An oligarch's fall

Published : Jul 01, 2005 00:00 IST

Mikhail Khodorkovsky (left) and his partner Platon Lebedev in the defendant's box at a courtroom in Moscow on May 30. Lebedev too was awarded a nine-year jail term for economic offences. - MISHA JAPARIDZE /AP

Mikhail Khodorkovsky (left) and his partner Platon Lebedev in the defendant's box at a courtroom in Moscow on May 30. Lebedev too was awarded a nine-year jail term for economic offences. - MISHA JAPARIDZE /AP

The nine-year jail term for Mikhail Khodorkovsky, Russia's richest man and owner of oil giant Yukos, signals the success of President Vladimir Putin's crackdown on the powerful oligarchy in an effort to re-establish state control of the Russian economy.

THE conviction of Russia's richest man, Mikhail Khodorkovsky, to nine years in jail on May 31 marked a major success in President Vladimir Putin's drive to undo the privatisation legacy of his predecessor Boris Yeltsin and enhance the role of the state in the national economy.

A Moscow court found the owner of Russia's biggest private oil company, Yukos, guilty on six counts including tax evasion, fraud, embezzlement and theft going back to the days of the chaotic rise of Russia's wild capitalism in the mid-1990s. Khodorkovsky's business partner Platon Lebedev was also awarded the same sentence. Before his arrest in 2003, Khodorkovsky was by far Russia's wealthiest man, worth $15 billion, while his company Yukos had a market value of $37 billion.

The verdict has signed the death warrant of Yukos. Its main production unit, Yuganskneftegaz, was sold to the state oil company Rosneft in December 2004 towards the settlement of a $28-billion back taxes bill . Yukos' other assets are also expected to be sold off to pay the remaining tax arrears.

RUSSIANS have overwhelmingly approved Khodorkovsky's conviction. In a recent poll, a mere 4 per cent said Khodorkovsky was not guilty, while 46 per cent agreed that he did break the law and 26 per cent felt he deserved a harsher sentence. This reflects the deep public resentment over the sweeping sell-off of state property in the 1990s.

Khodorkovsky was one of the main beneficiaries of the "piratisation of Russia" when some of the juiciest state assets, including oil and metals, were sold for a song to Kremlin-connected businessmen. Yukos, Russia's second biggest oil company which sits on 2 per cent of the world's oil reserves, was acquired by Khodorkovsky for $159 million in a rigged shares-for-loans auction organised by a bank he owned, Menatep. The price paid for Yukos was a quarter of the company's export revenues in 1995, the year it was privatised. Moreover, Khodorkovsky bought Yukos with money that his bank received as a loan from Russia's Central Bank.

The sell-off of state assets by the Yeltsin regime marked the beginning of what may well be the most massive robbery of a state in history. Khodorkovsky and a handful of other Russian "oligarchs" came to control the country's vast natural resources but contributed precious little to the state budget. Private oil majors paid between 5 and 14 per cent in profit tax instead of the statutory 35 per cent, by resorting to various tax-evasion schemes which included transfer pricing, offshore trading and using tax-haven zones inside Russia. Estimates of super-profits washed out of the country in the 1990s vary from $150 to 300 billion.

By the time Vladimir Putin succeeded Yeltsin as Russia's President in 2000, a group of two dozen commodity tycoons controlled 40 per cent of the country's gross domestic product (GDP) and dictated government policy.

Russia's Economics Minister German Gref recalled in an interview that talking about a new oil tax, Khodorkovsky had warned him: "Either you withdraw that law or I'll make sure you're sacked." Had Yeltsin and not Putin been at the helm of power at the time of the conversation, Khodorkovsky would have carried out his threat.

The Yukos chief sought to influence strategic policy decisions by the government. He pushed for privately owned pipelines to sell oil to China and the United States, publicly backed the U.S. in its war against Iraq, and criticised Putin's alliance with France and Germany in opposing the war.

Khodorkovsky's arrest in October 2003 wrecked his plan to sell a controlling stake in Yukos to U.S. oil majors ExxonMobil or ChevronTexaco. This would have given the U.S. a strong foothold in Russia's energy sector and put Yukos out of reach of the Russian judiciary. A little before that, another Russian private oil major, TNK, sold a 50 per cent equity to British Petroleum. More Russian oligarchs nurtured similar plans, which could effectively turn Russia, whose budget almost entirely depends on the export of oil, gas and natural resources, into a commodity appendage of the West.

If Putin were to uphold Russia's economic and political independence, he had little choice but to restore state control over natural resources and rein in the country's oligarchs. In a Ph.D thesis he wrote in the late 1990s when he headed the post-KGB Federal Security Service, Putin had observed:

"In the early stages of pro-market reforms in Russia the state temporarily lost strategic control over the mineral resources industry. This led to the stagnation and disintegration of the geological sector built over many decades... However, today the market euphoria of the early years of economic reform is gradually giving room to a more balanced approach that... recognises the need for a regulatory role of the state...."

The legal onslaught on Yukos has helped Putin recast business-state relations and re-establish state control over the strategic heights of the Russian economy. The jailing of Khodorkovsky, who once said that "the best business in Russia is politics", served notice to big business that it should pay taxes and stop meddling in politics. The warning was heeded. Last year oil companies paid three to five times more taxes than in the year before. They have also learnt to toe the Kremlin's political line.

The government in turn has promised there will be no new trials a la Khodorkovsky. Meeting big business leaders in the Kremlin in March, Putin called for reducing the statute of limitations for contesting privatisations from 10 years to three, which would protect the business empires created in the 1990s.

At the same time, the state plans to boost further its role in the energy sector. The nationalisation of Yukos has given the Kremlin control over 20 per cent of Russian oil exports. Next in the pipeline is the purchase by the Russian natural gas monopoly Gazprom of the country's fifth largest oil company, Sibneft, from another Yeltsin-bred oligarch, Roman Abramovich. The government also plans to boost its equity in Gazprom to 51 per cent. This will create state-run oil and gas giants that would rival the major global oil majors and give the Kremlin a powerful weapon to reposition Russia geopolitically.

THE Western media and politicians have denounced Khodorkovsky's conviction and the destruction of his company as an attack on private property, the rule of law and civil liberties in Russia. The U.S. was particularly upset by the fall of Khodorkovsky, who was the loudest pro-American voice in Russia. He had given U.S. oil and gas companies access to the Russian energy market independent of the Russian government.

However, Putin has little reason to fear any backlash from the West. The World Bank and the International Monetary Fund (IMF), which used to dictate policy to the Yeltsin government, have no levers in Russia today. As the Russian economy grew stronger, the country stopped seeking foreign credits, and it has been repaying Yeltsin's debts ahead of schedule. Catching up with Saudi Arabia as the biggest oil exporter and consolidating its position as the world's biggest natural gas producer, Russia has acquired so big a balancing role against the uncertainty of energy supplies from West Asia that the West will not risk spoiling relations with it over the conviction of a businessman.

A more credible threat to Putin's strategy comes from inside the country. By expanding the state sector in energy and enhancing state regulation of the economy Putin is giving too much clout to the bureaucracy, which had been thoroughly corrupted during Yeltsin's rule. Authorities in the provinces have taken the conviction of Khodorkovsky as a signal to step up pressure on local businesses. Across Russia, entrepreneurs complain of attempts to take away their business through tax audits, punitive fines and intrusive inspections. A poll conducted by Russia's small-business association, Opora, showed that the fear of illegal actions by officials and policemen was greater than fear of criminals. Less than 1 per cent of the entrepreneurs said they were sure that they could protect their lawful interests against the regional authorities in court, while nearly 70 per cent said they had only a slim chance or none at all.

Putin is aware that growing bureaucratic interference in the economy may choke growth. In his state-of-the-nation address this year, he lashed out at the bureaucracy, denouncing it as an "arrogant caste" that "understood state service as just another kind of business".

The problem is that the system of "managed democracy" Putin has promoted lacks checks and balances. With Parliament and the electronic media largely controlled by the Kremlin, there is little political competition, limited public oversight and reduced accountability of officialdom to the people.

In the state-of-nation address, Putin called for measures to strengthen democratic procedures and speed up the rise of a competitive political system in Russia by granting broader access to Opposition parties on state-run television channels, giving more rights to Opposition parties in Parliament and adopting a law on parliamentary investigations.

Unless he acts fast on his promises, Putin faces the risk that the country he saved from being privatised by Khodorkovsky and other oligarchs may end up being privatised by the corrupt bureaucracy.

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