Editorial
A Spectre is Haunting Europe
By Dr, Gary K, Busch 13/11/07
Nov 14, 2007 - 3:58:26 PM

There is a severe and enduring challenge which faces Europe and the West as a result of the preparations for the departure of Vladimir Putin as President of Russia. The changes which have occurred in the Russian political system as a result of the replacement of Boris Yeltsin by Vladimir Putin have yet to be fully assessed. The most important and fundamental change, however, has been the emergence of a new class of powerful, largely unelected, people who have been put in charge of virtually all the levers and agencies of power in the state as well as in charge of the vast private enterprises which emerged from the privatisation schemes of the Yeltsin period.

Despite the notion that Communism died with the fall of the Soviet Union, the state, its agencies and its companies are populated by the Undead; the unreconstructed nomenklatura of the failed communist system. In his book, Capital, Marx wrote that 'capital is dead labour which, vampire-like, lives only by sucking living labour' He coined the term ‘Vampire Capitalism”; of corporations whose exploitations 'only slightly quenches the vampire thirst for the living blood of labour', and that 'the vampire will not let go while there remains a single muscle, sinew or drop of blood to be exploited'. What Putin has created is a society of Vampire Communism where the Undead suck the life blood from private corporations and government agencies; leaving drained and powerless structures behind them.

The Rise of the Siloviki

The new and powerful people (‘siloviki’) have been almost exclusively drawn from the ranks of the ‘Chekists’. A ‘Chekist’ is a general, if pejorative, term for those who are or once were employed in the security operations of the Soviet state- KGB, GRU, MVD, FSB etc. (the ‘Organs’) Dzerzhinsky’s original agency was the Cheka. Under Putin, these new ‘siloviki’ have been firmly installed in the corridors of power.

Under Putin, the Chekists, primarily the St. Petersburg flavour of Chekist, openly took power as ministers, government advisors, governors, bankers and politicians. There may be as many as six thousand of these Chekists in powerful positions in the Russian state. There is no mystery about who they might be; Nikolai Patrushev, FSB director; Igor Sechin, now head of Rosneft; Yuriy Zaostrovtsev, FSB deputy director (and a director of Sovkomflot and first deputy chairman of the board of directors of Vneshekonombank); Viktor Ivanov, deputy chief of the Kremlin administration (who succeeded Nikolai Patrushev as the Head of the Internal Security Department of Russia's FSB and a director of the Antey Corporation and Almaz Scientific Industrial Corporation, developing and producing air defence systems and the Chairman of the Board of Directors of Aeroflot); Boris Gryzlov Minister of the Interior (chief of police); Sergei Ivanov, Defense Minister; former Prosecutor General, Vladimir Ustinov; Sergei Stepashin, chief of the Audit Chamber; Sergei Pugachov, president of Mezhprombank Bank; Nikolai Negodov, deputy transportation minister; Vladimir Yakunin, first deputy president of the Russian Railways Co.; Konstantin Romodanovsky, chief of internal security at the Ministry of the Interior;   Viktor Cherkesov, formerly head of the Tax Police (Deputy Director of FSB under Vladimir Putin and Nikolay Patrushev and now the Chairman of the State Committee for the Control of the Circulation of Narcotic and Psychotropic Substances of the Russian Federation); to name but a few.  To this list must be added the names of Viktor Alekseyevich Zubkov, the current Prime Minister (having served with Putin in Sobchak’s St. Petersburg) succeeding Fradkov who was named the new head of Russia’s Foreign Intelligence Service. Perhaps the most important of the new siloviki is Rosboronexport CEO Sergei Chemezov. Chemezov has a long, personal history with Vladimir Putin, dating back to their KGB days in Dresden.

Well, o ne may well ask, where’s the harm in concentrating power in the hands of the siloviki? The unelected ‘vlasti’ have always lived like parasites on the backs of the Russian people, from the days of serfdom, to the boyars to the political commissars to today’s oligarchs. Well, the answer is that today it is Western investors and economies which are suffering along with the Russian people. Western energy security is at risk. This is a different type of stew. While it is interesting to see the continuity of the ‘siloviki’ in historical context, it is their present activities which cause concern. There is little unity in the ‘siloviki’ position. There is no one united plan that they follow. These ‘siloviki’ are in competition with each other and form cliques, alliances and temporary groupings to further their aims. In doing so, they often attack other members of the clan and do serious damage to Russia. There are more factions of siloviki than there are factions of Trotskyites. As Putin prepares to vacate his post, these factions are engaged in an ever-spiraling war with each other.

The siloviki have established a pattern of behavior which they have followed to expand their economic strength. The best example was the case of Yukos, but it didn’t start there... One of the first battles, a kind of test case, was the effort to prise the railways from the grasp of Nikolay Asenenko, the Railways Minister. Asenenko was a long-serving Minister, associated with the Yeltsin Family, who was active in instituting reforms in the aging and poorly maintained Russian railroad system. After a long period of resistance the railway system agreed to be reformed. After long debate, the government agreed to Asenenko’s plan to split the railway into two entities, a managerial state-run system and a private operating railway business. As soon as this was agreed the ‘siloviki’ moved in to prevent Asenenko from carrying on the reforms and putting himself at the head of the railway monopoly. The then Prosecutor General, Vladimir Ustinov (himself once a Yeltsin man) began to find ‘tax errors’ and underpayments by the Railways. He purported to find almost seventy million rubles in unpaid taxes. Asonenko prepared his resignation and Putin fired him (3 January 2002). The new people who were moved into the railways were ‘siloviki’, led by Vladimir Yakunin. Aksonenko was ousted by a temporary alliance between his old enemy, Stepashin, and his new enemy Ustinov. Since then, reforms have been blocked in the railways.

These alliances have had a devastating effect on Russian banking as well, especially the alliance between Ustinov and Ivan Sechin against Alfa Bank. It was Sechin’s faction of the ‘siloviki’ which has been credited with creating and exploiting the banking crisis of June-July 2004. In mid-May, the Central Bank revoked the license of SodbiznesBank. This was strange as SodbiznesBank was one of the largest known contributors to President Vladimir Putin's re-election campaign. The Central Bank revoked its license for what it said was money laundering activities. This was followed by the closure of other, larger banks.   The method was simple; the ‘siloviki’ promoted a general lack of confidence in Russian banking through the circulation of ‘blacklists’ of banks purportedly in danger.   Most bankers are certain the crisis was provoked by the Kremlin, by Sechin and Ustinov in particular. Sechin’s daughter is married to Ustinov’s son so they could plot this over dinner. The real target was Mikhail Fridman’s Alfa Bank.

The first case to garner international recognition of the economic warfare of the siloviki was the ‘Yukos Case’. However, it would be a mistake to start with the attack on Mikhail Borisovich Khordokovsky as the head of Yukos. The problem started earlier with his bank. Menatep. The attack on Menatep illustrates the unique adaptation of capitalism accepted by the new Russian state as an escape from collapse with the fall of the Soviet Union.

When Mikhail Gorbachev abolished the Communist Party's monopoly of power, the KGB rushed in to fill the political void as well. Prior to the 1990 elections for the Congresses of People's Deputies in Russia and the other Soviet republics, the KGB set up a special task force to organize and manipulate the electoral processes. It held political organization training courses for favoured candidates, arming them with privileged information about their constituents' problems, needs and desires. Admitted KGB officers, some 2,758 in all, ran in races for local, regional and federal legislatures across the USSR; 86% won in the first round, according to an internal KGB newsletter.

The trends were similar in Russia's business community. It was the KGB and the Komsomol that established the first stock and commodities exchanges, "private" banks, and trading houses through which the Soviets' strategic stockpiles of minerals, metals, fuel and other wealth were sold. The West would not allow the Soviets to dump these reserves on the open market for fear of depressing world prices, so the KGB took the alternative route of selling these through organized criminal channels, to get the hard currency Moscow desperately needed.

These networks were facilitated by the strategic placement of support personnel abroad. KGB Chairman Vladimir Kryuchkov's son, as station chief in Switzerland, was implicated by a parliamentary commission in a scam to bank fortunes in hard currency for the KGB and Communist Party leaders and their families. The son of former Soviet Prime Minister Valentin Pavlov, who worked in a Luxembourg bank, was implicated in the same scandal. Even as the Russian government went through the motions of tracking down such monies, foreign intelligence chief Yevgeny Primakov blocked the parliamentary investigation from looking further, and the matter was forgotten.

Escaping Chaos

By 1990 Russia stood in a very precarious position. It had vast wealth in terms of resources but no way to trade them; a mighty army but an army that was retreating from Eastern Europe without a shot being fired; a banking system with no liquidity as all funds were held in Moscow and there were no regional banks. There was a gold ruble trading at $1.20 to the U.S. dollar and a free ruble trading at $0.66. Behind all of this was a hostile West, especially the glavni vrag, the ‘main enemy’ the U.S., who would certainly prevent Russia from dumping its products on the world market and who was refusing realistic credits to Russia. In addition, the break-up of the USSR into Russia and the CIS left many of Russia’s ports in the hands of local nationalists in Lithuania, Estonia and Latvia which restricted Russian access to the markets.

There were several major crises with which the Russians had to deal. The first was food. There was little food in Russia at the best of times, exacerbated by the problems of logistics and supply. Under the Soviet system the factory or place of work in rural Russia often offered most of the social services provided by the State, including food. With the end of the Soviet system these factories or places of work had no ability to fulfill these tasks. Because their factories operated under the strictures of the command economy there were no profits, no accumulated savings or other funds upon which they could draw. They couldn’t buy raw materials; they couldn’t pay for utilities or services; and they had no market for their goods. In the giant aluminium plants there was no way to pay for the alumina (which was derived from bauxite imports from Guinea); no way to pay for electricity; and no way to pay wages and no way to get the finished aluminium to market.

Equally there was no way to price these internal transactions as there never was anything other than notional prices for transport, notional prices for raw materials and notional prices for finished products. There was no money in the system, only notional internal clearing mechanisms.

The leaders of KGB developed a plan. The first part of the plan included inviting in foreign capitalists to prepay the expenses of the factories to get production moving. These capitalists would pay for raw materials, pay for transport and earn the right to sell the completed goods on the world market. They would pay, in addition, a fee or ‘toll’ to the factory for producing the goods. This system of tolling would only work if there were an internal currency which could be used to start the payment system and establish prices. There was no state mechanism capable of handling this. So, the planners decided on an ambitious, if risky, system. They would make an alliance with the small and disorganised criminal groups in Russia to develop a parallel system to the government’s business. They opened up the floodgates on a massive haemorrhage of rubles onto the world markets to get hard currency and to prime the ruble pump inside Russia.

The planning tasks were taken over by the First Directorate (INU - Innostrannoye Upravleniey, First Chief Directorate - Foreign) which was responsible for foreign intelligence collection, analysis, offensive counterintelligence, and active measures. It had been assembling a large cache of hard currency in banks outside Russia through the state trading companies. They, and the Sixth Department (which dealt with international economic programs) knew that the chaos which was about to overwhelm Russia in the wake of the political crises would leave Russia without an economic structure which could perform the tasks needed by the Russian State. Menatep and other ‘new banks’ were set up to handle the fund transfers. Young men in their late 20s and early 30s were put in charge and the money flowed. Because of the failure of the attempted coup against Gorbachev, the KGB had to hide. They chose several talented young men to be their surrogates. Among them was Mikhail Borisovich Khodorkovsky.

Menatep (Khodorkovsky's bank) was the vehicle through which almost all the transfers of serious money in and out of Russia took place from 1992 to 1998. When Western companies started 'tolling' aluminium and others started tolling copper and nickel they did not send the proceeds of the sales back to Russia. On the advice of Russian Prime Minister Silayev, Deputy Prime Minister Oleg Soskovets, presidential aide Aleksandr Korzhakov and Speaker Ruslan Kasbulatov Westerners were told to make all payments to Menatep Bank. Sometimes it might be Menatep Cyprus, sometimes Menatep Gibraltar, Menatep Finance Geneva, Menatep Inc. New York, etc. When the metals were sold small fee was paid to the smelters as a ‘toll’.  A payment was sent to them through their designated bank, often Citibank in NY. However, the bulk of the money was sent to Menatep marked "for onward transfer to “-.Company” or “- Account” at   “-- Bank". Western companies did not know the recipient at the end of the chain; it wasn't their business. Only Menatep know exactly to whom these payments were going after it received the funds. These were not trivial sums; payments for aluminium alone often amounted to US$60 million a month. Menatep monitored the cash flows and directed the funds to the accounts of the highest powers in the land (the Presidency, the Government and the Chekists) that staffed the parallel infrastructure. Menatep had been set up by these people and Khodorkovsky was chosen to be at its head; not the other way round.

There was virtually no aspect of what Menatep was doing which wasn't controlled by, monitored by and directed by these same leaders. This included providing government-sanctioned services to organised crime. From its early days the young men at Menatep provided financial services to the Solntsevo, Lyubarsky, Uralmash and Izmailova families. Through his connections with Semyon Mogilevich, Menatep began moving currencies and investments to and through Hungary and then to the U.S. Menatep handled the foreign exchange business of Grigory Luchansky in Nordex and moved large sums into the U.S.

In addition to its foreign currency and money laundering business Menatep also provided investment services. In the submissions before a U.S. judge in the "Avisma Case" Menatep was said to be the perpetrator of a gigantic con in which tens of millions of dollars were diverted from the company. Khodorkovsky and fugitive banker Alexander Konenyikin started the Antigua-registered European Union Bank which was described in a House Banking and Financial Services Committee as a "KGB money-laundering operation with stolen funds that were passed through Khodorkovsky of Menatep Bank as a KGB-controlled front firm" According to the investigators the entire operation was coordinated at SVR headquarters and was personally supervised by Yeltsin confidante, Aleksandr Korzakov. Through Korzakhov and his friendships with Mikhail Stepashin and Yuri Primakov, Khodorkovsky was given access to the Bulgarian and the Hungarian services to replicate his work for them. The main person in charge of security operations in Khodorkovsky's companies has been Mikhail Yosifovich Shestopalov former head of the Division for Combatting Thefts of Socialist Property and Speculation of the Ministry of Internal Affairs. The head of Menatep's and Yuko's information and analysis section was Karabinov, former head of the KGB Centre for Public Relations (the man who ran the "Miss KGB" contest).

The point of this is to make clear that virtually everything Khodorkovsky did was directed, supervised and monitored by the very people who subsequently attacked him. There were Chekists at every level of Menatep and then Yukos. Menatep was the link to the invisible government. One might reflect that Vladimir Putin's first job when he left the KGB was to supervise metals sales for Sobchak. The first contract to ship metals through the port of St. Petersburg is signed on the bottom by Vladimir Putin and countersigned by Viktor Alekseyevich Zubkov, the current Prime Minister.

As this system worked and metals and oil were produced and sold, these companies retained a part of the hard currency earnings; the foundations of Russian capitalism were laid. As these banks and investment trusts prospered, Russia became less and less dependent on the Mafia for its business. They also became less and less dependent on Western capitalists to introduce them to commodity trading. The Russians brought the rubles home and, in the various stages of privatisation, they invested these in Russian businesses. Quite often this privatization was a sham but that wasn’t the point. The point was to bring the money home and take over the shares and the businesses. An open tender for these might otherwise have attracted Western investment interest. A great deal of the money used to pay for the fake privatisations was money squirreled away in overseas banks by those in power and returned through the new ‘oligarchs’ to take over the shares in Russian companies.

One might well ask on what basis these “oligarchs” were chosen. The main reason, in addition to their competence, is that they were mainly Jews or outsiders (Potanin’s father was a trade official and he lived outside Russia for years). As Jews they were without a political base. No Russian member of the Duma would dare stand up to protect a rich Jew; as Berezovsky and Gusinsky soon found out. These oligarchs were initially dependent on their KGB bosses. As they took control of these businesses they began to operate as real entrepreneurs and sought modernisation, a Western-style management, and integration in the world economy.

This threatened the older generation of Chekists who had initiated the scheme. They, like Yeltsin, found that they were unable to adapt to modernisation and reform. The new Chekists, who came in with Putin, were not threatened. They were no more competent than their predecessors but they were much greedier. The key question is why these ‘siloviki’ have been so determined to move into business and take over control of public companies and take others back into public ownership? The answer is very simple – greed. There are no laws against insider trading in Russia. Putin has allowed the creation of a new set of oligarchs; oligarchs in epaulets. There were phenomenal sums of money being earned in Russia as a consequence of the Yukos case. There is no insider trading law which prevents this. The government knew when it was going to make an announcement about Yukos; an announcement that would send its shares up or down dramatically. It knew when it would announce news about stopping or starting oil flows; an announcement that would send oil prices up or down.  If they knew this they could use their banks and broking companies to ‘anticipate’ the markets. Fortunes were made.

The Yukos Model:

Yukos was one of the world's largest non-state oil companies, producing 20% of Russian oil—about 2% of world production The company was created on April 15, 1993. In June 1996, Yukos, Russia's second-largest oil company, confirmed had virtually been taken over by Menatep Bank, electing a new board headed by Menatep President Mikhail Khodorkovsky. The move completed a complicated strategic alliance between the two firms and followed logically from the appointment a few weeks earlier of Yukos President Sergei Muravlenko as chairman of Rosprom, Menatep's industrial holding company.

  The new chairman Khodorkovsky announced plans to raise money for Yukos but also promised a tougher stand in relation to another strategic partner, Amoco, which was working with Yukos on a major project in Siberia.

Menatep was easily able to secure its control over the Yukos board, having acquired 85.1 percent of Yukos stock in a series of controversial privatisation sales over the preceding six months.   The advantages were not only economic. There were other political reasons behind the speedy alliance between Yukos and Menatep By joining together they made it as difficult as possible to reverse the earlier “shares for loans” auctions. Menatep took a 45 percent stake in Yukos from the state as part of the controversial "shares-for-loans" privatisation auction after a rival bid was thrown out by the government on questionable technical grounds. Menatep paid the government for the shares, but the government retained the option to buy the shares back. Menatep picked up another 33 percent of Yukos from the government in an investment tender held on the same day, and a further 7.1 percent at a second cash privatisation auction. With the purchase of the Yukos shares directly the government’s option was effectively vacated.

In July 2004, Yukos was charged with tax evasion, for an amount of over US$7 billion. The Russian government accused the company of misusing tax havens inside Russia in the 1990s so as to reduce its tax burden; havens were set up by most major oil producers in outlying areas of Russia which had been granted special tax status to assist in their economic development; such "onshore-offshore" were used to evade profit taxes, resulting in Yukos having an effective tax rate of 11%, vs. a statutory rate of 30% at the time. Yukos claims its actions were legal at the time. Yukos subsidiaries also declared the oil they produced to be "oil-containing liquids" to avoid paying full taxes. Moreover, only Yukos was charged with such tax evasion.

In a move to prevent bankruptcy, management made a friendly offer to the government to pay eight billion dollars in a period of three years. A management presentation from December 2004 shows that the government’s tax claims put the "total tax burden" for 2000, 2001, 2002, and 2003 at 67%, 105%, 111%, and 83% of the company's declared revenue during those years. As a comparison, the annual tax bill of Gazprom is about $4 billion on 2003 revenues of $28.867 billion.

According to a resolution of the Council of Europe,

"Intimidating action by different law-enforcement agencies against Yukos and its business partners and other institutions linked to Mr. Khodorkovsky and his associates and the careful preparation of this action in terms of public relations, taken together, give a picture of a co-ordinated attack by the state." This "raises serious issues pertaining to the principle of nullum crimen, nulla poena sine lege laid down in Article 7 of the ECHR and also to the right to the protection of property laid down in Article 1 of the Additional Protocol to the ECHR."

"The circumstances of the sale by auction of Yuganskneftegaz to “Baikal Finance Group” and the swift takeover of the latter by state-owned Rosneft raises additional issues related to the protection of property (ECHR, Additional Protocol, Article 1). This concerns both the circumstances of the auction itself, resulting in a price far below the fair market-value, and the way Yukos was forced to sell off its principal asset, by way of trumped-up tax reassessments leading to a total tax burden far exceeding that of Yukos’s competitors, and for 2002 even exceeding Yukos’ total revenue for that year." In short, the siloviki used its power in the tax office and the Procurator’s office to issue grossly inflated tax demands on Yukos and effectively put the company into bankruptcy. Putin’s vampires sucked the cash out of Yukos, arrested Khordokovsky, threatened his partner Nevzlin with a trial for attempted murder and stole the company in a fake auction which left the assets with Rosneft (I. Sechin, proprietor). In the meantime, the siloviki were busy milking the Yukos cow through insider trading and depriving any Western investors of their stakes in Yukos shares.

The Yukos model has been followed in other takeovers; especially by Sergei Chemezov. As Mr. Chemezov's influence expanded, the line separating his different roles -- civil servant and entrepreneur -- became increasingly blurred.   His alliances with other siloviki (especially the Sechin faction) have given more muscle to the Rosboronexport power inside Kremlin, Inc. Chemezov's proximity to the Kremlin gives the company an overtly political dimension to its decision-making process.

Since the appointment of Chemezov, Rosoboronexport has exhibited very aggressive tactics in regards to competing exporters and in forcing industry acquisitions, with full Kremlin support. This has made his enemies crumble under the pressure. Sergei Tsivilev, the first deputy director general of the privately held Russian Aircraft Corporation MiG, came under the scrutiny of the Procurator General; accused of mass fraud for allegedly attempting to sell counterfeit aircraft parts to Poland (although Polish representatives came forth to his defence and stated clearly that they have no complaint against Tsivilev). Another case of Yukos-like tactics has been Rosoboronexport's ham-handed takeover of the AvtoVAZ, the manufacturer of the Lada. In December of 2005, Mr. Chemezov, whose company had no experience in cars, was accompanied by 300 heavily armed men to forcefully seize control AvtoVAZ, in what some have called a "creeping nationalization." In order to force out the old management and install Kremlin loyalists, the government had to assist Rosboronexport with force.

A similar "creeping nationalization" occurred with the takeover of 66% VSMPO-Avisma, the company responsible for manufacturing almost one-third of the country's titanium (a vital component of air frames and missile systems) To win control of this already troubled company the siloviki muscled the two major shareholders of the company with threats of ruinous tax penalties (2.45 billion rubles) and personal incarceration. They sold their shares to Rosboronexport at greatly reduced prices (and which has never been fully paid).

In October 2007, Rosboronexport announced that it was considering selling a 25%-plus-one-share blocking stake in the carmaker, AvtoVAZ, to either a major European or US carmaker.
Sergei Chemezov, Rosboronexport’s general director, explained that AvtoVAZ was currently holding strategic partnership talks with car-making majors Fiat (Italy) and Renault (France) and hoped to offer a blocking stake in the company by end-year. He added that the company was holding talks with Severstal, Russia's largest steel maker, and Metalloninvest, a leading mining and metallurgy group, concerning the sale of up to a 10% stake in AvtoVAZ, explaining that the carmaker needed to secure high-quality steel supplies for car production and that joint share-owning would lock their interest together.

Following the Yukos model, Putin’s vampires have sucked the blood out of many of what they call the ‘strategic industries’ of Russia, returning these industries to effective state control, but with profits going to the private sector of siloviki; the very model of Vampire Communism.

The effect of this Vampire Communism is best known in the energy sphere where countries like the Ukraine are pushed and shoved by the siloviki. Lithuania has lost its supply of oil to its main refinery. The port of Tallinn, having just constructed a major new coal terminal, has just found the Russian export coal shifted to Riga instead. The battles to bring in Sakhalin II on time have foundered on spurious environmental claims. As Putin’s term ends these fanciful exercises are increasing as factional fighting amongst the siloviki grows.

The Siloviki Wars

In early October 2007, Viktor Cherkesov, the head of the Federal Service for Control over Trafficking of Narcotics (Gosnarkokontrol), published a lengthy article in Kommersant outlining the risks of an “internecine feud” among the special services. The immediate cause for the highly unusual public declaration was the arrest of General Alexander Bulbov, Cherkesov’s deputy and right-hand man, who was initially accused of many crimes, including exposing state secrets, but now is charged only with illegal wire-tapping. Cherkesov and his colleagues vehemently insist that the case was fabricated to derail the ongoing investigation into corruption and smuggling in the special services, which Putin has personally assigned to Gosnarkokontrol.  While Cherkesov is careful not to reveal any names and puts the blame only on the newly created Investigations Committee within the State Prosecution Service, it is no secret that his attack is aimed at the all-powerful Federal Security Service (FSB). The petty details of mutual accusations are perhaps less interesting than Cherkesov’s attempt to claim the high moral ground and advance an ideology of chekizm (referring to the Extraordinary Commission -- ChK -- that unleashed the campaign of state terror under the leadership of Felix Dzerzhinsky in the first years after the October Revolution). Cherkesov claims that during the period of moral decay in the 1990s, the chekisty closed their ranks and provided a handhold that the desperate society grasped as their last hope and thus checked its free-fall into the abyss. Now the infighting inside the chekist corporation threatens to destroy that vital handhold, potentially resulting in a devastating crisis and collapse of the still-fragile state.

This Bulbov case is indeed not an isolated squabble but a battle in the escalating war between clans that use their enforcement capabilities to advance business interests. Sergei Stepashin, a former prime minister with an impeccable chekist pedigree, tried to make his Audit Chamber into a “power structure” that would control financial flows between state agencies, but he suffered a painful setback when several of his lieutenants were arrested on corruption charges. Recently sacked Prime Minister Mikhail Fradkov, whose performance was widely portrayed as pathetic, has suddenly re-emerged as head of the Foreign Intelligence Service, while Sergei Lebedev, a professional who directed this service for seven years, was inexplicably moved to the hopeless job of executive secretary of the Commonwealth of Independent States

Putin is trying to extinguish the flaring clan conflicts; the Kremlin celebration for his 55th birthday invited all of the prominent siloviki in an effort to boost corporate cohesion. Putin has also promoted a new clan, headed by newly appointed Prime Minister Viktor Zubkov and his son-in-law Defence Minister Anatoly Serdyukov, who have never belonged to the chekist brotherhood but have a solid base in the tax service and financial monitoring sector. Nothing, however, helps in reconciling the warring parties that can no longer keep their infighting under the proverbial carpet, so the peculiar details that the FSB generals sacked by Putin have, in fact, retained their jobs and that Nikolai Patrushev, the head of the FSB, has named Cherkesov as his “personal enemy” are leaked to the newspapers.

In November 2007 an officer with the Federal Narcotics Control Service (FSKN) and a former colleague of his were recently found dead in St. Petersburg, the apparent victims of poisoning. This deliberate poisoning suggests that an under-the-carpet battle between rival Russian special services may be spinning out of control.

The bodies of Kostantin Durzenko, an officer with the FSKN’s St. Petersburg directorate, and Sergei Lomako, a former colleague, were found on the morning October 27. The St. Petersburg-based website Fontanka.ru quoted police as saying that the two had met with another former colleague and other people at a city café, where they “partied on a grand scale,” but that the other revellers had said the Druzenko and Lomako were fine when they last saw them. On October 31, Alexander Mikhailov, head of the FSKN’s department for inter-agency and information activity, confirmed that the two men were poisoned and said the circumstances surrounding their deaths were “strange”.   The press service of the Investigative Committee of the St. Petersburg Prosecutor’s Office said on October 31 that the substance that poisoned the two men would be named in three weeks, when forensic analysis will be completed (Regnum.ru, October 31).

The apparent poisoning came against the backdrop of a conflict between the Federal Security Service (FSB) and the FSKN that went public last month following the arrest of the head of the FSKN’s operational department, Lieutenant-General Alexander Bulbov, and several other FSKN officers at Moscow’s Domodedovo Airport. Bulbov and the other FSKN officers were arrested by agents of the FSB and the Investigative Committee – a newly formed structure that operates under the auspices of the Prosecutor General’s Office, on October 2. The Investigative Committee accused Bulbov of taking bribes from several private companies for “protection” and monitoring the telephone conversations of 53 businessmen and journalists. Bulbov was charged, among other things, with abusing his office, illegal business activities, receiving bribes, and engaging in illegal wiretapping. On October 31, the Moscow City Court declared Bulbov’s arrest lawful, rejecting an appeal by the Prosecutor General’s Office and a protest motion from Bulbov’s lawyers. The Prosecutor General’s Office wanted the order for Bulbov’s arrest scrapped and his case sent back for a new trial at Moscow’s Basmanny Court, while Bulbov’s lawyers wanted him released from custody (Interfax, October 31).

Bulbov and one of the other FSKN officers arrested on October 2 had been leading the agency’s investigation of Tri Kita (Three Whales), a Moscow furniture store accused of running a smuggling operation that evaded millions of dollars in duties on goods imported from China. Back in 2002, the Novaya Gazeta deputy editor and State Duma deputy Yuri Shchekochikhin was put under protective guard along with his family after receiving threats connected to an investigative piece he published in Novaya Gazeta in February of that year claiming that a “criminal group” had paid $2 million to top officials in the Prosecutor General’s Office to close down an investigation into allegations that Tri Kita and another furniture store, Grand, evaded import duties by falsifying the weight and purchase price of millions of dollars’ worth of goods they had imported. According to media reports, among the co-founders of the Tri Kita and Grand stores were “firms belonging to the father” of Yuri Zaostrovtsev, then a deputy FSB director Shchekochikhin died in July 2003, apparently the victim of poisoning. In an open letter, Bulbov charged that three FSB generals, whom he identified by their last names – Kupryazhkin, Feoktistov, and Kharitonov – were behind his arrest and that the campaign against him began a year ago, when a group of FSKN staffers under his leadership was tasked with investigating the Tri Kita case.

The arrests of Bulbov and the other FSKN officers, however, appear to be part of a power struggle that goes beyond the battle over the Tri Kita investigation. Following the arrests, FSKN chief Viktor Cherkesov wrote an article in Kommersant stating that the arrests were evidence of “infighting among the special services” and warning: “There can be no winners in this war. There is too much at stake.” He also stated that it is impermissible for “warriors to turn into merchants” – the latter apparently being a reference to his foes within Russia’s special services and other agencies.

Some observers say that this broader conflict pits Cherkesov and Viktor Zolotov, head of the Presidential Guard Service, against deputy Kremlin chief of staff Igor Sechin, FSB Director Nikolai Patrushev, and Investigative Committee chief Alexander Bastrykin... The power struggle may be getting worse because of the ongoing uncertainty over what will happen next year following the end of President Vladimir Putin’s second and constitutionally mandated final term.

According to one school of thought, the rival camps are jockeying for position in anticipation that Putin will no longer be around to play a mediating role: as the well-known political analyst Stanislav Belkovsky put it: “The wars between the elites have come to the surface. Not everyone is convinced that Putin can stay in power. For now, however, Putin appears to be trying to maintain a balance between the warring factions: After Cherkesov’s article appeared in Kommersant, Putin publicly scolded him, telling Kommersant that it is “wrong to bring these kinds of problems to the media” and that someone who claims a war between security agencies is going on “should, first of all, be spotless.” Yet the following day, Putin created a new state committee to fight illegal drugs and named Cherkesov as its chief. That put Cherkesov on a par with Patrushev, who, in addition to heading the FSB, heads the National Anti-Terrorism Committee

In addition to Cherkesov, other top government officials have recently stepped out of the shadows. In late September 2007 Sergei Chemizov, the head of Russia’s arms trading monopoly Rosoboronexport and board chairman of the AvtoVAZ carmaker who served with Putin in the KGB in Dresden in the 1980s, called for using the Stabilization Fund, set up in 2004 to insulate Russia’s economy from the volatility of raw materials export earnings, to provide credit for domestic industry. Analysts also pointed to the Soviet-era behaviour of Viktor Zubkov. Since his appointment as prime minister in September, Zubkov has publicly upbraided subordinates in a manner far harsher than anything Putin himself has displayed while in power. Zubkov has also been the point man in a PR campaign to shift the blame for sharp food price rises onto retailers and producers. Then came Cherkesov’s article, the significance of which is not what it had to say about the specific dispute between the FSKN and the FSB, but its description of the “ideology of the corporatist model of the Chekist state” – which amounts to a “completely obvious formulation of a model for building totalitarianism in Russia.” Observers note that while Cherkesov’s article may have been a sign of his weakness in the current power struggle, what is important is that his rivals “think in exactly the same categories that he very rashly half opened” in the article.

On October 18, Putin told journalists that Russia's political system will need to remain "under manual control" for the next 15 to 20 years. This statement confirms the decision and efforts made by Putin and the siloviki plan to expand their brand of authoritarian, state-dominated capitalism at home, while remaining on a possible collision course with Western democracies abroad.

Despite their power, the siloviki have had to form alliances of a sort in order to cement their power. They have allied with the huge class of government bureaucrats in the form of the so-called party of power, Unified Russia. In order to maintain their domination of the bureaucracy, the siloviki use the tried-and-true method of selective repression and intimidation. In just the last few months, governors, mayors, and other high-ranking regional officials in no fewer than 49 regions have found themselves under arrest or investigation. Such probes occasionally reach federal officials as well.

Finally, the siloviki paradoxically benefit from criminal activity. By some estimates, up to 30 percent of the economy is controlled by organized crime, and Russian crime bosses spend much of their illegal capital on bribes to law-enforcement officials for legal, tactical, and administrative support. Even Putin confessed, in 2006, "Our law-enforcement organs are completely corrupt." With the aid of these alliances and by manipulating the other forces within modern Russia, Putin's siloviki have managed to gain control of the country and even achieve a measure of popular support. They have been assisted in this by the enormous wealth coming in because of high global energy prices, wealth that has enabled them to implement populist measures and raise living standards .

Victor Yasmann (RFE/RL) points out that the real secret of the siloviki is their massive and skillful use of "soft power." Italian political theorist Antonio Gramsci noted that ruling classes secure their power over the governed not only through coercion, but also by manufacturing their consent by establishing "cultural hegemony" over the national consciousness. Over the last decade, the siloviki in Putin's Russia have provided a textbook example of the practical implementation of this seemingly abstract idea.

Over the last decade, the siloviki waged a "quiet cultural counterrevolution" with tremendous effect. They worked to systematically devalue and compromise liberal values, standards, and institutions -- values that had massive public support in the early 1990s. This was coupled with repression, and murder, of journalists and commentators hostile to their views. They have indoctrinated the new youth of Russia, who remember little of the Soviet Union, that the siloviki control access to jobs, careers and good fortune in business, government and the civil service.

Is The Future of Russia Under The Siloviki Model Inevitable?

The ability of the siloviki to garner such power and influence is largely as the result of high energy prices. There is a lot of cash awash in the system. However, the accretion of such assets in the hands of the siloviki is also the biggest weakness in the system. There is little co-ordination of how best to spend this cash. The Russian infrastructure (rail, roads and pipelines) are in desperate need of investment. The siloviki have shown that they have no real interest in wasting their cash on the infrastructure. There is also a demographic crisis in Russia. Each year there are fewer and fewer Russians. Russia is short of an expanding skill base in the transport and engineering industries. There are just not enough people. Even if the Russians were willing to spend some money in rebuilding the leaking oil pipelines in the Kola Peninsula they have found that staffing these projects is a difficult exercise.

The xenophobia of Russia militates that hordes of foreigners will not be let in to fill these jobs so it is unlikely that major infrastructural changes will occur. The high levels of technology associated with the exploitation of oil reserves in a hostile climate are primarily the preserve of the major foreign oil companies. The hostile behavior of the Russian oil vampires towards Western oil companies makes co-operation less attractive.

The economy is not doing as well as it pretends, despite the high price of oil. Until the first days of October 2007 the government had insisted on an inflation benchmark of 8%, but that estimate was later revised to 11-11.5%. A few percentage points might seem to be a far cry from a big deal, but the macro-figures of the State Committee on Statistics show only a fragment of the problem. Opinion polls show that up to 80% of respondents now assess inflation as “high,” while that figure was about 50% last summer.   Such perceptions reflect the fact that food products are the main driver of inflation, with the prices on eggs increasing by 20–22% and on vegetable oil by 25–27%. Sociological research show that nearly 60% of families spend more than a half of their budget on food, so the current inflation surge is far more painful for the poor than for the rich.

Inflation as a cause of discontent is really bad news. The government response has been entirely predictable, announcing a flat increase of pensions by 300 rubles (on top of the 400-ruble raise earlier this year), but less than 30% of respondents in a recent   opinion poll were satisfied with this step, while 25% saw it as a cynical joke.. Another emergency measure was the enforcement of fixed prices on several “socially sensitive” kinds of food, including bread and milk. Without fail, that measure caused a jump in prices on other products, so inflation has added another 0.2% in the first week of November. The government has even resorted to persecution of “greedy traders,” for instance, opening an investigation against a milk plant in Nizhny Novgorod.  However, the experts predict more damage than relief from these awkward Soviet-style interventions

As Pavel Baev has pointed out (Eurasia) The sum total of all these mistakes is the apparently absurd situation when three weeks before the parliamentary elections nothing resembling a political debate is happening, while sixteen weeks before the presidential election nobody knows who is running. Putin’s smart tactics of preserving full control and keeping loyal subordinates in the dark has set a perfect self-made trap where he can only pretend to ignore the irrepressible spread of the enthusiastic movement “For Putin!” and the ‘Nashi’ youth movement. His system of power has clearly exhausted its stabilizing potential and is facing a crisis of legitimacy and integrity—much the same way as Brezhnev’s stagnation presaged the end of an era exactly 25 years ago. The question is not whether the regime will be able to withstand a gathering economic storm but what tremble will sudde nly send it crashing down

In the few short years of Putin’s rule the chaotic expansion and reconstruction of the Yeltsin years has been altered. The old Chekists who built the oligarchs under Yeltsin have been replaced by the new and younger Chekists, primarily from St. Petersburg. The siloviki factions are at war to see who will take over when Putin leaves; a war which will gather in intensity as the election nears. These factions have made a good start in reconstructing the control system of the Soviet Union and restoring the blind patriotism which substituted for good food, housing, health care and free expression which Russians expected in the removal of communism.

They didn’t reckon with the Undead and the rise of Vampire Communism and the dedication of what Marx called “that Wallachian boyar”, Vlad Dracula, in spreading his cloak over the remaining light in the society.