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Kremlin-Yukos Struggle Has Investors Worried - 2003-10-31

The struggle pitting Russian President Vladimir Putin's Kremlin against the head of the huge Russian oil company Yukos has analysts and investors concerned about the future of political and economic reform in Russia.

Of most concern is the belief among some leading analysts that the methods being used in the case are reminiscent of the Soviet era.

In a pre-dawn raid on October 25, Russian secret service agents moved in to arrest Yukos Chief Executive Mikhail Khodorkovsky at gunpoint, while he was on a business trip in Siberia. Mr. Khodorkovsky was flown to Moscow for questioning, and shortly thereafter was charged with seven counts of tax evasion and fraud.

The dramatic move against Russia's richest man made him the third senior Yukos official to be arrested since the crisis over Russia's largest oil company erupted four months ago.

The dispute began in July with the arrest of major Yukos share-holder Planton Lebedev on theft charges, and a wave of raids on Yukos-affiliated companies by Russian prosecutors.

In an escalation of the crisis on Thursday, Russian prosecutors seized a controlling interest in the huge Russian oil company. And President Vladimir Putin's chief of staff, Alexander Voloshin, resigned, amid apparent disagreement over the tactics being used against Mr. Khodorkovsky.

Russian business leaders see the government's moves against Yukos executives as a disturbing trend in law enforcement that could lead to a massive redistribution of assets gained during the privatization of the 1990's, and, they say, economic calamity.

Others are more concerned with the political implications of the government crackdown. On Friday, Russian Prime Minister Mikhail Kasyanov said he is 'deeply concerned' about the government's seizure of the Yukos shares.

Mr. Kasyanov told journalists the seizure of shares in a private company traded on the Russian stock market is a new phenomenon, the consequences of which are difficult to define.

One consequence of the government's recent actions is clear. Russia's long-rising stock market suffered deep losses four days running, after Mr. Khodorkovsky's arrest, and trading was forced to halt briefly for the first time since the Russian financial collapse of 1998. The market rebounded somewhat on Friday.

President Putin has come under increasing pressure to rein in the prosecutor's office, but he has refused, saying the prosecutors are acting within the framework of Russian law.

Mr. Putin says everyone is equal before the law, regardless of how much money they have. Otherwise, he asks, how will Russia defeat organized crime and corruption, or teach its citizens that they must pay their taxes?

But many observers see the recent arrest and jailing of Mr. Khodorkovsky as retaliation for his support of opposition parties running against President Putin's allies in parliamentary elections scheduled for December.

Political analyst Sergei Markov of the Moscow Institute of Political Studies dismisses President Putin's suggestion that Mr. Khodorkovsky's arrest had anything to do with taxes. He says it is all about a show of state power.

Mr. Markov says, if the issue were taxes, everyone in Russia could soon expect to be jailed. He says some 10 million people are in violation of the law in Russia, where paying taxes is the exception not the rule. Mr. Markov says this is really nothing more than President Putin and his power structure showing a strong hand.

The question on the minds of many analysts and Russia-watchers now is, can the dispute be stopped, before it spirals out of control and damages Russia's economic and political reforms?

At the Carnegie Endowment's Moscow office, analyst Lilia Shevtsova is not optimistic.

Ms. Shevtsova told Echo Moscow Radio this week that it was clear to her that Mr. Khodorkovsky's arrest could not have happened without President Putin's approval. The trouble is, she says, other factors can cause events to roll out of control, like an avalanche. And, Ms. Shevtsova says, stopping an avalanche can be difficult.

She also says politicians and investors in the West are tired of what she calls the endless crisis going on in Russia. Ms. Shevtsova says many executives in the United States and Europe perceive the recent Russian behavior has been 'unpleasant,' and she says this does not bode well for future foreign investment.

Political analyst Sergei Markov takes a different view. He says there are a lot of ways out of the Yukos crisis.

Mr. Markov says one possible way out of the dispute would be for President Putin to restore the balance of power between the two rival groups in the Kremlin, the one seen as representing bureaucratic state interests, and the other supporting big businesses like Yukos. He also says large Russian companies should agree to operate within the law, and to take on some social responsibility, which might placate their critics in the Kremlin.

But for now, the standoff continues. Forty-year-old billionaire Mikhail Khodorkovsky is behind bars at Moscow's Matrosskaya Tishina prison, where he is served a simple fish soup for breakfast and is allowed one hour each evening to exercise outdoors.

Mr. Khodorkovsky's lawyer, Anton Drel, has filed an appeal against the Moscow court, which recently upheld the prosecutor general's order to keep the Yukos billionaire jailed until at least the end of this year.

Mr. Drel says his client has no regrets about anything he has done, and is not sorry he chose to stay in Russia to fight the charges against him, rather than flee into exile as some other Russian tycoons have done.

Mr. Khodorkovsky's bravado is rapidly turning the once reviled oil magnate into a bit of a cult figure in Russia. In a commentary this week, one Russian politician suggested that the longer Mr. Khodorkovsky sits in jail, the more popular he will become, and the more his political power will rise.