Rosatom's role in Russian foreign policy with a case study of the Astravets plant in Belarus

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Rosatom’s Role in Russian Foreign Policy

with a Case Study of the Astravets Plant in

Belarus

MSc Thesis Political Science: Political Economy

Research Project: The Political Economy of Energy

University of Amsterdam. Graduate School of Social Sciences

Amsterdam

June 22, 2018

Author: Sarah Poss

#10880887

Supervisor: Dr. M.P. (Mehdi) Amineh

Second reader: Dr. H. (Henk) Houweling

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Acknowledgements

A special thank you to Mehdi Amineh, whose advice was as invaluable as his enthusiasm for the politics of energy is contagious. I would also like to thank Dr. Houweling for being the second reader. It is both an honor and an source of motivation to have these two scholars read my work. And to Roman Artyushkin, who supports me endlessly and generously indulged me in my constant talk of Rosatom over the past five months. And finally, I would like to thank my parents for helping me pursue my dreams throughout my life.

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Maps

Map 1: Russia

Map 2: Belarus

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Source: CIA Factbook

List of Abbreviations

NPP - Nuclear Power Plant

CIS - Commonwealth of Independent States

MoU - Memorandum of Understanding

BOO - a reference to Rosatom’s “Build, Operate, Own” model

EAEU - Eurasian Economic Union

FSB - Russia’s Federal Security Service

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CSTO - Collective Security Treaty Organization

SCO - Shanghai Cooperation Organization

FAEA - Russia’s Federal Atomic Energy Agency

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List of Tables and Figures

Figure 1. Correlation between Russia’s GDP and the price of oil……….34

Figure 2. Inflation, disposable income, and labor compensation in the Russian economy....38

Figure 3. Nuclear power plants in Russia………...50

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Abstract

The Russian state atomic corporation, Rosatom, has quickly expanded its business abroad since it was formed in 2007. The objective of this research is to clarify the connection between this expansion and the political motivations of the Russian government. Rosatom offers to finance, build, operate, and own nuclear plants in client states, which makes a compelling opportunity for developing countries with increasing electricity demand and little or no experience in the nuclear industry. However, becoming dependent on a Russian state corporation for energy supply is a definitive risk, explored in this research by looking at past occurrences of political involvement by the state in oil, gas, and nuclear energy deals. The case of the Astravets plant under

construction in Belarus shows how the political impact of a Russian plant can extend far beyond the borders of the client country, and connects the construction of a nuclear plant with the objectives of Russian foreign policy. The outward expansion of Rosatom is found to coincide with the development of a more globally-oriented yet neomercantilist foreign policy, driven by economic and geopolitical factors.

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Chapter 1: Research Design

Objectives

The topic of this thesis is the expansion of Rosatom internationally, and how this expansion plays into Russian external policy goals. The primary objective of this research is to understand the extent and nature of Rosatom’s activities with respect to promoting and expanding the use of nuclear energy internationally. A second objective is to understand Rosatom’s role in the global nuclear energy industry now and in the medium term. The final objective is to ascertain how Rosatom’s activities coincide with the Russian foreign policy agenda.

Research question

What are drivers of Rosatom’s international expansion, and how does this expansion coincide with the Russian foreign policy agenda?

Sub-questions

1. How do Russian state corporations fit into the political, economic, and foreign policy agenda?

2. How has the role of Rosatom developed over time, and what is the outlook and strategy for the future?

3. What are the potential consequences of reliance on Rosatom for energy security?

Social Relevance

The social relevance of this research is multifaceted. First, as a matter of national security for other states, monitoring the changes and development of the Russian sphere of influence is

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paramount. The Russian government has proved it is willing to forcefully defend its perceived sphere of influence using diplomatic, economic, covert, and military means (Sokolsky, 2017). The promotion of Russia-backed nuclear energy to create long-term dependence in

energy-deprived states has the potential to significantly expand Russian influence around the world, and this research seeks to identify if and how this is taking place under the auspices of Rosatom.

Second, for all the scholarship on Russia as an oil and gas giant, Rosatom is a leader in the nuclear energy industry and the ever-growing list of countries Rosatom has made agreements with is a neglected topic of study given the potential influence Russia could gain from pushing nuclear energy adoption around the world, especially in the recent past as the number of deals with Rosatom have more than doubled (Rosatom, 2018). There is a debate among scholars about the nature of Russian energy giants, with some pointing to the economic logic behind their actions while others emphasize actions perceived to be politically motivated, and this research will bridge the gap between those arguments. The work of Minin & Vlček (2017) provides the most comprehensive argument in the peer-reviewed literature in favor of an economic

explanation for Rosatom’s expansion, but there are flaws in this argument that this research attempts to address. Lastly, those who are working toward a future powered by renewable energy must be aware and contend with the fact that Russia’s vision of the energy transition includes the use of nuclear energy, making this research is relevant as it highlights the actions Rosatom is taking to ensure that Russia is central to the future of global energy supply and security.

Delineation of Research

This thesis is centered on how Rosatom fits within the framework of Russian foreign, economic, and security policy, and how Russia gains influence through Rosatom’s newly-acquired reach into all regions of the world. The research is delineated into the space of Russian policy and outcomes, over the time period since 1991, with brief references to ways the Soviet system has influenced the current behavior of the Russian state.

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The main actors in this research are organs of the Russian state, from Rosatom and its subsidiaries, to the Kremlin, security services, the Ministry of Foreign Affairs, and other ministries. Since arrangements regarding nuclear energy are typically organized at the state level, the foreign actors in this research are primarily state actors and state-run companies as well. An exception is in the analysis of Rosatom’s competitors, some of which are private companies.

The time frame under consideration is from the collapse of the Soviet Union until the present time. This research is focused on role of Rosatom in foreign policy, and therefore the

development of Russian policy from its Soviet roots through its evolution under the Russian flag will be referenced, but the primary focus is the development of nuclear expansion under

Vladimir Putin.

1.2 Literature Review

There is a debate among scholars about the nature and existence of the Russian energy “weapon.” Some conclude that political meddling in the energy industry by the Russian government is a rare occurrence or coincidental byproduct, while others see Rosatom or

Gazprom as being inherently political in nature. This literature review covers both sides of this debate in terms of the economic as well as the political arguments to highlight different

perspectives on the drivers and motivations of Russian energy giants. It draws on experiences in the oil and gas industry as well as the nuclear energy industry to create a broad view of the motivations and involvement of the Russian state in energy issues.

The Economic Argument

Minin and Vlček (2017) assess whether concerns regarding Rosatom as a political tool is

warranted, and conclude that economic motivations are sufficient to explain Rosatom’s external strategy to the extent that political factors are coincidental. They note the competitiveness of the

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global nuclear industry, emphasizing that regardless of ownership, Rosatom could not survive in the competitive environment if political considerations routinely superseded the economic.

The economic argument highlights the fact that nuclear power plants are becoming more

efficient through technological advances that lower the production costs of electricity generated by nuclear energy (Minin and Vlček, 2017). Despite the push for renewable energy on economic grounds, modern nuclear power plants (NPPs) remain an economically sound form of electricity production that is profitable for companies such as Rosatom. For example, light water reactors, the most common type of reactor in service today, have operating costs between USD

0.025/kWh and 0.07/kWh to produce electricity (Sovacool, 2011). Turkey’s first nuclear power plant, the Akkuyu plant being built by Rosatom, has a guaranteed price of USD 0.1235/kWh over a period of 15 years (Rosatom, 2016). Out of four total units, Rosatom receives this price for 70% of the first two units and 30% of the third and fourth (Minin & Vlček, 2017:39). This favorable margin and long time period leaves Rosatom with a handsome profit, especially when considering the growing demand for energy in Turkey, which is expected to grow 6% every year until 2020 (Bilgin, as quoted by Minin & Vlček, 2017). Since the free market will set the price of electricity produced outside the USD 0.1235/kWh agreement, rising demand will result in a similarly rising profit for Rosatom (Minin & Vlček, 2017:39). With a life of 60 years and a payback period of 17 years, Rosatom has made a sound investment (Minin & Vlček, 2017).

The economic argument pertains not only to Turkey but also to Rosatom’s other projects abroad. Compared to domestic projects, the expected rate of profitability from foreign projects is at 6.1% compared to 2.3% inside of the Russian Federation (Minin & Vlček, 2017:39). Making triple the profit can explain Rosatom’s foreign investments outside of any political considerations, though these numbers do not include decommissioning costs or spent fuel management (Minin & Vlček, 2017).

Part of the economic argument is that Rosatom’s engagements abroad are also beneficial to the Russian economy. The construction of NPPs employs around 25,000 people inside Russia, and

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every ruble invested in a foreign NPP, two rubles come back to the Russian economy, according to Kiril Komarov, the first deputy director general of Rosatom (Rosatom, 2016). Nuclear energy is a high-tech sector that facilitates the development and diversification of the Russian economy. In 2015, Rosatom paid the ruble equivalent of $2.7 billion in taxes to the Russian government, with nearly half (45%) coming from international projects (Rosatom, 2015). In this sense, Rosatom acts in a theoretically liberal fashion, based on economic prospects and opportunities, with the benefit of providing jobs and tax revenue back home.

Another piece of the argument is that unlike with fossil fuels, NPPs don’t rely on a steady, uninterrupted flow of nuclear fuel in the same way that gas does, and fuel can be stored at the facility for a certain period of time in the event of disruption (Jirušek, Vlček, & Koďousková et. al., 2015). The transportation of nuclear fuel is relatively more difficult to interrupt, leaving less room for political manipulation. For example, when the Ukrainian government banned Russian nuclear fuel from being transported by rail through Ukrainian territory, Rosatom was able to fly the fuel to their customers in Bulgaria, Hungary, and Slovakia instead (Nuclear Engineering International, 2014). This disruption was minor and had practically no impact compared to threats to the flow of gas, which relies on pipelines for transit. However, if Russia is the supplier of fuel and politically-motivated actor, the ease of changing transportation methods or routes is irrelevant.

Finally, Rosatom has a number of competitors for new projects but also faces the threat that other companies will replace Rosatom as a technology and fuel supplier. Westinghouse Electric Company LLC and its partners, for example, has a contract with the EU to produce nuclear fuel for a Russian-built reactor in an effort to diversify their sources (Westinghouse, 2015). If Rosatom is perceived as a political actor, other companies can take over their services over the medium-term. It is therefore in Rosatom’s interest to appear apolitical to thrive in a competitive environment.

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To conclude this section on the economic argument to explain Rosatom’s activities, there are substantive economic reasons for Rosatom to expand abroad. In terms of Rosatom’s strategy, political advantages for the Russian government are coincidental, and not a part of the logic of expansion. While there are convincing aspects of this argument, other literature presents evidence that Rosatom cannot extricate itself from the political motivations of the Russian government.

The Political Argument

The former CEO of Rosatom Sergei Kiriyenko said that, “It is a fact that atomic energy is not just nuclear power plants. Atomic energy is the entire nuclear weapons shield of this country...If a country phases out civil nuclear power, then it's a matter of time …20 years if you are lucky, and you don't have a competitive weapons complex” (Kiriyenko as quoted by Minin & Vlček, 2017). Expressed in this quote is an explicit connection between peaceful nuclear energy use and weapons at the very heart of Russian power. The alignment of foreign and energy policy became explicit in the 2003 Energy Strategy, which stated that: “energy resources and powerful

fuel-energy complex were instruments for conducting domestic and foreign policy’ and also that ‘the role of the country on global energy markets to a great degree determined its geopolitical influence’ (as quoted by Minin & Vlček, 2017). To carry out this strategy, federal law states that it is the president’s duty to appoint the Director General and Supervisory Board, and Rosatom’s long-term strategy is approved by the government (Brunnengräber, Di Nucci, Losada, et.al, 2018).

As leaders in the developing world look for sources of cheap electricity, Rosatom has been busy signing a slew of bilateral agreements to promote the use of nuclear energy. In 2017, Rosatom’s international orders made up two-thirds of the market for new plants worldwide. These 34 NPPs in 13 countries were valued at over $300 billion (WNA, 2017). This success is partly due to funding by the Russian government, allowing Rosatom to offer cheaper financing and lower- cost reactors (Saha, 2017). State involvement, however, goes beyond undercutting the market price. Installing a NPP in a foreign country requires a degree of trust and level of strategic

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mutual understanding, which Sitaras (2018) compares to selling advanced weapons systems. When Rosatom constructs a NPP, the customer state is signing up to become dependent on a Russian state corporation led by people appointed by the Russian government for 60 years, which signifies a strengthening of ties between Russia and the client state (Sitaras, 2018).

Another Russian energy giant, Gazprom, which concede is used as a political tool, is useful for making some comparisons with Rosatom. While Gazprom is limited by geography due to the economics of building pipelines over 4500 kilometers, Rosatom has no such restrictions Sitaras, 2018:28). Gazprom’s clients are mostly European countries with only modest economic growth expected in the coming decades, with the exception of Turkey and China. Rosatom’s clients, on the other hand, are primarily in developing countries with enormous potential for growth

(Sitaras, 2018).

In the hydrocarbon sector more generally, supply disruptions were found to occur 55 times in Commonwealth of Independent States (CIS) countries from 1991-2006, with mostly political motivations (Hedenskog & Larsson, 2007). In 2007, the Russian ambassador to Ukraine publicly stated that the outcome of the upcoming election would determine the gas price. After newly-elected president Yanukovych extended the lease at Sevastopol, Russia offered a discount of 30% on exports for a period of ten years (Oldberg, 2011:51). In Latvia, upon a failed bid to get a controlling stake in the Ventspils oil terminal, Russia decided to stop the flow of oil in the pipeline that fed the terminal. Blaming technical problems, the oil pipeline feeding the Mazeikiu refinery in Lithuania was shut down upon the sale of the refinery to a Polish company (Oldberg, 2001:51). These examples put the intersection of foreign and energy policy on display.

A primary aim of Russian energy policy is to decrease reliance on transit countries, which has been achieved to an extent with the Nord Stream pipeline originating in the ports at the Gulf of Finland and the Turkstream pipeline (Oldberg, 2011). Coming back to nuclear energy, it suits the Russian energy strategy well if cutting middlemen in the transport of resources is a key goal since that is not an issue with transporting nuclear fuel. Given the history of Russia using energy

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supply as leverage in pursuing political interests, it is unclear why Rosatom would not be used in a similar way if deemed politically necessary. In the above examples, carrots and sticks were offered by the Russian government that were outside the purview of the oil and gas companies, so even if Rosatom acts as a purely profit-seeking entity, the government can use a client state’s dependence on Rosatom to extract political concessions or punish ungrateful partners.

Ziegler (2010) writes about oil and gas in ways that are comparable to nuclear power. Like oil and gas, uranium is a strategic commodity, and as the country with the largest reserves of gas and uranium, Russia is involved in relationships of interdependence with its customers. With nuclear power, client countries also become dependent on the services provided by Rosatom throughout the lifetime of their reactors under the BOO model. There are alternatives to both nuclear power and Rosatom as a service provider, but the costs associated with changing types and sources of energy are so high as to be prohibitive, especially in the poorer countries Rosatom is signing agreements with (Rosatom, 2018) (Oldberg, 2011).

The long term commitment constructing a pipeline is similar to the commitment of constructing and maintaining a NPP. A trend of liberalization under Yeltsin was reversed by Putin, who centralized control over strategically important industries. It would be incongruent with Russian policy for the nuclear energy industry to be treated differently than the oil and gas sector.

Ziegler contends that Russian policy is neomercantilist, explaining the political nature of energy policy on paper and in practice. He notes that energy relationships are not inherently conflictual, citing the relationships between the US and Canada and the EU with OPEC (Ziegler, 2014). It is a choice to politicize energy policy. If the Russian government subscribes to neomercantilism, Rosatom is at risk of becoming political tool, however, as the economic argument highlights, Rosatom would fail if it couldn’t offer competitive services. Going forward, this research explores a synthesized argument, that Rosatom acts competitively but is nonetheless subject to political influence from the state. That is, regardless of whether the management at Rosatom wants to base business decisions strictly on the profit motive, government ministers, the

Presidential Administration, or other officials can quickly destroy the credibility of Rosatom as a

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neutral actor. For example, in March 2014, Deputy Prime Minister Dmitri Rogozin made comments about nuclear fuel supplies going to Ukraine in light of the unfolding crisis in a meeting of ministers with Putin. He remarked that, “There is also the issue of transit of nuclear fuel via Ukrainian territory to our partners in Eastern Europe, and the issue of fuel supplies for the nuclear power plants in Ukraine itself… A ban on fuel transit through Ukrainian territory is in place at the moment because of the unstable situation in the country” (Kremlin, 2014). Rosatom’s Director General was quick to deny that there was a ban in place and said fuel deliveries would continue on schedule, and this was supported later by Foreign Minister Sergei Lavrov as questions continued over the discrepancy between the public comments on the

existence or potential for a ban on sending nuclear fuel to Ukraine (Digges, 2014). Rosatom can quickly become politicized, with or without input or consent from its leadership.

1.3 Theoretical Framework

The theoretical approach of this research draws from the fields of international relations and political economy to help explain the role Rosatom serves in Russian strategy. Realism provides the first block of the theoretical foundation, complemented by neomercantilist theory to explain the ideological position of Russian power brokers. This research also draws on the energy weapon model, which adds context to the actions of Rosatom abroad. Prospect theory is used to further understand the Russian government’s actions when engaging in risky behavior, and finally, neopatrimonialist theory will help explain the political and economic structure of Russia to improve the analysis of Rosatom. Following the description of these theories,, three

hypotheses are developed.

Neomercantilist Approach

Rooted in the realist school of international relations theory where international anarchy, balance of power, and zero sum gains are central concepts, the neomercantilist approach focuses on the connection between economic relationships abroad and competition among rival powers, an apt theory for studying the role of Rosatom as an economic, political, and strategically important entity (Ziegler, 2010). Neomercantilism provides a theoretical framework to interpret the political and economic facets of competition among states in a hierarchical system.

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Unlike the liberal view, where economic interdependence theoretically leads to mutual, peaceful development, the neomercantilist view sees the accumulation of wealth as a tool when jostling for a better position in the hierarchy of states (Ziegler, 2010). The mercantilist state intervenes in the economy to facilitate the development of industries considered to be in the national interest, and will protect these industries from external forces through various measures even at the expense of economic efficiency. This includes limiting foreign investment or having outright state control over strategic industries, as seen in the Russian oil and gas sector. (Ziegler, 2014).

Neomercantilism guides this research as it assesses how the state is protecting its nuclear energy industry through direct ownership, building economic ties with other states through the

promotion of nuclear energy use, and using business models designed to control different aspects of the global nuclear energy supply chain.

The Energy Weapon Model

Stegen (2011) outlines the conditions that facilitate turning sources of energy into political capital. These conditions are: state consolidation of resources, state control of transit routes, and the state using its consolidated resources and control of transit routes to accomplish political goals. This includes not only punishment or threats, but it can also be used to persuade or as a reward. Stegen proposes a fourth stage, the reaction of client states to threats or punishment, to build a more comprehensive energy weapon model, since the strength of an energy weapon depends on the reaction to its use. This model, alongside the realist and neomercantilist

approaches, provides a framework for understanding the role that Rosatom plays in the Russian external policy sphere.

Prospect Theory

Displeased with the status quo, if Putin’s comment about the greatest geopolitical disaster being the collapse of the Soviet Union is any indication, Russia’s military activities in Georgia, Ukraine, and Syria can be seen as an attempt to recapture the Soviet’s geopolitical might

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(Lampert, 2016; Sloat, 2014). These acts of aggression are not for the risk averse. This lack of risk aversion is observable in situations when a perceived loser is attempting to return to a previous, more favorable, status quo, such as when a losing gambler tries to win back his losses or as Putin strives to recover Russia from its weakened state. This is prospect theory. In its essence, prospect theory explains why actors that perceive themselves to be losing are more likely to engage in risky behavior than perceived winners who avoid risks that could upset the favorable status quo (Lampert, 2016). This propensity for risk-taking and the explanation provided by prospect theory guides the analysis and understanding of Russian strategy.

Neopatrimonialism

Russia’s political structure can be described as neopatrimonialist, meaning that informal personal networks shape the political and economic environment. In a neopatrimonialist system, loyalty is demanded in exchange for rents within a legal bureaucratic system. Gelman (2016) explains the continuance of neopatrimonialism in post-Soviet states, how the political structure that developed after the Soviet collapse was forged to suit the interests of the elite, which fostered an environment of excessive rent-seeking. Attempts to reform the economic structure of these countries revealed the ineptitude of institutions to serve broad interests, so small reforms often have negative effects. Since major reforms would undermine the system of the ruling elite, they lack the will to do so which disincentivizes reform and perpetuates the cycle of slow

development (Gelman, 2016).

Gelman describes the Russian social order as neopatrimonial for several reasons. First, collecting rents is described as a main goal of governance throughout the government. This system lends itself to a hierarchy with decision-making monopolized by single power base. Autonomous decision-making outside the power base is subject to conditions or reversal, and the formal power of institutions reflects the hierarchical system or power vertical, which is

comprised of rival groups that fight for influence up the hierarchy (Gelman, 2016).

Neopatrimonialist theory sheds light on the political structure in Russia, which contextualizes Russian policy as well as Rosatom’s role domestically and internationally.

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1.4 Argumentation and Hypotheses

This thesis puts forth three hypotheses to be tested. These hypotheses are rooted in the literature and theory regarding the nature of Russian efforts using economic tools to forge a dependence on Russia for energy security. These hypotheses form the argumentation to answer the research question: _{What are drivers of Rosatom’s international expansion, and how does this expansion}

coincide with the Russian external policy agenda?

This research

considers the expansion of Rosatom in the context of Russian external policy goals. Russian foreign policy is has been historically geared toward using energy giants to political ends, therefore, Rosatom’s growing influence in the nuclear energy sector will likely impact Russian external policy options. This research aims to specify the relation between Rosatom’s activities and the external agenda. With this argumentation, the following hypotheses are developed:

1.

Rosatom’s foreign NPP and mining projects are subject to political interference, even if

business decisions are based on sound economic judgement. In accordance with neomercantilist theory, economic relationships abroad are pursued to the extent that they strengthen the security situation at home. The inseparability of the state and economic affairs in theory and the

observable dynamic in practice in the oil and gas industry, it is reasonable to hypothesize that, despite the claims to the contrary, political factors help explain Rosatom’s expansion.

2.

Rosatom seeks to increase its importance in the global nuclear energy supply chain, though its

efforts are only moderately successful. While the number of countries Rosatom has made agreements with has risen, it is unlikely that all of these states will one day host a Russian NPP. While many agreements have been signed, there have also been a number of projects that have been cancelled. This research aims to examine the extent to which Rosatom is successful in managing a project from start to completion, and how much of a threat it poses to opponents of Rosatom’s expansion.

3. Rosatom has successfully increased dependence worldwide on the Russian nuclear sector,

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resulting in increased foreign influence for the government. The analysis of Rosatom’s activities reveals the extent of their involvement in the energy affairs of other states. This involvement may have positive effects for the Russian external policy environment, to be explored through the case study. This topic is explored in the final sections of this research.

1.5 Data and Method

This research uses a qualitative method. The influence that nuclear energy development brings to Russia via Rosatom and the extent that Rosatom act as a tool of external policy cannot be directly measured. This research therefore relies on indirect measures to understand this phenomenon. To understand Russian foreign policy, official documents and statements as well as scholarly interpretations of Russian policy and actions will be used to see how promoting the use of nuclear energy suits foreign policy goals. An assessment of the Russian economy and political system to bridge the gap between aspirational policies and realistic opportunities will draw on data from the OECD’s Economic Forecast Summary (2017 & 2018) and academic articles to grasp the challenges and future prospects for the Russian economy.

The current state of Rosatom’s engagements will be established through data acquired from the Rosatom website, and informed by data from BP’s Nuclear Energy Statistical Review, the

Nuclear Threat Initiative organization’s Russia page, and academic articles that shed further light on the issue namely NTI (2017), Rosatom (2018), and BP (2017). With an understanding of Russian politics, economy, policy, and how Rosatom is affected by these areas, it becomes possible to address the research question and sub-questions.

1.6 Structure of Thesis

This research is divided into five chapters each with multiple sub-sections. The first chapter focuses on the research design and has six sections covering the research objectives, research questions, the literature review, relevant theory, hypotheses, research methods, and thesis structure. The theoretical approach provides a framework to understand Rosatom’s place in

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Russian external policy. The literature review outlines the debate over the drivers of Rosatom’s expansion, with one side favoring an economic argument and the other viewing political and economic drivers as inseparable.

In the second chapter, the first of six sections examines the political structure in Russia, with particular emphasis on the consolidation of institutions, management of the elite, and how the existing power structure under Putin evolved and shaped the political and business environment. The second section is about the Russian economy, from the current state of the economy to the effect of authoritarianism and the role of energy in the economy. The third section covers Russian foreign policy, regionally and globally, particularly regarding the ways energy issues have played an important role in foreign policy and the relationship between energy giants and Russian energy security. These sections will uncover the political, strategic, and economic drivers underlying Rosatom’s expansion abroad. Each section balances official policy and statements with outside analysis of how stated policy and aims have worked in practice. The final section concludes the chapter by connecting the economic and political environment to the tenets of neomercantilist theory, which begins to answer to the first hypothesis regarding

Rosatom’s vulnerability to being used as a political tool.

Chapter three will examine the nature of nuclear power in Russia and analyze Rosatom itself. The original aspect of this research lies in the analysis of Rosatom, in terms of identifying the scope of its international activities and how Rosatom’s outreach abroad has changed over time. The data for this section is sourced from the Rosatom website and reports from the partner ministries in client countries (Rosatom, 2018). This will answer the second sub-question about the development and scope of Rosatom’s reach. It is divided into six sections, from the history of Russian nuclear energy agencies, the structure and leadership at Rosatom, the domestic nuclear energy industry, Rosatom’s expansion abroad in terms of building power plants and opening mines, Rosatom’s new industries beyond nuclear energy, and a conclusion.

The fourth chapter is focused on assessing the possible implications of growing Russian

influence in a Rosatom client country. A case study is used to examine how Rosatom’s activities

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and Russian political aims are intertwined in a specific example. The subject of this case study is the Astravets NPP under construction in Belarus. The first section provides a background on the use of nuclear energy in Belarus. The next sections focus on Russia-Belarus relations, financing of the plant, safety issues which reflect on Rosatom’s performance, and the political

repercussions of building this plant for Russia, Belarus, and their neighbors. This chapter

addresses the final hypothesis and concludes with a review of how the Astravets case exemplifies the overlap of NPP construction and Russian foreign policy goals using prospect theory.

Finally, after describing the domestic situation, foreign and energy policy, and gaining a deep understanding of Rosatom’s activities abroad, conclusions are made about the findings. Chapter five revisits the research questions, hypotheses, and objectives of the research to draw

conclusions.

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Chapter 2 - Russia’s Political & Economic Structure

Introduction

The role that Rosatom plays in the Russian economic and political sphere can only be understood by thoroughly grasping the nature of the Russian economy, political system, and relevant policy areas, which is the focus of this chapter. This chapter covers sub-question #1: _{How do Russian}

state corporations fit into the political and economic structure?

It also explores the first

hypothesis, that

Rosatom’s activities are inherently political, even if they are based on sound

economic judgement, in line with the neomercantilist leanings of Russian policy. Another purpose of this chapter is to set the groundwork for later chapters analyzing the activities of Rosatom.

The first of five sections examines the Russian political structure. The second section is about the economic structure and energy sector in Russia, reviewing the current state of the Russian economy as well as the medium-term outlook to help understand the capabilities of the Russian government. The third section covers Russian foreign policy, regionally and globally,

particularly regarding the ways energy issues have played an important role in foreign policy. These sections will uncover the political, strategic, and economic drivers underlying Rosatom’s expansion abroad. This chapter concludes in the final section by connecting the economic and political environment to the tenets of neomercantilist theory, which begins to answer to the first hypothesis regarding the inherent political nature of Rosatom.

2.1 Political Structure: Who Rules Russia?

This section focuses on the development of the power structure in the Russian political sphere. As Vladimir Putin has secured a fourth term as President, having developed his power base since becoming acting president in 1999, it is worth considering how he consolidated institutions and

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managed the elite to form the system we see today. The “power vertical” or hierarchical

structure, applies to both the neopatrimonialist personal networks and shaping of institutions to increase the power of the president.

Consolidation of Institutions

One of the early moves in Putin’s administration, in May of 2000, was to undermine the power of governors by appointing presidential envoys in seven federal administrative districts that would report to the president and execute his orders (Carbonnel, 2013). In July of that year, the president gained the power to unseat governors if they broke federal law. In 2004, the

nomination of governors came under the purview of the president, though the nominee required consent from the regional assembly. If the regional assembly voted against the president's nominee twice, the president was permitted to appoint an acting governor and dismiss the entire assembly. Under these arrangements, regional assemblies and governors faced pressure to act in accordance with the president’s preferences. The presidential powers were nominally weakened under Medvedev’s presidency, when the nomination process changed so that the president would pick the governor from a selection of three nominated by the regional assembly with the

president being allowed to request an additional three nominees to choose from if the first set were considered unacceptable. By this point however, the president’s party, United Russia, had come to control most regional assemblies, so it was rather safe to allow the party to nominate a satisfactory candidate. In 2011 some of this power was repealed after protests, and the ability to elect certain governors by popular vote was reenacted though the president could still remove governors from their posts (Gill, 2016:53). This change over time from consolidation of the power of the president to a more systemic rather than personal type of control relied on the domination in party politics of United Russia.

In his work, Gill refers to United Russia as a “party of power,” or one with a top-down structure rather than a grassroot approach, with members comprised of government officials with funding from the state. United Russia has no discernable ideology, platform, or principles that inspire popular support, the party serves to support the president and maintain the pocket parliament

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(Gill, 2016). United Russia politicians over time became unpopular, earning the title of the “Party of Crooks and Thieves,” acknowledged by Putin to the extent that he ran as an

independent candidate for president in 2018 (Reuters, 2017). The Levada Center found that in 2013 that 62% of Russians thought Putin’s underlings were only interested in money and power (Yashin, 2016). The party has nevertheless been successful in keeping the Duma from being a center of opposition to the president as it had been under Yeltsin’s presidency, maintaining enough seats to control the parliament since the party’s inception (Gill, 2016). There is a benefit to membership in United Russia if desire for personal gain is taken into account. If one views electoral politics as a competition for state resources and a chance for personal gain then it follows that rubber-stamping legislation from above would be the norm.

The control United Russia has over the Duma grew in 2008 after they passed a measure that allowed the party to strip deputies of their seat if they voted against their party or if they

switched parties after they were elected. This further consolidated power under the president as disagreeing with the president and voting against his policies in the Duma would mean losing that position. As the government is molded to serve the president, and as loyalists come to dominate the bureaucracy and administration, a system becomes entrenched whose purpose is solely to execute the will of the president (Gill, 2016). The role and development of United Russia was integral to forming the power vertical that Putin currently sits atop. This institutional power over the Duma and regional officials helps secure and reinforce this political structure.

Management of the Elite

In contrast with institutional reforms that consolidate the president’s power, the personal relationships that characterize patrimonialism are evident in the management of elites. Gill (2016) highlights this contradiction, that on one hand Putin consolidates power by

institutionalizing his hold on power, while on the other, personal relationships are allowed to prevail over rules and norms of institutions, inherently undermining them. Gill notes that leaders often try to balance the two, typically leaning toward either institutionalization or patrimonialism over time.

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In his first term as president, Putin began replacing Yeltsin holdovers in his inner circle and among the oligarchy with people he had personal relations with. These replacements are often divided into two groups: people he had served with in the security services, known as the

siloviki

, and people from his hometown of St. Petersburg, the _Pitersy(Gill, 2016). The influence

and cohesiveness of these groups is discussed in a later section, the point here is that Putin filled important positions with people in his personal orbit. There is a certain stability in this system where loyalty begets loyalty. There is relatively low turnover, for example, Putin has had four prime ministers over 15 years compared to the six in Yeltsin’s eight years (Gill, 2016:58-59). If a loyal official finds him or herself removed from their post, they can expect to be moved to a comparable position elsewhere in the system (Gill, 2016). A notable exception is the former prime minister Mikhail Kasyanov who is now an opposition figure that regularly receives death threats and various types of harassment, and became the highest ranking opposition figure since the assassination of Boris Nemtsov (Osborn, 2016). Keeping what would otherwise have been former officials within the hierarchy, there is a lesser chance that an opposition block of former officials can emerge and it also incentivizes loyalty if officials understand that loyalty trumps job performance or policy outcomes.

Putin has taken some measures to reduce the chance of fracture and discord among elites. Unlike under Yeltsin where conflict was unavoidable due to the overlapping responsibilities of ministers, Putin has separated the ministries into their own domains. Rather than overruling ministers, he works with them which fosters a sense of security (Gill, 2016). The is unlike in the Trump administration, for example, where cabinet secretaries are undermined and even fired on Twitter in a culture of leaks and intense division (Mangan, 2018). Loyalty, security, and stability between Putin and the elite in their discrete, but interchangeable positions characterize the

patrimonial nature of the Russian political structure. Putin found a way to make

institutionalization and patrimonialism work fairly well together, if he appoints loyal friends to important positions they can use institutions to further entrench the hierarchy.

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In industry, the oligarchs that built their fortunes during the privatization drives in the 1990s in ways Putin perceived as to the detriment to the state were stripped of their positions, freedom, and lives in the cases of the “Seven Bankers” who are either dead like Boris Berezovsky or unlikely to set foot in Russia again like Mikhail Khodorkovsky, formerly of Yukos (See Shinar, 2015). Concurrently, re-nationalization of companies such as Yukos, the appointment of loyalists such as Alexey Miller to Gazprom, and the appointment of loyal officials to lucrative positions on boards of directors, Putin has created a way to reward political loyalists by giving them access to the wealth generated in private business (Gill, 2016). With the possibility of becoming very wealthy, officials face strong incentives to remain loyal to the president.

The absence of a definitive ideology has allowed Putin to unite under him people who were fiercely ideologically divided in the early years of the Russian Federation. He was able to bring the nationalists opposed to Yeltsin into the fold, which reduced the likelihood of a nationalist opposition block, but he also did not so offend the so-called liberal clans to alienate them (Miller, 2018, Gill, 2016). The big ideological questions to be resolved after the Soviet Union collapsed were mostly settled by the time Putin became president, a capitalist system has been already set and a return to communism wasn’t a realistic option. Putin was able to take perspectives from communists, nationalists, and liberals to make the different groups sense their voice was being heard, which coincided with his patrimonial institutionalist measures to foster loyalty

(Kiriyenko, 1999; Gill, 2016).

Another tool for elite management is mobilizing popular support. If Putin is perceived to have popular support, elites will be less likely to revolt if doing so would bring derision from the masses. Legitimacy through popularity is a shield against opposition. Putin’s electoral victories have been substantial, earning in 2000, 2004, 2012, and 2018, 52.9%, 71.3%, 63.6%, and 76% of the vote respectively (Gill, 2016:62). Though Putin enjoys popular support, bolstered by state media and image management that portrays him as a strong, determined leader in the face of crisis, his electoral victories have been aided by manipulation. From barring opposition figures from participating in elections to stuffing ballot boxes on election day, Putin relies on local party

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officials and governors to ensure a favorable result (Gill, 2016) (Meyer, 2018). Putin can take credit for rising living standards when oil and gas prices are high, and blame the West for Russia’s troubles when they are low, a view repeated often in Russian state media widely watched by the Russian electorate (EFIS, 2018).

The conceptualization of the power vertical as a pyramid with Putin sitting at the top provides a clear visualization of the power structure. Reality is not quite that simple, however. This visual could be seen as a top-down structure, one where Putin dictates and his subordinates follow. But consider that Vyacheslav Nikonov, grandson of Stalin’s foreign minister Vyacheslav Molotov - former employee on Putin’s staff, Duma member, head of the fund to spread Russian culture and language globally called Russkiy Mir, and holder of other roles - said that he had counted over 1,800 instances of Putin’s decrees failing to be carried out (Sakwa, 2011; Laurinavičius, 2016:121). If the orders coming down from the peak of the power vertical go unfulfilled en masse by subordinates, it is difficult to consider Putin as the omnipotent leader implied by the power vertical model. Stanislav Belkovsky, a political analyst once considered to be close to Putin who most recently had joined the presidential campaign of Ksenia Sobchak, said, as translated in Laurinavičius (2016):

“The “Power Vertical” is no more than just a propaganda cliché. Russian power is a conglomerate of clans and groups that compete with one another over resources. Vladimir Putin’s role in this system remains unchanged – he is an arbiter and a moderator but a powerful arbiter who has the last word, at least for the time being, in conflict situations.”

This view is referred to as the “collective Putin” by Laurinavičius, emphasizing how Putin’s role is less dictatorial and that decisions are made collectively, a holdover from the Soviet era KGB mentality. As such, a primary goal of the Soviet successor state is to regain the lost geopolitical position and international standing the Soviet Union once commanded. Another implication of the “collective Putin” view is that the demise of Vladimir Putin does not necessarily entail the end of this system. Out of 75 key officials identified from Putin’s regime before Medvedev’s

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turn as president, none of them were removed from their posts during the latter’s presidency (Laurinavičius, 2016:123). It is an arguably likely possibility that whoever succeeds Putin will oversee the continuation of the structure observable today. The collective Putin versus the power vertical models are not entirely contradictory, though. Either way, loyalty begets rewards, rival clans compete for influence and power, and Putin remains in power whether he is mainly an arbiter or mostly a dictator.

In conclusion, according to Hale (2016), patronal systems, as he calls them, will survive as long as the benefits in exchange for loyalty are likely to be realized. If such a president becomes a lame duck or loses popularity, and the prospect of collecting rewards becomes uncertain, the regime becomes unstable (Hale, 2016). This explains the acceptance of Putin serving two terms, becoming Prime Minister and then returning to the presidency two more times, because it

assured the continuance of reaping rewards by the loyal elite. Since the president can only serve two terms at time, Putin’s reelection in March 2018 will be the last unless he changes or

disregards the constitution to run again or he waits through another placeholder term to regain the presidency (AFP, 2018). Regardless of whether he runs again or appoints a successor, there is an uncertainty about the future that Putin will be unable to ignore. The consolidation of power under Putin by exercising power over institutions, the elite, party politics, industry, and media has kept Putin in power for 18 years. This is a brittle type of political stability, however, emblematic of a patrimonialist system.

Rising to the top: A profile of Sergei Kiriyenko

The career of the first Director General of Rosatom, Sergei Kiriyenko, is a case that

demonstrates the political dynamics in Russia outlined in the preceding sections. The following shows how Kiriyenko had a role in the consolidation of institutions and continued to build Putin’s trust over many years, how he remained unscathed despite his liberal views, and how the government can influence and be influenced by the ideology of those in power. The first

Director General played a major role in shaping what Rosatom has become. His position as the

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first Director General of Rosatom was just one of many influential jobs in his career. In 1998, he was made Prime Minister under Yeltsin, nicknamed “Kinder Surprise” for his sudden appearance in the political scene. Just 35 at the time, he was the youngest ever prime minister, but just four months into his tenure, the ruble crisis and default led Yeltsin to fire Kiriyenko and the rest of his government. Having the government default on its debts under his watch turned out not to be a devastating hit to his career, he went on to serve as the director of Rosatom and is currently the First Deputy Chief of Staff of the Presidential Office. Kiriyenko’s career makes an interesting case in the rise to power in Russia.

His first job in politics was as a deputy in Gorky’s Regional Council of People’s Deputies. When the Soviet Union fell, he went into business, leading a Komsomol-organized goods and services provider. He also took part in organizing a scratch-off lottery game that he patented in 1997. He started the Garantiya Bank and also began trading in oil, becoming in 1996 the CEO of the company NorSea Oil. It was during this time in Nizhny Novgorod that he met Boris

Nemtsov, who would ascend the political ladder becoming prime minister, then becoming a leader of the opposition until he was assassinated just outside the Kremlin in 2015 (Virtop, 2018). Kiriyenko went from deputy to minister to prime minister in short order, having impressed Yeltsin with his managerial skills and professional manner.

Though his time as PM only lasted four months and ended as the Russian economy was in crisis, he was able to stay in politics. Upon learning of his dismissals from government, he said that, “all the bad things in Russia’s economy stemmed from the magnates and he himself was to blame neither for crises nor for the devaluation” (Russiapedia, 2018). Kiriyenko went on to run for the mayor of Moscow in 1999, only receiving 11.2% of the vote, but his campaign for a State Duma seat was successful, running with the Union of Rightist Forces under the slogan, “Putin for President, Kiriyenko for Duma” (Rescheto, 2016) (Russiapedia, 2018).

Putin’s relationship with Kiriyenko likely began during their work in Yeltsin’s administration. An unknown figure at the time, Putin was appointed head of the Federal Security Service (FSB),

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and it was Kiriyenko who introduced him to the public. The two reportedly developed a positive relationship over this time (Rescheto, 2016). Putin appointed Kiriyenko as a Presidential Envoy to the Volga District in 2000, a position he held for five years. Alongside his work as a

Presidential Envoy, he led the State Commission for Chemical Disarmament, spearheading the negotiations with the US, giving him experience in the international security realm (Virtop, 2018). The appointment as an envoy was notable at the time because all the other Presidential Envoys in these newly-formed districts had been generals. Known as a good manager,

Kiriyenko said Putin tasked him with finding a model to manage the districts which could be applied nationally. His model was to create a hierarchy, making regional leaders loyal to the federal government (Russiapedia, 2018). Regional governments had been trampling on the authority of the federal government and importantly, not paying enough in federal taxes, so this authoritarian move was not warrantless (Miller, 2018). However, the power the federal

government now exercises over local and regional officials described in Section 2.2.1 has stifled free society.

In 2005, Kirienko became head of the Federal Atomic Energy Agency (FAEA). He proposed the consolidation of nuclear facilities under a state corporation that became Rosatom in 2007. He said that Russia should increase its control over the nuclear energy market, aiming for 20% control by 2025 (Yasmann, 2006). Kiriyenko’s legacy at Rosatom is mixed. Many promises and agreements were made but few became more than pieces of paper. There many more plans for NPPs than were actually built. Planned NPPs built abroad are said to be worth $130 billion, a figure that is touted by Rosatom and in the media, but is difficult to independently calculate (Rosatom, 2018). Senior members of his staff were arrested on embezzlement charges, marring his legacy. By the time Kirienko left Rosatom, there were only three reactors being built, in Belarus, India, and China, the latter two resulting from cooperation over nuclear energy that preceded Kiriyenko’s involvement in the nuclear energy sector. He proved capable of getting many memorandums of understanding signed, but less capable of making concrete plans for further cooperation (Slivyak, 2016).

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After spending more than a decade at the helm of Rosatom, he left to join the Presidential Administration in 2016 as First Deputy Chief of Staff. It would appear that Putin was pleased with Kiriyenko’s service at Rosatom. He became the chairman of Rosatom’s Supervisory Board to maintain influence over projects he initiated and oversee the development of corporate

strategy (Grobman, 2016). Appointed to the Presidential Administration to help with the March 2018 election, Kiriyenko reportedly told his staff to create Russia’s own version of Cambridge Analytica, a company that did microtargeting, directing ads at people based on specific

characteristics using psychological profiles and data gathered from Facebook, famously for the Brexit and Trump campaigns (Arkhipov, Kravchenko, & Pismennaya, 2017). Cambridge Analytica (now defunct) is currently under investigation in the UK and US over the improper possession and use of data gleaned from Facebook. Curiously, Kiriyenko is on a list of 40 names the US Senate provided to the Trump campaign to turn over all communications with or

regarding those on the list (Grassley, Graham, Feinstein, & Whitehouse, 2017).

Kiriyenko aptly described the development of the political system of today, notably in his articles for Project Syndicate in 1999. According to Kiriyenko (1999):

“The key task now is... to overcome the corrupt and inept bureaucratic/oligarchic state in which bureaucrats are simultaneously entrepreneurs and politicians, and in which obeying the law is not mandatory but somehow negotiable. Most Russians know that such a state is dangerous and cannot succeed….If [the state] limits itself to setting clear rules and applies them equally, society will benefit. But if the state follows the old Russian tradition and attempts to manage everything, the consequences will be as grave as those of the absence of state power in the first four years of the Yeltsin era.”

On the two ways Russia could reach its economic potential, from Kiriyenko (1999a):

“One [way] is through the continuation of market reforms and the strengthening of democratic institutions; the other is through pursuit of the stagnant authoritarian power model and a strengthening of state control over a monopolized economy...If society fails to organise effective

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resistance to the state's attempts to increase its control over the economy, sooner or later, this will lead to a stronger authoritarian political regime.”

Clearly, Kiriyenko recognized the authoritarian path that was ahead and hoped Russia would veer away from it. It did not, but he has nevertheless remained. He can understand the system he is in, be in (past) public disagreement with it, and still expertly operate within it. His mentor Boris Nemtsov was not so fortunate. With knowledge of Kiriyenko’s background, it is easier to understand Rosatom’s place in the political and economic spectrum. His role in the

consolidation of power under the federal government helped to shape the authoritarian system of today. Moving from Rosatom to the Presidential Administration while maintaining oversight of his projects at Rosatom shows the overlap between politics and state corporations. The

trajectory of his career also indicates that Putin was satisfied with Kiriyenko’s work at Rosatom, which aids the analysis of Rosatom in later sections.

2.2 The Russian Economy

This section is about the economic structure and influence of the energy sector on the Russian economy, reviewing the ideological underpinnings and the current state of the economy to see how the political and economic structure complement each other.

The Neomercantilist, Patronage-driven Economy

The Russian economy is patrimonial and neomercantilist in nature. As such, the economy is not oriented toward increasing the standard of living of the population, but for highest, most

well-connected echelon of society to increase their own wealth and influence. Instead of facilitating a competitive market environment, the Russian economy is driven by patronage and

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manipulations for the national interest. Government contracts are awarded based on personal connections to the extent that the Russian media assess the influence of different companies based on the earnings they make from government contracts (EFIS, 2018). See Macfarquhar (2018) for the example of Yevgeny Prigozhin, known as Putin’s Chef, who has come to run the Internet Research Agency (the notorious troll factory), send mercenaries to Ukraine and Syria, and receives other enormous contracts in other areas such as catering and logistics for the military. Prigozhin, who at the time of the Soviet collapse had just been released from prison and opened a hotdog stand, is now among the wealthiest, most well-connected people in Russia (Macfarquhar, 2018). With a weak civil society, a corrupt justice system, and the lack of a competitive environment, the Russian economy fails to live up to its potential and entrepreneurs face an uphill battle to survive in this atmosphere. These detriments to the economy are

exacerbated by the lack of diversification and sanctions. The price of oil continues to dictate the direction of the economy (see figure 1), and necessary structural reforms have not materialized (EFIS, 2018).

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Figure 1: Oil Price and Russian GDP

Source: World Bank GDP Data, OPEC data from Statista

The (re)nationalization of the economy under Putin’s leadership is further evidence of the neomercantilist, patrimonial system. In 2005, the state sector made up 35% of GDP, and by 2015 this figure reached 70% (Mereminskaya, 2016). At its best, state capitalism can provide public goods and give a boost to valuable sectors of the economy. In practice, people in Putin’s inner circle are appointed to leadership positions who in turn give their own friends procurement contracts or sell assets below the market price (Åslund, 2017). In May 2018, a Sberbank analyst was fired because he wrote a publicly-sourced report that the primary beneficiaries of Gazprom’s major projects (Power of Siberia, Turkstream, and Nord Stream 2 pipelines) are the contractors involved, namely the companies of Putin’s long time, currently-sanctioned friends Arkady Rotenberg and Gennadi Timchenko. The analyst said that, “we find the decisions of Gazprom

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very clear once we assume that the company is managed in the interests of its contractors, and not for extracting commercial profits" (BNE Intellinews, 2018).

Corruption and inefficiency in large state enterprises contrasts with other businesses that have experienced dramatic growth and productivity gains since the early 1990s. The barriers to entering the oil and gas sector, for example, are difficult to overcome and the sector is therefore prone to becoming monopolistic and intertwined with politics. An oil company is also relatively easier to nationalize than a chain of retail stores, because the oil wells will remain in place while a competing retail chain unencumbered by state involvement can capture the market, leading to a situation where the state’s assets lose value as their business becomes less competitive over time (Miller, 2018). This logic has nonetheless been ignored by the government as of late, for

example when the founder of the Magnit supermarket chain (worth $8 billion) recently sold most of his shares to the VTB bank and stepped down as CEO (Orlova, 2018). Though the founder Sergei Galitsky said he sold his shares willingly, he had indicated in the months before the decision that he would not sell his shares and witnesses to the sale announcement said he was visibly upset (Orlova, 2018). Regardless of whether this was a voluntary arrangement, running a supermarket chain, especially one that Miller (2018) compares to Walmart in terms of the

Walton family’s unending drive to maximize efficiency and lower prices, requires a crew of capable managers without which the company will decline. Galitsky was perhaps as ruthless as he was successful at the helm of his company; he was even known to make executives submit to polygraph tests (Miller, 2018:33). Taking on Galitsky’s role will be difficult for his replacement and the consequences of doing even a mediocre job could be significant for the company.

Orlova (2018) suggests that VTB acquired its stake in Magnit to have a successful business bring in cash to help balance book given the government projects VTB is involved with. VTB receives more support from the state than any other bank in Russia, taking in more than $18.4 billion dollars from the state since 2008 (Seddon, 2016). An analyst at Standard & Poor’s found that VTB relies on state funds to remain profitable, and the bank is alleged to take on pet projects of powerful officials, especially after Sberbank began reforms to improve transparency (Seddon, 2016).

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As expected in a patrimonial system, executives who are loyal retain and reap the rewards of their positions regardless of performance. Alexei Miller has been the CEO of Gazprom for 16 years (Åslund, 2017). Under his leadership, the market cap hit its peak in 2008 at $369 billion, compared to $57 billion in 2018 (Bloomberg, 2018). Miller made $25 million in 2013, the last year his income was published by Gazprom (Podobedova, 2015). In exchange, Gazprom was used as a tool of foreign policy when cutting gas supplies in the instances outlined in the literature review, to the detriment to Gazprom’s reputation as a commercial entity.

Patrimonialism also lends itself to nepotism. Young children of ministers and officials find themselves in leading positions in state companies. For example, the 25-year old son of Putin’s former chief of staff held the position of first vice president at Gazprombank and later became president of the state-owned diamond company, Alrosa (Åslund, 2017). The children of the director of the FSB, the National Security Council Chair, as well as officials from the

Presidential Administration have found employment at VTB (Seddon, 2016) This rather feudal system is prone to crack when the certainty of rewards wavers and structural problems in the economy go unreformed.

Current State of the Economy

The Estonian Intelligence Report (EFIS, 2018) found four factors at the center of Russia’s current economic problems. First, the role of the state in picking winners is at odds with the development of a market economy. Entrepreneurs without connections have little ability to survive in an environment created by and for those linked to the state. Starting a business is a risk-laden endeavor and the existing system is a disincentive to starting a business.

Second, to add to the first point, large companies have an advantage over small and medium size businesses. Small business owners must contend with corrupt low-level bureaucrats and mafias that larger companies with links to higher-level officials can avoid (Furtuna & Ravinskaya, 2012). Where small business isn’t a viable path toward upward economic mobility, there is little competition from below and big businesses can be complacent and inefficient.

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Third, when crisis hits, instead of the labor market shifting to a more profitable, diverse array of sectors, there is a tendency to retain workers and ride out the crisis collectively. Finally, broad economic reform requires an openness to change, and the attitude among the population to be wary of change and people outside their social circles makes the prospect of reform not as appealing as the economic situation may lead one to believe (EFIS,2017).

Since economic prospects are set in large part due to location, people wishing to improve their living stands can move to a different city, region, or country rather than retraining, opening a business, or otherwise reinventing themselves. This reduces the tax base of less prosperous regions and further exacerbates economic problems. From 2011 to 2017, income leftover after basic expenses for a family of four has declined by 15% while income inequality has increased (EFIS, 2017:14). Since structural reforms would infringe on privileges enjoyed currently by the elite, there is little appetite for extensive reforms. If the rewards for loyalty become uncertain, the current political structure will collapse. The Kremlin faces the problem that structurally improving the economy would threaten the integrity of the power structure, so it directs attention away from the economic problems it will not fix.

In terms of the effect of sanctions, the anticipated effect on the economy is to reduce GDP growth by one percent in 2018 (EFIS, 2018:16). Propaganda focused on the unfairness of sanctions shields the government from blame over the persistent structural problems (Reuters, 2014). The counter-sanctions and import substitution regime stoked some patriotic sentiment, though it has not had a discernible positive effect and the illegal import of banned products signals that this sentiment is limited. There is difficulty in substituting certain products,

particularly in the energy sector, and raising capital has become difficult. High interest rates and a lack of foreign investment further inhibit economic growth. While the longer term effect of sanctions is uncertain, it is questionable whether the government can keep blaming sanctions for economic troubles and ignore the deep structural issues (EFIS, 2018). Before the 2012

presidential election, Putin promised that by 2020, wages would increase between 60--70%

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(RIA, 2012). The average income in 2011 was 25,600 rubles and reached 38,000 rubles by 2017, but inflation rose 53% so Putin not only failed to deliver on his promise, but wages fell by over 5% and real income by 10% (Zhavoronkov, 2017). Initiatives to increase salaries have had some poor results. Doubling a doctor’s salary entailed firing other healthcare employees, and three years after promising to raise salaries doctors still make around $12,000 a year, half that of state officials (Moscow Times, 2018).

Figure 2. Inflation, disposable income, and labor compensation in the Russian economy

Source: OECD (2018)

With ⅔ of Russians earning less than the average wage, this loss in income has strained the finances of the majority of the population (Zhavoronkov, 2017). Pensions are supposed to decrease by 2.7% by 2020 (RIA, 2017). Military spending, meanwhile, has risen from 2.1 trillion rubles in 2013 to an expected 2.8 trillion in 2020, not including the extra spending that

Rosatom's role in Russian foreign policy with a case study of the Astravets plant in Belarus