#13 - JRL 7273
OPINION: Of Robber Barons and Oligarchs
Contributed by Roland Nash, Chief Strategist, Renaissance Capital
MOSCOW, July 31 /Prime-TASS/ -- Almost exactly 100 years ago in the run-up to the 1904 US Presidential elections, Theodore Roosevelt rather shocked the important part of an audience in a New England address by shouting somewhat unexpectedly that 'The great corporations [of the US] are the creatures of the State, and the State not only has the right to control them, but it is in duty bound to control them'. In so doing, he escalated that century's major clash between industry and state.
The defining political campaign of the Roosevelt presidency was the legal assault against the US's industrial magnates. Other Presidents had tried somewhat half-heartedly to legislate the issue away, but had quailed when threatened with the potential economic and financial fallout. JP Morgan, JD Rockefeller, EH Harriman and the rest assumed that Roosevelt would similarly fail.
Not that they could be faulted for their optimism. For the previous twenty years they had dominated industry, finance and by extension much of politics to an extent that makes the influence of Russia's oligarchs today seem relatively mild. Less than ten years before, Morgan had personally saved the US government from bankruptcy when a stock market crash had seen the Treasury's reserves fall from USD100 mn to USD12 million. To put the Treasury's relative power in perspective, Rockefeller was personally worth USD900 mn and controlled 90% of all the oil business in the US. The 2% of GDP Rockefeller's oil business then represented would be worth a mind-boggling USD190 billion today, or 50% more than Russia's entire market capitalization. The vast cross industry Trusts built by the industrial giants at the beginning of the 20th Century controlled 65% of the industrial base of the world's largest economy.
It is tempting to view the Kremlin's current war against the oligarchs as Russia's own rite of passage from industrial plutocracy to competitive economy. The similarities are striking. Squeezing the robber barons in a US mired in the labor disputes of 1903 was as popular as bashing the oligarchs in the Russia of 2003. At 42, Theodore Roosevelt was then America's youngest ever President, and built his popularity on a combination of compromise when possible and independence when necessary. While the competition is somewhat more limited, Putin is also remarkable for his youth, and has a track record of preferring debate to confrontation but being willing to stamp his authority when necessary. The push against the Trusts of the robber barons was led by Attorney General Philander Knox, the US equivalent of Russia's General Prosecutor Vladimir Ustinov.
Unfortunately, it would also be highly misleading. The Trust-breaking of the Roosevelt era was aimed at creating a competitive economic base and was pursued within an institutional framework which neither side ever questioned. While there remains no consensus exactly what is behind the Kremlin's pursuit of YUKOS, it is clearly motivated first and foremost by politics, and is being conducted by the obvious abuse of Russia's political institutions. Indeed, the only consensus is that it is not simply about the questionable privatisation of the early nineties, the prima facae reason for the arrest of the languishing Platon Lebedev.
At last count, YUKOS and its management had been threatened with charges of stealing through extortion, multiple tax fraud, bribery, corruption and four counts of murder. The case has spent one day in court and every day on the front pages of the newspapers and in behind-close-door meetings. Lobbying groups have publicly petitioned the President to be allowed to pay off the prosecutors with USD228 mn and senior government officials have given anonymous mass briefings to the international press. In the most recent raid by the FSB on YUKOS, the accounts of a company rumored to be linked to Prime Minister Mikhail '2%' Khodorkovsky were specifically targeted after he had attempted to defend YUKOS. A top economic advisor to the President has mentioned the possibility of civil war.
Compare this to the due process followed in the US when the Attorney General used the Anti-Trust law to charge JP Morgan's Northern Securities Corporation with abuse of market power over the railways. The case took two years to reach the Supreme Court and was announced as no more than Case Number 277. Most impressively, perhaps, it was JP Morgan who provided the USD25 million needed to keep the stock market afloat during the panic of 1907, three years after his Trust was ruled against. Government recognized the necessity of working within the law, and business recognized that even when the law was against them, their long-term interest remained in protecting and respecting the institutions within which their wealth was created.
Much as it is tempting to view the current confrontation as a flexing of political muscle by the Kremlin over oligarchs who had become too politically influential, it is most fundamentally a reminder that Russian politics remains weak and its institutions, fragile. Property rights, personal freedom, the law, the judiciary, parliament and electoral process have all been abused in the tackling of YUKOS. They are all still viewed as instruments of the state, rather than defining its limits. The strength of the private sector and of the economy more widely had tempted the market to lower Russia's discount rate to 250 bps over the US. The public flogging of the country's biggest and best representative of the private sector is a reminder that the potential rewards of doing business in Russia come at a price. The market is still up 20% since the end of March. Before the state is assured that its dominance over politics will be extended after the parliamentary elections in December, there is likely to be continued volatility, despite the marvelous economics.
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