A Rare Moment of Policy Transparency in Russia: Why the Government Just Ordered Companies not to Obey Laws

The following is a guest post from political scientist Sam Greene, the director of the Center for the Study of New Media & Society at the New Economic School in Moscow, Russia.


It is rare that observers of politics get a clear view of how and why a policy decision is made. Such clarity is even more infrequent in Russia, with its notoriously opaque approach to the drafting and implementation of policy. (Indeed, if the government gets its way, which it usually does, Russian policymaking will become even more opaque, as debate on legislative amendments not approved in committee will be limited to 60 seconds, and the federal budget will be ratified without any debate at all.)

Thus it is all the more remarkable that we know almost without doubt or equivocation the reasoning and process behind one of the Kremlin’s most stunning recent policy initiatives, a presidential decree that, in essence, prohibits major Russian companies from obeying the law in third countries without express permission from the Russian government.

The decree, which was published Sept. 11 and entered into force immediately, prohibits companies designated by the government as strategic – which includes most of the extractive industries, telecommunications, media, finance and transportation sectors, regardless of whether the companies are state- or privately owned – and their subsidiaries from complying with foreign investigative requests and court or administrative orders without permission from the government. Further, the decree forbids the government from granting such permission if compliance would be deemed detrimental to Russian economic interests.

Leaving aside, for a moment, all of the problems this decree creates, it is extraordinary for its transparency. On Sept. 4, the European Commission announced the launch of an antitrust investigation into Gazprom, following up on allegations emanating from Poland, Lithuania and elsewhere in Central and Eastern Europe that the Russian company was abusing its market position, manipulating the competitive environment and setting unfair prices. This upped the ante in a long-running effort by the Commission to prod Gazprom into compliance with the so-called ‘Third Package’ of energy market regulations, which requires that wholesale suppliers of natural gas and other energy commodities to the European Union split their market distribution businesses off from their extraction and transportation businesses. Gazprom, with the explicit backing of the Russian government (which controls the company), has steadfastly refused to comply, while the Commission has steadfastly insisted that it must.

Faced with the investigation, Gazprom argued that, among other things, it was not really subject to European jurisdiction, while maintaining that it always acts in accordance with European law. Six days later, the Kremlin appeared to back up its gas champion with the aforementioned decree, and we know, thanks to reporting by the Russian newspaper Kommersant, that appearances are not deceiving. Gazprom’s leadership knew of the decree even before many in the government did, according to the report, and the company called a press conference about the decree even before it was published. Indeed, the decree – which effectively bars Gazprom from providing evidence to European investigators and, in the end, from complying with the Third Package’s divestment requirements – was almost certainly drafted with Gazprom’s direct participation.

Observers have noted that this sort of thing is not exactly beneficial for Russia’s own investment climate, and may lead foreign governments and commercial partners to think twice (or thrice) about doing deals with Russian majors. Beyond that, the decree creates some rather interesting juridical conundrums. For example, it states that it applies to all subsidiaries of Russian strategic enterprises. However, many of these subsidiaries – Gazprom Marketing & Trading, for example – are incorporated in foreign jurisdictions. Contractually, by virtue of ownership, these subsidiaries are, of course, required to do the bidding of their Russian owners. Legally, on the other hand, they are required to abide by the law of the country in which they are incorporated, and statutory obligations generally override contractual ones.

And because these foreign-based subsidiaries are not directly subject to Russian jurisdiction, it is hard to see how the Russian government could enforce this decree. While it may seem a stretch to imagine that the subsidiaries of Gazprom or other strategic enterprises would ever find themselves at odds with their head offices or with the Kremlin, there may be a bit of a principal-agent problem. After all, the corporate officers of many of these subsidiaries are foreign nationals, who, in the case of a standoff, could face criminal charges for obstructing an investigation but would not be afforded consular or other protection by the Russian government. Nor are the likely to want to flee to Moscow to escape prosecution.

Regardless of whether the Kremlin’s goals with this decree are achievable, the goals themselves are plain to see. I have argued elsewhere that the Russian leadership tends to use the rents generated by Gazprom and a handful of other majors not only to grease the wheels of an otherwise inefficient economy, but also (and perhaps chiefly) as a tool of political management. Behind Moscow’s formal arguments to Brussels about economic efficiency and energy security stands a fundamental reality: decoupling Gazprom’s extraction, transport and distribution businesses would rob the company of the rent flows that are so valuable to the Kremlin. There is, arguably, no way that Russia could allow compliance with the Third Package and still maintain the current system of power relations inside the country. The ‘noncompliance decree’ is thus only the latest demonstration of the degree to which domestic politics and foreign policy in contemporary Russia are inseparable.

2 Responses to A Rare Moment of Policy Transparency in Russia: Why the Government Just Ordered Companies not to Obey Laws

  1. Chaz September 13, 2012 at 1:14 pm #

    “Behind Moscow’s formal arguments to Brussels about economic efficiency and energy security stands a fundamental reality: decoupling Gazprom’s extraction, transport and distribution businesses would rob the company of the rent flows that are so valuable to the Kremlin.”

    Could you explain why you think this? Gazprom’s main source of income is the sale of oil for money. The elite’s method of extracting this income for themselves is (I presume) from inflated salaries at and contracts with Gazprom. And the state treasury gets money as well from profits since it owns most of the shares. None of that would be disrupted by a decoupling.

    The EU rules are meant to prevent abuse of market power. Gazprom is currently abusing market power greatly and deriving extra profit (your rent flows) from that. This is a source of extra gain for the elites and the state, but it is not all of it or even most of it. I would also note that they have often used this power to gain political leverage for Russia, at the expense of profit for Gazprom, and this may be another motivator for the EU to stop their shenanigans.

    If they played fair Gazprom might have to accept lower prices, but they would still bring buckets of money in from oil sales and the elites back in Russia would still happily steal those buckets for themselves. You make it sound as if their monopolistic practices are all the company has. You say if they stopped the Russian political order would collapse! How can you support that?

  2. Sam Greene September 13, 2012 at 3:43 pm #

    Happy to. Gazprom sells natural gas, not oil. They control the vast majority of gas extraction in Russia and 100% of the gas pipelines leading through and out of Russia. In addition, also by law, they purchase all of the Central Asian gas destined for Europe and then re-sell it in the EU. All independent Russian gas producers – who are allowed to sell only on the domestic market – also are required by law to use Gazprom’s pipelines and distribution network. And guess who sets the prices?

    You’re right that Gazprom can take a hit and still remain highly profitable. But compliance with the Third Package – i.e., divorcing extraction from transport – would allow Europe to buy gas directly from the Central Asians and the independent producers at whateverprice they can negotiate, while leaving the rump-Gazprom saddled with gas fields at the end of their useful lifespans and/or aging and inefficient infrastructure (depending on how they manage the decoupling and the structure of the resulting enterprises). In that scenario, Gazprom could well end up a loss-making business, which would radically alter the political landscape in Russia.