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Time Europe
July 28, 2003
Going For The Moguls
Russia's richest man and largest oil firm are under investigation. Has the Kremlin declared open season on the oligarchs?

Vladimir Putin tries hard to convince the world that Russian business has changed since the wild '90s, when it was synonymous with dodgy privatization and contract killings. These days he wants to depict the Russian corporate world as dynamic, modern — and predictable. That image shattered last week when the Kremlin went head to head with Russia's richest man, Mikhail Khodorkovsky, the 40-year-old proprietor of the oil giant Yukos and the richest man in Russia. The markets dropped abruptly, and polite discourse was infused with language reminiscent of The Godfather. The operation against Khodorkovsky, pundits and Yukos supporters claimed, was a Kremlin "contract" designed to punish him for his incipient political ambitions. Khodorkovsky suggested the pressure on his $11 billion-a-year, Fortune 500 firm would cost the economy billions of dollars by year's end.

Despite such stakes, Putin has remained frustratingly, if typically, silent. Filling the vacuum are people close to the President saying openly that by attacking Khodorkovsky, a hard-line Kremlin faction known as the Petersburg group has escaped Putin's control. The group — made up largely of senior officials who, like Putin, are veterans of the Soviet KGB — is said to be trying to push the President into an aggressively populist stance in preparation for the presidential elections next spring, Gleb Pavlovsky, a key Kremlin strategist, tells Time. Hard-liners are trying to "shift the President's position," and portray him as "the leader of the impoverished masses," Pavlovsky says, a move that could be politically disastrous. Putin is not backing the faction, Pavlovsky claims, and the President's silence is a result of "disarray" rather than consent. But by hesitating, he has allowed the situation to deteriorate. Sooner or later, Pavlovsky believes the President will have to intervene, probably by making changes at the top of his Kremlin administration.

How did Putin's relationship with Khodorkovsky become so strained? The crisis started early this month when the prosecutor's office accused Platon Lebedev, 43, a billionaire and key member of Khodorkovsky's financial empire, of embezzlement in connection with the privatization of a fertilizer plant. This was strange, as the prosecutor's office had previously decided that there was no case to bring. About the same time, a senior Yukos security official was detained on suspicion of a double murder. Yukos representatives say neither man has been formally charged, and dismiss the allegations as spurious.

Yet things got worse. Yukos offices were subject to a 16-hour raid, and last week the government announced it would review the firm's tax payments, a favorite harassment tactic. Rumors began circulating that another Yukos official, this time a top member of the board, would be charged with homicide. The attacks on Yukos caused such an uproar that Putin's own economics adviser, Andrey Illarionov, spoke publicly of the prosecutor's office's "selective" approach to the law. Other respected figures, like former Economics Minister Yevgeny Yasin, warned that the clampdown was part of a slow erosion of political and economic freedoms. "The whole case is quite simply politically motivated," says Aleksey Melnikov, a liberal member of the Duma, the lower house of parliament, who has in the past strongly criticized Yukos.

Despite the uproar, prosecutors show no sign of backing down. Last Friday they announced they were now investigating a total of seven separate criminal cases connected with Yukos; five of them involved "premeditated murder or attempted murder." Among those alleged to have been murdered are a local official in the oil fields of Siberia and the general director of an oil company. "The common denominator in all five criminal cases is conflicts over property between state or commercial bodies and Yukos," a source close to the prosecutor's office told the Interfax news agency. Yukos rejects all allegations leveled against it as baseless.

The disarray reflects schisms within the Kremlin. Despite the confident hands-on image that Putin projects to the world — and which Russia's tightly controlled electronic media transmit daily to its citizens — the President is a tentative leader who almost four years after taking office has still not created his own team. Instead, two factions compete for his ear. The Petersburg group — which Pavlovsky describes as consisting of "bureaucratic populists" — is viewed as ideologically hostile to the big private corporations that control much of Russia's natural resources. Some members of the group, Pavlovsky adds, probably also want a cut of the businesses themselves. The other faction is known as the Family. They are the relatives and close associates of former President Boris Yeltsin, who continue to maintain discreet influence on economic policy, working through Alexander Voloshin, the head of the presidential administration. Voloshin had the same post under Yeltsin. Upcoming elections have exacerbated tension between the two groups.

Enter Khodorkovsky. In the past few months he has become remarkably talkative about politics, and has often been critical of Putin over issues like Iraq. Much more quietly, sources in the Duma say, last spring he began to plan a new acquisition — what a liberal deputy told Time was "a serious attempt to create his own Duma majority." He funded both liberal parties, Yabloko and the Union of Right Forces (SPS), and, Duma sources claim, also gave money to the Communists, the second most powerful party in the lower house. The idea seemed to be that a strong showing by the three parties would create a Duma bloc that could, if required, outvote the Kremlin-backed parties.

Yukos dismisses as absurd the idea that Khodorkovsky was out to take over the Duma, but admits that he funds SPS and Yabloko as a private individual. The firm denies that Khodorkovsky has financed the Communist Party. The scheme, if it existed, was farfetched, given the modest showing of SPS and Yabloko in recent years and the Communists' tendency to self-destruct. But if the alleged plan had worked, Khodorkovsky would have become extremely powerful. Anyway, it came at a delicate time for Kremlin strategists: their party, Unity, is showing signs of coming apart at the seams.

Khodorkovsky's apparent venture into open politics is perplexing. A former official in the Soviet Communist Party youth organization, Komsomol, he had until recently the reputation of a secretive, careful operator who accumulated a fortune by deal making, not confrontation. Putin, meanwhile, has a proven track record of destroying business magnates who cross him. The media tycoon Vladimir Gusinsky opposed the war in Chechnya and failed to back Putin in the presidential elections. He was briefly imprisoned (though not convicted of any offenses), lost his empire and now lives overseas. The billionaire Boris Berezovsky, who helped Putin get elected but broke with him soon after, is now in restless exile in London. No one has a clear explanation for this change in Khodorkovsky's behavior, though many believe that the answer lies in a combination of massive wealth and growing ennui. "I think he is just bored," says one Duma member. "And as he is very rich, perhaps he thinks he is smarter than anyone else." Whatever Khodorkovsky's motivation, the Kremlin moved fast to teach him a lesson. [an error occurred while processing this directive]In entering the political arena, Khodorkovsky broke two unwritten rules in today's Russia: businessmen can make money as long as they stay out of politics, and they are welcome to fund political parties as long as the parties are pro-Kremlin. Now some fear the attack on Khodorkovsky means that it's open season on oligarchs. Last week, prosecutors restarted an investigation into allegations that aluminum magnate Oleg Deripaska had illegally acquired assets in a major insurance company. Deripaska denies any wrongdoing. This is a separate and complex case, but the fact that Deripaska is related by marriage to the Yeltsin family added to the mood of factionalism run amok.

Two key Kremlin officials, Viktor Ivanov and Igor Sechin, have been repeatedly singled out in the Russian press as playing a crucial role in the Khodorkovsky affair. Many observers feel they are a cover for Putin himself. "I don't see these folks as independent actors," says Michael McFaul, a professor at Stanford University and specialist in Russian politics. Pavlovsky maintains that the faction, not the President, is pushing this particular crusade. After crushing independent TV networks, the Petersburg group is falling victim to its own propaganda. "These are people who control TV news, who order programs and who have started believing what they see on television," Pavlovsky says.

Putin's public silence has complicated the crisis, which has now gathered so much momentum that it will be hard to stop. But when it does finally wind down, Putin will be left with a series of unpleasant problems. Despite Khodorkovsky's dramatic predictions, the financial fallout for Yukos and the Russian economy as a whole may not be catastrophic. But Russia's image has taken a battering: doing business here once again looks risky. The delicate balance in Putin's Kremlin has been destroyed. And the hard-liners' attack on Yukos has produced precisely the result they were trying to avoid, Pavlovsky notes dryly: Khodorkovsky is now a major political figure.

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