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#11 - JRL 7257
The Globe and Mail (Canada)
July 19, 2003
Is Russian oil tycoon stepping on the toes of President Putin?
Special to The Globe and Mail

MOSCOW -- No one knows whether Russia's richest man saw it coming: More than a dozen black-clad officers carrying Kalashnikov rifles burst into the offices of the country's second-largest oil company last week to spend 16 hours searching computer files and archives for evidence of fraud and illegal acquisitions.

Mikhail Khodorkovsky has been, at least in recent years, a poster boy for accountability and transparency in the murky and often violent world of Russian big business. The raid on OAO Yukos came shortly after his 40th birthday as the tycoon -- whom Forbes magazine estimates to be worth $7.2-billion (U.S.) -- was preparing to attend an industry conference in Sun Valley alongside Bill Gates, one of dozens of attempts to boost his profile in the West.

Unlike Russia's other oil and metals barons, who use the profits from their acquisitions to collect cars and mistresses, Mr. Khodorkovsky has made a public show of philanthropy, pouring money into cultural funds and Internet programs for schools and into political opposition parties.

But like most Russian businessmen, Mr. Khodorkovsky's empire had a dubious beginning, and now he is at the centre of what some political-watchers call a "sluggish civil war" as the law moves to stifle the budding political player.

The Russian general prosecutor's office announced yesterday it is investigating seven separate cases involving Yukos, including tax evasion, the murder and attempted murder of several officials who had disputes with the company, and charges of embezzlement of state property after a 1994 privatization auction.

The Interfax news agency reported that the list of victims in the 1998 killings includes the mayor of the Siberian city of Nefteyugansk -- where Yukos bases its operations -- and two businessmen.

The accusations are damaging, but even if true, most Russian analysts say Yukos's history is no different from that of most major Russian companies. Mr. Khodorkovsky, they say, is being singled out.

"Khodorkovsky has started to play on the political field, and [Russian President Vladimir] Putin doesn't like it," said Lilia Shevtsova, a senior associate at Moscow's Carnegie Institute think tank. "I believe Putin didn't like Khodorkovsky's political potential -- he saw that Khodorkovsky was approaching the limits or crossing the lines Putin drew."

Since his 2000 election, Mr. Putin has had a tacit agreement with the oligarchs -- the dozen or so men who assumed control of oil and metals conglomerates in corrupt schemes in the 1990s drive for privatization, and who now control about 70 per cent of the Russian economy: Keep your businesses, but stay out of politics.

But Mr. Khodorkovsky crossed that line this year by donating millions of dollars to two political parties -- the Union of Right Forces and Yabloko, a social democratic party -- that have the best chance to unseat the pro-Kremlin Unity Party in the lower house of parliament in a December election.

At the centre of this power struggle are two men more alike than either would care to admit. Both Mr. Khodorkovsky and Mr. Putin have worked hard to polish images of honesty and strength. Both are family men, well travelled, ambitious and the children of working-class parents.

The round-faced, bespectacled Mr. Khodorkovsky started his career in the Komsomol, or Young Communist League, but quit to start a caf. That didn't last, but another venture -- a semi-private scientific centre -- allowed him to build his fortune by importing computers and operating a shady currency exchange on the side. That centre became Bank Menatep, which financed Mr. Khodorkovsky's scoop of Yukos in 1995.

His early reputation was, like most Russian big-businessmen, that of a swindler, who defaulted on loans, hid assets in shell companies and offshore accounts, and squeezed out a U.S. partner through a reissue of shares. But about three years ago, Mr. Khodorkovsky did an about-face, embracing international accounting standards and paying dividends to shareholders.

"Transparency and good corporate governance are the rules of the game now," Mr. Khodorkovsky said in an interview with Knight-Ridder last fall. "The more developed our market, the stricter those rules need to be."

Unlike his country's second-richest man, Roman Abramovich -- who has parlayed his wealth into the governorship of a small region and bought Britain's Chelsea soccer team last month -- Mr. Khodorkovsky is guarded about his private life.

He is known to live in a heavily secured home about an hour from Moscow with his second wife and four children, and enjoys the use of a private jet. Said to favour jeans and sweaters over suits, his only publicly acknowledged indulgence is collecting wallets, briefcases and electronic gadgets.

"He is a real genius; a brilliant financier and manager. At the same time, he is not charismatic, he is not a public leader or great orator," said Olga Kryshtanovskaya, head of the Russian Academy of Sciences research centre on the country's elite, who first met Mr. Khodorkovsky in the early 1990s, when Menatep was still operating out of a small basement office. "His plans even then were great," she said.

He is still ambitious. Most political watchers believe Mr. Khodorkovsky is gunning for the presidency as early as 2008 -- when Mr. Putin's anticipated second term will end, leaving him ineligible to run again. That makes Mr. Khodorkovsky a threat to Mr. Putin's legacy as well as to his current support in the Duma. Some even theorize that breaking up Mr. Khodorkovsky's empire would give Mr. Putin's circle more money for their own coffers.

"Such a man [as Khodorkovsky] is in such a position that, when he begins to show political interest, it's worrying to the President," said Otto Latsis, a deputy editor at the independent Russian Courier newspaper and long-time critic of the Kremlin.

Publicly, Mr. Putin is staying out of the confrontation. He has not mentioned Yukos by name in connection with the affair, speaking only generally in a meeting late last week with Russian Union of Industrialists and Entrepreneurs president Arkady Volsky, who fears the move signals a greater action against oligarchs.

Any wider review of the 1990s privatization of state firms would be publicly popular, particularly before an election, but would also destabilize the Russian economy.

"Nobody loves the rich people. If people are told, 'We are clamping down on oligarchs for bad behaviour,' of course they will support it," Mr. Latsis said. A recent poll conducted by the Ekho Moskvy radio station showed as many as 75 per cent of listeners supported revisiting privatization.

Mr. Khodorkovsky himself has made only a few, pointed public comments about the affair, at one point warning that oil supplies to Russian regions might be threatened by the investigations. "There will be a significant outflow of capital from the country. Many investment decisions will be put off. I felt this in my meetings with powerful business people in the United States," Mr. Khodorkovsky told reporters at a Moscow-area airport Wednesday, on his return from the U.S. conference.

So far, the messages from the Kremlin have been mixed. Prime Minister Mikhail Kasyanov has insisted privatization will not be reviewed, only to be contradicted by a deputy property relations minister. And Andrei Illaryonov, the Kremlin's economic counsel, had a dire warning for listeners of the Ekho Moskvy radio station this week: "If we start now to revisit privatization, it will not be easy to stop this process," he said, "and it is not inconceivable that it will lead to civil war."

Many analysts say that's an overstatement, but acknowledge the affair has proven to be a serious setback for Russian business.

"Of course, it's a severe blow to Russia's economic and financial credibility as a country for investment," Ms. Shevtsova of the Carnegie Institute said.

She believes Mr. Putin, his warning duly issued, will soon call off the hunt.

"The President's survival depends on his ability to control all groups and rein them in," she said. "The problem is, he cannot neutralize the damage that has already been done."

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