Taming the robber barons

The oligarchs are keeping their heads down, but out of fear, not respect for the law

THE tussles between the inscrutable Kremlin and a small band of obscenely rich men are far removed from the lives of ordinary Russians. But nothing typifies the contradictions of Mr Putin's presidency like the saga of Mikhail Khodorkovsky. It embodies the tension between the rule of power and the rule of law, exemplifies the opacity of Russian decision-making, and splits opinion--especially western opinion--about Mr Putin's real motives right down the middle.

Like other “oligarchs”, Mr Khodorkovsky, already rich after some clever wheeling and dealing in the crumbling Soviet Union, became super-rich thanks to the pact between business and the Kremlin to ward off a Communist comeback in the 1996 presidential election. In return for supporting Boris Yeltsin, he was allowed to buy control of his oil company, Yukos, for $309m in 1995. His own bank, Menatep, ran the auction. Like his fellow magnates, he expanded his business empire by dealing ruthlessly with business partners, creditors and minority shareholders.

When Mr Putin took office, two media barons, Vladimir Gusinsky and Boris Berezovsky, realised that he might break their hold on power, and began using their national television stations to attack him. In July 2000 he called a meeting with 20 other oligarchs to set the rules: they could keep what they already had, but in future must stick to the law and stay out of politics. Soon a series of legal investigations had stripped Messrs Gusinsky and Berezovsky of their main assets (though they kept sizeable fortunes) and chased them into exile. Several others faced criminal cases too, which were later quietly dropped when they toed the line.

Mr Khodorkovsky seemed to understand the new rules. He was also the first to grasp that, with the era of asset-grabbing gone, it would pay to turn Yukos into a transparent company run the western way. Investors rewarded him. At its peak last year, his stake in Yukos was worth 106 times more than what he had paid eight years earlier.

But last July Platon Lebedev, one of Mr Khodorkovsky's closest partners, was arrested for embezzlement in the acquisition of Apatit, a fertiliser company, in the early 1990s. A wave of investigations followed, looking into everything from Yukos's tax payments to its part-privatisation to its links to unsolved murders. In October, in a dramatic dawn raid on his private jet, Mr Khodorkovsky himself was arrested. Hehas been in jail awaiting trial ever since.

For months, even the best-connected were baffled. Each scrap of information bred new theories and shook the financial markets. Had Mr Khodorkovsky broken Mr Putin's ban by openly funding political parties or pro-democracy projects through his philanthropic Open Russia Foundation? Had he annoyed the president by campaigning too hard for an end to the state pipeline monopoly, or for a pipeline from Siberia to China when the government was in talks with Japan? Did the government want to prevent Yukos from being bought by a foreign oil firm, or from buying a Russian firm, Sibneft, and becoming too big? Was it because Mr Khodorkovsky, at a public meeting with Mr Putin, had implicitly accused senior officials of corruption? Had Mr Putin himself sanctioned the attack on Yukos, or were the shadowy siloviki, his henchmen from the security services, pulling his strings? If so, would they stop there, or was it part of a wider campaign against the oligarchs and Yeltsinites? Mr Putin always insisted that the prosecutors were independent and merely looking into alleged crimes. But if they were, why not investigate every single oligarch in the country?

Since then, a sort of consensus has emerged. Though Mr Khodorkovsky's agitation against pipelines and corruption had doubtless made him enemies, probably Yukos's greatest crime, explains Chris Weafer, chief strategist at Alfa-Bank in Moscow, was to fall foul of Mr Putin's long-term plan. During his first term the president had allowed the oil firms to ride the wave of high oil prices and make huge profits, thanks to transfer pricing and offshore tax havens. This had helped kick-start the economy. He would use his second term to wean it off oil. Thus, early last year, ministers began talking of raising taxes on the natural-resources companies and closing loopholes. The extra revenues would allow them to help other businesses, for instance by lowering other taxes and investing in infrastructure.

Yukos was not the only firm to oppose the tax changes. But as Alexei Kudrin, the finance minister, told a Russian magazine, Kompania, in February, in the only admission from on high that the case was political: “Other companies' lobbyists did not behave so aggressively.” Yukos's people, he said, “came to me and talked directly about laws that didn't suit them: 'Alexei Leonidovich, we won't let you get your decisions through the Duma, no matter what it costs us'.” They meant it. At a reading of the tax bill in June last year, even the Communists, usually no friends of the oligarchs, voted against it. That must have been the final straw. Mr Lebedev was arrested soon after.

Paying the price

So, Mr Kudrin said, the Yukos affair was “inevitable, not in the personal sense, but in the sense of a clarification of the rules of the game.” The new laws were bound to meet opposition; because he led it and refused to bend, Mr Khodorkovsky was the one who paid the price. After his arrest, Mr Putin told a meeting of business leaders that “the business community could also put some effort into developing a system of new social guarantees” and “help support the transformations that have now begun in the armed forces, the housing and utilities sector, health and education.”

As in 2000, other oligarchs were quick to pay fealty. Earlier this year Vladimir Potanin, the head of the Interros group, demonstratively took his investment plans to the Kremlin before showing them to shareholders. Lukoil, one of Yukos's rivals, said it would voluntarily keep clear of tax loopholes, even though they were not illegal. Viktor Vekselberg of TNK-BP, another oil firm, bought a Faberge egg collection that had belonged to Tsar Nicholas II from the Forbes family in America, calling it “a once-in-a-lifetime chance to give back to my country one of its most revered treasures.” Meanwhile, Mr Khodorkovsky sits in jail, sending out windy manifestos that nobody takes seriously. Yukos, some think, faces partial renationalisation, but the markets are as upbeat about Russia as ever. And there has been no more talk of private pipelines.

So all is well? Not really. The rules of the game remain hazy. There is talk of a list of 15 top businessmen who risk the same fate as Mr Khodorkovsky unless they show particular devotion. Firms are scrambling to implement whatever they think Mr Putin's idea of “social guarantees” might be: Pension schemes? Charity work? Investing where they are told to? Closing their offshore bank accounts? Firms now feature their philanthropic activities prominently on their websites.

There is no doubt that Mr Putin is in charge--for now. But it all sounds suspiciously like a re-run of July 2000, when he promised to support businesses “who act in the state's interests” and they, in turn, praised his “honesty and goodwill”. It may only be a matter of time before another magnate gets bold or foolish enough to provoke another clash. They still have clout: by one estimate, as many as 40% of the Duma's deputies are ex-employees or have other links to oligarchic firms.

These problems will arise because Mr Putin has deliberately avoided introducing something he claims to hold dear: the rule of law. When the “robber barons” who built the foundations of American industry got too powerful at the end of the 19th century, the government passed antitrust laws to break up the barons' monopolies, and enforced those laws evenly and openly. Mr Putin prefers to limit the influence of business on politics by wielding arbitrary power. That is not so surprising: laws might be weak, whereas a sword of Damocles hanging over every head is highly effective. Feudalism works. But it is also easily abused.

Article forms part of a survey on Russia in this issue of The Economist. The oligarchs are keeping their heads down, but out of fear, not respect for the law.

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