The Case of the Rich Men On A Yacht - The Russian Angle

Our private clients have been given a fairly tart review of the deepening mess surrounding the story of four men on a boat (or was it a villa?) in the Mediterranean.

Mindful that we are in the jurisdiction of the toughest libel laws in the so-called free West, we will not make known our own devastating analysis of what Mr. Osborne, Mr. Deripaska and Mr. Rothschild said or did not say, let alone make assumptions about the conduct of Mr. Mandelson.

The public has now got sight of how business is done in the ruling order. They have seen how sausages are made and we will see if this turns the voters into vegetarians.

Let Mr. Rothschild himself explain, from his letter to The Times, what he thinks appropriate: “ I also think it ill behoves all political parties to try and make capital at the expense of another in such circumstances. Perhaps in future it would be better if all involved accepted the age-old adage that private parties are just that.”

Certainly a code for gentlemen but scarcely the level of transparency expected in a modern democracy when the fact of elected and appointed senior members of opposing parties being on the same multi-millionaire's yacht, on an azure blue sea, will seem odd in itself to many voters.

There is another aspect of the scandal – the position of Derispaska in relation to Russian politics. Again, we have to be careful of what we write - there is much rumour in the market and it would be wrong ever to assume that a man is bad because he is rich. On the contrary, integrity and decency are class-free.

Bill Gates has indirectly done more damage today to my office from a misapplied and poorly handled Microsoft Update than ever did any Russian oligarch. I forgive him now that I have heard how much cash he has lost from his punt into the ethanol industry ...

Deripaska, though, is a powerful man and should be under scrutiny. What he seems to have done, on advice, is to try to link himself both to the rising Tory administration and with the McCain camp in the US.

Was this an attempt by Deripaska to bring links with what might have been seen as an incoming McCain-Cameron-led Atlantic system into the Putin camp for advantage at home?

It would have been a rational strategy until quite late this summer even if the inevitability of a McCain-Cameron leadership of the West is now in doubt.

The trend in Russian politics is for the State to claw back power from the oligarchs who emerged under Yeltsin whose grand-daughter Deripaska married. There has also been widespread talk of the Russians wanting to turn Deripaska’s empire into a ‘metals Gazprom’.

There are interesting plays here between his personal ambitions (even survival), the West’s ambition to retain an oligarchical foot in the Putin door and the neo-nationalist Russian interest in controlling the strategic metals market.

This is of importance as Deripaska struggles to get Russian Government refinancing or else see 25% of the world’s biggest nickel miner fall into the hands of a consortium of Western banks. The question is always whether the Russian State would prefer an oligarch to a Western bank holding strategic assets.

Deripaska’s links to the Rothschild name (only because of the notoriety of the family name in old Soviet propaganda as representative figures of capitalism and certainly not because of any real reason to believe ignorant conspiracy theory) could have a negative effect on Deripaska’s image at home.

The key political sub-text behind this is the eternal struggle between the power of the State and the power of men of wealth and of corporations that is being played out across the world as the credit crisis turns into precisely the sort of recession that affects voter behaviour.

The news from Russia itself is that the State is using its bail-out measures to re-acquire strategic stakes in the holdings of the oligarchical class that emerged in the Wild West atmosphere of the Yeltsin years.

The oligarchs as a class are in serious trouble. They have tended to grow their businesses through massive loans guaranteed against gravity-defying eternal rises in equity values. It does not take a rocket scientist out of Baikonur to work out that the numbers are not adding up.

$50bn of Russian state aid has already been made available to finance the external debts of this class, just part of a $200bn Kremlin national economic bail-out. The stakes are high - the middle classes are getting edgy, even beginning to switch out of the rouble and into the dollar and euro where they can.

This is not to say that the Russian State wishes to eliminate the oligarchical class (although some conservatives and military men might be happy with such a result). It is only to say that it wishes them completely neutral or even servants of the state rather than arrogant political players in their own right.

If Hank Paulson is the type of ‘Government by Golden Sachs’, i.e. the informal leaching of Wall Street into the US executive, then Dmitri Medvedev is the type of ‘Government by Gazprom’ which represents the sometimes ambiguous use of major corporations as arms of the state.

In one world, it is finance capitalism fuelling debt through innovation and, in the other, it is managerial capitalism designed to create resource-driven export wealth. Both are seen as systemic ways of increasing tax take for welfare and armament.

It is not the case that the private sector has captured the state. There is just a natural synergy between the state and the primary form of capitalism in the respective systems. The two - the system of capitalist organisation and the state - are perfectly symbiotic.

It is in the American system, where Wall Street seems opposed to Main Street, where the crisis is now greater. The Russian Government has adopted a more independent stance between oligarchy and Prospekt – a model that might be copied in intent if not in method by an Obama Administration.

When we were in Russia in 1992, a senior American adviser openly stated that the country needed its age of robber barons, one much like the American Gilded Age, to progress to ‘mature capitalism’.

We felt, at the time and said so, that he underestimated the culture of collectivism, the long memory and patience of the bureaucratic class and the role of nationalism as displacement for socialism – but few were in a mood to listen then. And Americans, of course, have little experience of really existing socialism.

What we seem to be seeing now is a hybridization of the capitalist revolution of the 1990s with Russian state authority, much as we are seeing a forced hybridization of government intervention with the market in the West.

The Russian State fully understands the superior effectiveness of the market in creating wealth and innovation but it is prepared to manipulate the market and adopt strategic ownership to guide economic policy in the national interest. In the Russian case, this is still presented as the interest of the people.

First Deputy Prime Minister Shuvalov is the type of the young technocrat who will have watched and learned during the 1990s. He is now First Deputy Prime Minister under Putin and is known for his liberal and pro-business views.

He has said, in the Financial Times this morning, that the Russian State is reserving its right to buy back (not expropriate) selective assets from the oligarchs as they become distressed during the first massive turn-down they have had to face.

Shuvalov is making it clear that the State may purchase assets to stabilize the market but that it may then sell them on for a profit later. The Russian State, it seems, is not seeking to own shares for the sake of owning shares. It is positioning itself almost as equity trader of last resort.

This is a lesson learnt far too late by their British counterparts who have been giving away taxpayers’ money for some time by over-considering the alleged effect on shareholder confidence.

We advised in Labour Party circles in the mid-1990s that network rail subsidies should be converted into equity on similar lines and were dismissed as naive because the 'City would not stand for it'. The liaison between the City and the State in the UK is the peculiar pact of British state capitalism.

It is also being made clear by Shuvalov that those oligarchs who can pull themselves out of the mire with the help of state credit and eventually repay their loans will be allowed to do so.

The overall aim is clear – to let the market winnow out weak players, encourage consolidation (especially in banking) and ensure that the oligarchical class stops playing politics and becomes like any other business class, an influencer through the lobby but not a rival to the State.

Shuvalov has the confidence of Putin and Medvedev. His views represent their views of a market-driven economic leadership operating in the national interest, well aware that state planning is economically inferior to capitalism - yet the conservative national planning interest is still there to be placated.

This is the context for Deripaska’s struggle to survive (where the long term odds are probably in his favour) and why the recent scandal is really not very helpful for him in negotiations that have to be sold in some form to the Russian people and not be blocked by conservative interests in the Russian State.

Major oligarchs who buck the trend or who embarrass the Government need to watch their step. Russia remains orientated towards the market (despite the hysteria of cold warriors) and towards the global community but only insofar as these will work to the benefit of the Russian national interest.

We could do worse than have a similar ethos in the West ....

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