The Drama Is Putin's, But so Are the Results

By Anders Aslund

Originally appeared in The Moscow Times on July 25, 2003.

Since July 2, a campaign has been pursued against Yukos, Russia's biggest private enterprise and one of its best managed. Several facts are evident. First, it is a concerted and long-planned action. Second, all the culprits are from the St. Petersburg FSB group -- led by Viktor Ivanov and Igor Sechin, President Vladimir Putin's closest collaborators in the Kremlin. Third, this campaign must have been undertaken with the president's consent; he keeps just enough public distance to be able to call it off when he reckons the time is ripe.

This serious drama involves many issues, but the most important is probably that the ruling party United Russia is in tatters with no program and little popularity five months before the parliamentary elections. Meanwhile, the Communists have gained new popularity because of left-wing concerns about oligarchs and corruption. Sensibly, Interior Minister Boris Gryzlov is pursuing a campaign against corrupt policemen, but United Russia also needs to beat up on the oligarchs.

At the same time, this campaign must not go too far because then three major planks in Putin's platform would be lost. Both the political stability he has achieved and the nation's economic welfare would be jeopardized. Furthermore, hostile reaction among foreign investors could endanger the planned Putin-Bush summit in the United States at the end of September. Therefore, the campaign must not run beyond the "silly season" of July and August.

Another important factor is the vicious fighting between the FSB men from St. Petersburg and the oligarchs that has characterized the Putin presidency. The St. Petersburg group gained ground in 2000 and 2001, but the oligarchs hit back in late 2001, as the FSB adepts failed miserably to make inroads into business or to manage democracy. After the oligarchs' long bull run, it was high time for an FSB counteroffensive.

Putin's victory in the presidential election in March 2004 is too secure to be a concern. There is much talk about whether Putin will get the two-thirds majority in the next parliament that would allow him to undertake constitutional changes. Naturally, Mikhail Khodorkovsky and most oligarchs oppose that, but the likelihood of such a majority is small in any case.

The current FSB attack smacks of desperation. Putin was able to deploy the seemingly neutral Tax Police to deal with Vladimir Gusinsky, but since it has been abolished FSB officers must now carry out the dirty raids themselves, exposing themselves to popular demands for their disciplining. Rosneft and Gazprom, two poorly managed state enterprises, have also been mobilized to fight Yukos. Frankly, such troglodyte enemies are not too worrisome.

Russia's financial markets have enjoyed an extraordinary boom and were longing for profit-taking. Numerous investors were hoping for a market correction to buy assets more cheaply, while many foreign investors have entered Russia recently with a poor understanding of Russian reality and are therefore prone to panic. While short-term foreigners are rushing out, Russian investors are taking some profits and waiting on the sidelines for lower prices. A total fall in the stock market of 20 percent to 30 percent from its peak would be natural, but few financial actors would want it to fall further. Last year, UES stock was talked down, and foreigners with weak nerves sold out to the great benefit of certain Russian strategic investors, as its stock price has more than tripled in a year.

Although the oligarchs have thrived, they are not entirely satisfied. Their main concern is that their property rights are not secure, which lays them open to extortion from political parties and the authorities. Reportedly, the Kremlin has extorted a total of $200 million for United Russia's campaign this year, $20 million from each of the big oligarchs. That is four times more than Khodorkovsky is said to have paid to Yabloko and the Union of Right Forces, so his financing of them cannot be the problem, although United Russia might want even more.

Even if other oligarchs are or were jealous of Khodorkovsky, they all suffer from this attack and are prepared to act with Yukos through the Russian Union of Industrialists and Entrepreneurs, or RSPP. Moreover, the recent TNK-BP megamerger could easily fall victim to larger price realignments, and others could be pre-empted. Most big businessmen care about their stock values, favoring stability.

The international repercussions of this scandal may be devastating. What foreigner will dare to invest in Russia, if even Russia's richest man and best operator is not safe? Putin's claims to promote the rule of law and good relations with the West come across as a joke while he is making use of law enforcement for political persecution.

Being responsible for the economy, Prime Minister Mikhail Kasyanov and his government have every reason to oppose this destabilizing conflict. It will cause capital outflow and reduce investment, economic growth and Russia's credit rating.

The bottom line is that it would be extremely dangerous to tamper with the outcome of mass privatization, which is one of Russia's main accomplishments. It has laid the foundation for five years of strong economic growth. Most of the elite understands that.

After three weeks of intense fighting, a possible outcome of the campaign is apparent. Politically, it is so important that it may last for two months, but if it continues for longer it would harm economic growth, political stability and Russia's international standing -- undermining Putin's authority.

The campaign has seriously shaken any belief in the sanctity of property rights in Russia. The economic and political effects will be devastating if the state does not guarantee the outcome of privatization. A sensible suggestion is the three-year statute of limitations on privatization disputes for which RSPP chairman Arkady Volsky is now campaigning. It should include not only enterprises, but also land and real estate. Yet foreign investors will be deterred for quite some time.

The oligarchs' huge political contributions remain a sore spot. Since this financing cannot be prohibited, it should be legalized but made public and transparent. The oligarchs would be less keen to fund politicians then, while also becoming less vulnerable to extortion.

Politically, United Russia is likely to benefit from this campaign against oligarchs and corruption, but so are the Union of Right Forces and Yabloko, which are mobilizing in defense of rule of law and democracy. Clearly, civil society is being energized.

As is usually the case in a major Russian campaign, the prime movers are likely to be punished for having gone too far. Clearly, the powers of the FSB and the prosecutor general should be subject to review. Certain comparisons with the routing of the lawless Korzhakov-Barsukov-Soskovets group in June 1996 may be appropriate. That Platon Lebedev has not yet been released is hardly surprising given that Olga Yegorova, the head of the Moscow City Court, is considered a loyalist of Viktor Ivanov, one of the instigators of the scandal.

Yukos expects even more legal cases in the regions, but it has the legal acumen to win most of them. After all, Khodorkovsky is Russia's best operator and he is not likely to be beaten or driven into exile. Any tampering with the ownership of Russia's best large company would be devastating to economic growth. In addition, if Yukos had planned a merger with a major Western oil company, that deal is most likely off.

There is no escaping it: Putin is the master of this drama, and he will be judged by how soon he brings this tragedy to an end, how severely he punishes the culprits and whether he disciplines the secret police.

Anders Aslund, a senior associate of the Carnegie Endowment for International Peace, contributed this comment to The Moscow Times.