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The Making Of A Russian Political Machine (Int'l Edition)


International -- European Business: RUSSIA

THE MAKING OF A RUSSIAN POLITICAL MACHINE (int'l edition)

Yeltsin aide Chubais wheels and deals in regional elections

Russia is a young and chaotic democracy, but its politicians are quickly learning the art of the backroom deal. The master player is Boris Yeltsin's chief of staff, Anatoly B. Chubais. Last summer, he engineered Yeltsin's election victory by pulling in hundreds of millions of dollars in campaign contributions from Big Business, which owes its wealth to the privatization program Chubais managed. And in a Kremlin spat in mid-October, he persuaded Yeltsin to oust National Security Chief Alexander Lebed after the maverick former general tried to grab too much power for himself.

Now, Chubais is expanding his influence in the next big arena for Russian political clashes: the regions. All this fall, crucial elections are taking place to select 52 governors for slots previously filled by Yeltsin appointees. To boost the chances the elections will go Yeltsin's way, Chubais is raising billions of rubles for pro-Yeltsin candidates. Under Chubais' tutelage, Russia's newly powerful industrial groups are ponying up hefty contributions and local moguls who control the media are slanting coverage to favor pro-Yeltsin candidates. Amid budget shortfalls, Chubais is ensuring that favored incumbents get government funds for wages and pensions.

LOYALTY. Chubais' more laudable goal is to spread democratic and market reforms irreversibly down to Russia's grass roots, where communist chieftains often rule. But he is also building a new Russian political machine as he strives to guarantee the loyalty of newly elected governors who will wield increasing power. So as he and his aides dole out campaign advice, they are also leaning on business allies for cash. These include big banks such as Menatep and Oneximbank, which acquired some of Russia's most prized industrial companies cheaply during the privatization campaign Chubais led. Says a Western investment banker in Moscow: "Chubais wants the guys in the regions to be beholden to him. He's personally overseeing funds going to the gubernatorial candidates. And he's telling his clique of financial-industrial groups where to send the money."

Menatep willingly contributes. Its holding company, Rosprom, has shares in more than 30 enterprises, ranging from a fertilizer plant in the city of Murmansk in the Arctic Circle to the Yukos oil company near the Kazakhstan border. Says Nataliya A. Mandrova, a Menatep spokeswoman: "We want local political situations to be stable, so we can't be indifferent to the outcomes of these elections." Menatep is giving money to candidates and postponing layoffs at its locally based industrial holdings until after the elections.

Other financial-industrial groups are not so open. LogoVAZ and Oneximbank, which were involved in the Yeltsin campaign, deny they are contributing to local races. Most Group, which owns key media assets, declines to comment on its political activities. Meanwhile, oil giant Lukoil, whose president campaigned for Yeltsin, says it is not financing regional campaigns but offers advice to the Yeltsin administration about candidates in areas where it operates.

Russia has a poorly developed system of monitoring campaign gifts, so it's impossible to trace them. But people involved with the campaigns say many of the financial-industrial groups, known as FIGs, are giving money. "FIGs don't advertise their contributions, but they do give money," says Ekaterina Yegorova, a consultant at Moscow-based Niccola M, which offers political advice to candidates.

Chubais continues to use privatization as a political tool. In September, he persuaded Yeltsin to sign a decree giving regional authorities a bigger stake in privatizing the 20% of the economy still in government hands. Regional governments will now be able to retain 66% of income generated from sell-offs of stakes of local enterprises, up from 20%. For the first time, they can also sell their own real estate and retain 100% of the income. Such measures will give officials a new source of money to pay wages and finance social programs. Who do they have to thank? Chubais.

MEDIA CONTROL. Increasingly, local businesses are copying the tactics of their Moscow brethren. Take Severstal, a steel company in Cherepovets, about 500 kilometers north of Moscow. Like LogoVAZ and Most Group, Severstal invested in mass media, which favors pro-government candidates. Severstal controls a radio station, four television stations, and two newspapers in Cherepovets and nearby Vologda. Says Andre Okunyev, a local reporter: "No candidate who was not supported by Severstal got any air time on radio or TV stations that it controls" before the recent election. Like Oneximbank, which converted its support for Yeltsin into a $1.3 billion tax break for one of its holdings, Severstal is likely to seek a tax break in return for its support.

Of course, Kremlin backing doesn't guarantee victory. Of the 11 races held so far, only five have been won by Yeltsin-supported candidates. Opposition candidates have won another five, and one will be decided in a runoff. One key winner was former Vice-President Alexander Rutskoi, who led the armed revolt against Yeltsin in 1993. He gained 78.9% of the vote in Kursk, easily beating the Yeltsin-backed incumbent for the post of governor. In January, another tough contest could come in Tula, where Lebed is weighing a bid for the governorship. That would give him both a regional power base and a Moscow forum: Each governor automatically gains a seat in the Federation Council, the upper house of Russia's parliament.

As election fever grips the regions, it's no surprise that both local and Moscow-based businesses are jumping into the melee. While the presidential election was a contest between capitalism and communism, the regional elections more closely resemble Western ballots. With even the communists now willing to work within democratic rules, the elections pit rival candidates and their plans for defending local interests against each other.

To be sure, it will be some time before Russia develops U.S.-style political action committees to finance campaigns, and its laws in this area are flimsy. For now, it boils down to pure patronage. When Chubais asks, Big Business usually antes up.By Patricia Kranz in MoscowReturn to top


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