Stratfor --------------------------- SPECIAL REPORT: THE NEXT KREMLIN CLAN WAR BEGINS

Stratfor
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SPECIAL REPORT: THE NEXT KREMLIN CLAN WAR BEGINS

Summary
Editor's Note: As STRATFOR forecast in October, the Russian government is moving
ahead with economic reforms meant to reverse the damage done by the global
financial crisis -- and to strip one of the Kremlin's two rival political clans
of influence.

STRATFOR sources in the Kremlin have said the government will begin
investigating claims of financial and corporate malpractice at several key
state-owned corporations. The financial and economic reforms Moscow is about to
undertake are meant to attract foreign investment, but they are also part of the
struggle between the Kremlin's rival political clans -- one led by Russian
President Dmitri Medvedev's First Deputy Chief of Staff Vladislav Surkov, and
the other led by Deputy Prime Minister Igor Sechin. Because the firms targeted
for investigation are all led by members of Sechin's camp, the government
investigations likely will strip Sechin of his profitable business ventures and
political support.

Analysis


According to STRATFOR sources in the Kremlin, the Russian government is
initiating the first round of investigations into alleged financial and
corporate malpractice at several key state-owned corporations. Russian President
Dmitri Medvedev apparently signed the paperwork for 22 criminal investigations
on Nov. 10. The prosecutor general's office will take the lead on the
investigations.

The financial and economic reforms Russia is about to launch are in part an
effort to attract much-needed Western investment and technical know-how in order
to overhaul the Russian economy, which was greatly damaged by the global
financial crisis. However, they are also part of the ongoing battle for
political power within the Kremlin between the Surkov and Sechin clans.
Medvedev's First Deputy Chief of Staff Vladislav Surkov, with his allies the
civiliki (economic and legal technocrats), means to use the economic reforms to
undercut his rival, Deputy Prime Minister Igor Sechin, whose power base
comprises the Federal Security Service (FSB) and the siloviki (the "strong men,"
former FSB agents put in positions of financial or business leadership).

Surkov's plan is to use key civiliki, including Finance Minister Alexei Kudrin,
Russian Prosecutor General Yuri Chaika and Medvedev, to go after state-owned
companies -- mainly those with siloviki and FSB links -- that borrowed
egregiously prior to the financial crisis. Many used state funds and Western
loans borrowed before the financial crisis to take over rival companies for
political, rather than economic, reasons. Most of these firms are poorly run
from a business perspective and are a drain on state funds; because these
companies' leaders came from the FSB and the siloviki, they had access to state
funds to recover from the crisis. Thus, the plan's supposed main intention is to
rid Russia of inefficient state-owned corporations and rationalize the economy.
But beneath that is the real motive: cutting Sechin off from his most profitable
business ventures and political assets.

STRATFOR sources in the Kremlin said Medvedev has also signed a document giving
the prosecutor general the means to overhaul state corporations whose practices
the prosecutor general's office deems to be "inappropriate and ineffective."
Such practices include giving large bonuses to board members and executives,
tender and public auction violations, unaddressed but well-known inefficiencies
in business operations, outsourcing violations, and illegal spending of state
funds. These are all standard business practices in Russia, which means that the
prosecutor general's office will be able to "overhaul" whatever company it
wants. Furthermore, the prosecutor general will be allowed to set parameters to
test companies' efficiency.

The actual criminal investigations are likely to begin fairly soon; the initial
inquiries had already begun in October. The prosecutor general's office now can
officially start demanding financial and management material from the state and
the corporations being investigated. The companies under investigation will be
cleared, fined or shut down and turned into joint stock companies -- which may
be the first step toward potential privatizations.

In the sights of the prosecutor general are Vnesheconombank, Rosnano,
Rosoboronexport, VSMPO-Avisma, AvtoVAZ, the Housing Maintenance Fund and the
Housing and Utilities Reform Fund. The last two agencies have huge public funds
that Sechin has used to finance his operations.

Rosoboronexport is the state-owned defense technology exporter and industrial
unit. It is one of the major non-energy-related moneymaking ventures owned by
the state, earning $7 billion in foreign arms sales in 2009 with another
possible $27 billion in contracted orders. It is also led by one of the main FSB
personalities, Sergei Chemezov. For Surkov, whose power base is the Russian
Military Intelligence Directorate (GRU), the fact that the defense industry has
been under the purview of his rival, Sechin, and the GRU's natural competitor,
the FSB, has been particularly irksome. Surkov therefore wants to target
Rosoboronexport first, make an example of it and probably split it into more
than 400 pieces. Meanwhile, Rosnano (a Russian nanotechnology corporation) will
be asked to provide information on where $5 billion of its allotted $10 billion
in state funds went.

The approval of the criminal investigation process indicates a very crucial
point: Russian Prime Minister Vladimir Putin has approved the coming culling of
Sechin's economic power base. Until now, Putin has sought to keep a balance
between the two clans, not allowing either to become too powerful. However,
Putin is clearly putting economic concerns ahead of the Sechin clan's agenda.

These developments come just before Medvedev's "State of the State" speech on
Nov. 12. Medvedev will most likely use the speech to put the investigations and
the coming political changes in the context of needed economic reforms. The
underlying reality, however, is that political battle lines have been drawn, and
the next episode of the Kremlin clan wars has begun.

Copyright 2009 Stratfor.