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#7 - JRL 7269
The Times (UK)
31 July 2003
From Russia with fear
Putin must act before business loses confidence in him

Russias relationship with business and the men who control it has been volatile for a decade. The latest confrontation between politicians and corporate oligarchs has become so intense that the latter offered yesterday to pay more in taxes and donate to charity if it would ease the situation. This latest saga started when the giant oil company Yukos came under high-profile attack by the Russian bureaucracy. Sudden, threatening, police raids and official investigations into many aspects of Yukoss business and especially the arrest of a leading shareholder on charges relating to a 1994 privatisation deal have caused panic among Russian and Western business people. The attack on Yukos, the property of Russias richest man, Mikhail Khodorkovsky, has been interpreted as an attack on Russian capitalism itself by a group with reason to fear that the Kremlin may also want to examine the murky sources of its wealth.

Any discussion of privatisation in Russia is bound to make strong men quake. The defining moment of Russias transition to capitalism was in 1994-95, when a large number of state companies were transferred into private hands. These dubious deals, among insiders, at knockdown prices, made a very small number of people fabulously rich and were always considered highly questionable. Yet, in the years since, these unlovely privatisations have become the basis on which Russias business is done. Any revision of the status quo could only do harm.

Hand-wringing assurances by the Prime Minister (a week ago) and by an unnamed top Russian official (who briefed the media on Tuesday evening) that President Putin has no intention of revisiting privatisation have failed to calm these fears. In particular, the comment by Mikhail Kasyanov, the Prime Minister, that the scandal was hurting Russias investment climate backfired. It so annoyed the Prosecutor-General that he told the Prime Minister to mind his own business. That sharpness of tone caused still more panic.

President Putin has no great love for the oligarchs, or billionaires, who won the privatisation gamble and became Russias business leaders. Two of them, who had media empires that could be deployed against the new President, were worried enough to flee abroad when he first came to power. But he did a deal with the rest that was supposed to give Russia the stability which, more than anything else, she needed if free-market democracy was truly to take root. Under the bargain, the oligarchs past excesses would escape government scrutiny and, more importantly, their assets would not face renationalisation; in return, they were to concentrate exclusively on their businesses in Russia, keep their money in the country and drop all thoughts of influencing politics. Until now, it has worked.

Among the many conspiracy theories seeking to explain why Yukos has fallen foul of officialdom, and why now, the favourite one is that Mr Khodorkovsky has broken the deal by backing Putin opponents in this Decembers parliamentary elections. Others see it as a power struggle between a Kremlin group loyal to ex-President Yeltsin and the staff Mr Putin has drawn from his own background in the security police.

Mr Putin must end this awkward situation now. The top official briefing on his behalf claimed that a police investigation had got out of control, leaving the President in a difficult situation, unable to stop the investigation. More needs to be said. Yukoss share price has fallen. Foreign investors fearing capital flight and loss of property rights in Russia are talking about taking their money elsewhere. The President must raise his own voice to call off the hounds.

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