Source: Carnegie

Lawless Russia

By Masha Lipman

Originally published in the Washington Post, October 31, 2003.

The arrest of Mikhail Khodorkovsky, Russia's biggest oil tycoon, followed by the seizure of shares of his company, signals a dramatic escalation of the political change underway in this country.

The campaign against Khodorkovsky is being conducted by two bodies -- the Federal Security Service and the Prosecutor General's Office -- whose operations are now unchecked, while other public and government institutions have grown weak or irrelevant. Both agencies are controlled by a faction in the Kremlin administration, their activities endorsed by President Vladimir Putin. The political opposition is timid and the elites fragmented and demoralized.

The political regime of Putin's Russia is commonly described as a "managed democracy," but in the Khodorkovsky affair it has acted as a police state. Russian law enforcers have blatantly trampled the law. Yesterday they seized the 44 percent of shares in Yukos, Khodorkovsky's firm, owned by two foreign holding companies. The Prosecutor General's Office claimed that the shares "de facto belong to Khodorkovsky." Calls for public discussion of Khodorkovsky's arrest were cut short by a sharp and angry statement from Putin. All in all, the message to the business community was that those who dare challenge the state may end up in jail -- or have their property summarily expropriated.

Like any Russian tycoon, Khodorkovsky may have been involved at one time in murky business operations. His early capitalist past is not impeccable, as he readily admits. But in later years he transformed Yukos into a transparent, world-class business. He has carried out major philanthropic projects in education, training teachers in Internet skills and in the support of liberal political parties. While he used his wealth and influence to further his business goals at home and abroad, the very size of his business and the scope of his philanthropy caused him to think about Russia's future in broad terms.

There are several possible reasons for the Kremlin attack on him. One is that he had become too big a player, almost a rival to the Kremlin -- apparently arousing Putin's grave concern. Another was that those around Putin have their own ambitions to shape Russian politics. The biggest stakes in the Russian political game involve the presidential election of 2008, when Putin's second term (which he's certain to win this coming March) will expire.

The competition in this game played by feuding factions in the Kremlin administration has been extremely tough. The elimination of the influential billionaire by one such faction -- Putin's new elite, consisting of former KGB people -- gives it a tremendous advantage in the struggle.

The attack on Khodorkovsky and his employees began months ago. Against all expectations, he was not intimidated. He said he would rather be a political prisoner than a political émigré, and embarked on a trip around Russia pledging to prove to the Russian people that it was still possible to stand up for one's rights. Such open defiance is virtually unheard of in Putin's Russia. The emergence of such a direct challenger -- almost a political dissident -- was apparently more than the president and his KGB aides could take.

The victory of this faction has now been made clear by the resignation of Alexander Voloshin, Putin's chief of staff and leader of the rival Kremlin group. It is a victory for which Russia will pay a high price. The Russian stock market dropped dramatically after Khodorkovsky's arrest. Yesterday's freezing of almost half of Yukos's shares was followed by a steep decline in the firm's stock price and a flurry of panicky statements from market experts. Foreign investors are likely to shun Russia.

This was probably not what Putin had in mind. What he wanted was to get rid of a powerful and arrogant tycoon and keep Russia stable. But having unleashed the methods of a police state and entrusted the government to his KGB henchmen, Putin may now find it difficult to keep them in check. His favored faction are an incompetent, unsophisticated and greedy lot, with little experience of political maneuver but with some bad habits of repression. Their being in power is bound to do Russia tremendous harm.

The majority of the Russian public, meanwhile, may be pleased to see a fat cat in trouble with the state. But everyone in Russia is certain that the case against Khodorkovsky is politically motivated, and because of this the rule of law is undermined. The realization that law enforcers as well as the courts are manipulated by the state further deepens the mistrust between the Russian state and society.

The broad grant of power given the Prosecutor General's Office in the Yukos affair will be interpreted by prosecutors all over the country as a license for them to hunt local businessmen. A threat to jail them for real or imagined economic crimes will sound much more convincing after prosecutors have locked up the man who built the best-governed and most transparent of Russia's big businesses. This does not mean scores of smaller entrepreneurs will find themselves behind bars but rather that the "tariffs" they have to pay to be left alone will grow. Corruption will become even more blatant than it is today.

Putin should consider himself lucky to have a business elite that is subdued and easily intimidated: So far, Khodorkovsky's fellow tycoons have declined to stand up for him. Some of them leave the country, while others curry favor with the Kremlin. But pushing the nation's most active, efficient and achieving group into humiliation and passivity can hardly help Russia's economy. By bringing back fear of the state to public and political life, Putin is killing one of the most important achievements of Russia's post-Communist liberation. He may also be killing Russia's hope for a better future.

Masha Lipman, editor of the Carnegie Moscow Center's Pro et Contra Journal, writes a monthly column for The Post.