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#6 - JRL 7271
New York Times
July 31, 2003
Unease Rises Over Motives Behind Raids in Russia

MOSCOW, July 30 -- At first, investors shrugged off the series of raids on the periphery of the empire of Russia's richest man, Mikhail B. Khodorkovsky, as just a passing unpleasantness. Now, as the wrangle drags into its fourth week, investors are starting to worry.

Russian authorities began a series of investigations against allies and companies of Mr. Khodorkovsky in the three weeks beginning July 2. The charges include fraud, tax evasion and even murder.

Mr. Khodorkovsky says they are politically motivated and not legitimate.

Initially, investors dismissed the investigations as another Russian oddity, reminiscent of the behind-the-scenes political struggles that came and went so often during the presidency of Boris N. Yeltsin. But as the weeks pass, questions remain, and the uncertainty is leaving investors uneasy.

"The investor community is still saying that it's just a Russian mess," said Roland Nash, chief strategist at Renaissance Capital, an investment bank in Moscow. "They're saying it's just short-term politics. But they are saying that with less and less conviction."

The legal battle has served as a reminder of the realities of business in Russia. Property rights are far weaker than investors have let themselves believe over the last year of booming stock and bond markets and new foreign investment pledges. Just a decade into capitalism, the court system is still fragile and easily manipulated by rich and powerful Russians.

Russian officials are expressing concern. In a rare briefing on Tuesday night, a senior Russian official warned that irreparable damage has been done to Russia's reputation. The official, however, defended Russia's president, Vladimir V. Putin, saying he had no part in the raids.

Mr. Putin "reacted negatively," to the charges against Mr. Khodorkovsky's associates, said the official, who spoke only on condition of anonymity. "He understands that what has happened has delivered a systemic strike to the economy and has destabilized the political situation."

Though Moscow is swirling with theories about who is behind the raids, Mr. Putin's role has remained a mystery — he has not addressed the issue directly in public. The official blamed corrupt law enforcement agencies and powerful corporate enemies, and denied that the Kremlin was involved.

The uncertainty over who is behind the investigations is making managements of foreign companies increasingly nervous. The senior Russian official said British officials had contacted the Kremlin "to get assurances that everything is O.K." for a planned investment of $6 billion by BP, the oil company, which is due to be finalized soon. A spokesman for BP denied that calls had been made on BP's behest.

"We are starting to get questions back from the board," said a Western oil company executive, who is based in Moscow. "Other colleagues in the industry are having the same issue. We are concerned about potential damage to Russia's image and the consequent unwillingness of people to invest."

The investigations have come as a surprise to many investors here. Mr. Putin had achieved significant economic successes and relative political stability in Russia and the economy is the strongest it has been in 50 years. Investors are asking why Mr. Putin would be willing to risk tarnishing that record over a seemingly minor political skirmish.

"It's not a zero-political-risk country, even though it was priced as such a month ago," said Stephen O'Sullivan, co-head of research at the United Financial Group, an investment bank in Moscow.

For others, the investigations are are a reminder of how fickle fortunes in Russia can be. Mr. Khodorkovsky is one of Russia's most powerful men. His Yukos Oil Company is Russia's biggest producer. He is well connected in Washington, dining last year with Condoleezza Rice, President Bush's national security adviser, according to a spokesman for Mr. Khodorkovsky.

More recently, and with less success, he has been trying to secure the release of a partner, Platon Lebedev, from prison. Mr. Lebedev was recently denied bail.

"The law enforcement system can be turned on and off according to political necessity," said another Western oil executive, who is also based in Moscow. "That's something we knew, but we obviously don't like. It's one of the risks that you have to factor in doing business here."

Still, foreign oil companies like Royal Dutch/Shell, Exxon Mobil and BP are not changing their investment plans.

BP said that it was forging ahead with its $6 billion investment in a Russian oil company. A BP spokesman declined to specify when BP would transfer the funds to seal it.

As for the slowly tightening noose around Mr. Khodorkovsky's business interests, Peter Henshaw, a BP spokesman, said: "It's part of the general business background rather than something that's going to affect the deal. It has not changed our commitment one iota."

The market has not panicked. Russian stock prices are down by 10 percent since July 1, and are about equal to levels in May. The international rating agency, Moody's Investors Service, said this week that it might upgrade its rating of Russia's sovereign debt by the end of this year.

Yukos stock, one of the most popular Russian issues among foreign investors, has fallen by 20 percent, however.

"There's genuine concern, but not panic," said Mr. O'Sullivan of United Financial, who added that the number of clients listening in to his investment bank's analyst conference calls had increased to 100 from 30 to 50 usually.

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