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#4 - JRL 7269
Moscow Times
July 31, 2003
Official: Yukos Affair Is Tricky
By Catherine Belton
Staff Writer

President Vladimir Putin is determined to keep the escalating investigations into Yukos from evolving into a wholesale review of early privatizations, according to a senior official.

"We have to steadily move away from this situation without revisiting the results of privatization," the senior official told foreign journalists late Tuesday on the condition of anonymity. "The position of the president is that privatization will not be revised."

The official said Putin was well aware that the legal onslaught against the nation's biggest oil producer had rocked investor confidence and had a negative affect on the economy. But, he said, the tense standoff, which began July 2 with the arrest of core Yukos shareholder Platon Lebedev on charges of stealing state property in 1994, is proving difficult to defuse.

"It is very easy to get into such situations, but it is very difficult to get out of them," he said. "You can't tell prosecutors to close their eyes to possible violations of the law. But on the other hand, the political aim is to try and get out of this situation."

He admitted, however, that he had no clear answers as to how to put a lid on the affair.

"It is not a simple task, especially considering the upcoming elections and public opinion. It is clear the president has to listen to this," the official said.

In the meantime, he said, the situation has "gotten worse."

The attack on Yukos appears to have transformed the fortunes of its founder, Mikhail Khodorkovsky, almost overnight, as he has gone from the pro-Western wonder boy of the market to oligarch-under-siege. The sudden turnaround is a sharp reminder to foreign investors that Russia's business climate is far from stable.

The stock market has slumped 13 percent since the investigations began, and a decline in the Central Bank's foreign currency reserves suggests that domestic players are starting to take money out of the country amid fears the case could set a precedent for a new attack on property rights.

The official said that one of the main hurdles to solving the conflict is that "Russia is still stuck between the past and the future." We are in a country, he said, where for more than 70 years the population believed that all property should belong to the state, and when that state of affairs was overturned a rapid privatization was carried out on such an unprecedented scale that the legal system was ill-equipped to handle it.

While a handful of movers and shakers like Khodorkovsky enriched themselves in that transformation, much of the rest of the population plunged into poverty. Recent public opinion polls, conducted in the wake of the first moves against Yukos, show that the vast majority of Russians are still bitter about that. Indeed, one poll conducted by ROMIR found that 77 percent think that privatization should be reviewed.

Obviously, there are people in power who agree. And because the privatization laws that were in place in the 1990s left much to be desired, companies that were won in rigged auctions, like Yukos, are now open to attack.

"This means you can in practice challenge any privatization action and find fault, irregularities with some," the official said.

"On the one hand there may have been violations from the point of view of the law. But on the other when you begin to rake all this up, those actions may bring systemic damage to the current situation."

He said there were no guarantees that a similar attack could not be launched against Alfa Group's Tyumen Oil Co., which is embarking on a $6.2 billion merger with British supermajor BP that has been hailed as the hallmark of the stability that the Putin administration has thus far been able to foster.

"Nothing is guaranteed. This is a serious problem," he said. "There has to be guarantees for all. ... Otherwise there will be an endless redistribution of property." He added that the government was working on ways, possibly including an amnesty, to guarantee that property rights will not be attacked. But he conceded he had not discussed the idea of an amnesty with Putin.

Despite the massive waves of anxiety that the attack on Yukos has produced among investors, however, the official claimed he was at a loss to explain what had prompted the affair.

"One can only guess," he said. "Even Khodorkovsky can't identify the source of the threat."

He would only say that what seemed like a "campaign" against the company could have been launched by a group of law enforcement officials acting independently, or by competitors unhappy at the growing political and economic influence of Yukos. A third possibility, he said, is a combination of the first two.

"The situation with Yukos, when one day it suddenly turns out that the leadership of one of [Russia's] biggest companies has been accused of stealing, killing, violence, embezzlement and, on top of all that, tax evasion, looks like a campaign."

He said that prosecutors should not act on "political orders or those of Yukos' competitors. If this continues systematically it will destroy the political and economic system."

He claimed that Putin had not known the attack was going to be unleashed before it happened, and that it was "unlikely" it was launched by the Kremlin. Most analysts polled, however, suggested that an attack of such scope could not have been launched without a nod from the president.

The official, however, said blame for the attack lay partly on big businesses for frequently using law enforcement agencies in the past to drive out competitors. But he dismissed suggestions that it indicated a power struggle between the old elite that thrived under the freewheeling Yeltsin regime and the siloviki, who are former KGB men brought in by Putin. "This current situation is not due to [the siloviki] having strengthened their position. This looks more like the hand of individuals. This has been thought up by a group of omonovtsy that think they represent the interests of the country," he said, referring to the word for elite police.

He said Putin had already sent out all the "necessary signals," both in public and in private, that the affair is hurting the economy.

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