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Newsweek International
August 4, 2003
Tycoon Takedown
The Kremlin’s campaign against one of the world’s richest men, a poster boy for the New Russia, could threaten the country’s fragile economy
By Christian Caryl

If anyone embodies Russia’s transformation from financial pariah to new economic star, it’s 40-year-old Mikhail Khodorkovsky. Not long ago he was just another post-Soviet business tycoon, getting rich quick in dubious privatizations and trampling on minority shareholders.

THEN HE GAVE himself a makeover. He engineered a management revolution at his flagship company, the oil giant YUKOS, and watched production figures spike. He embraced good corporate governance, and foreign-portfolio investors piled in, raising the stock-market valuation of his company to unheard-of heights. Last but not least, he hired a host of Western experts to handle his PR. These days he’s a welcome guest among the world’s business elite—and in Washington, too, where he has contributed generously, among others, to conservative think tanks linked with the Bush administration.

It’s been quite a roller-coaster ride, and it’s evidently not over yet. These days the man who should be basking in his newly acquired status as Russia’s richest tycoon is fighting for his professional life. Starting with the arrest of one of his key associates on July 2, Khodorkovsky and his company have found themselves warding off a flurry of searches, official threats and criminal charges ranging from embezzlement to murder. Needless to say, the attacks on YUKOS aren’t simply motivated by the government’s eagerness to pursue wrongdoing. In fact, the ferocity of the affair has far more to do with a lingering conflict between Yeltsin-era oligarchs, their supporters in the government and a group of parvenu rivals who have risen to power on the coattails of Vladimir Putin. Those Putin confidantes—many of them, like the president, alumni of the old KGB—evidently spied an opening when Khodorkovsky openly declared that he was paying money to political parties that are competing with the Kremlin’s own candidates in upcoming parliamentary elections.

The mess has sent shock waves through an international investor community that was just beginning to trust in Russia’s newfound political and economic stability. Since the affair started, the once high-flying Russian stock market has lost some $20 billion, around 17 percent of its value. The worth of YUKOS itself has slid by nearly a quarter, from a high of $31 billion in June to $25 billion last week—knocking it from its place as the country’s biggest company in terms of market capitalization. For the first time in years, newly released Central Bank figures suggest that capital flight might be picking up again, indicating that worried investors are opting to move repatriated funds back offshore.

Nor is that all. Khodorkovsky has been a prime moving force behind the much-heralded energy dialogue between Russia and the United States. The growing possibility that he, too, could end up behind bars is casting a pall over that project, just weeks ahead of a high-level energy summit planned in Moscow for September. That’s probably the main reason why the U.S. ambassador in Moscow has publicly taken Khodorkovsky’s side in the dispute. A State Department official speaks of “very strong concern among the business community in the United States.” “Khodorkovsky is the poster child for the new Russia,” says a former U.S. government official. “Now you can put bars on the picture.”

How did it come to this? The first strong indication that something was up came in the spring, when a hitherto little-known think tank caused a stir by issuing a report accusing Russia’s most powerful business tycoons of staging a “creeping coup” against the Kremlin. Some Moscow analysts accuse the think tank’s director, Stanislav Belkovsky, of carrying out the job at the orders of a cabal of former KGB officers in Putin’s immediate entourage. Belkovsky denies it. (“Do I have contact with them? I wish I did,” he says.) What matters, though, —is that the report landed on the desk of none other than the president, and a few weeks later he used the occasion to issue the oligarchs a public warning reminding them of the fate of two others among their number, Vladimir Gusinsky and Boris Berezovsky. Both men now live in exile, their punishment for failing to follow the president’s advice that they stay out of politics. “As for those who do not agree with this position,” said Putin, “there’s neither sight nor sound of them now.”

Among other things, Khodorkovsky’s plans to merge YUKOS with Sibneft, potentially creating the world’s fourth-largest oil company, have excited suspicion among denizens of the Kremlin who were already worried about the oligarch’s growing power. As head of a giant like that, Khodorkovsky would dominate Russia’s energy industry—and, by extension, its government, considering that the national budget depends on revenues from oil and gas.

Rumors that Khodorkovsky has been in merger negotiations with foreign oil majors (including ExxonMobil) have provoked the “statists” in Putin’s entourage even further. “Economic liberals want integration with the West,” says commentator Aleksei Venediktov of radio broadcaster Ekho Moskvy. “These people don’t want that at all.” The aggressiveness of Khodorkovsky’s lobbying for a new pipeline that would make it far easier to deliver oil from western Siberian fields to consumers in the United States—a centerpiece of the U.S.-Russian energy dialogue—has also angered some in the Kremlin, especially those wary of America’s growing presence in Central Asia, Russia’s traditional geopolitical stamping ground.

So how can the standoff be broken? As uncertainty about Russia’s political stability grows at home and abroad, rumors abound of possible ceasefire agreements. But last week YUKOS foes scorned an opportunity to de-escalate by refusing to grant bail to Platonov Lebedev, the Khodorkovsky right-hand man whose arrest started the whole imbroglio. (A YUKOS security officer also remains in jail on murder changes.) Khodorkovsky’s own rhetoric has grown more intransigent; some analysts warn that the loud support of his Western friends may have only helped his opponents. Meanwhile, Putin himself has remained ominously silent. Khodorkovsky has been warning his employees that the fight could continue for a year or more. Needless to say, that’s not exactly music to the ears of foreign investors. They’re now watching with dismay as Russian politicians have begun to discuss the possibility of a sweeping review of the privatizations of the 1990s—potentially calling into question the ownership and management of Russia’s entire economy.

A lot depends on what the attackers ultimately want. Commentator Venediktov argues that the security-service contingent in the Kremlin is aiming for a Soviet-style revanche by wiping out the oligarchs, cutting back on cooperation with the West and gearing up the military-industrial complex. “They don’t care if foreign investors are worried,” he argues. “It’s the Soviet model of thinking. They’re sure that the West will always want our oil and gas no matter what.” Others, like Sergei Markov of the Moscow Institute for Political Studies, say that Putin’s cronies simply aim to show the oligarchs that their proper place is in “subordination to the state,” not least in big investment decisions like the pipeline.

As for the man who started it all, Stanislav Belkovsky may be echoing—or anticipating—views in the Kremlin when he suggests that the oligarchs should be forced to pick up the bill for some planned reforms that will hit ordinary Russians the hardest. “Otherwise,” he insists, “I see the increasing possibility of a social explosion.” That, he argues, is because the oligarchs have been putting their wealth and power on show while many Russians slip deeper into poverty. With elections ahead, that could well turn out to be another reason for the Kremlin’s attack on YUKOS. It may be bad for business, but with polls showing that some 70 percent favor re-examining privatization, it also looks a lot like old-fashioned vote-getting politics.