#3 - RW 268
Houston Chronicle
August 7, 2003
Charges tell of Russian intrigue
Some see Kremlin threat to oil giant, privatization
By REBECCA SANTANA

MOSCOW -- Mikhail Khodorkovsky once had everything going for him. He was Russia's richest man and controlled one of the country's largest energy companies, Yukos. He had a reputation in the West as a philanthropist and good businessman.

But after a series of legal attacks against his company and some of its employees that seem to be a concerted campaign against the 39-year-old entrepreneur, the futures of the company and Khodorkovsky seem less rosy.

Some political analysts and liberal Russian politicians say the campaign, which appears to be organized from within the Kremlin, has called into question President Vladimir Putin's commitment to economic reform and democracy.

Yukos' legal problems began July 2 when Platon Lebedev, a close associate of Khodorkovsky and the head of Menatep, a company that controls about 60 percent of Yukos, was arrested on fraud charges relating to the 1994 privatization of a fertilizer company.

Next, Yukos was accused of evading taxes. Then, its head of security was implicated in the slayings of several business associates. Yukos officials have denied all the charges.

In Russia, where the courts are rarely independent and, some critics believe, easily corruptible, legal attacks like the ones against Yukos usually indicate a battle is being waged by a competitor or powerful government officials.

The company's legal troubles have drawn the attention of Western investors and government officials who worry that it is the result of political pressure intended to cut Khodorkovsky down to size.

As Russia's largest oil company, Yukos has proven oil reserves of nearly 14 billion barrels and gas reserves of slightly less than 8 trillion cubic feet, according to the company's Web site. In 2002, Yukos accounted for 18 percent of the oil produced in Russia and pumped out 1.5 million barrels during the October-December quarter of last year.

Khodorkovsky is also one of Russia's highest-profile business leaders, which some analysts say may have contributed to his company's problems. He's the driving force behind a pending merger of Yukos with Russian oil company giant , which would create the world's fourth-largest publicly traded oil company.

Recent press reports indicate Yukos has been in talks with ChevronTexaco to sell a minority stake in the Russian company.

Khodorkovsky has been giving money to opposition political parties, and there are rumors he wants to run for president. He has also been promoting the idea of increasing Russian oil exports to the United States and building a new pipeline to the Russian far north.

Longtime Russia watcher Michael McFaul, a professor at Stanford University, says Khodorkovsky was simply becoming too powerful to control.

"He's just a giant figure, a hundred Bill Gates," said McFaul. "Those who are truly loyal to Putin saw this rise of Khodorkovsky as something they had to do something about."

But who are the "truly loyal"?

Many analysts point to a group of bureaucrats who came to power with Putin and hold high-level positions within the Kremlin, the Russian security services and the prosecutor's office.

At the Moscow-based Foundation for Analytical Programs, Mark Ournov says some members of the faction simply missed out on privatization during the early '90s and now want to pressure men like Khodorokovsky to share the wealth. He says they also care more about controlling the country's large industries than allowing them to thrive.

Those behind this campaign see the dominance of private capital in certain industries, especially if this capital has close ties with the West, as a national security threat, said Ournov.

In Russia, most of the wealth has been concentrated into the hands of just a few oligarchs, who gained control of some of the country's main industries in murky privatization deals in the early 1990s. Many Russians, having lost their jobs and savings during the Kremlin's sell-off of state-owned industries, despise the oligarchs.

Khodorkovsky has transformed Yukos by increasing oil production, updating the company's Soviet-era technology, bringing in outside analysts and making the company more transparent to attract Western investors.

The changes came at a time when Putin was bringing stability to the country after years of chaos under former President Boris Yeltsin.

Since the legal attacks began, Yukos' stock price has fallen significantly, and the company's market capitalization has dropped by about $7 billion. Analysts say worried investors fear the legal battles could slow the company's growth or halt the Sibneft merger.

There are also concerns the attacks may be just the first step before a complete redistribution of wealth and reversal of privatizations during the Yeltsin era.

"Yukos is only the first target. If they are allowed to succeed, they will not stop at that," said Ournov.

Others say the incident is not a harbinger of privatization reversals, but they believe the case will drag on through parliamentary elections this December as a way to show that the Kremlin is tough on the oligarchs.

It's a tactic that could work. Slightly more than 70 percent of Russian voters said in a recent poll that they would not object to revisiting privatization.

But even if privatization is not reconsidered, the incident has reminded many that Russia is a young democracy, where concepts like rule of law or independent courts are still in their infancy.

Lilia Shevtsova, with the Moscow-based Carnegie Center, says she expects more battles between the business leaders and government officials who believe the state should be stronger than business.

"They will constantly fight for control, for money, because there are no independent institutions," said Shevtsova.

Putin has characteristically refrained from talking about the case, although in comments reported earlier this week by the Associated Press, a senior Kremlin official who did not want to be otherwise identified, said Putin did not support the campaign against the company and believes it is hurting Russia's image abroad. But, said the official, the Russian president cannot stop the legal attacks without appearing to be interfering in the judicial system.

Still, the situation and Putin's reticence are already worrying many U.S. officials, analysts and investors.

"What it signals," said Stanford's McFaul, "is that many people within the Kremlin have a very different perception of capitalism than Americans do."

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