Russia’s oligarch wars: The trial of K

Date: 01/11/03

Once again, Russia's business and political forces have clashed mightily. Which side will win?

IN THE fog swirling round Russian politics this week, one thing at least looks clearer. The prosecutors' campaign against Yukos, Russia's biggest oil company, which began on July 2nd with the arrest of a big shareholder and culminated on October 25th with the arrest of its boss, Mikhail Khodorkovsky, has President Vladimir Putin's approval. Only he, most think, could have given the go-ahead to throw the country's richest man in jail. Mr Putin feigned detachment from the legal probes, as he did three years ago when two other oligarchs, Vladimir Gusinsky and Boris Berezovsky, were stripped of their assets and chased into exile; but nobody doubts that their fate, like Mr Khodorkovsky's, was Mr Putin's punishment for political meddling.

Apart from this, though, Moscow is as awash with conspiracy theories about Yukos as ever. The theories were fed by mid-week rumours of the resignation of the Kremlin's chief of staff, Alexander Voloshin, the linchpin of a pro-business faction in the government (though his departure has been wrongly rumoured before).

Mr Khodorkovsky, like other oligarchs, became rich from buying up state assets at knock-down prices in the early 1990s. Some won senior jobs under President Boris Yeltsin. At a meeting in early 2000, Mr Putin reputedly told the oligarchs to stay out of politics, or risk losing their assets. Messrs Gusinsky and Berezovsky used their television stations to attack the president. They lost them, and their Russian residency, soon afterwards. But others, who bent in the wind, survived.

Mr Khodorkovsky at first seemed to play by the rules. He devoted himself to becoming the face of modern, cleaned-up Russian business, leading the way in corporate governance, transparency and taxpaying. By this year he could boast that his companies were financing 7% of the federal budget. A merger now being completed with Sibneft will make Yukos the world's fourth-biggest oil company.

But with his wealth grew his influence - and his use of that influence to sustain his wealth. Yukos's lobbying in parliament against changes to the oil industry's tax regime earlier this year, blocking some of them, was “absolutely the trigger” for the prosecutors' investigations, says Christopher Granville of United Financial Group, a Moscow-based investment bank. Mr Khodorkovsky criticised the government's ban on privately owned oil pipelines. He stepped on other toes by alleging corruption in state firms at a public meeting with Mr Putin, provoking a sharp presidential rebuke. He even hinted at political ambitions by saying he would step down from Yukos in 2007.

Even so, nobody is quite sure why the campaign against him began in July. Was it at Mr Putin's behest, or did he just give the nod to henchmen with scores to settle? Is it aimed only at Mr Khodorkovsky, or is it part of a Kremlin power struggle? Is the goal to make Mr Khodorkovsky shut up or to confiscate part or all of his empire? Is it an attempt to scare off foreign oil companies from buying a big stake in Yukos - Exxon Mobil and Chevron Texaco are both interested - or merely to get Mr Khodorkovsky out before letting them in?

The answer is probably a mixture of all of these. Some think that Mr Putin may have authorised the investigations into Yukos without realising how brutally they would be carried out: night-time arrests, blatant shows of force, armed raids on Yukos's charity projects. Or he may just have thought that Mr Khodorkovsky would back down.

Instead, the oil magnate kicked up an international fuss about his persecution, bought a newspaper and got no fewer than 101 members of the Duma to sign a petition complaining about the alleged torture of one of the Yukos suspects. Mr Khodorkovsky's gall was remarkable; his fall may have been inevitable. He faces up to ten years in jail on charges ranging from tax evasion to theft of state property.

The stockmarket plunged after the arrest, though it later rallied. Even the talks over a foreign purchase of Yukos were reportedly put only on temporary hold. But Yukos shares slumped again when prosecutors said they had seized a 61% stake.

Foreigners who do business in Russia already know that their protection comes not from the law but from their krysha, or “roof” - ie, a well-connected power-broker. Arbitrary use of the law is not news; few expect it to go wider this time. Mr Putin himself insisted that “there will be no generalisations, analogies and precedents regarding the results of privatisation...Therefore, I would ask for all speculation and hysterics to stop.”

After earlier anti-oligarch campaigns, business did indeed return to normal. Once this clash with Mr Khodorkovsky is resolved, will the same happen again? Maybe not. The purges early in Mr Putin's term marked a separation of business and political power. But since then he has displayed ever-increasing authoritarianism, with tighter control over elections, the media and all branches of government. A confrontation between two separate, but now more powerful, business and political elites was almost inevitable.

The question is how it will play out. Some see Mr Khodorkovsky's arrest as a win for the siloviki, Mr Putin's former colleagues from the security services. Mr Voloshin's departure would lend further credence to this theory. If the rumour proves correct, this will mean a slowdown of such reforms as bureaucratic streamlining or the privatisation of Gazprom, the state gas monopoly. Some seem to have decided already that Russia is no longer a safe place to keep their money: capital flight was up sharply in the third quarter.

However, Mr Khodorkovsky is not broken yet. And the harshness of his persecution seems to have shocked other business leaders, who were even more upset when Mr Putin refused to discuss it with them. Support for the oligarch has come from unlikely quarters. Vladimir Ryzhkov, head of one of the pro-Kremlin parliamentary factions, called the affair “a sign that the state is not willing to see business as a partner, but only as a subordinate.” Anatoly Chubais, chairman of the state electricity company, called on Mr Putin for clarification: “I want business to understand the authorities' position on business.”

All of which suggests that, far from being cowed, the business side may be ready to fight back. A big battle is the last thing Mr Putin wants. He has based his presidency on creating stability, not upsetting it. The measure of his grip on power now will be his ability to maintain a truce.

Once again, Russia's businesses and political forces have clashed mightily. Which side will win?