#8 - RW 267
Boston Globe
July 31, 2003
THE OLIGARCHS OVERSSTEP THEIR BOUNDS
By Marshall I. Goldman, Associate Director of the Davis Center for Russian and Eurasian Studies and author of The Piratization of Russia: Russian Reform Goes Awry

Its not easy being the present day president of Russia, especially for someone like Vladimir Putin whose prior work experience has been almost entirely in the ranks of the KGB. Loyalty to the ideals of the KGB as well as to past comrades inevitably clashes with the much less structured and unrestrained ways of the market.

Moreover the emergence of a pluralistic political system with power emanating not only from the party and the government but also from a civil society and business community is disorienting for former party and KGB officials who grew up within the confines of a disciplined vertical chain of command. The development of these new rival centers of power controlled by individuals, the new oligarchs, who in the old system were often on the fringes of society, must be particularly disconcerting. Before the collapse of communism, some of these soon-to-be oligarchs even had run-ins with the police over what the old regime designated as economic crimes. What then could be punished with a death sentence today is simply considered normal business, including the way these oligarchs seized former state assets at what could be considered an obscene discount. In a rigged bid, Mikhail Khordorkovky, for example, paid only $300 million for Yukos Oil. Today through no fault of Mr. Khodorkovsky, Yukos is worth upward of $15 billion (a three-fold increase in oil prices sent oil company stock prices soaring). That makes Mr. Khodorkovsky, its CEO, worth an estimated $8 billion

As a measure of how fast and radical this transition has been, in the 2003 Forbes Magazine list of world billionaires, there were 17 from Russia. That includes Khodorkovsky and Roman Abramovich, second on the Forbes Russian list with an estimated $5.7 billion. Abramovich just used some $240 million of his money to purchase the Chelsea Football Club in London. Only three other countries had more billionaires; not bad for a country where in 1985, no one had assets worth more than a few thousand dollars. No wonder many former members of the Soviet elite are uncomfortable with, if not envious, of these new oligarchs.

Uneasy he may have been, but upon succeeding to the presidency in March 2000, Putin also came to understand that the country needed some stability after the down and up years of the Yeltsin era. Fortunately for Putin, the three-fold jump in oil prices benefited not only Russia's private oil companies, it also triggered an economic recovery. Were the state to attempt any large scale renationalization of these companies, that economic recovery could be jeopardized, if not reversed. With this in mind, Putin proposed a political-business compact whereby he would agree not to revisit or undo the privatization results of the Yeltsin era on the condition that the oligarchs abstain from interfering in politics. "Render unto Caesar. . .

For a time this arrangement worked reasonably well. While economic growth hit 10% in 2000, in more recent years it slowed a bit but at 7% so far this year, it is still at a rate higher than that of most of the other industrialized countries.

The problem is that Putin's political-business compact was unrealistic. As the Russian oligarchs began to accumulate vast sums of money, they looked for new fields to conquer or at least influence. Violating Putin's arrangement, both Vladimir Gusinsky and Boris Berezovsky allowed or encouraged their TV networks to criticize Putin's policies in Chechnia and his failure to respond properly to the sinking of the submarine, Kursk. Shortly thereafter Gusinsky was called in for questioning and arrested. Once released, Gusinsky fled into exile followed soon after by Berezovsky. Unlike the Yeltsin years, both quickly discovered it is disloyal if not heresy to criticize the President (or the Czar or the General Secretary) as well as a violation of the political-business compact.

The harassment of Mr. Khodorkovsky and the arrest of Roman Lebedev, one of his senior Yukos associates, appears to be following a similar pattern. Lebedev was detained and Yukos was raided ostensibly because of questionable, if not illegal, privatization practices in the 1990s. While virtually all such takeovers of state property at the time involved trampling on the law, most observers believe that the real reason for the crackdown on Yukos is because Mr. Khodorkovsky broke the compact with Putin. After Putin's anticipated reelection as president in March 2004, Khordorkovsky fears that Putin will move to recapture some of the privatized companies or at least raise taxes. To prevent this, Khodorkovsky openly began to dispense tens of millions of dollars to political parties such as Yabloko and SPS, which were opposed to Putin. According to some rumors, this even included gifts to the Communist Party.

To those around Putin, such disrespectful moves were too much to ignore. As a hint of what was to come, in early June a "research study" suddenly appeared that charged Khodorkovsky and some other oligarchs were engaged in a plot to weaken the prerogatives of the president while increasing the influence of the oligarchs.

Interfering in politics was provocative enough but what may have seemed to be even more brazen to Putin and those KGB comrades around him was Khodorkovsy's effort to gain ownership of an oil company which had come under the control of a former KGB associate of Putin. Hadn't Khodorkovsky seized enough for himself? That at least seemed to be the reaction of yet another Putin buddy and former KGBnik, Igor Sechin, presently the deputy head of the Presidential Administration in Putin's office. In a secretly taped phone call, Sechin took it for granted that former KGB officials have as much if not more right than these nouveau riche oligarchs to take over what was state property and operate it for their own benefit.

Based on the harassment over the last few days of several of the oligarchs , it appears that the authorities around Putin are now prepared to go after anyone who steps the least bit out of line, even if it does not involve political interference. Spend $240 million to buy a football team in London and you will be visited by the tax authorities and attacked publicly for not spending that money on a Moscow football team.

That former members of the KGB now want to participate in the market economy may be a sign that the stalwarts of the old regime are no longer clinging to the past. But the downside in this high stakes contest for control is that these shenanigans have turned off many foreign investors who had only just come around to accepting the argument that Russia was safe for investment.

Undoubtedly by allowing this harassment, Putin has shown the oligarchs that he is still the boss. But this is bound to impede the high growth rates that Putin has been seeking and the increased investment, both domestic as well as foreign, that Russia needs to sustain that growth.

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