Rival Kremlin camps prepare for battle over economy

By Christian Lowe and Alexander Winning

ST PETERSBURG, Russia (Reuters) – Rival camps inside President Vladimir Putin’s entourage are preparing to do battle with each other over whether the Russian state should keep its role as custodian of the economy.

While to the outside world the Kremlin presents a united front, especially in its stand-off with the West, in reality it is divided with Putin often having to act as umpire in contests between different factions.

On one side of the economic argument is a loose coalition of pro-market liberals who say if robust growth is to return, the Kremlin must slash government spending, break up monopolies, and dilute state control over giant corporations.

In the other camp are the people who control those corporations, many of them with state security backgrounds, who have been close to Putin for decades, who say relinquishing the state’s control is the path to chaos.

The debate has now acquired new urgency because, according to the reform camp, the economic slump in Russia of the past two years has left the state running out of money, and demonstrated that Russia cannot keep relying on oil exports in a volatile world market.

Putin last week promised to reduce bureaucratic interference in business, and announced he would head a new presidential council on strategic development. But there was no word on the kind of bold changes the pro-market camp says are needed.

According to several people who know him, Putin recognizes the need for changes but is caught in the middle, unable to make a decisive move one way or another because that would risk a backlash from the losing camp.

“There is no consensus on what to do,” said a senior figure in business circles who was in St Petersburg last week to hear Putin address investors at an annual forum.

Putin’s apparent inability to choose decisively between the camps occasionally produces mixed signals or sudden policy reversals. In one example earlier this year, the government announced that all state-owned companies would be required to contribute more to state coffers by paying at least 50 percent of their profits in dividends.

Officials insisted there would be no exceptions. But the state’s two main oil and gas companies, Rosneft and Gazprom, both flouted the requirement, announcing far smaller dividends. Putin did not publicly take sides.

LIBERAL CIRCLES

The camps fighting it out over the direction of the economy are loosely formed and constantly shifting, but they coalesce around certain personalities.

The center of gravity in the pro-market camp is Alexei Kudrin, who was finance minister for 11 years before he quit five years ago when Putin declined to make him the paramount economy policymaker.

Yet he stayed in Putin’s orbit. In the past few months he was in talks about taking an official post in the presidential administration. That foundered because he believed he would have to share influence with officials from the statist camp, according to people familiar with the negotiations.

Kudrin, a bespectacled 55-year-old economist with a bookish manner, instead took on a part-time advisory role as deputy head of the presidential economic council, with the job of drawing up proposals for economic reform.

Moving in Kudrin’s circle are figures such as German Gref, chief executive of state-owned Sberbank, Russia’s biggest lender, central bank governor Elvira Nabiullia, and prominent business people from sectors outside the state-dominated mining and energy sectors.

Among the sort of reforms sought by members of that camp are cuts in state budget spending, a raising of the retirement age to re-balance the pension system, and the sale of the state’s controlling interests in major companies.

“I think we need to stop uttering these mantras and actually do these reforms,” said Alexander Shokhin, a former deputy prime minister who is now head of the Russian Union of Entrepreneurs and Industrialists, a business lobby.

Ziyavudin Magomedov, owner of Summa group, with interests in transportation, construction and agriculture, said Russia should privatize everything but the most essential monopolies.

“Then everything will flourish in glorious colors,” he said. “The time is ripe for reforms.”

INDUSTRY BOSSES

But some of those close to Putin, including many who derive their power from leadership positions in state-owned conglomerates, see those reforms as a threat.

“I believe we don’t need more reforms,” said Sergei Chemezov, chief executive of Rostec, a state-owned conglomerate that makes aircraft, weapons, and high-tech equipment and is part-owner with Renault-Nissan of automaker Avtovaz , which produces Russia’s Lada saloon cars.

Like other figures in the statist camp, Chemezov has longstanding personal ties to Putin: they lived in the same east German apartment block in the 1980s, when the future Russian leader was working as a Soviet spy.

“Any reforms unsettle business. Unpredictability appears, and people don’t know which direction things will go in,” Chemezov told Reuters. “Any reform gives rise to a certain amount of anxiety among business.”

The group’s other major figures include Igor Sechin, the Putin lieutenant who runs state-owned oil giant Rosneft , and Sergei Ivanov, a former spy who is now Kremlin chief of staff.

Several members of this camp are subject to Western sanctions that were imposed over the conflict in Ukraine, since those sanctions sought to target Putin’s closest associates.

In the view of this camp, sectors of the economy such as oil and defense manufacturing are of strategic importance to the state, and if the Kremlin relinquished control that could be a threat to Russia’s national security.

For now, Putin is sitting on the fence. But staying in that position will grow more uncomfortable as the contest between the rival groups intensifies.

(Additional reporting by Darya Korsunskaya, Katya Golubkova, Oksana Kobzeva, Denis Pinchuk, Anastasiay Lyrchikova and Olesya Astakhova; editing by Peter Graff)