Russia’s Yukos. An over-played hand

Vladimir Putin's brutal tactics against the oil giant may be an ominous sign of weakness

TWO weeks ago, Vladimir Putin reassured investors that his government was “not interested” in the bankruptcy of Yukos, one of Russia's biggest oil companies, which has spent a year fending off attacks by prosecutors and tax officials. But in the days after the Russian president's remarks, the attacks intensified: Yukos was ordered to pay $3.4 billion in back taxes by July 7th and threatened with another, similarly huge claim, while creditors declared the firm in default of a $1 billion loan. As The Economist went to press, with the tax-payment deadline past, Yukos was waiting for either an official response to its proposals for a deal, or for bailiffs to start seizing assets and selling them off to cover its debts.

There would be a certain poetic justice if Yukos were to die, as it was born, through the aggressive interpretation of vaguely-defined laws. Its main shareholder and former boss, Mikhail Khodorkovsky - in jail on his own charges of tax evasion and embezzlement - has always insisted that the freewheeling ways in which he and other “oligarchs” acquired their companies in the 1990s were legal at the time. Indeed, the government itself helped to arrange the rigged auctions. Nobody doubts that Mr Khodorkovsky is now being punished for brazenly flouting Mr Putin's informal agreement with the oligarchs that they should not meddle in politics. And it seems clear that the Kremlin's ultimate intention is to make Mr Khodorkovsky and his partners give up their stake in Yukos.

Because of this, many foreign investors have until now seen Yukos's woes as something isolated: an inevitable stage in Mr Putin's attempts to wrest political power away from the oligarchs and to institute what he calls a “dictatorship of the law”. He clearly wants Russia to prosper, and understands the need for investment and economic reform. And the more he has tightened the state's grip on the media and political institutions, the more cheerily some have argued for the “benevolent-dictator” model: a heavy-handed and well-meaning ruler who can deliver reform, and prosperity, that much faster.

Yet the past few weeks have sown doubts, even among those who like the idea of a benevolent dictator. The blatant manipulation of the law against Yukos - its lawyers were given a few hours to review over 300 volumes of evidence - sets an example that politicians and prosecutors in other regions may now feel free to follow. Rumours that other oligarchs may be targeted next have made the financial markets jittery. And every other event that smacks of official whimsy, such as the threat earlier this year to suspend a leading mobile operator's licence, unnerves investors. This week the government claimed that America's ChevronTexaco plans a big Russian investment, but the firm gently dismissed the idea.

On top of that, Mr Putin's reforms are losing momentum. Liberalisation of the state-controlled gas and electricity sectors has been postponed. An overhaul of the army seems to have been abandoned. Mr Putin's shake-up of Russia's government has brought some departments nearly to a standstill.

One reassurance would be a quick and fair resolution of the Yukos affair, either by mutual agreement or by a sale of its assets conducted transparently. But a forced bankruptcy or a quick fire-sale to Kremlin favourites would suggest that either Mr Putin has ceased to care even about the appearance of propriety or that - as some observers suspect - things have spun beyond his control and he cannot keep the vultures away. Either would be an ominous development for Russia.

Editorial says that Vladimir Putin's brutal tactics against the oil giant Yukos may be an ominous sign of weakness.

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