#4 - RW 268
www.opendemocracy.net
August 7, 2003
Russia’s future in balance: Putin versus Khodorkovsky?
By Charles Grant
Charles Grant is director of the Centre for European Reform.

The unofficial pact between Russia’s parliament and its business ‘oligarchs’ has been an important element in the country’s recent political stability and economic progress. Now, Russia’s president Vladimir Putin is targeting executives of the giant Yukos oil corporation – including its ambitious head, Mikhail Khodorkovsky, interviewed here. Are both pact and progress now at risk?

President Vladimir Putin seemed to have a clear and successful strategy. He understood that in order to revive Russia’s strength, he needed economic growth. That required him to conserve the relatively open and liberal economy that Yeltsin had bequeathed him, and to create political stability. He also needed closer ties with the west in order to hasten Russia’s integration into the world economy. That did not mean adopting political liberalism: the Russian government has smothered TV stations that criticised the government. Nevertheless, after more than three years of the Putin presidency, its broadly pro-western orientation did not seem in doubt.

That is, until early July 2003, when state prosecutors started to investigate Yukos, the oil giant run by Mikhail Khodorkovsky, the richest man in Russia. Several Yukos executives are under investigation for crimes, including murder, that were allegedly committed in the 1990s.

Platon Lebedev, a banker, friend of Khodorkovsky and major shareholder in Yukos, is in prison. And the state prosecutors now appear to be targeting other ‘oligarchs’, including Roman Abramovich, who controls the Sibneft oil group and Chelsea Football Club, and is a major shareholder in Russian Aluminium; and Oleg Deripaska, the CEO of Russian Aluminium. These two are associated with the ‘family’, as the entourage of Boris Yeltsin, Putin’s predecessor as president, is known.

It is not in itself surprising that Putin, who faces legislative elections in December and a presidential election in the spring of 2004, chose to fire a warning shot across the bows of Yukos. For there has been a tacit understanding between the president and the oligarchs that he would recognise the property settlement of the mid-1990s – when many of them picked up privatised assets very cheaply – in return for their agreement to stay out of politics.

Mikhail Khodorkovsky has broken the terms of that understanding, by funding at least two opposition parties – the Union of Right Forces, led by Boris Nemtsov, and Yabloko, a liberal/social democratic party led by Gregor Yavlinsky. According to some reports, his associates have even given money to the Communists. In recent arguments over legislation affecting oil companies, Khodorkovsky has allegedly out-spent the Kremlin in his attempts to influence Duma members. And he has been said to talk, at least in private, of a future political career.

Almost everybody in Russia thinks the oligarchs are crooks. After all, some of them did not have to work particularly hard in order to become billionaires. And very few of them – Khodorkovsky is an exception – have put some of their money back into the community through spending on good causes. Bashing the oligarchs is popular with public opinion (almost all the oligarchs, including Khodorkovsky, are Jewish, but that is probably unconnected to the current moves against them).

A political threat to economic success

If the mere fact that Vladimir Putin has allowed the prosecutors to investigate Yukos is not surprising, his decision a month later to permit the investigations to escalate seems harder to explain. For the actions of chief prosecutor Vladimir Ustinov are now damaging the economy. Over the past five years, the Russian economy has been a success story. The devaluation of 1998 and the high oil price certainly helped. But more important has been the steady growth in business confidence, fostered by the stability that Putin has created, and the transformation of gangster-capitalists into relatively conventional businessmen.

Many of those who kept their ill-gotten gains in offshore bank accounts have been repatriating cash to invest in Russia. They have learned that the application of western standards of corporate governance increases the share price of their companies – and it may attract foreign partners. Yukos itself, once a very secretive company, has led the field in adopting western standards of transparency. In Khodorkovsky’s own words (at a Moscow School of Political Studies seminar on 26 July), “business is gradually decriminalising, people in the regions who wore pink jackets [ie, the ‘new Russians’] are now having children and thinking about the future of society”.

Moscow is a booming city, full of very rich people demanding western-style services. Some of the wealth has trickled down to a few regional centres. The economy as a whole has been clocking up growth rates of 6-7%, its best performance since the end of the Soviet Union in 1991. Although foreign investment in Russia remains meagre, BP’s decision to invest $6.8 billion in a deal with TNK, a Russian oil firm, suggests that foreign views of Russia’s prospects have become more optimistic.

But the attacks on the oligarchs, and above all Putin’s refusal to disown or halt them, have begun to erode these gains. The stockmarket fell by 13% after the legal moves, and Yukos shares by over 20%. Businessmen from Russia and elsewhere require stability and security before they invest in the country. They do not care very much about whether the country is democratic. But they do worry about the risk of the state interfering with property rights.

If some factions in the Kremlin are able to manipulate the judicial system to pursue vendettas against certain companies, Russia becomes a less attractive destination for investment. Business lobbies report that some foreign firms which had plans to invest in Russia have put them on hold. And the oligarchs’ capital has started to flow out rather than in. The purchase of Chelsea – announced just before the attacks on Yukos – suggests that Abramovich may see his future as outside Russia rather than within.

On a recent visit to Russia, I met some of the liberals within the government, including one of Putin’s advisers. They understand the damage that is being done to the economy, but seem powerless to prevent it. They echo the comments made by prime minister Mikhail Yasyanov in public, and say that the affair should be brought to a swift conclusion. So why has Putin allowed the attack on Yukos to go so far?

The “men in epaulettes” versus the rest

The root of the problem appears to be a faction in the Kremlin that is linked to the FSB (the KGB’s successor). The officials in this faction have encouraged the state prosecutor to launch investigations, for both economic and political reasons. Economically, they think the oligarchs are too rich, and they want their friends – in the security services and companies that are close to the security services – to get a slice of the assets of Yukos and other big companies. As to the risk of their actions discouraging foreign investment, they are delighted. They do not want Russia to become integrated into a global economy in which the United States calls the shots.

Politically, these officials worry about the succession. Putin has said he will stand down in 2007, at the end of his second term. They know that Khodorkovsky is spending his fortune on promoting an enormous number of liberal groups and causes within Russia. For example he funds a university, a youth movement and the Moscow School of Political Studies (an institution which promotes civil society in Russia). Those who pass through these institutions tend to become pro-western political activists who want to rid Russia of the old guard. Many of them would be willing cadres for Khodorkovsky, should he launch a political career.

The FSB faction is probably right to worry about the long-term impact of Mikhail Khodorkovsky’s largesse. This faction – whom Khodorkovsky himself refers to as “the men in epaulettes” – have a point. He uses his money to influence the political process in a more blatant way than would a western company lobbying a western government. Like the other oligarchs, Khodorkovsky presumably has some skeletons in his cupboard. I have no expertise on the story of his meteoric rise – from Komsomol (communist youth) leader, to the founder of Menatep bank, to oil baron – though people who have studied his career say that he has fewer skeletons in his cupboard than many oligarchs.

What I am sure of is that today, in strict utilitarian terms, Khodorkovsky is a force for good in Russia. He gives direct and indirect support to a range of organisations and individuals that are trying to raise the standards of Russian capitalism, civil society and democracy. He wants to make Russia more western, which in my view is exactly what it needs.

Whatever his past, I am convinced that he now believes in his own rhetoric on the need to promote civil society in Russia. On 26 July, he and I took part in a board meeting of the Moscow School of Political Studies (of which we are both members), and I then heard him give a lecture to the students – mostly the younger generation of political leaders from the Russian regions. He spoke passionately about his struggle with the authorities, sounding more like a politician of conviction than a conventional business leader. This session, including questions and answers, lasted for almost three hours without a break.

Much of what he said was off the record. But some of his on-the-record comments were forthright enough. He tried to explain why a majority of Russians would not oppose the Kremlin’s moves against the oligarchs. “In Russia we have a history of serfdom, which still influences the psychology of society.” He said that when the Kremlin organised raids and used strong-arm methods, people were deferential. “We don’t yet have the structures of a civil society, we are under the influence of the Czar.”

He said that the conflict could be defined as one between business and authoritarianism, but also as one between the men in epaulettes and the rest of society. “The balance of forces is almost equal. Civil society equals the Union of Right Forces plus Yabloko – but also the Communists and the Liberal Democrats (Vladimir Zhirinovsky’s fascistic party).”

He said that many elements in the armed forces also represented civil society: “They will define Russia’s future.” He said that civil society’s problem is not that it lacks arms, but is rather its mentality. “The FSB thinks it has the power, and the people think it has power – but civil society should have the power, the FSB should be our servants.”

Without revealing his off-the-record comments, I can say that he showed no sign of flinching under the considerable pressure he is under. He does not want to compromise with the people who are pursuing him. Indeed, one of his friends tells me that in mid-July, after the prosecutor had launched his initial investigation, Khodorkovsky went to a meeting with a senior minister. Khodorkovsky was told that if he donated a large sum of money, the dogs would be called off. The answer was a firm “no” – and a few days later the prosecutor stepped up the pressure by announcing the first investigations of alleged murders by Yukos employees.

If Khodorkovsky’s main concern was to make Yukos into one of the world’s most successful oil companies, he would surely have struck a deal with the authorities: a few billion dollars and some astute grovelling could have bought him peace. But Khodorkovsky seems – at least for now – to be relishing the battle he is engaged in. This struggle has thrown a serious question mark over the future of Yukos; its planned merger with Sibneft, which would make it the world’s fourth largest oil company, is now in doubt.

Two possibilities, one worry

Mikhail Khodorkovsky’s resistance is making it harder for Vladimir Putin to bring this affair to a close. Nevertheless I am surprised that Putin has let the FSB faction go as far as it has. One of Putin’s advisers told me not to worry, and that all would soon be well: “Putin’s great achievement is to have brought economic stability to Russia, and of course he is not going to allow that stability to be threatened.”

But that may be wishful thinking from the adviser. This affair has reminded the world that Russia’s police state did not wither away with the collapse of the Soviet Union. Western commentators and politicians may have to start shifting their view of Putin. Perhaps he is not such a committed westerniser as most of us believed.

The Khodorkovsky affair suggests one of two possible scenarios. Either, Putin thinks that he can strengthen Russia without adopting many parts of the western social and economic models; he is not committed to the property settlement of the mid-1990s; he thinks that the need to assert political authority is more important than a rise in economic instability and capital flight, and a decline in foreign investment and economic growth; and he agrees with the FSB that pro-western political forces should not be allowed to become too strong before he stands down in 2007 (unless Putin changes the constitution, he can serve only two presidential terms).

Or, Putin is not his own master. The security establishment has decided that Putin’s foreign policy has been too close to that of the Americans. The FSB faction wants to curb the political and economic power of the oligarchs. These officials want less foreign investment, believing that foreign capital will suck the value out of Russia’s natural resources (many Russians see foreign investment in that way). They do not want Russia to join the World Trade Organisation. They want to use the coercive apparatus of the state to smash any force which threatens their authority. And they have persuaded, cajoled or forced Putin to follow their agenda.

Both possibilities are alarming. Unless Putin reins back the “men in epaulettes” very soon, we may have to assume that one or other of these possibilities is true.

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