Scandal Shakes the Siloviki

November 15, 2012 Topic: EconomicsPolitical Economy Region: Russia

Scandal Shakes the Siloviki

A series of investigations in Russia's defense establishment highlights a corrupt elite.

Disgraced former Russian defense minister Anatoly Serdyukov. Wikimedia Commons/Marina Lystseva.If last week’s corruption scandal involving the former Russian defense minister was not embarrassing enough for Moscow, the plot now thickens.

A police investigation is targeting one of the Russian high-tech modernization projects, a type of GPS called GLONASS (Global Navigation Satellite System). The threads may lead to higher-ups, and turn into another episode in the ongoing fight between the “economists” and the siloviki (literally, “men of power”), who supervise defense projects such as GLONASS.

The “economists,” a weaker faction on the Russian political Olympus, led by Prime Minister Dmitry Medvedev and senior officials around him, are all in favor of investigating their political opponents. In an ominous-sounding statement, Deputy Prime Minister Vladislav Surkov said Friday that “The Russian government is supporting a transparent investigation of an alleged embezzlement of 6.5 billion rubles ($206 mln) allocated for the development of the GLONASS global navigation satellite system.” On Monday, Kommersant reported that the Russian equivalent of the General Accounting Office is investigating over $200 million allegedly embezzled during the recent Asian Pacific Economic Cooperation (APEC) summit.

This comes only days after Russian President Vladimir Putin sacked Defense Minister Anatoly E. Serdyukov, who has held the post since 2007, on November 6. These are the most significant anti-corruption moves since the collapse of the Soviet Union twenty years ago, and the implications are far reaching.

Serdyukov had overseen the largest and most radical military reform of the Russian armed forces since the creation of the Red Army in 1918. Under Serdyukov, a former furniture businessman and senior tax-collection official, the Russian army went from the Soviet-style empty-shell divisions to 50 brigades, many of them rapid deployment forces and airborne units. He increased salaries and improved the living conditions of officers and NCOs, and he did his best to push the military into the high-tech twenty-first century.

Yet the uniformed military dead set on fighting last century’s wars, vehemently resisted —and resented—his efforts. Serdyukov was the first truly civilian defense minister and had never even served in the military. He was widely hated by general officers who are still nostalgic for a vast Soviet military with a global footprint, a vision which Russia simply no longer has the economic resources to sustain.

Serdyukov was replaced by the popular Sergei Shoigu, the Moscow region governor, the former Minister of Emergency Situation (the Russian equivalent of a FEMA director).

The immediate reason for Serdyukov’s removal is the investigation of widespread corruption in the defense ministry. On the morning of October 25, investigators raided a posh apartment belonging to 32-year-old Evgenia Vasilyeva, Serdyukov’s longtime friend and a former senior official in the defense ministry. Surprised investigators reportedly found the defense minister himself in the woman’s apartment at 6:00 a.m.

Vasilyeva was until now affiliated with Oboronimushchestvo, a state-owned company that deals with the defense ministry’s real estate. Just one of the company’s transactions generated a $100 million loss to the state.

It was never a secret that Serdyukov presided over a very corrupt institution. Senior Russian officials told me that according to their estimates, a third to a half of the defense-procurement budget is pilfered. However, corruption, which is systematic, is probably not the key reason for Serdyukov’s removal. It is common for top Russian officials to have business ties and amass substantial wealth, which is typically tolerated—unless an official falls out of grace with the powers that be in the Kremlin.

Serdyukov became part of Putin’s inner circle in 2007. He is married to the daughter of then-prime minister and currently Deputy Prime Minister Victor Zubkov, who is widely known as the Russian president’s mentor from his Leningrad days and still wields considerable influence.

Shortly after the marriage, Serdyukov, a businessman, became a senior tax official in St. Petersburg. He later became defense minister. The disappointing performance of the Russian military in a brief conflict with Georgia in August 2008 made that task even more urgent.

This was an unpopular and thankless job. Under the much needed reforms, the defense ministry cut military personnel, sold military assets, and forced defense manufacturers to accept lower prices by threatening to turn to foreign companies. Russia made a famous purchase of Mistral-class amphibious assault ships from France. This was the country’s first naval transaction since the Bolshevik October putsch of 1917 and the first massive Western weapons purchasing contract since the lend-lease of World War II, when the United States and Britain became Stalin’s weapons providers.

The military brass and the military industrial complex stalwarts regarded him as an incompetent civilian endangering national security. He allegedly called them “little green men” and allowed his protégés, such as the young Vasilyeva, to occupy a three-star general’s position and yell and curse at her general officer colleagues.

No military in the world forgives such abuse. Hence the interior-ministry investigation, which so far has cost Serdyukov his job and may cost him his freedom.

In the end, it is likely that the opposition to Serdyukov reached a critical mass, prompting Putin to look for his replacement. But there is more to this than the firing of a defense minister. Over 200 years ago, when visiting Paris, the father of contemporary Russian historiography, Nikolay Karamzin, was asked, “What’s going on in Russia?” Karamzin famously replied, “Ils vols” (“they steal”).

Two centuries passed, and today the graft-ridden bureaucracy keeps Russia’s investment climate at the bottom of the World Bank’s Doing Business rating: 112 for the year 2013. In the Heritage Foundation Index of Economic Freedom, it remains at an abysmal 144 for 2012.

Until such time that Russia undertakes a fight against corruption in earnest, foreigners will continue to pursue mostly the country’s mineral riches, while popular support of the government will remain questionable. Firing one minister and arresting a couple of greedy bureaucrats may just not be enough.

Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Policy at The Heritage Foundation.