“Waves” of the Russia’s Presidential Reforms Break about Premier’s “Energy-Rocks”

BY ZURAB GARAKANIDZE | 25.09.2011

Story about the Russian President Dmitry Medvedev’s initiative to change the make-up of the boards of state-owned firms, especially energy companies.

In late March of this year, Russian President Dmitry Medvedev demanded that high-ranking officials – namely, deputy prime ministers and cabinet-level ministers that co-ordinate state policy in the same sectors in which those companies are active – step down from their seats on the boards of state-run energy companies by July 1. He also said that October 1 would be the deadline for replacing these civil servants with independent directors.

The deadline has now passed, but Medvedev’s bid to diminish the government’s influence in the energy sector has run into roadblocks. Most of the high-level government officials who have stepped down are being replaced not by independent managers, but by directors from other state companies in the same sector. Russia’s state-owned oil and gas companies have not been quick to replace directors who also hold high-ranking government posts, despite orders from President Dmitry Medvedev. High-ranking Russian officials have made a show of following President Medvedev’s order to leave the boards of state-run energy companies, but government influence over the sector remains strong.

This indicates that the political will needed for the presidential administration to push economic reforms forward may be inadequate.

At the end of March in Magnitogorsk, Russian President Dmitry Medvedev announced plans for removing high-level civil servants from the boards of state-owned energy-companies. So far, though, the government has not fully executed this order, particularly with respect to companies active in the energy sector.

Medvedev has justified his decision by pointing out that government officials who are responsible for setting policy in a certain area – for example, energy – are serving as directors of competitive companies active in that same area. This causes conflicts of interest, he said, and leads to discord between the government, with its reformist agenda, and members of parliament, who are influenced by energy lobbyists.

The president has officially charged the government with executing his initiative in several stages. By July 1, state-owned companies must discharge all deputy prime ministers and cabinet-level ministers that co-ordinate state policy in the same sectors in which those companies are active and replace them with independent directors at their shareholder meetings.

By October 1, state-owned companies involved in the energy sector, as well as some state-run military-industrial firms, must elect supervisory board chairmen who are not civil servants.

October 1 has also been designated as the deadline for finalising the replacement of all high-level civil servants with independent directors. (Board seats will still be open to officials at the level of deputy minister and departmental director, as these are not considered to have independent political influence.)
State involvement

The high number of government representatives on the boards of state-run companies stems from the fact that the Russian state has a high level of direct involvement in many sectors of the economy.

In other words, the Russian economy has yet to be extensively liberalised. Although more than a decade has passed since the so-called “Chubais” wave of post-Soviet privatisation (a reference to former First Deputy Prime Minister Anatoly Chubais), Russia is still home to many state-owned enterprises, not least in the oil and gas sectors.

After a period of consolidation of state interests under former President Vladimir Putin, now serving as prime minister, the push for reform took on renewed urgency because of the world economic slowdown that erupted in 2008.

In 2009-2010, the government of the Russian Federation again began actively considering serious reforms. However, the tortuous recovery from the crisis and the return of high oil prices have stymied Moscow’s efforts to move in this direction.

Moreover, the state has even raised its stake in some companies. This year, for example, the government has upped its interest in the Russian oil pipeline monopoly Transneft by 3.5%.

Sechin’s moves

Now, though, Medvedev is pushing for a change. He won his first victory in April, when Deputy Prime Minister Igor Sechin agreed to leave his post as chairman of the board of directors of Rosneft, the state-owned oil company.It should be noted that Sechin is still in a position to influence Rosneft, as his departure coincided with the promotion of another board member who is completely loyal to him – Sergei Shishin, the vice president of state-owned VTB Bank. According to a source close to the oil company’s board, Shishin has “good relations with both Igor Sechin and with the directorate of the FSB [Russia’s Federal Security Service, the successor to the KGB] – in particular, with [FSB director] Alexander Bortnikov.”

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