the opposition, according to Olga Kryshtanovskaya, a former member of the ruling party and sociologist who studies the elite at the Russian Academy of Sciences. The protests from last December to March were the largest against Putin since he came to power in 1999.

Medvedev, 46, is pushing back against the state’s growing stakes in Russia’s biggest companies and the broader economy. He has also clashed with Putin, 60, over his acquiescence in the Western-led overthrow of Libya’s Muammar Qaddafi and criticized the jailing of punk group Pussy Riot members.

“It is very clear from Medvedev’s many speeches that he doesn’t like state capitalism and prefers privatization,” said Sergei Guriev, rector of the New Economic School in Moscow and a government adviser in an interview.

Putin’s Veto

Putin on Dec. 12 vetoed a law passed by parliament that would have eased rules for the Skolkovo innovation hub, a project championed by Medvedev, threatening to widen the rift between the two men. The law will be amended and resubmitted for approval, said Natalya Timakova, Medvedev’s spokeswoman.

“There are no problems between the president and prime minister,” Timakova said by phone yesterday. They “work as a single team.”

State-owned OAO Rosneft’s $55 billion planned takeover of BP Plc (BP/)’s Russian venture to create the world’s largest publicly traded oil company by volume will take the government share of the economy above 50 percent and make the biggest global energy exporter more dependent on natural resources.

While Medvedev hasn’t openly criticized the deal, his close ally, Deputy Prime Minister Arkady Dvorkovich, in an interview with business daily Vedomosti in September said he opposed it because it served “no useful purpose” to expand any state company’s role in the economy. Putin, who said last year that Russia must avoid liberal “experiments” to ensure sustainable growth, personally blessed the Rosneft acquisition.

Russia Discount

Russia’s benchmark Micex stock index is down 0.82 percent in the past three months, compared with a gain of 6 percent in the MSCI Emerging Markets Index.

Russian stocks are the cheapest in the index because of corporate governance and corruption concerns, oil and gas dependency and a lack of a long-term domestic investor base, according to Roland Nash, chief investment strategist at Verno Capital, which manages $200 million in Russian equities.

Medvedev’s approach of promoting private companies over the state ownership of assets is supported by part of the political leadership and major corporations, said Dmitry Oreshkin, an independent Moscow-based analyst. Still, he failed to implement these principles even while he had a chance as president, Oreshkin added.

State-owned companies account for about $1.14 trillion, or half of Russia’s economic output, according to BNP Paribas SA (BNP)’s Moscow unit. That’s up from about 42 percent in 2008 and 38 percent in 2006 and doesn’t take account of the TNK-BP acquisition, BNP said in an Oct. 22 research note.

‘Autocratic Style’

Putin in his first 12 years of power, the last four as prime minister, presided over a period of stability after the post-Soviet political and economic upheavals of the 1990s. Russian economic growth averaged around 7 percent between 2000 and 2008, buoyed by high oil prices.

The Russian leader’s actions today as he seeks to preserve his rule are adding to nervousness among investors, according to Jim O’Neill, chairman of Goldman Sachs (GS:US) Asset Management.

“He was very popular and stood for stability, but now it looks like his style is not so popular anymore,” O’Neill said in a Nov. 28 interview in London. Investors “don’t trust Russian governance or the rule of business law, the autocratic style in which Putin has come back.”

Succession Game

Putin in 2007 selected Medvedev as his successor when the constitution prevented the then-president from seeking a third consecutive term. Putin became prime minister after Medvedev stepped aside to make way for him to return to the Kremlin in May after March elections won by the Russian leader with 64 percent of the vote, compared with 71 percent in 2004.

The two men had their first high-profile dispute in March last year, when Medvedev as president criticized Putin for calling the NATO-led campaign in Libya a “crusade.” Medvedev had ordered Russia to abstain from the United Nations vote that allowed the military action in Libya rather than using a Russian veto to block it. Since Putin has returned to the presidency, the disagreements have centered on the state role in the economy and human rights issues.

The prime minister has criticized the two-year jail sentences handed down to three members of Pussy Riot for their anti-Putin stunt in a Moscow cathedral as excessive, saying on state television in September that they should have been set free at their trial. Putin in an October television interview said the defendants “got what they wanted.”

Khodorkovsky Case

Medvedev as president said in December after the protests started that he understood the need for change and restored direct elections for regional governors, abolished by Putin in 2004. In May 2011, he said that freeing jailed former Yukos Oil Co. billionaire Mikhail Khodorkovsky wouldn’t be “dangerous” for Russia. Putin has said that Khodorkovsky has blood on his hands and “thieves should sit in jail.”

Medvedev on Oct. 22 criticized the possibility of state companies buying stakes in privatized asset. Under a plan approved by Putin in May, a state holding company will acquire stakes in energy assets being sold off by the government.

“It’s clear that Putin doesn’t like Medvedev’s actions,” said Gleb Pavlovsky, a former Kremlin adviser. “The prime minister’s job is the second post in the country and I think Putin regretted giving it to him.”

To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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