#7 - JRL 7249
July 11 - 17, 2003
THE KREMLIN PLAYING WITH OLIGARCHS
INSTEAD OF HARASSING OLIGARCHS, THE KREMLIN SHOULD CHANGE ITS ECONOMIC POLICY.
Author: Professor Stanislav Menshikov
[from WPS Monitoring Agency, www.wps.ru/e_index.html]
Traditionally enough, everybody has been wondering why would the Kremlin assault oligarchs. The overt explanations that this is just another election maneuver, something to show that the United Russia and the Kremlin itself care for the people. It is hardly a coincidence that the prosecutor's office recalled the Apatit episode on insistence of a United Russia deputy while before the prosecutor's office had remained - or feigned to - in blissful ignorance. It is hardly a coincidence that Vladimir Putin himself was allegedly angered by YUKOS owners when they began sponsoring parties of the opposition. The president even reminded oligarchs at his marathon press conference not so long ago that some of them had already paid dearly for their decision to meddle in politics. It must have been a message because right-hand man of the "best corporation" in Russia joined the club of the humiliated and disgraced less than two weeks later. According to The Wall-Street Journal, Putin once again reminded everybody who was who in Russia, and Mikhail Khodorkovsky was shown his place. As a matter of fact, this is how Khodorkovsky himself understood it. He said that the anti-YUKOS campaign was "but a means of power struggle, not the end as such."
There is, however, a different opinion, the opinion that the president does not have anything to do with all of that and that the initiative belongs to the St. Petersburg faction in the presidential circle. The one that aspires for control over oil and gas. According to the rumors, this faction in the Kremlin itself is represented by Viktor Ivanov, Deputy Director of the Presidential Administration, and Igor Sechin, Chief of the President's Chancellory. The rumors indicate furthermore that the list of major players in this particular faction is restricted to Boris Pugachev (Mezhprombank), Aleksei Miller (Gazprom), and Sergei Bogdanchikov (Rosneft). This faction allegedly opposes the clan of Alexander Voloshin known for his contacts with Yeltsin and oligarchs. This hypothesis assumes that the upcoming election is but a pretext, and that the report on "oligarchic conspiracy" drafted by the group not so long ago was a ploy to condition Putin against oligarchs in general and ambitious Khodorkovsky in particular.
There is another conspiracy theory as well implying that Khodorkovsky has been involved in covert negotiations abroad over the sale of YUKOS-Sibneft to Exxon or Shell. According to some analysts, a sale like that would have been triply beneficial as far as shareholders are concerned. In the first place, a sale like that would have converted a part of oligarchs' paper capital into hard cash. In the second, it would have legalized their assets additionally via involvement of foreign business tycoons. In the third, it would have left the Kremlin unable to meddle with the affairs of Russian businessmen (the assumption is that the Kremlin would not have dared meddle with transnational capitals and the government in Washington and London behind it).
There is some kernel of truth in this concept. The recent acquisition of 50% interest in Tyumen Oil Company by British Petroleum indicates the existing tendency in line with which Russian oligarchs integrate into the network of international financial and industrial contacts. Some specialists do not rule out the possibility that Khodorkovsky and Roman Abramovich (another owner of the united YUKOS- Sibneft) might have planned to follow suit. There is, however, a question: how all of that may jeopardize Putin who has just wholeheartedly approved of the deal between Fridman and John Brown of BP? Moreover, Khodorkovsky who does not control YUKOS anymore is less politically dangerous for the president as a potential rival.
There is something mysterious here and it in mysteries it always helps to try and answer the question of who stands to gain by it. In this particular episodes, there are a lot of men and structures who would dearly like to see YUKOS and its owners in trouble. There can be no doubts that this is truly a PR trick billionaire Platon Lebedev inadvertently fell victim of. Yes, Khodorkovsky's group has some serious adversaries who would like to lay their hands on a part of its oil dividends. Yes, Russian oligarchs would like to become related with their Western counterparts and, whenever necessary and possible, to hide behind them.
It is also the truth at the same time that the state is not prepared to make it to the logical conclusion in the matter of correcting the unfairness that cost it in the course of crooked privatization one of the major sources of income and made paupers and semi-paupers of the majority of the population. The Kremlin merely reiterated that it was not going to annul the outcome of the privatization. If that is what it is, then the campaign against billionaires is going to remain a campaign against certain figures only.
There is, however, more to the problem of dominance of oligarchs in our economy and society then the way Khodorkovsky, Lebedev, Nevzlin, and others made their fortunes. There is another aspect, no less important. The matter concerns the negative effect of oligarchic power on economic and financial development of the country, on living standards in the country in general. Even if we forget for the moment exactly how a small group came to own natural resources of the country, there remains the problem of the natural rent (including the dividends resulting from the difference between relatively low domestic and high foreign oil prices) that is supposed to belong to the state but ends up in the pockets of the already mentioned group. The problem is regularly brought up but has never been solved. A substantial part of the natural rent never makes it to the state budget, it is never invested in processing industries development or high technologies, and is merely stashed abroad. The country depends on export of raw materials too much. It is this fault that prevents rapid development of economy. In other words, the super dividends Khodorkovsky, Abramovich, and others lay their hands on are a macroeconomic matter, something that has an effect on the interests of society in general.
What sort of money are we talking about? The oil industry balance recently published evaluates net profit at $8.5 billion in 2002. According to our estimates (see Anatomy of Russian Capitalism, the book that is to be published soon), super dividends resulting from the difference between domestic and foreign prices only (discounting the internal sales profits, that is) amounted to $14.5 billion in 2000. Had even 50% of the sum made it to the federal budget, its revenue part would have increased by 18%.
Khodorkovsky repeats every now and then that Russian oil industry has to struggle to make ends meet. Really? In 2002, Russian oil was sold abroad at triple the domestic price, and Vagit Alekperov (LUKOIL) announced that its cost price was only $2,7 a barrel. Oil was sold abroad at $22-23. The industry where average profitability is always 50% and more cannot help having colossal dividends. This is why capitalization of oil companies and bank accounts of their owners have been growing by the year.
It does not necessarily take nationalization of oil industry to correct this deformed legacy of Yeltsin-Chubais privatization. Introduce the taxes that will deprive oil companies of what exceeds the profitability typical of the Russian economy in general, and that will be that.
The Economic Ministry has come up with an idea in the correct direction suggesting a diversified income tax - higher in production and lower in processing. Like many other attempts to restrict oil barons, this one has never amounted to anything. Oligarchs counterattack by demanding even lower taxation. The Kremlin and the government do not turn down the proposals immediately. On the contrary, Presidential Advisor Andrei Illarionov believes that lower taxation is the only means capable of maintaining the economic growth. Putin himself keeps silent.
If the Kremlin is seriously determined to deal with oligarchs, it should introduce dramatic changes into its economic policy. It promotes the interests of moneybags nowadays, and it is supposed to serve the interests of society and the state. Jailing a billionaire is not going to work. From this point of view, the campaign against Lebedev and his colleagues is a PR trick, just like the operation against renegades in uniforms. Both smack of a propagandistic show.
(Translated by A. Ignatkin)