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#2 - JRL 7256
The Times (UK)
July 18, 2003
Russian oligarchs fear Putin inquiry into their wealth
Clem Cecil in Moscow

THE billionaire tycoons who control Russia's economy are alarmed by signs that President Putin may order an investigation into the burst of privatisations which handed them the country's most valuable natural assets.

The Moscow stock market fell sharply this week, tumbling another 5 per cent yesterday, after police raided the offices of Yukos, Russia's largest oil company, to investigate allegations of embezzlement and tax fraud.

Armed men in masks forced the company's security guards to the ground and searched the archive through the night. They left 17 hours later, carrying videos and documents.

The judicial campaign against Yukos has prompted fears among Russia's richest men that they, too, might be investigated. They made their wealth almost overnight during the flawed privatisations of state-owned natural resources in the 1990s. A dozen "oligarchs", such as Mikhail Khodorkovsky, became billionaires after assets they acquired for relatively modest sums were revalued.

Hoping to halt the fall in the stock market, which threatened to precipitate an economic crisis, Mikhail Kasyanov, the Russian Prime Minister, told investors that the privatisations were irreversible. He admitted that the process had been imperfect, but said it had provided advantages by introducing competition.

Yet investors are alarmed by the prospect of a civil war between business and the Government. Yesterday a lobby group representing the oligarchs urged parliament to approve a law barring any review of privatisations that took place more than three years ago.

Arkadi Volsky, the head of the Union of Industrialists and Entrepreneurs, said: "I believe it would be wrong to re-examine the results of the privatisations. I believe that the longest period a review of privatisations should stretch back is three years."

The criminal investigation into Yukos appears to violate a secret truce between the oligarchs and Mr Putin, who agreed not to examine the privatisation deals if the oligarchs did not stray into politics. But Mr Khodorkovsky has ventured into the political arena, even hinting that he might run for president in 2008.

The country's richest man, he is thought to be worth Pounds 5 billion. He has outgrown Russia's stock market and the "rules of play" that exist between the state and business in a country where the rule of law is hazy.This week he suggested that the investigation against Yukos was politically motivated. "Law enforcement agencies are using the law for personal interests," he said. "It will be clear by the end of the year what damage the country has suffered from this."

Michael McFaul, Professor of Political Science at Stanford University, California, suggests that Mr Putin has realised that if he wants to achieve the economic growth he planned, "the state should have a controlling share of the country's major corporations". This would involve a messy renationalisation process and Russia would forfeit billions as foreign investors abandoned the country that was thought to have stablised.

Mr Khodorkovsky has taken steps to protect Yukos in case it is seized and he is forced into self-imposed exile to avoid prison, as the oligarchs Boris Berezovsky and Vladimir Gusinsky have been. He has drawn up an emergency plan which includes the appointment of Lord Rothschild as a potential chief executive of Yukos.

A fellow oligarch, Roman Abramovich, has also been in the line of fire, accused by Sergei Stepashin, head of the Russian Parliament's Accounting Chamber and a close ally of Mr Putin, of evading Pounds 175 million in taxes. Mr Stepashin implied that Mr Abramovich had used the money to buy Chelsea Football Club.

In the lawless 1990s, when Russia was reinvented after 70 years of Soviet rule, there was widespread abuse of the financial system.

"That was a time of extreme legal ambiguity," Vladimir Pribylovsky, head of Panorama, an independent think-tank, said. "So when the prosecutors decide to go after somebody today, it's clearly a political position and not about upholding the law."

How the Kremlin deals with the Yukos scandal will be indicative of the freedom, or lack of it, in Russia's market today.

Professor McFaul said: "The key issue is how society fights back to establish the rule of law."

RUSSIA'S RICHEST

1. Mikhail Khodorkovsky, 39. Menatep; Yukos Oil. Worth: $ 8 billion (Pounds 5 billion) (26th richest in world)

2. Roman Abramovich, 36. Sibneft (oil); Russian Aluminium. Worth: $ 5.7 billion (49th)

3. Mikhail Fridman, 38. Tyumen Oil. Worth: $ 4.3 billion (68th)

4. Viktor Vekselberg, 45. Tyumen Oil. Worth: $ 2.5 billion (147th)

5. Vladimir Potanin, 42. Norilsk Nickel. Worth: $ 1.8 billion (222nd)

6. Mikhail Prokhorov, 37. Norilsk Nickel. Worth: $ 1.6 billion (256th)

7. Vladimir Yevtushenkov, 54. AFK Sistema. Worth: $ 1.5 billion (278th)

8. Oleg Deripaska, 34. Russian Aluminium. Worth: $ 1.5 billion (278th)

9. Vagit Alekperov, 52. LUK Oil. Worth: $ 1.3 billion (329th)

10. Alexei Mordashov, 37. Severstal (steel). Worth: $ 1.2 billion (348th)

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