#10 - JRL 7273
Wall Street Journal
August 1, 2003
Behind Moscow's Big Showdown
Putin Thought He Had Cut A Better Deal With Oil Barons
By GREGORY L. WHITE and JEANNE WHALEN
Staff Reporters of THE WALL STREET JOURNAL
MOSCOW -- Flush with cash from high oil prices, Russia's big energy companies are flexing their political muscle more and more, posing a growing challenge to President Vladimir Putin's efforts to limit the role of business in politics.
The tensions have been highlighted in recent weeks as prosecutors opened a sudden flurry of criminal probes related to OAO Yukos, as well as some of its employees and shareholders. Russian officials deny the Kremlin is behind the investigations of Yukos, which have knocked $7 billion off the oil company's market capitalization and spooked investors here, both Russian and foreign.
But several senior legislators and government officials say Yukos has become one of the most active of Russian companies in lobbying for its interests in the corridors of power, particularly the parliament. Yukos CEO Mikhail Khodorkovsky, Russia's richest man, has become more vocal in recent months about the need he sees for Russia to build closer ties with the U.S. -- a critical potential market for Yukos -- and disclosed that he provides financial support for liberal parties in parliament.
"When capital is so strongly concentrated and the people who have these financial resources suddenly start talking about politics, it's understandable that the authorities become alarmed," says Grigory Yavlinsky, leader of the liberal Yabloko party, which gets much of its funding from Mr. Khodorkovsky. Parliamentary campaigns often cost less than $1 million, according to legislators, meaning the vast wealth of businessmen like Mr. Khodorkovsky goes a long way.
Limiting the influence of business in the Kremlin has been one of the major successes of President Putin's term. In the chaotic period of privatization and economic reforms in the 1990s, Russian business had sought an ever-bigger political role. Business leaders took senior government jobs and lobbied for sweetheart deals that often cost the state billions. Mr. Khodorkovsky and his colleagues, for example, won control of Yukos in the 1990s in a series of privatization auctions widely regarded as rigged, paying only about $1 billion for a company now valued at $26 billion. As a result of deals like those, Mr. Khodorkovsky and a handful of other super-rich men control more than half of Russia's private sector.
When Mr. Putin came to power in 2000, he made clear to these business barons that they would no longer be able to dictate to the Kremlin, pledging in return not to question how they came to own their assets, provided they invest in the companies they own.
It is also a signal fact of Russian political life that pro-Kremlin parties control the majority of seats in the State Duma, the lower house of parliament.
But as these companies have grown, so have their political ambitions. The oil industry is regarded as one of the most effective lobbyists in the Duma, according to legislators, often exerting substantial influence on important tax and regulatory issues. While a common feature in legislatures around the world, business lobbying is still something of a novelty in Russia . Having little experience working with parties, business often relies on its own representatives in parliament.
"Part of being a big company in this country is having a certain amount of political and economic influence," Mr. Khodorkovsky says, sitting in his 17th-floor office, with views across Moscow to the gold-covered domes of the Kremlin. "It's not a matter of our desire -- it just is." He insists business is still no match for the state in a country with a centuries-old tradition of autocracy.
But Kremlin officials fear that with critical decisions looming in the next few years on controversial issues such as the possible breakup of Russia's natural-gas monopoly and the liberalization of restrictions on the ownership of oil pipelines, business and government won't always see eye to eye. "We are not certain our big corporations have the ability to feel their real responsibility to the country," says a Kremlin official.
Mr. Khodorkovsky smiles as he describes Yukos as "the chairman of the informal club of oil men who do the industry's lobbying in the Duma." A former Yukos executive holds a seat in the upper house of Russia's parliament, as do representatives or shareholders of many other big Russian companies.
But the symbol of industry's clout in the Duma is Vladimir Dubov, who holds a 4% stake in Yukos, valued at about $1 billion, and is the head of the State Duma's tax subcommittee. "When an amendment concerning the interests of Yukos comes up, it seems there are 250 Dubovs in the hall," complains Gennady Seleznyov, a speaker of the Duma and the leader of a socialist party.
A 45-year-old former physicist who was Yukos's tax chief until he retired in 1999 to run for parliament, Mr. Dubov says he has put his Yukos stock in a trust to reduce the potential for conflicts of interest. He emphatically denies lobbying for Yukos's narrow interests, noting that he has pushed for tax cuts and deregulation measures that benefit all of Russian business.
"My job is to reduce country risks [for Russia ]. If they are lower, then Yukos will be worth more, as will all the other [companies]," he says, joking that he hasn't seen any "draft laws that would lower taxes for oil companies starting with the letter Y."
But he and his committee supported an amendment last year that legislators slipped into floor debate. The measure capped export tariffs on oil products such as diesel and gasoline, major Russian exports. The Finance Ministry howled, saying the move would cost $400 million a year in lost revenues, but the amendment passed. Because it was attached to a critical economic package, government officials say, President Putin had no choice but to sign it into law.
Mr. Dubov argues that the amendment was an important deregulation measure, since the government often manipulated the tariffs to control supply on the domestic market. Government officials say a compromise is close that would allow the state greater flexibility to set tariffs.
Those officials also credit Mr. Dubov with helping shepherd through the Duma the aggressive tax reform program that has been one of Mr. Putin's great economic successes, cutting rates, reducing evasion and boosting government revenue. The Kremlin often agrees with Mr. Dubov and his business colleagues on issues like tax reform. The oil sector, for example, paid about $5 billion more in taxes last year than in 2001 -- thanks in large part to higher oil prices -- and will pay at least as much this year, according to the Finance Ministry.
"When the government and presidential administration have a clear, common position," says Alexander Zhukov, chairman of the Budget Committee in the Duma, "the authorities will get what they want, Dubov or no Dubov."
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