#3 - RW 264
Chicago Tribune
July 13, 2003
Russia takes aim at giant oil company
Experts say probe politically driven
By Alex Rodriguez
Tribune foreign correspondent

MOSCOW -- About the same time that Russian President Vladimir Putin began preaching the virtues of good governance in a speech at the Kremlin on Friday, police donning masks and armed with automatic rifles were scouring the files of Russia's largest oil company in a raid the company called illegal.

The officers conducting a five-hour search of the archives building of Yukos Oil stormed in without showing a search warrant and without identifying themselves, company officials said.

A mile away at the Kremlin, Putin was telling a group of government officials and political and business leaders that economic growth and sound governing practices went hand in hand.

"A lot depends on state governance," he said, "qualification and professionalism of personnel."

The day's events added another bizarre chapter to the government's controversial investigation of Yukos, which will become the world's fourth-largest oil producer once it completes its acquisition of another Russian oil company, Sibneft.

Financing rival parties

The real target of the investigation, observers believe, is Russia's wealthiest man, Yukos chief Mikhail Khodorkovsky, who in an election year has openly begun financing two liberal parties opposed to the Kremlin.

That has angered a faction within the Kremlin bent on reining in the political activities of Russia's business elite, analysts say.

Khodorkovsky was summoned by Russian prosecutors for questioning July 4, two days after his longtime Yukos business associate, Platon Lebedev, was arrested on charges of theft of state property stemming from a 9-year-old privatization deal.

Since then, prosecutors have opened a tax evasion probe against Yukos, though the company paid $3.4 billion in taxes to the Russian government last year. Prosecutors have also begun investigating Sibneft's tax records.

The investigations have sent Yukos stock plummeting. The company's value has dropped nearly 20 percent since the end of June.

But depending on how the Kremlin resolves the row with Yukos, the episode could have far deeper ramifications for Russia and its economy.

Foreign investors had begun to look at Russia with increasing interest, in part because of positive milestones such as the British oil giant BP's acquisition of Russia's TNK oil company earlier this year and the Yukos-Sibneft deal.

The latter was considered to be even more important to potential investors because of the reputation Yukos had built for good corporate governance. The company is widely regarded as Russia's best-managed.

Politically unstable?

However, the Yukos and Sibneft investigations are sending signals that Russia remains far too politically unstable for investors to risk a sizable chunk of cash. A dearth of investment capital would hit Russia when it needs that money the most, especially to build new pipelines to boost oil exports, the fulcrum of the country's economy.

"The situation is really serious," said Valery Nesterov, an oil analyst for the Troika Dialog brokerage in Moscow. "Once again it suggests that Russia remains a risky country to do business in. With respect to the perception foreign investors have of Russia, damage has already been done. And that's a pity."

Economic troubles also could cost Putin some credibility with voters. In his annual address to the nation earlier this year, he made economic rebirth a key part of his vision for the country, promising a doubling of Russia's gross domestic product in 10 years.

Though he hasn't announced his candidacy, Putin is expected to run for a second term in March and win. However, his inability to make progress with economic and social reforms he has promised has begun to raise doubts.

Now the Yukos debacle raises another question: How much control does Putin, regarded by Russians as an iron-willed, no-nonsense leader, actually have over the Kremlin and his own staff?

"There's a broader question of whether Putin controls the show, and my answer is no," said Vyacheslav Nikonov, president of the Politika Foundation, a think tank in Moscow. "Putin is not the authoritative leader some would describe him to be. That perception of him is definitely wrong."

It is not known what role, if any, Putin has played in the Yukos case. However, it is widely believed that the security wing in his administration, his St. Petersburg allies known as the Chekists, engineered the attack on Yukos and Khodorkovsky.

Analysts believe Putin's St. Petersburg allies see Khodorkovsky as a threat as campaigns for Russia's December parliamentary elections take shape.

Khodorkovsky's financing of the liberal parties Yabloko and Union of Right Forces could help those factions muster a majority in Russia's legislature.

Though he has brushed off questions about his interest in a political career, Khodorkovsky has said he will leave the oil business in 2007, which would coincide with the 2008 presidential campaign season.

Deal with Putin

The investigations may also be a stern reminder to Khodorkovsky, one of the so-called oligarchs who got rich during the rigged privatizations of the mid-1990s, of the widely reported accord he and his fellow businessmen reached with Putin in 2000.

At the time, Putin agreed not to investigate those state sell-offs if the oligarchs agreed to avoid politics.

Most analysts believe Putin will have to intervene soon to minimize the damage.

Presented with an appeal from Russia's top industrialists to restore calm, Putin gave an indirect response. Never mentioning Yukos, he called "arm-twisting . . . no way to resolve the issue of economic crimes. We cannot base our actions on wild applause at someone being put away in a cell. That notion is absolutely wrong."

Meanwhile, the U.S. government, which sees Khodorkovsky as a bridge to stronger energy ties between Washington and Moscow, has sought clarification from the Russian government on the investigation.

"It's been clear for some time that there are competing interest groups within the president's [Putin's] immediate entourage who look for opportunities to advance their own agenda," a senior U.S. diplomat said. "Putin has a tough balancing act to play in keeping those groups under control."

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