#10 - JRL 7261
The Times (UK)
July 23, 2003
Power struggle tears at Russia's purse strings
By Carl Mortished

WHO will rid me of this meddlesome oligarch? President Vladimir Putin has not, so far as we know, taken to misquoting Henry II, but the Kremlin’s persecution of Mikhail Khodorkovsky, chief executive of Yukos, is beginning to look like a medieval struggle between church and State. Except that, in Russia today, the struggle is between the State and Mammon.

Mr Putin’s allies in the Kremlin are doing their best to silence the Yukos chief. First, there were allegations of theft, dragging up the issue of dubious privatisations under the Yeltsin regime. Then they tried tax evasion and late last week the prosecutor’s office made vague references to criminal inquiries, including several unsolved murders.

The attacks on Russia’s largest company and its richest man have alarmed investors in the West. The Russian stock market has lost a fifth of its value since the Yukos affair began and yesterday a group of Russian businessmen called for a social pact between business and the State. In a letter to the President they called for the State to defend democratic institutions and privatisation while business would uphold its ethical responsibilities, pay taxes and root out corruption.

The idea of a pact is interesting because many of the oligarchs thought they already had one. In June 2000 Mr Putin made peace with Russia’s tycoons, promising not to question their entitlement to the shares they acquired in the dubious Yeltsin deals, providing they stayed out of politics.

Mr Putin could say, with justification, that Mr Khodorkovsky has not kept the bargain. He has, it is rumoured, financed as many as a quarter of the deputies in the Duma. He has called for more government action on corporate governance and stronger ties with the US. If this antagonises Mr Putin, it enrages his supporters, many of them KGB officers from St Petersburg who detest the nouveau riche oligarchs and would rather have business under their thumb.

And there lies the danger. The St Petersburg view is common among those who believe Mr Khodorkovsky, Roman Abramovich and others acquired their wealth through sleight of hand. The oil is ours, they say, and they have no right to squander it on English football teams.

Mr Khodorkovsky is too canny to end up slain on the altar of capitalism. He will make another truce with Mr Putin but the tycoon’s colossal wealth and the power of Yukos today is a huge problem for Russia and for Europe, which needs Russia’s oil and gas. In order to maintain political stability, Russia’s economy needs to grow quickly. Over the past three years ruthless capitalism has delivered rapid recovery, while state organisations have squandered and wasted.

But the oligarchs are now cashing in. Billions of dollars are being released from the merger of TNK and BP’s Russian assets and the Yukos-Sibneft deal. The question is: how will this wealth be recycled? Excluding oil, Russia’s economy is not deep enough to accommodate such huge investments. The oligarchs would like to invest in gas but Mr Putin is loath to weaken Gazprom’s monopoly, and there are few big alternatives. It is therefore possible that a great deal of the cash will move abroad and if that becomes apparent it could damage the pro-market consensus in Russia.

And strengthen the hand of the Russian State.