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Moscow Times
April 22, 2005
Aven Urges State to Liberalize the Economy
By Catherine Belton
Staff Writer

Joining a strengthening chorus of warnings over the state's growing grip on the economy and political life, Alfa Bank president Pyotr Aven urged the government to quickly move forward on liberal reforms and take steps to share its vast oil-fueled wealth with the population.

Otherwise, he said, the state could eventually face a backlash similar to the one that struck Iran in its 1979 revolution.

"There has to be a serious liberalization of economic life," Aven said in a wide-ranging interview this week. "We have to really give people the opportunity to earn money.

"The situation here is not revolutionary. But very often in the fastest-growing economies, the government loses the trust of the people," he said.

Aven's comments came as pressure appeared to mount on businesses owned by Alfa Bank's parent company, the multibillion-dollar oil and telecoms holding Alfa Group. TNK-BP, the 50-50 venture between British Petroleum and part-Alfa-owned Tyumen Oil last week said it had received a back tax claim for nearly $1 billion.

BP president Lord Browne is to meet with President Vladimir Putin on Friday together with Aven's partner, Alfa Group founder Mikhail Fridman, to discuss the tax claim and the country's overall investment climate.

Speculation even swirled on Thursday that Alfa Group's owners could soon be the target of a Yukos-style criminal probe, but the rumors were later flatly denied by spokespeople for both the Prosecutor General's Office and Alfa Bank.

The nearly two-year attack on Yukos has cast a massive shadow over the entire business climate, setting a precedent for a partial state takeover of one of the country's biggest oil majors via massive back tax claims and the jailing of one of the country's most powerful businessmen. Even though the case has been portrayed by the Kremlin as isolated, it has led the way for increasing state interference in the economy and mounting investor fears over arbitrary action from the state. As a result, growth and investment rates have been falling and capital flight has soared.

The verdict in the fraud and embezzlement trial against Yukos owner Mikhail Khodorkovsky is expected to be handed down next week.

On Thursday, an organization owned by oligarch-in-exile Boris Berezovsky distributed what it said was a file held by law enforcement agencies alleging that Fridman and his partners had formed an organized criminal group to defraud the state in the privatization of Tyumen Oil and in transfer-pricing schemes -- charges very similar to those filed against Khodorkovsky. The organization said there was a group in the Kremlin intent on pursuing Alfa over the claims.

Both Alfa and the prosecutor's office dismissed the report as a provocation. Alfa said the report contained "blatantly false information" and was aimed at "undermining trust between big business and the state authorities."

Berezovsky has recently publicly battled with Alfa over a libel suit that it filed against his Kommersant newspaper.

Ever since the state launched its attack against Yukos, big business has been largely silent, making few comments to the press on where they think things are headed. But as much-anticipated government reforms get bogged down and a slew of recent back-tax scares start to add up, jittery businessmen are beginning to make themselves heard.

The Kremlin has jitters of its own after recent uprisings toppled the leaders of neighboring Ukraine and Kyrgyzstan and pensioners staged massive protests at home over botched social reforms.

At the Russian Economic Forum in London last week, Aven expressed concern over the government's lack of movement on the economy in the past year and said it was running the risk of losing popular support for reforms. TNK-BP CEO Robert Dudley, in rare critical comments, told the forum that the state's increasing role was making life difficult for foreign investors.

Aven was a key member of the group of Western-oriented economists at the forefront of liberalizing the planned Soviet economy in the chaotic early years of President Boris Yeltsin's regime. After a year in government as head of the Committee for Foreign Economic Trade, he formed a partnership with Fridman in founding Alfa Bank.

After mostly steering clear of open controversy with the government, Alfa Group businesses have recently faced a slew of back-tax scares.

Sitting in his spacious office, which is only meters down the hall from Fridman's, Aven, 50, stepped back from directly criticizing Kremlin policies. But he warned that attempts to further strengthen Moscow's hegemony over its far-flung regions could open a Pandora's box with terrible consequences.

"A push for greater centralization is a very dangerous policy," he said, citing recent rallies in Bashkortostan against regional leader Murtaza Rakhimov and a recent police riot as an example of increasingly vociferous reaction to the over-centralization of power.

He warned that a prevailing imperialist mentality for superpower status and a push to keep Russian Orthodoxy as the state religion even though 20 percent of the population are not Orthodox believers could lead to a breakup of the country. "This superpower thinking and the wish to see Russia as a hegemony led first of all to the collapse of the Warsaw Pact and then the Soviet Union," he said. "Potentially such a wish for domination over the regions out of the center ... could lead to breakup. I hope that such thinking will be overcome."

In the wake of the Beslan hostage crisis, Putin announced radical measures to increase Kremlin control over the regions by, among other things, canceling gubernatorial elections.

"I don't want to comment on the actions of the president. But I think that Russia needs a deep federalism ... to be run more as a confederation," Aven said.

Even though he warned against prevailing trends, he insisted that Alfa Group would not attempt to bail out of Russia. "Russia remains the center of our main interests," he said.

The holding, however, has been increasingly looking to expand its activities outside Russia, recently bidding more than $3 billion for a 27 percent stake in Turkey's biggest mobile phone company, Turkcell, and eyeing assets in Ukraine.

Putin's recent bid to regain the support of big business by offering to forgive and forget the controversial privatizations of the 1990s was "very important," Aven said. "It brings the stability that we've lacked, especially for bringing in foreign investment," he said.

He said, however, that even as living standards are increasing after five years of high oil prices, a rapidly growing income gap between the richest and poorest segments of society could provoke increasing resentment and anger over social injustice.

"All this provokes frustration and frustration against those in power," he said. "The process of enrichment is not equal, and there could be a growing feeling of social injustice among the people."

The country's wealthiest 10 percent earned about 15 times as much as the poorest10 percent last year. In developed countries, the norm is less than five times, and when the coefficient is over 10, normally there are outbreaks of social unrest, according to a recent Alfa Bank research report.

To combat the growing gap, the economy must be liberalized to open the way for more small and medium businesses to be formed, Aven said.

Otherwise, he said, the government might lose the public's trust and be threatened with a repeat of what happened in Iran. In 1979, fundamentalist Islamic workers and students left out of the oil boom toppled the profligate pro-U.S. regime of the Shah.

Even though Putin also recently called for an improvement in conditions for small and medium businesses, the government appears to be moving in the opposite direction. The state has been expanding its role in the economy through increasing state employment, a greater tax take, more bureaucracy and moves for greater domination over the oil sector via its takeover of Yukos.

State-controlled Gazprom appears to be bidding for greater domination over the energy sector with recent major moves into the oil and electricity sectors. "It seems to me that such a monopolization and expansion of state activities does not have much potential," Aven said.

He said Alfa was prepared to support pro-market forces in the future.

"We gave funding to the Union of Right Forces like many other business groups," he said. "This is not because [Anatoly] Chubais and [Boris] Nemtsov are our friends, but because this right-wing ideology is clear to us. They are our natural ideological allies and we are prepared to support the right wing somehow in the future.

"This does not mean that we have taken an opposition stance," he said. "But it is just a wish to have a right-wing force in place that would defend the interests of business, including ours."