Publication: Eurasia Daily Monitor Volume: 2 Issue: 128

On June 25 President Vladimir Putin met in St. Petersburg with 12 business leaders from the United States, including the leading executives of Conoco-Philips, Alcoa, Intel, and United Technologies. The next day he met with a dozen corporate leaders from Germany, representing companies such as BASF, Ruhrgas, and Dresdner Bank.

Aside from the pleasures of visiting the northern capital during the White Nights, the purpose of these meetings was presumably to help Putin prepare for the G8 summit in Scotland next week, which he will chair, and to generate some favorable international publicity for Russia as a business-friendly environment, a hard sell in the wake of the Yukos affair. Similarly, on June 28 Prime Minister Mikhail Fradkov met with executives from 13 global investment funds, including Barclays, Morgan Stanley, and Fidelity investment (Izvestiya, June 29).

Under President Boris Yeltsin, the prevailing model for business-state relations was one of oligarchic capitalism. A few dozen businessmen established close ties with state leaders (at national and regional levels) and used state institutions to further their own corporate interests.

President Vladimir Putin has shattered that model, as exemplified by the Yukos case. But it is not clear just what kind of business-state relationship will evolve to replace oligarchic capitalism — and whether it will be economically and politically sustainable.

As was clear from the debates at the St. Petersburg economic forum earlier in June, the government’s approach is schizophrenic, combining elements of paternalism and market liberalism (Kommersant, June 21). State-controlled corporations like Gazprom, Rosneft, Transneft, and Russian Railways will play a key role in the new model. The theory is that these national champions, given their marching orders directly by the Kremlin officials who chair their boards of directors, will pull Russia into the 21st century (assuming that those officials will not use their positions to further the interests of factional rivals). At the same time the liberal wing of the government will supposedly complete the task of building the market institutions necessary to transform Russia into a modern economy.

The problem is that this approach has alienated some key actors whose active participation is needed for Russia’s economic recovery. Apart from foreign investors, another group that feels left out is small and medium business – actors not big enough to feature on the Kremlin’s radar screen. On June 21 there was an interesting conference that brought together the pro-government party United Russia with leaders of the two main organizations representing small businesses — Opora Rossii and Delovaya Rossiya (Ekspert, June 27).

Putin sent the conference a formal greeting, in which he stressed, “The main thing is to strengthen trust between the state and business.” The conference saw a high degree of consensus among the political leaders and business representatives — but the consensus was that the government is ignoring the interests of small business. State Duma speaker Boris Gryzlov criticized the budget for not doing enough to stimulate growth. He called for the Stabilization Fund (formed from excess oil revenues) to be used for investment in infrastructure and high-tech industries, and he argued for protectionist measures such as a ban on the export of uncut logs to China. Alexander Zharkov from Opora expressed concern about the negotiations underway by German Gref’s Ministry for Economic Development and Trade, which may lead to the removal of quotas limiting the import of American meat products.

Russian small businesses are in a difficult position, trapped between an indifferent state and a hostile public. They feel their economic interests are being ignored or overridden by the state bureaucracy, which rallies behind the big corporations. At the same time the Russian public remains hostile towards business in general — an attitude that is only encouraged by Kremlin support for the big state corporations. Mikhail Barshevsky, the government representative to the Constitutional Court, told the conference, “We live in a country with a capitalist economic structure and a socialist ideological outlook.”

The government is aware of the problem and has taken some faltering steps to address it — such as the creation of a Civic Chamber announced last September. Enthusiasm for this body, a consultative gathering of handpicked representatives of civil society, is lukewarm. Veronika Kutsyllo pointed out that this experiment was tried before — Yeltsin summoned such a civic chamber twice, in 1993 and 1994, before and after his clash with the elected parliament. The experience left no positive legacy (Kommersant vlast, June 27).

In reality, the business-state relationship is not a dyad, but a triangle. The Russian public is an inevitable political presence, a silent partner in business-state negotiations. Both government and industry are looking over their shoulder at possible popular reactions. They are worried about inflation, about tax levels, and about how fast to proceed with the liberalization of public utilities. Last week, for example, the government announced the price increases for regulated monopolies for 2006: 11% for natural gas, 7.5% for electricity, and 8% for railroad freight. These figures barely keep pace with the general rate of inflation, and they are way below what these industries need to cover their costs from domestic sales and generate funds for long-overdue investment.