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Analysis & Opinion
05.08.08 Undermining Medvedev
Comment by Vladimir Frolov

There are very few people who know for sure why Prime Minister Vladimir Putin decided to exercise his full verbal powers, and with a few terse sentences about Mechel, a major coal and steel producer in Russia, shaved off $60 billion worth of the Russian stock market capitalization.

There may have been a whole host of valid reasons to attack Mechel. After all, the company was too greedy and its owner, Igor Zuzin, was brazen enough to stand up to none other than Vladimir Putin. There may well be a case for the Anti-Monopoly Ministry and for the law enforcement agencies to investigate and, if found guilty, to punish Mechel and its CEO.

This would not really be a big deal. Microsoft, for example, was investigated on monopoly charges in the 1990s, was found guilty by a federal judge in the United States, as well as by the European Commission, and was forced to pay billions of dollars in fines and compensation measures. Yet it is still one of the greatest companies in the world, with only Google as a peer competitor.

The problem is with the way Putin did it, not to mention that ordinary people, who had nothing to do with Mechel, lost their money as Russian stocks tanked after his comments. The fact that Putin had to lambast Mechel and its owner and CEO Zuzin on public television sends out two extremely negative messages about the way Russia is governed.
The first message is that the system and its institutions do not really work. The Anti-Monopoly Ministry and other law enforcement agencies did nothing about Mechel’s dicey business practices until Putin threatened the company publicly (the Anti-Monopoly Ministry was equally complacent about price-fixing for jet fuel, until Putin publicly threatened to fire the Anti-Monopoly Minister Igor Artemyev). Mechel and Zuzin should have appeared before a judge (as Bill Gates did) and the court should have ruled on the matter. Instead, he had to appear before Putin to face punishment.

If it takes Putin’s personal and televised intervention for something as mundane as an anti-trust decision to happen in this country, then the system is really dysfunctional. This is not the way other G8 powers operate.
The second message is even worse than the first one. Putin’s intervention, with its devastating effect on the Russian stock market, undermined Dmitry Medvedev’s efforts to build up Russia’s image as a good place for international investors to do business, and made a mockery of Medvedev’s drive to turn Moscow into a major international financial center.

The impression that international investors were bound to get from this episode is that Medvedev’s word does not amount to much, and that the president does not generate real policy decisions, just some wishful thinking. The impression is that the president cannot overrule his prime minister who, ostensibly, serves at the pleasure of the president.

This is made to look even more awkward by shy, tongue-in-cheek comments by Medvedev’s men, like his assistant Arkady Dvorkovich, his informal advisor Igor Yurgens, and even First Deputy Prime Minister Igor Shuvalov, that no one wants to rock the boat and that no second Yukos case was in the cards.

Dvorkovich and Yurgens’ appeal to an unnamed high authority to be careful in handling the Russian stock market where ever more ordinary Russians invest their savings looks particularly lame and frustrating. Even worse is Shuvalov’s off-the cuff remark that “no second Yukos is planned, but in real life you never know for sure…” One gets the impression that this is the team that knows what needs to be done, but is not trusted with pulling the levers of power. This is done elsewhere.

It is very bad news for president Medvedev, particularly as it comes on the heels of a badly thought-out foreign policy decision that has heightened confusion in Western capitals as to who really is in charge of Moscow’s foreign policy.
The G8 leaders are still scratching their heads in bewilderment, having seen President Dmitry Medvedev agreeing to the G8 statement on Zimbabwe, only to be followed by a Russian veto in the UN Security Council of a resolution to impose sanctions on the Robert Mugabe’s regime.

The G8 statement on Zimbabwe was quite explicit about the intention of the G8 to “take further steps, inter alia introducing financial and other measures against those individuals responsible for violence.”

The British did not conceal their plans to seek authorization by the UN Security Council to put pressure on Mugabe and his cronies by freezing their bank accounts and imposing travel bans. It is obvious that both Prime Minister Gordon Brown and President George Bush spoke to Medvedev about this in Japan, and were clearly encouraged to think that Russia would go along when Medvedev agreed to the G8 statement.

Yet, just four days later, Russia joined China in vetoing the UNSC resolution with sanctions against Mugabe and his closest associates.

Perhaps, when Medvedev returned to Moscow and got to read the British draft of the UNSC resolution, it might have dawned upon him and others in the Kremlin that Moscow was asked to endorse a precedent of a UN Security Council passing a judgment about an election in a sovereign country, and imposing UN sanctions on perpetrators of electoral fraud. This was something that Russia could have openly opposed at the G8, but did not.

As a result, the veto decision was interpreted in the G8 capitals as a sign that president Medvedev, having agreed to the G8 statement, got back home and ….was overruled by a higher authority. This is indeed how it looked, whether it was the case or not. It sent a signal around the world that Medvedev’s word on major international issues was not final. And it made the Russian leader look, well, foolish.

It is hard to say whether this was simply a case of bad political planning and poor execution by the Russian foreign policy bureaucracy that failed to guide the president out of the trap set up for him in Japan, or an orchestrated effort to humiliate Medvedev internationally.

Prime minister Putin could have intervened to prevent a decision that was likely to undercut the international standing of his successor. He did not do so, and a couple of weeks later went on the air and made a laughing stock of one of Medvedev’s major policy initiatives - to turn Moscow into an international financial center. Now the question is - why?
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