Implications of the Yukos Scandal for Russian Domestic Politics

On September 16, 2003, the Carnegie Endowment for International Peace hosted a meeting on the implications of the recent scandal surrounding the Russian oil company Yukos. The speaker was Dr. Lilia Shevtsova, an expert on Russian domestic politics. Dr. Anders Åslund, Director of the Russian and Eurasian Program at the Carnegie Endowment, moderated the session.

Dr. Shevtsova began by noting that there are different prisms through which one could analyze the problems of contemporary Russia: that of the upcoming parliamentary and presidential elections; that of center-periphery relations, and in particular the problem of Chechnya; that of the evolution of President Vladimir Putin's leadership, and so on. But one angle in particular would yield the most insight into the challenges currently facing Russia. This angle is the relationship between power and big business in Russia.

Looking at Russia through this angle would bring up a large range of issues for discussion. Some of these would be the elections; foreign investments; the political trajectory of major actors, such as Anatoly Chubais; regional political power and election of a new governor in Sakhalin; Russo-Chinese and Russo-Japanese relations; the political fortunes of Sergei Darkin, Viktor Ishayev, and other governors in Siberia and the Russian Far East; the destiny of the proposed oil pipeline to Murmansk, Angarsk- Daqing-Nakhodka; Russia's role in Iraq; and Russian-U.S. partnership, in particular in the energy sector. These issues and events, seemingly not connected with each other, nevertheless have something in common: they are all influenced by the complicated relationship between power and big business and they are the reflection on how this relationship unfolds on the federal and local levels in Russia. In this context the Yukos affair might serve as a litmus test that would demonstrate the logic and paradoxes of this relationship.

Moreover, one could find traces of the Yukos scandal, whether open or hidden, in all the diverse issues mentioned above. Indeed, the relationship between power and big business transcends all other problems and challenges that are usually seen as the most significant in today's Russia. These include the evolution of the Russian political system and current political regime, the struggle between political parties, Putin's destiny and the question of the succession in 2008.

Dr. Shevtsova mentioned that the use of the term "oligarchy" in Russia to describe relations between big business and power has a venerable tradition, as can be found by reading, for instance, the famous Russian monarchist Lev Tikhomirov, who was describing Russian political experience in the late 19th and early 20th centuries. However, the period under analysis in the given talk began in 1995-96, when a group of seven bankers, known as the Semibankirshchina, engaged in a "desperate" struggle for power with the bureaucracy, and its most aggressive echelon, the siloviki, or representatives of power structures. Among the seven bankers were oligarchs Boris Berezovsky, Vladimir Gusinsky, and Vladimir Potanin, while on the other side were Oleg Soskovets and Yeltsin's bodygurd, Aleksandr Korzhakov.

The struggle ended with the first defeat of the usually omnipotent bureaucracy in Russian history. As a result, Mr. Potanin joined the government as first deputy prime minister, while Mr. Chubais became head of the presidential administration. Mr. Yeltsin's political regime acquired one important characteristic: a merger between power and money with the leading role of big business connected with finances and natural resources. However, the Semibankirshchina failed to consolidate its power or even to form its corporate mentality and common agenda, using its dominant position in the Kremlin only to grab assets.

While President Yeltsin relied on the fusion of his administration with big business, allowing big business to be a leader and major victor in the struggle, President Putin's regime has been different. He has tried to rein "the oligarchs" in and replace Mr. Yeltsin's elected monarchy with a conveyer belt system of power. His crackdown on Gusinsky, Berezovsky and now Khodorkovsky demonstrates not only the new nature of the Russian political regime, but also the fact that oligarchy as an interest group of big business people who dominate the state, have a common agenda, and have succeeded in forcing all other powers, including the state apparatus, to implement their interests, does not exist in Russia. The state and state apparatus continue to play a domineering role in new Russia like they had been for centuries: the Chair has always been more important than the Buck here.

Discussing upcoming political developments in Russia, Dr. Shevtsova noted that the 2003 parliamentary and 2004 presidential elections are fast becoming "a comma, … a footnote in Russian history." Instead, all of Russia is focusing on the 2008 elections, when President Putin would have to relinquish power to a new president. This fact highlights the fact that Russian system is still geared towards the reproduction of power and guaranteeing succession instead of concentrating on an agenda of modernization and effective governance. In this process of power reproduction, the current election plays the role of setting the table for the major event in 2008, securing positions, influence and control over the resources for the major players preparing to fight for Mr. Putin's legacy. Sadly, this leaves few opportunities for Mr. Putin himself to start structural reforms during his second presidency, limiting his role to keeping the lid on, and preventing the warring clans from capsizing the boat. In order to put an end to this tradition of power reproduction, he has to change the way Russia is ruled; but this may become an easy way to break his neck. Will he have the courage and recklessness to turn into a political kamikaze? Nothing in his first term hints at this possibility.

Commenting on the fact that the Russian stock market has been performing well (after some initial shock) despite the Yukos scandal, Dr. Shevtsova noted that Russian markets sometimes tended to follow their own trajectory, while deeper political events followed a different path. Russian economic stability was artificial. Eventually, underlying fragility and uncertainty about political rules of the game would have its impact on the economy as well.

Among the many motives behind the attack on Yukos, the one at the top of Dr. Shevtsova's list was the struggle between the two "families"-security people, siloviki or Chekisty on the one hand, and "Yeltsinites," representatives of the old ruling group formed during Mr. Yeltsin's rule, on the other. The Yeltsinites have succeeded in gaining control over all the major "financial and administrative resources of the Russian government." In fact, for the old ruling "family", Mr. Putin's presidency has been an ongoing process of acquiring new assets and instruments of control. Having recently obtained control over Vneshekonombank, Yeltsin loyalists took control of the money generated by Russia's arms sales. Finally getting hold of the medical insurance of the pensioners, Mr. Yeltsin's family obtained one more financial resource, not without the help of Prime Minister Mikhail Kasyanov. Quite possibly, the Yeltsinites' expansion before the forthcoming elections was the last straw and Mr. Putin's praetorians decided that "enough is enough." They want not only to grab a slice of the "oligarchic pie," but also to secure positions before the final fight for power after Putin is gone. In any case, the asymmetry of resources on the top always produces confrontation. Putin himself hardly felt comfortable feeling the pressure of his political "Godfather's gang." True, the president had the option to appeal to society and turn to transparent policy where both clans would feel uncomfortable. Instead, he unleashed his loyalists.

Since everything that is happening in Russia is linked to the 2008 elections, there are signs that the Chekisty are working out a new strategy to consolidate the country. This strategy may involve an anti-corruption drive, an anti-oligarchic struggle, and even perhaps the use of anti-Semitic rhetoric. Yukos can be a test case for all three crusades put together. It would be, however, too simple to picture the people from the intelligence services as the only group interested in overthrowing the preponderance of the Yeltsinites and the winners of the first wave of privatization. The Chekist attack is supported by many representatives of Russian medium-size business that is mainly engaged in the less profitable manufacturing industry and which is frustrated by the grabbing activity of oil and financial majors. Thus, a tug of war between the Kremlin clans may trigger much deeper ramifications and one of these can be the consolidation of a part of Russia's economic community on an authoritarian and nationalistic platform, which can have support of broad segments of the Russian population.

Chevron's alleged interest in the purchase of 25 percent of Yukos stock may also have been a "triggering factor." A greater involvement of foreign capital in Russia's most powerful oil company would diminish the Kremlin's ability to control it.

Mr. Berezovsky, the "great conspirator," apparently also had a hand in the affair. Some of his associates in Moscow helped to justify an attack against Mr. Khodorkovsky. It seems, the former Kremlin spin doctor has his interest in destabilizaing situation in Moscow, trying to rouse the Kremlin against the oligarchs who are still "happily" living in Russia.

Further, there is "bad blood, sour feelings" between Yukos and the state-owned oil company Rosneft, which also contributed to the build-up of the scandal. Mr. Khodorkovsky has also antagonized the state-owned Transneft with his plan to build a network of private pipelines, the crown jewel of which would be a $4 billion pipeline transporting West Siberian oil to Murmansk for export. This pipeline would have the capacity to transport 150 million metric tonnes per year. For comparison, Dr. Shevtsova noted that Russia currently exported 200 million tonnes a year. Thus, Mr. Khodorkovsky's projected pipeline would significantly expand the oil export capability of his empire, and this is hardly welcomed by the state-owned oil companies. To this, we should add the clashing interests of Yukos and state companies in Sakhalin.

Moreover, Mr. Khodorkovsky apparently antagonized another oil company, Lukoil, by fighting to end the production-sharing agreements favored by Lukoil -instead, he wants Western partners to take equity stakes in Russian companies.

In the field of foreign policy, Mr. Khodorkovsky is the only oligarch who advocates stronger relations with the United States. In the run-up to the war in Iraq, Mr. Khodorkovsky argued that Russia should side with the U.S., which upset a number of people in the Kremlin.

It is also true that in domestic politics, Mr. Khodorkovsky's moves also irritated Mr. Puin's Chekists and apparently the president himself: he tried to take control of the Duma essentially by buying new deputies. Some people in Moscow- rightly or wrongly - expressed concern that once in control of the Duma, Mr. Khodorkovsky would have been able to use his position to push through an amnesty for big business, to prevent the establishment of caps on oil and gas rent, and even enforce changes in the constitution favorable to big business.

Thus, there were too many people on the Russian political and economic scene who would have liked to stop Mr. Khodorkovsky, or at least to give him a warning. One can assume that the Russian president was irritated by the oligarch's activity, or by his alleged ambitions, or even by his potential to advance the praetorians.

There have been exaggerations about the extent of the siloviki's ambitions and their intentions as well, Dr. Shevtsova noted. Although the siloviki might be willing to undertake a redistribution of privatized property, they are hardly ready or capable of starting its renationalization. This is not only because Mr. Putin will not let them do this, but also because they themselves have an interest in private property. However, the engagement of intelligence people in economic activity means further distortion not only of the market, but also of the state itself, which is becoming an instrument for coercive organs to pursue their own interests.

Further, in Dr. Shevtsova's view, the Kremlin was probably not seriously worried about Mr. Khodorkovsky's backing for the Union of Rightist Forces (SPS), Yabloko, or even the Communists. In fact, he never took any steps without the "consent, agreement, or endorsement" of the Yeltsinites within the Kremlin.

Much more important than the motives for the crack down on Yukos are the political and systemic ramifications of this fact for Russia. One conclusion that could be drawn from the Yukos scandal is that Mr. Putin has failed to consolidate the political-economic system in Russia. He was, in fact, doomed to failure, because the Russian system is based on incompatible principles-the personification of power and its democratic legitimacy-and survives through conflicts. Lack of developed institutions makes these conflicts vicious and their results unpredictable. Thus, Russia is likely to see many more nasty clan wars and attacks. Ironically, the most devastating of the wars waged will be the clashes among the interconnected elites-big business and the bureaucracy. Yukos was only the beginning, according to Dr. Shevtsova.

However, the Russian "oligarchy" is not a unified group with a corporatist mentality ready to defend itself. While some, like Mr. Potanin, sided with the Kremlin in the Yukos affair, other oligarchs are preparing to liquidate their assets and get out of Russia: the country is getting too unpleasant, and apparently is not very safe for them. However, several of them, such as Mr. Khodorkovsky, remain in Russia, and they are an easy target for the aggressive echelons of the state apparatus.

Moving on to the role of Mr. Putin in the Yukos case, Dr. Shevtsova noted that while the ruling team split and its two parts have been engaged in confrontation, the president has been trying to avoid making choices or even betraying hints about his position. The declaration that property rights will not be revised-a statement important for Russia's future development-was made recently not by Mr. Putin, but by Mr. Kasyanov. The president nowadays is hardly seen in Moscow. He is traveling, going on vacations, and concentrating his efforts on meeting foreign leaders like Silvio Berlusconi, or George Bush Sr. While after his rise to power "Who is Mr. Putin?" was a popular question in Russian politics, now it can be replaced by "Where is Mr. Putin?" President Putin's posture has been breeding confusion on the political scene. Such ambiguity is quite satisfactory if Mr. Putin tries to continue being a stabilizer and Everybody's Man. But of late, Russians have come to expect from their president a more ambitious agenda, and his aloofness creates frustration even among his own electorate.

The Checkists may have chosen this particular moment for the attack on Yukos because of the impending elections. After all, under the current Russian constitution, the presidential election of 2004 is to be Putin's last: his only chance of extending his mandate would be by becoming president of the Union State of Russia and Belarus. Belarusian president Aliaksandr Lukashenka, however, has been doing everything possible to prevent such an outcome. But the very fact that part of Mr. Putin's team is trying to set a scenario for the post-Putin period is symbolic and dangerous for their boss at the same time. The question can be raised: where is the place for the president himself in this context?

Russian society, on the whole, approves of the attack on Yukos. There is still no consensus on privatization and private property rights in Russia. As many as 73 percent of Russians believe that the privatization process of the 1990s was illegitimate. However, 41 percent are opposed to renationalization (while 35 percent are in favor). And this proves that Russia opposes new shake-ups and bolshevist revolutions.

Dr. Shevtsova noted that the SPS is one of the potential victims of the Yukos affair, since it is mainly a party representing the interests of big business. Now, however, it is torn between big business and the state apparatus, and any choice may be disastrous for it: siding with business might mean loosening its chances of staying close to power. Choosing the apparatus means betraying business.

President Putin, meanwhile, let the process unfold. Dr. Shevtsova warned, however, that such processes and their ramifications are very difficult to control, especially in Russia, when the state is currently unable to use coercion on a broader scale, and there are no institutions that could offer a platform for compromise. Thus, Mr. Putin faces the challenge of dealing with deeper outcomes of the Yukos affair that are not always seen on the surface.

So why was it Mr. Khodorkovsky in particular whom the siloviki picked out as a target? The primary reason, according to Dr. Shevtsova, was that he was not directly a Yeltsinite or a member of the old gang. The siloviki are still cautious and not completely sure of themselves; attacking someone who is close to Mr. Yeltsin would have required "too much courage and aggressiveness." A confrontation with Mr. Khodorkovsky has the advantage of giving a warning to the Yeltsinites without fighting them directly.

Besides, Mr. Khodorkovsky is also an oddball on the oligarchic scene: Yukos became the first Russian company that started to look for a new legitimacy-not in cozy relations with the apparatus (like those of Mr. Potanin or the Alfa oligarchs). but in switching to transparency and legality. Greater transparency would mean greater independence, something that was not lost on the Kremlin. This was a challenge to the traditional role of the Russian bureaucracy, and it reacted immediately.

Dr. Shevtsova concluded that the Yukos story had presented Russia with a "moment of truth." The way it ends, if it ever does end, will show us where Mr. Putin is headed, what the balance of forces in the Kremlin will be, and also what the nature of the future political regime will end up being. Finally, she predicted the ramifications of the Yukos scandal, whether directly or indirectly, would "influence the outcomes of Russia's presidential campaign in the year 2008."

Summary prepared by Rashed Chowdhury, Junior Fellow with the Russian and Eurasian program at the Carnegie Endowment.