John Lough
Associate Fellow, Russia and Eurasia Programme
As Western sanctions exacerbate Russia’s wider economic weaknesses, the campaign against Vladimir Yevtushenkov sends a clear warning to the business elite, and reveals the pressure Putin faces to keep his power base loyal.
Vladimir Yevtushenkov speaks to attendees at the 21st World Petroleum Congress in Moscow on 16 June 2014. Photo by Getty Images.Vladimir Yevtushenkov speaks to attendees at the 21st World Petroleum Congress in Moscow on 16 June 2014. Photo by Getty Images.

The targeting of Vladimir Yevtushenkov, the majority owner of the industrial conglomerate Sistema and one of Russia’s richest men, has inevitably invited comparisons with the arrest of Mikhail Khodorkovsky in 2003.

Khodorkovsky’s conviction and the break-up of Yukos re-cast the Kremlin’s relations with Russia’s private business owners and heralded the rise of state-owned Rosneft as a major player in the Russian energy industry. Like Khodorkovsky, Yevtushenkov appears to have overestimated his level of protection and found himself in open conflict with Rosneft’s chairman, Igor Sechin, in his case over Sistema’s ownership of Russia’s seventh-largest oil producer Bashneft. Similarly, the filing of criminal charges against Yevtushenkov and his house arrest cannot have happened without the approval of President Vladimir Putin.

Yet there is a crucial difference between the two. Unlike Khodorkovsky, Yevtushenkov was considered loyal to his political masters. He enjoyed good relations with both Putin and Prime Minister Dmitry Medvedev. In fact, Sistema even acquired a controlling stake in Bashneft in 2009 at the instigation of then-president Medvedev.

It is hard to escape the conclusion that Putin has deliberately chosen to make an example of Yevtushenkov and send a signal to keep big business on its toes. The core message is that there are new rules of the game and no one is untouchable.

Why has Putin chosen now to remind the business elite who is in charge? The answer is almost certainly related to the multiple pressures on the Russian economy resulting from sluggish growth, the increasingly visible effects of Western sanctions and increasing recognition that the boom years since Putin came to power in 2000 are over.

As Russia’s former long-serving finance minister, Alexei Kudrin, noted last week, for decades to come Russia will remain dependent on Western capital and technologies for its development.  He forecast that if sanctions remain in place, they would deprive the economy of the basis for growth and lead to several years of economic stagnation teetering on recession. He also pointed out that a significant part of Russia’s elite did not know how the fallout of the Ukraine crisis was going to alter Russia’s development path, in particular the political and economic model that the country would follow.

Over recent months, it has become clear that a hawkish group is in the ascendancy in the Kremlin that cares little for economic considerations. The ‘economic bloc’ in the government has found itself marginalized with decision-making left to an increasingly narrow group around Putin.

Meanwhile, some of Putin’s close associates who became spectacularly wealthy during his years in power have found themselves facing asset freezes as part of Western sanctions measures designed to persuade Putin to change course on Ukraine.

For the moment, Putin is continuing to batten down the hatches. The hasty passage of a law through parliament restricting foreign ownership of media outlets as well as debate in government circles about cutting off Russia from the global internet in the event of crisis are further signs that Russia is retreating into a traditional ‘besieged fortress’ mentality.

In these circumstances, it is logical for Putin to fear dissent among the business elite and the formation of interest groups that could unite to challenge his course of facing down the West in Ukraine. By showing that a loyal figure such as Yevtushenkov is not invulnerable, Russia’s business leaders have been put on notice that the slightest sign of protest could lead straight to a prison cell.

The Yevtushenkov affair is an indication of the fragility at the heart of Russia’s highly personalised system of power. Western sanctions measures are having rapid impact because they are reinforcing broader economic weaknesses that the current Russian system is unable to counter. It cannot reconcile its survival instincts with the need for long overdue structural reforms that are only possible with greater economic and political freedoms.

As a result, Putin’s social contract over the past 15 years that delivered improved living standards in return for popular acceptance of limitations on civic freedoms has been turned on its head. To compensate for stagnating economic performance, Putin can now only offer the population a defiant reassertion of Russia’s influence in Ukraine but at the price of much harsher restrictions on civil society and confrontation with the West.

As Western governments contemplate how to manage the next phase of the Ukraine crisis, they need to consider the Putin system’s short-term strengths in the context of its longer-term weaknesses. A smart strategy will seek to counter the strengths and accelerate the weaknesses as a way of encouraging Russia back onto a path of reform and accommodation with its neighbours.

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