Turning the heat on the Oligarchs

Vladimir Putin initiates stern action against the tycoons who wielded immense power during Boris Yeltsin's presidentship.

in Moscow

MIKHAEL KHODORKOVSKY, Chief Executive Officer of the oil giant Yukos, had barely finished celebrating the merger of Yukos with Sibneft, another mega Russian oil company, when, in a dramatic turnaround of circumstances, calamity struck. The Russian legal apparatus has launched a major offensive against Yukos and Khodorkovsky in what is said to be an attempt to cut to size Russia's most powerful Oligarch. (The group of influential persons who were supporters of Boris Yeltsin during his presidency came to be known as Oligarchs.)

The first indicators of trouble came as early as spring this year when talk began that the National Strategy Council, a think tank, had produced a report hinting at a "creeping coup" instigated by powerful Oligarchs. The report indicated that a powerful lobby of Oligarchs was planning to win a loyal Parliament majority and change the system of governance in Russia. (Elections to the Russian Duma are due this December and presidential elections are scheduled for March 2004.) At this juncture President Putin put out a telling statement, which was a precursor to the crackdown that followed. Putin indicated in his annual press conference on June 20 that "I am absolutely convinced that the much-talked-about equal distance between various business representatives and the authorities has been achieved in our country in the past few years. Today, those who disagree with this position, and used to say so, are no longer with us."

The reference, apparently, was to Boris Berezovsky and Vladimir Guzinsky, Oligarchs who wielded great power in the Yeltsin years and who attempted to influence the government at the beginning of Putin's tenure. Within weeks of Putin taking over, they were exiled from Russia, their businesses were seized and their associates jailed or driven out.

President Putin's `social contract' with the Oligarchs was said to have been worked out in the beginning of his tenure; they were allowed to flourish and further their businesses but were not supposed to harbour any political ambitions. So, what happened to Khodorkovsky? According to analysts, he crossed the line of feasibility.

The action began on July 2, when top-shot billionaire, Yukos shareholder and Khodorkovsky's right hand, Platov Lebedev, was arrested on charges of embezzlement in the 1994 privatisation of the state-run Apatit fertilizer company. Lebedev is the chairman of the Menatep group, a holding company with 61 per cent of Yukos' shares. He was charged with defrauding the state of $283 million. The prosecutors then conducted a 16-hour raid on Yukos' premises and the government announced that it would review the firm's tax payments.

A week later, the situation took a turn for the worse with the Prosecutor-General announcing that seven separate cases against Yukos were being investigated. They included Lebedev's case, a case of alleged tax evasion, and five cases of murder and attempted murder. Among these, the prosecutors are currently probing the 1998 murder of the Mayor of the Siberian city of Nefteyugansk; the case against Alexei Pichugin, a Yukos security officer, who is accused of a double murder in Moscow in 1998; and a case relating to the attempted murder of Yevgeny Rybin, the head of an Austrian company. The Prosecutor-General's Office declared that the cases of murder and attempted murder were prompted by "property disputes between the victims, official and private structures and the Yukos oil company".

Ironically, in the very year that should have logically heralded Khodorkovsky's ascent to major power, he is facing the greatest challenge of his career. Conspiracy theories abound, and experts, both in Moscow and in the West, are outdoing one another in coming up with explanations or excuses for the actions of the dramatis personae.

One popular theory is encapsulated in Khodorkovsky's recent statement that the probe was the result of a "struggle for power between different wings of Putin's administration". Sergei Markov, Director of the Institute of Political Studies and Chairman of the Civic Committee on Foreign Affairs, indicated in a recent comment to The Moscow Times that currently Russia has two main bureaucratic groups "the St. Petersburgers" and the "Family". He explained that "it would be more accurate to call these groups the business-oriented and the state-oriented parts of the bureaucracy".

The predominant view is that the crisis spiralled out of a clash between the Federal Security Service (FSB)-dominated St. Petersburgers or those who are called "Statists" or "Chekists" (named after the brutal, early Soviet era "Cheka", or secret police) by Putin's opponents and the business-oriented faction, which comprises the relatives and close associates of Boris Yeltsin. The two factions are split ideologically. Even as the Family works discreetly, influencing economic policy in favour of big business, the Statists use their influence to curb the power of the Oligarchs by building up the crisis and following an aggressively populist stance in the period before the elections.

Commentators link the clash between the factions to the situation that has built up around Khodorkovsky. According to them, Khodorkovsky crossed the Rubicon when evidence of his so-called overt political ambitions came out in the open. On more than one occasion he has talked of funding opposition parties such as Yabloko, the Union of Right Forces (SPS) and even the Communists. The last is especially pertinent as they represent the most serious challenge to Putin in the approaching elections. Further, he criticised Putin's policy on Iraq on more than one occasion.

Markov is of the view that over the past few months a "myth" has been built about Khodorkovsky's strategic plans: that of controlling "a majority in the next Duma" to effect a change to a de-facto parliamentary republic that would help him become Prime Minister. Yet another variation of this theory is that Khodorkovsky might not join the government but simply control it until the next presidential election. This theory in several forms has done its rounds and has many takers. According to Khodorkovsky's supporters, the Statists have used all this against him.

The fact remains that Khodorkovsky crossed the Rubicon where Putin's social contract with the Oligarchs is concerned: he went political. Khodorkovsky is not the only Oligarch under fire. Investigations have begun on aluminium magnate Oleg Deripaska. Fears are that the Kremlin may be unleashing a witch-hunt against the Oligarchs, which may lead to a review of the "murky" privatisation of the mid-1990s. It is said that the Prosecutor-General's Office may initiate five or six more investigations on other companies, involving privatisation of public property, financial machinations, and money laundering.

Western analysts argue that Putin's administration and his party, United Russia, needed a fresh issue before the elections, and what better than the "guilty Oligarchs". The Russian public hates the Oligarchs, whom they hold responsible for robbing the state and for the poverty among the people. The business elite in Russia today made its fortunes in the mid-1990s when state-owned industries were privatised through a series of carefully engineered auctions. State resources were snapped up by the Oligarchs. Wealth got concentrated in the hands of a few, there was a major flight of capital from the country, and the majority of the country's population found itself without a means of sustenance. The result was that Russia's gross domestic product (GDP) shrank by half and government policy came to be controlled largely by the Oligarchs.

POLITICS aside, a critical underlying cause of the Kremlin's action is energy politics. Yukos had simply become too big. It surpassed Lukoil as the number one oil producer in Russia. After its merger with Sibneft its name began to count among the world's premier oil majors and Khodorkovsky increasingly basked under the West's approval and favour. In July, Yukos reported a net profit of $1.3 billion on second quarter sales of $3.9 billion. Khodorkovsky pushed aggressively to take control of Russia's oil pipelines, which to date are controlled by the state. He has attempted to develop a network of privately owned oil pipelines that would break the monopoly of the state-owned Transneft Corporation. He has been angling for government approval of a new $4 billion pipeline to carry western Siberian crude from Murmansk for export by sea.

Further, negotiations are under way between Yukos and the Chinese National Petroleum Company to build a 2,400-km pipeline from Angarsk in Siberia to Daging. Khodorkovsky's aggressive attempts to break Transneft's monopoly over the pipelines have put off powerful sections in the government. His aggressive business tactics, combined with the courting of western companies and governments, further soured the situation. Interestingly, international luminaries such as Jacob Rothschild and Henry Kissinger are on the board of Khodorkovsky's Open Russia Foundation, a corporate philanthropic organisation.

A fact that is being bandied about by Khodorkovsky's supporters in the West is that the outbreak of this row between the state and the Oligarchs can prove dangerous for Russia's economic stability. The situation, they assert, has already begun to cause panic among Western investors. Yukos' shares fell 7 per cent on the day of Lebedev's arrest and a week later the general RTS index fell by 47 points or 9.2 per cent. By July 16, the market had crashed by another 5 per cent.

Conventional economic analysts said that the markets were deeply concerned. They also feared that the affair could signal a wider investigation into privatisation deals of the past, which potentially affected the distribution of property. However, the main RTS index is stabilising, and as long as oil prices stay above $20 a barrel the Russian economy does not have much to fear. In fact, State planners are working to create conditions for a mobilisation policy on economic growth for doubling the GDP by 2010.

The situation in Russia grows intriguing by the day. On the one hand, the state legal apparatus continues escalating the crisis, refusing to work out a compromise despite the apprehensions among Western corporates and investors, while on the other Putin maintains a sphinx-like silence on the crisis. He has refrained from commenting on the on-going investigations against Yukos except for saying that the rights of business will be protected.