#13 - JRL 7276
Washington Post
Oil Probes Test Putin's Leadership
Stocks Plummet, Infighting Increases
By Susan B. Glasser
Washington Post Foreign Service
MOSCOW, Aug. 3 -- In February, Russian billionaire Mikhail Khodorkovsky gave a lecture to President Vladimir Putin at the Kremlin, warning that "corruption in the country is spreading" and asking pointed questions about a state-owned company that is a rival to Khodorkovsky's firm, Yukos. Putin shot back, noting that Yukos had acquired huge oil reserves. "And the question is, how did they obtain them?" he asked.
At the time, few people here viewed Putin's words, conveyed in a televised exchange between the Russian leader and his wealthiest constituent, as anything other than a not-so-subtle barb directed at Khodorkovsky's past in the frenetic capitalist era of the 1990s, when politically connected business leaders snapped up valuable state assets for bargain prices at auctions that were often rigged.
But last month, prosecutors launched a full-scale assault on Yukos, arresting Khodorkovsky's top lieutenant and opening as many as eight investigations linking top company officials to allegations that included murder and defrauding the state in a decade-old privatization deal.
The Yukos affair has ballooned into a broad political and economic scandal. In the four weeks that Khodorkovsky adviser Platon Lebedev has been held without bail at Moscow's Lefortovo prison, the once-booming Russian stock market has fallen by about 15 percent, costing investors about $20 billion in lost stock value, and rival factions in the Kremlin have gone public with disputes over the case. "This crisis is very deep, and it's growing deeper," said Gleb Pavlovsky, a Kremlin political strategist.
Prime Minister Mikhail Kasyanov has called the prosecutors' tactics "excessive." Putin, however, has remained all but silent, vaguely pronouncing himself against the use of "arm-twisting" and "jail cells" in such cases but failing to comment directly on a matter that many here now believe could undermine one of the central legacies of his three years in office: the perception of political stability and the return of investor confidence to the Russian market.
Many investors fear that the investigation might signal an intent to revisit the privatization deals of the 1990s. There are frequent reports in the Russian news media, so far unconfirmed, that other tycoons such as Oleg Deripaska, whose fortune is based on aluminum, and Roman Abramovich, who is merging his Sibneft oil company with Yukos, might also be targeted by prosecutors.
"Investors are very concerned," said Stephen O'Sullivan, chief oil and gas analyst for United Financial Group, a brokerage house here. "Some are put off, believing this is a sign that Russia hasn't really changed at all."
"There's just a negative reaction across most stocks; the market is not making distinctions," he said. "There is a general concern about property rights and a sense of insecurity."
Communist leader Gennady Zyuganov, usually a sharp critic of 1990s privatization deals like those at issue in Lebedev's case, warned about the consequences of the investigations last week. "Such actions not only destabilize the situation but also sow complete chaos and could paralyze the financial and economic system," he told reporters, calling prosecutors' actions against Yukos "barbaric."
At the same time, the Yukos affair has exposed deep differences within Putin's administration and led many analysts to question the level of his own control over powerful interest groups inside the government.
Khodorkovsky has said publicly that the president himself must have authorized such a direct attack on Yukos, Russia's largest oil producer, and warned that it might signal a return to the "stagnant swamp" of Russia's "totalitarian" past.
Many political insiders concur that Putin must have approved the Yukos investigation. Several said that Putin appeared to have a personal dislike for Khodorkovsky, and cited their televised clash last winter as an early public indicator of trouble brewing for the oil oligarch.
"It's definitely very personal," said a veteran political operative who requested anonymity. "Yukos and Khodorkovsky had too much power; they were a threat."
But a senior Russian official told foreign reporters last week that Putin did not know about the Yukos investigation in advance and was very concerned about the turmoil it has generated. "He understands that what has happened has delivered a systemic strike to the economy and has destabilized the political situation," said the official, who said that Putin had no intention of revisiting the results of privatization.
His portrait of Putin, however, suggested a president with little ability to control the course of events. "These situations are usually easier to get into than they are to get out of," he said.
Another senior Russian official said in an interview that Putin would not have ordered up a case posing a "clear danger to him, to his administration, to the economy and to the country."
Either way, most political analysts here said the Yukos affair had sharpened the fight inside the Kremlin between rival factions that compete for Putin's ear -- one led by chief of staff Alexander Voloshin and other holdovers from President Boris Yeltsin's era, the other consisting of veterans of the Soviet-era KGB like Putin himself.
Voloshin's group and Putin's team of Western-oriented economic advisers have sided with Yukos, publicly warning, as top economics aide Andrei Illarionov did, of a "civil war" if the results of privatization were revisited. The rival group, known as the "Petersburgers" because many of them come from Putin's northern home town, has remained publicly silent even as Khodorkovsky's allies accuse two of Putin's deputies -- Viktor Ivanov and Igor Sechin, both former KBG operatives -- of helping launch the investigation.
"This is a struggle for presidential power," said Olga Kryshtanovskaya, a sociologist well-known here for her studies of the Russian elite.
The mystery surrounding who really initiated the Yukos case is typical of Putin's Kremlin, according to Pavlovsky, the political strategist, who described a system in which "every large agency has its own patrons in the Kremlin and uses them to get cover. This is convenient, since the agency can always refer to some anonymous opinion in the Kremlin, and the patron in the Kremlin can say, 'It's not me, it's them.' This is the abdication of responsibility."
In the meantime, the investigation of Yukos has escalated. While there was early speculation that Khodorkovsky might make a deal to head it off, no such agreement has been made. Last week, Khodorkovsky publicly dismissed any notion of a deal and accused prosecutors of drugging Yukos security official Alexei Pichugin, who was arrested last month on double murder charges. The cases against Pichugin and Lebedev, he said, are the result of a "political order" and "have nothing to do with reality."
Many critics of the prosecutor's office fear that the investigation will mushroom beyond what in their opinion was initially a targeted attempt to rein in the country's most powerful business leader.
"The danger now is that the process could develop out of control," said Leonid Gozman, a top adviser to Anatoly Chubais, an architect of controversial 1990s privatization sales. "What if local governors and local prosecutors start taking on their local oligarchs? Why not investigate them, too, if this is the signal coming from the top?"
Others say that Putin and Khodorkovsky will simply have to come to terms, no matter how far back their animosity goes.
"In Russia, we have power and we have the oligarchs, and they work not according to the laws but on the basis of deals. When they don't make a deal, a crisis starts, and this is what is happening," said Irina Khakamada, deputy leader of the pro-business Union of Right Forces party, which is partially funded by Khodorkovsky. "So now, everyone is waiting for a deal, openly. Nobody even tries to hide it."
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