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Oil Magnate's Arrest Creates Waves in Russia - 2003-11-05

Russian prosecutors arrested the country's richest man and then seized a major share of his company’s stock. President Vladimir Putin’s top aide resigned in protest, and the U.S. State Department criticized the moves. Does the arrest of Russia’s wealthiest citizen mean Russia is discarding reform? VOA's Jeff Lilley talked to some Russian analysts about their views.

The Russian oil company Yukos has a glossy magazine and a sleek, 20-story headquarters in downtown Moscow. It also has a reputation as Russia’s most progressive company with transparent accounting and state-of-the art technology. In short, Yukos is the biggest symbol of Russia’s new capitalism.

But Yukos took a big hit last month when its president Mikhail Khodorkovsky was arrested after a lengthy investigation. He is now sharing a Moscow jail cell with two criminals and faces up to ten years in prison if convicted of massive tax evasion and fraud. Earlier this week, Mr. Khodorkovsky resigned as chief executive, apparently to separate his company from his legal troubles. Russian prosecutors say Mr. Khodorkovsky’s arrest is a step forward in the fight against corruption.

But some Russian analysts say the case against Russia’s most prominent businessman is politically motivated and unlawful. They believe Mr. Putin saw Mr. Khodorkovsky as a threat in the run-up to parliamentary elections in December and presidential elections next March. The Russian President has already shown he won’t tolerate rival power sources. His government has forced two other vocal businessmen to leave Russia and closed down their media outlets.

Nikolai Zlobin, Director of Russia and Asia programs at the Center for Defense Information in Washington, says big political changes are underway in Russia. “I wouldn’t be surprised if the arrest of Khodorkovsky will be just the beginning of changes in Russian political life, which we will see in the next six months in the struggle for the Duma and the presidential election next March and, of course, the struggle about shaping a new Russian government and foreign policy team,” he says.

Who is Mr. Khodorkovsky and how did he get so wealthy?

Marshall Goldman, a professor at Harvard and author of The Piratization of Russia: Russian Reform Goes Awry, says you have to go back to the last days of the Soviet Union for an answer. That’s when Mr. Khodorkovsky and some friends took advantage of reforms under then Soviet president Mikhail Gorbachev and started selling computers in the late 1980’s. Then, they started a series of companies, including a bank. Soon they had access to huge amounts of money. An opportunity to invest came in 1995 when Russia was short of cash. The Yeltsin Government and some of the new financial moguls made a deal. “The government was having trouble collecting taxes and could not pay expenditures,” says Mr. Goldman. “So a group of banks offered to lend the government money in exchange for which they took as collateral shares of stocks of some of those companies that had not yet been privatized. The government, of course, never collected the taxes, and, therefore, the bankers said, ‘We’ll take the collateral.’”

Through a series of auctions that most analysts agree were rigged, the banks held onto the shares of stock. In the case of Yukos, Mr. Khodorkovsky’s bank ran the auction while another of his companies was the highest bidder. Mr. Khodorkovsky became president of Yukos Oil Company by paying $300 million. In just a couple of years, the company was worth eight to ten billion dollars.

Analysts say it’s not clear to what extent Mr. Putin is directing the campaign against Yukos or being pushed to take action. Mr. Zlobin of the Center for Defense Information says the Russian President is in the middle of a power struggle inside the Kremlin between so-called “statists,” who favor a strong central government, and liberals, who support a stronger role for business in Russia’s national life.

One dispute is over who will own Russia’s natural resources. Marshall Goldman says the “statists,” many of whom are security service veterans, became alarmed that Russia is losing control of its oil and gas resources after British Petroleum acquired half of Russia’s third biggest oil firm and two American oil companies expressed interest in buying a major share of Yukos. Last Thursday, Russian prosecutors effectively blocked that deal by freezing a major portion of Yukos’ shares. “These people around Putin -- about one quarter of his staff now are former KGB people from Leningrad, where Putin also came from -- are becoming increasingly concerned that these oligarchs seem to be more willing to sell shares in their companies, in some cases 50 percent or more, to Western oil companies,” says Mr. Goldman. The security people in the Kremlin were apparently also alarmed by Mr. Khodorkovsky’s political activism, which defied Mr. Putin’s advice to stay out of politics in return for the government leaving his company alone. This year, Mr. Khodorkovsky began financing two opposition parties, and he has hinted at a political future for himself.

Mr. Khodorkovsky has also carved out a sympathetic image outside Russia by donating to charity and running his business along Western accounting practices. Bill Maynes is president of the Eurasia Foundation, the first Western recipient of Mr. Khodorkovsky’s generosity: one million dollars last year to support small business and community development in Siberia. “What distinguished Yukos was that they were the first in the Russian environment to see that this was part of a successful corporate strategy,” says Mr. Maynes. “They began to provide the kind of reporting that western investors require in order to have assurance in a company’s books. They instituted a number of policies of transparency. They launched a corporate giving campaign. All of these were part of a strategy by Yukos to become a normal, successful multinational company, and they made extraordinary steps forward in doing that.”

Mr. Maynes says Mr. Putin has to take some countermeasures to reassure the West about his intentions because there is a fear the privatization deals of the 1990’s will be reexamined and the assets redistributed. While he acknowledges that Mr. Khodorkovsky’s wealth might have been ill-gotten, he says unraveling the whole process could have a devastating effect on Russia’s economy.

Other analysts think Mr. Putin will keep his promise not to annul the 1990’s privatizations. They say his attack on Mr. Khodorkovsky is just a strategic move to help ensure his reelection. Under this explanation, Mr. Putin is consolidating power without sacrificing the larger goals of reforming the Russian economy. “I can’t imagine that he has a strategy by which he would actually try to clean up the way privatization was done because that would mean he’d have to reach into the regions and go after smaller fish, and it doesn’t look to me that he’s prepared to do that,” says Robert Legvold, a professor of political science at Columbia University. “So I am not quite sure what rectifying the past in terms of the massive asset stealing on the part of the major oligarchs is going to accomplish. I still believe that its principal purpose is in the political realm. It’s not to clean up privatization.”

President Vladimir Putin is expected to win reelection. For his second term, he says he wants to deepen economic reforms, a stand which would seem to rule out any extensive attacks on Russia’s most prominent businessmen.