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Russia's billionaire tycoons feel the heat as privatisations in doubt
July 2002

Just months ago, Russia's fabulously wealthy tycoons who built their fortunes from dodgy 1990s privatisations were popping open the champagne as a record 17 of them made it to the Forbes billionaires' list.

Now they are ringing up their lawyers as prosecutors go after the richest of them all, 40-year-old Mikhail Khodorkovsky, who owns the second-biggest oil producer Yukos, amid fears they could have their questionable gains seized.

President Vladimir Putin, a steely-eyed former KGB colonel who came to power in 2000 pledging to establish a "dictatorship of the law," struck a pact with the so-called "oligarchs" soon after his election.

If they kept out of politics, the deal went, they could hold onto the oil and mining assets they acquired from the state in bargain-basement deals during the "wild era of capitalism" that followed the collapse of the Soviet Union.

The Yukos chief, commentators say, broke the agreement by financing opposition parties, and powerful officials in the Kremlin who were colleagues of Putin in the security services are bent now on cutting the oligarchs down to size.

"Khodorkovsky was quite aggressive about playing a political role in Russia and sponsoring political parties. That broke the pact with the tycoons that they wouldn't get involved in politics," said Peter Boone, head of research at UBS Brunswick brokerage.

"Putin probably knew about this and implicitly condoned it," he said of the series of fraud, murder and tax evasion investigations targeting Yukos over the past fortnight.

With Platon Lebedev, a core Yukos shareholder behind bars since July 2 on charges of fraud over a 1994 privatisation, the impoverished Russian population has hardly hidden its glee at the discomfort of Russia's "robber barons."

An opinion poll by Monitoring.ru showed that only seven percent of people believed the tycoons had won their fortunes honestly and another survey by Romir showed that 77 percent favoured a review of the 1990s privatisations.

But the financial markets have seen dealing screens plunge into a sea of red as foreign and domestic investors pull money out of Russian stocks, fearing that the government will no longer respect property rights.

"Western investors have started to flee from the country. They are afraid of the situation," Arkady Volsky, head of the Russian Union of Industrialists and Entrepreneurs warned, estimating the economy had already lost 20 billion dollars (18 billion euros).

The roots of the present conflict lie in an infamous pact in 1996 dubbed "loans for shares," in which the government handed the seven principal tycoons the crown jewels of the economy -- the mining and natural resource companies -- in exchange for cheap loans.

The corrupt deal allowed then president Boris Yeltsin to bankroll his presidential campaign, which was key to his re-election in 1996, and gave the magnates untold influence in the corridors of power.

That select club has now expanded to 17 billionaires -- all male and averaging 41 years old -- a staggering amount for a country where the average wage is 160 dollars a month.

But economists say the Russian tycoons have passed the stage of robber capitalism and are now promoting Western corporate values and providing a strong engine of growth. Yukos in particular is held up as an example.

"Whatever you might think of the 1990s privatisations, just accept that it was reality and let's not go back into the past. Let's look to the future," said Stephen O'Sullivan, head of research at UFG finance house.

"This is one of the bedrocks on which growth has been based," he added, referring to the 2000 pact between Putin and the oligarchs.

Second after Khodorkovsky, whose fortune is estimated at eight billion dollars, is Roman Abramovich, 36, who has 5.7 billion dollars and made headlines by buying the fashionable West London football club Chelsea.

Abramovich's Sibneft oil firm is to merge with Yukos to create the world's fourth-largest oil producer.

He also owns a half-share in RusAl -- which controls around 80 percent of Russia's aluminium market and ranks third worldwide in its sector -- along with Russia's youngest billionaire, Oleg Deripaska, 35.

Vladimir Potanin, who heads the Interros metals and industrial group, whose assets include the world's largest nickel producer Norilsk Nickel, is valued at 1.78 billion dollars.

Despite the scare, Boone at UBS Brunswick believes the tycoons will ultimately manage to keep their assets because the government knows it has too much to lose.

"If they were going to open up property rights, we'd see much more than just what we've seen now. Foreign capital would be finished, so would domestic capital. There would be massive capital flight. For that reason, it won't happen," he predicted.

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