A Desperate Putin Makes a Private Sector Power Grab
Policy + Politics

A Desperate Putin Makes a Private Sector Power Grab

Speaking at a fiscal summit on Wednesday, senior members of the Russian government painted a grim picture of the country’s financial future – one that includes across the board spending cuts, a likely downgrade of its public debt to junk status, and, perhaps most ominously, the specter of high-level government officials looking over the shoulder of executives at publicly held companies. 

Many of Russia’s largest companies, including energy behemoths Gazprom and Rosneft, were assembled from government owned firms that were privatized in the late 1980s and 1990s. Because the government retained an ownership stake, many companies had senior Russian officials serving on their boards of directors until fairly recently. They were replaced with much more junior government figures in 2011, when then-Prime Minister Dmitry Medvedev directed cabinet ministers and vice premiers to remove themselves from corporate boards as part of an effort to modernize the economy.

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No longer.

“Now, we will apparently have to return them,” Economic Development Minister Alexey Ulyukayev announced Wednesday, according to the state-owned media company ITAR-TASS.

Russian President Vladimir Putin has already been pressuring large Russian companies that do business overseas to support the country’s failing currency by converting income earned in foreign currencies to rubles. Now, when the directors of major Russian companies consider their financial strategies, they will have members of Putin’s inner political circle at the table with them.

Consider Treasury Secretary Jack Lew serving on the board of JP Morgan Chase, or Defense Secretary Chuck Hagel on the board of General Electric.

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Ulyukayev also said that Russians should expect that their sovereign debt offerings would be downgraded to “junk” status by international ratings agency Standard & Poor’s in coming days. 

The new addition to corporate boards comes at the same time that Russian Finance minister Anton Siluanov warned that, with the country facing a loss of as much as $45 billion in revenue this year due to declining oil prices, the government is planning 10 percent across-the-board cuts in spending, targeting virtually everything except the military and some infrastructure projects. 

That’s a doubling of the cuts that Putin warned Russians, just last month, they should expect in the coming year. 

Worse still, from a fiscal perspective, the Kremlin apparently plans to start withdrawing money from its $88 billion sovereign wealth fund as part of its continued effort to prop up the ruble, which has lost nearly half its value against the U.S. dollar in the past year. Russia’s central bank has spent a reported $76 billion in an ultimately failed attempt to support the ruble over the past year.

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None of this should suggest that Russia is in immediate danger of financial collapse. The country still has substantial foreign currency reserves, in the hundreds of billions of dollars, despite the fact that it has been spending them down as part of the effort to protect the ruble. However, Ulyukayev’s recognition that international debt market are, for all intents and purposes, likely to be closed to the Russian government in the near future makes those reserves look a lot smaller.

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