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Moscow Times
June 21, 2004
The Case Against Optimism
By Yevgenia Albats

In Tashkent last Thursday, President Vladimir Putin announced that the "official authorities of the Russian Federation, the government and the country's economic authorities are not interested in the bankruptcy of a company like Yukos." Putin's remarks ignited the biggest stock market rally since he came to power. Yukos shares finished the day up 34.2 percent and the entire market followed in its wake. The MICEX and RTS indices rose 8.8 percent and 10.1 percent, respectively. Yet the president's long-awaited statement has also sown confusion and even some despair.

The big question now is whether the state will honor the contracts it has signed with businesses across the country or begin unilaterally voiding contracts on the grounds that they are unfair or illegal before proceeding with the wholesale redistribution of property. The answer to this question will determine Russia's future for years to come. The enforcement of contracts is the backbone of capitalism, after all, and an ironclad obligation for all but totalitarian regimes.

At present, two scenarios are possible, one optimistic and the other pessimistic.

The optimistic scenario assumes that Putin's goal in the Yukos affair is to bring the oligarchs to their knees and force them to pay the state the difference between the real market value of their companies and the rock-bottom prices they paid during the murky privatization deals of the 1990s. His goals would presumably also include forcing businesses to pay their taxes in full and to dispense with the practice of transfer pricing, which most often amounts to blatant cheating.

The pessimistic scenario, by contrast, assumes that whatever Putin and the Kremlin's spin doctors might say, the president's real goal is to place control of the most important sectors of the economy -- oil and gas, metals, telecoms and so on -- in the hands of the state and/or Kremlin insiders. In order to make this redistribution of property more profitable, the value of major companies would be artificially driven down by jailing the current owners and through bankruptcy proceedings. Once this strategy was unleashed against big business, it would only be a matter of time before medium and small business came under attack as well.

Which scenario is the more likely? Recent history provides little cause for optimism. Putin has been known to make all sorts of promising statements in the past that proved to bear little relation to the actual course of events and little if any impact on the activities of law enforcement and the judiciary.

The president famously could not get the prosecutor general on the phone when media magnate Vladimir Gusinsky was thrown in jail and forced to sign away his assets under threat of confinement in a prison cell with HIV-positive and highly violent cellmates. On other occasions, Putin has differed with law enforcement about the pretrial detention of businessmen accused of white-collar crimes, such as Mikhail Khodorkovsky, who has been denied bail and held in prison since his arrest last October.

The optimistic scenario also has the potential to create a great deal of uncertainty for the ruling elite, and could even undermine Putin's hold on power. By relying on the bureaucracy for support to the exclusion of other institutions, Putin has forfeited control over Russia's army of government officials, who are all too eager to assert their control over business.

To ensure the loyalty of his supporters, particularly those in uniform, Putin has been forced to cede both property and power to satisfy their ambitions. Moreover, announcing an amnesty regarding the privatization deals of the 1990s and allowing the oligarchs to buy their way into the regime's good graces using the fortunes they have amassed over the past decade would lead to the rise of a powerful opposition pitted against Putin's bureaucratic state. It would only be logical for business leaders to assume that the state, having once used coercion and force to gain control of a privately held company's assets, would do so again in the future. And in the absence of an independent judiciary capable of defending property and ownership rights, no contract will be set in stone.

It has become all too clear, even to outsiders, that Putin, not the courts or the prosecutors, will decide the fate of Yukos and its former CEO. Given the total lack of transparency in the Kremlin's decision-making processes, we can only guess what may have prompted Putin to make his reassuring remarks in Tashkent. Nor is there any way to gauge the president's sincerity. It may just as well turn out that Putin failed to convey his message to the Prosecutor General's Office, or that the Kremlin couldn't get the judge on the line.

In the end, the optimistic scenario would come as a pleasant surprise, but it would fundamentally contradict the system that Putin put in place during his first four years in the Kremlin.

Yevgenia Albats hosts a political talk show on Ekho Moskvy radio on Sundays.