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Russian oligarchy capitalism

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Monday, Oct. 27, 2003. Page 1

The Elite Demand Some Answers

By Valeria Korchagina
Staff Writer So it's back to square one for politicians and businessmen: Who is Mr. Putin after all?

About four years after President Vladimir Putin shot to the highest ranks of power with his appointment as prime minister in August 1999, the question is being raised once again. Faced by Saturday's arrest of Yukos chief Mikhail Khodorkovsky, even those who have known Putin for years appear to be at a loss.

"Now the extent of the conflict and the risks are so great that we need a clear position from the president," Anatoly Chubais, head of Unified Energy Systems and an informal leader of the business community, said on the "Zerkalo" weekly analytical TV show Saturday evening. "The situation won't go away by itself -- the conflict has grown to such a scale that we need direct interference from the president," Chubais said.

"I want business to understand the authorities' position on business. I want business to understand whether it has a future or whether its future is similar to Khodorkovsky's fate. ... I want this position to be pronounced clearly and openly, not in the form of private talks, but in the form of an open public statement by the country's leader."

The conflict, Chubais warned, has become big enough to cause business to unite against the president.

"The main threat is of a split in the elite. There will be a conflict of such an extent that it will bring in the entire society and it could turn out to be uncontrollable," he said.

Chubais spoke after he and other business leaders called an urgent meeting Saturday afternoon over Khodorkovsky's arrest.

"The arrest is like a red light for businesses. A big question is now up in the air for many of them: Should I continue investing, should I expand my business?" said a source familiar with the meeting.

The source pointed out that the charges filed against Khodorkovsky could easily be applied to any other businessman who built up a company in the 1990s and got his hands dirty in the "lawlessness and corruption associated with this period."

"And imagine what regional law enforcement officials will start doing now that they see such an example in front of them," the source said.

Business leaders at Saturday's meeting -- organized by the Russian Union of Industrialists and Entrepreneurs, the Opora Rossii small business association and the Delovaya Rossiya business association -- issued a call for Putin to clarify his position immediately.

"The business community's trust in the authorities is ruined, and the dialogue [between business and government] has de facto collapsed," the statement said.

"Companies are being forced to reassess investment strategies and give up on projects important for the country."

U.S. Ambassador to Russia Alexander Vershbow shared the worries about the impact of Khodorkovsky's arrest on the investment climate.

"We are concerned about this escalation of legal pressure being exerted on Yukos. We won't comment on the legal basis for Khodorkovsky's detention, it would appear, though, that the law is being applied selectively at the very least," Vershbow said through his spokesman on Sunday. "This move will send a very negative signal to companies investing in or considering investing in Russia."

Vershbow declined to comment on how Khodorkovsky's arrest may affect the interest of international oil majors, including ExxonMobil, in buying a stake in Yukos.

But foreign investment aside, the price tag for the arrest could be high. The relative political and economic stability of the past few years has resulted in the return of capital -- billions of dollars that could once more flee abroad over new uncertainties, said Roland Nash, head of the Equity Product Group at the Renaissance Capital investment bank.

"Between 1995 and 2000, capital flight from Russia averaged at about $20 billion a year. Since then, money has been coming in, and these are significant sums which have driven the restructuring and the growth of the economy," he said.

A number of politicians are also crying foul over Khodorkovsky's arrest, accusing the Prosecutor General's Office of pursuing a political agenda.

"The Union of Right Forces is very concerned. ... It is obvious to us that the Khodorkovsky and Yukos cases are a political contract hit," the party, which gets funding from Khodorkovsky, said in a statement.

The liberal Yabloko party echoed those comments. Yabloko also gets funding from Khodorkovsky, and reams of campaign documents for its State Duma election bid were confiscated in a Yukos-connected raid Thursday. On Friday, Yabloko leader Grigory Yavlinsky bluntly said the government was running under a regime of "Stalinist capitalism."

Communist leader Gennady Zyuganov, a less likely admirer of Khodorkovsky, said Saturday that Khodorkovsky was not being prosecuted for economic crimes but for his political ambitions.

"When Khodorkovsky was strictly doing business, he was an ally for those in power. But as soon as he made his political ambitions public, he immediately turned into an enemy," he told Interfax.

Yabloko Duma Deputy Alexei Melnikov said a "gang of four" former Petersburg Federal Security Service officers were behind the attack: Viktor Ivanov and Igor Sechin of the presidential administration, Prosecutor General Vladimir Ustinov and deputy FSB director Yury Zaostrovtsev. "Ivanov, Ustinov, Sechin and Zaostrovtsev are the gang of four. The activities of these gentlemen should become the subject of a public investigation," Melnikov was quoted by Interfax as saying.

The same group of so-called siloviki is thought to be behind the People's Party, one of the few parties that welcomed the arrest.

"We do not fear that the arrest of one oligarch might undermine the reforms of the 1990s," People's Party leader Gennady Raikov said in a statement.

"All socially orientated parties should stand up to defend the interests of the people, the state and the president from oligarchs who have overstepped the mark. One must share with society!"

Raikov's call to crack down on businessmen is shared to some extend by about 80 percent of the population, according to recent polls.

But any celebration over the arrest by the People's Party may well be too early, independent political analyst Andrei Piontkovsky said.

"This is not a war to take away wealth from the super-rich and pass it over to the poor. This is a struggle of millionaires trying to take away wealth from billionaires," Piontkovsky said Sunday.

He said the struggle is not aimed at changing the system but at shuffling the forces within the oligarchy. "The interesting thing is that Khodorkovsky, who has been a part of this society, is now being punished for trying to walk away from it and play by different, more transparent rules," he said.

Piontkovsky said the arrest seems to show that Putin has finally decided to take a stand on the Yukos issue -- a populist one that may not be the best thing for the country but should certainly help him stay in power.

Political analysts agreed that a decision as significant as Khodorkovsky's arrest could have not have been made without Putin's consent.

"This is the single worst thing that could have been done to damage Russia's image," said Vyacheslav Nikonov, director of the Fond Politika think tank.

"I am sure it was done with Putin's approval."

Piontkovsky, meanwhile, expressed skepticism that the arrest would deter foreign investment. "All those niceties like human rights are in fact not that important for the West. Look at China, money is still flowing into it, despite the fact that it is a pretty authoritarian country," he said.

A Western fund manager concurred. "Everyone is going to forget about Khodorkovsky in two months' time, just like they did about Platon Lebedev," the manager said on condition of anonymity.

"In the short term, [the arrest] is bad [for the investment climate] because it creates new instability. In the long term, it may be good because it clears out one of the oligarchs who was trying to privatize part of state power," he said.

Paul Collison, energy analyst with Brunswick UBS, said investors are indeed likely to differentiate between what happens to Khodorkovsky and what happens to Yukos. He said the attractive fundamentals of Russian oil are still in place, and the bigger risks being considered by international oil majors are not politics but possible fiscal instability and a lack of clarity about production licensing.

While some foreigners were ready to factor the arrest into their investment equations, the Russian business community appeared determined to draw a reaction out of Putin. On Saturday, a visibly angry and determined Chubais even slipped to the less polite ty form of "you" as he addressed Putin on television and demanded that the president give up populist moves. "You have to answer for what you do," Chubais said. "This could be the [public's] mood, but I know your interests are absolutely different."

Staff Writer Catherine Belton contributed to this report.

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