#7 - JRL 7281
The Guardian (UK)
August 8, 2003
Putin's new war
Yeltsin's fire sale of Russian assets created a breed of power-hungry
billionaires - but now state bureaucrats are challenging their supremacy
By Simon Pirani

If you thought that Russia's wealth and political system had fallen under
the sway of an all-powerful group of billionaires, just consider the plight
of Platon Lebedev. He is one of them: a key shareholder in Yukos, Russia's
second-largest oil company, effectively second-in-command to its chief, the
even richer Mikhail Khodorkovsky. But Lebedev, director of the
Gibraltar-based Menatep group that controls Yukos, is now starting his
sixth week in prison, charged with stealing a share of a fertiliser company
in 1994. A bail application has been rejected and prosecutors are hurling
bundles of other charges at Yukos, ranging from tax evasion to conspiracy
to murder (for which a Yukos security chief has been detained). Last month,
machine-gun-toting officers mounted a raid on Yukos's headquarters and on
Wednesday, prosecutors searched the offices of Yukos's internet provider,
Sibintek. Yukos strenuously denies all charges.

The campaign against Yukos has raised fears that President Vladimir Putin's
regime is not as business-friendly as had been assumed. The nervousness
yesterday fuelled groundless - or at least premature - rumours that
business-friendly prime minister Mikhail Kasyanov was about to resign.
Western investors are worrying that the Russian state is again turning on
Russian capitalism.

The reality is more complex. The partnership of power and wealth is not
about to dissolve; it is being reconfigured. The grotesquely rich
"oligarchs" (politically influential businessmen) such as Khodorkovsky and
Lebedev, who bought up the economy's crown jewels a decade ago in President
Boris Yeltsin's bargain-basement privatisation sale, are being warned
against stepping out of line.

A class of state bureaucrats, including many former KGB officers, is
flexing its muscles: the most prominent of them, the group around the
president himself, are issuing a challenge. They appear to be pushing for a
redivision of power, and at least some of the wealth, in the run-up to
Putin's second term - into which he will slip, barring an astonishing
upset, after elections next spring.

Some suggested that the attack on Yukos was pre-election propaganda:
politicians who bring the wealthy to heel are popular with voters. But a
more plausible explanation is that this is a warning to Khodorkovsky not to
interfere in the elections.

That refers back to a meeting between Putin and the oligarchs in 2000, at
which he said he would not challenge the deals that made them rich if they
kept out of politics. The subtext was that those who stuck to the bargain
wouldn't share the fate of Boris Berezovsky and Vladimir Gusinsky,
Yeltsin-era oligarchs who used the media they owned to attack the
government and are now in exile.

In recent months Khodorkovsky reneged on the deal and declared his support
for the rightwing liberal parties that oppose Putin. After Lebedev's
arrest, many in Moscow took the view that if the Yukos bosses had stuck to
buying football clubs, like new Chelsea owner Roman Abramovich, they would
have been left alone.

With Lebedev still in jail and the list of charges growing, it appears that
more thoroughgoing changes in the state-oligarch partnership are now under
way. It was never a simple relationship. In the course of administering
"shock therapy" to the crisis-ridden former Soviet economy in the early
1990s, the Yeltsin government privatised the key hard-currency-earning
exporters of raw materials - oil, gas and metals. In 1995 interests close
to Abramovich bought a majority stake in Sibneft oil company (now worth
$12.5bn) for $200m. Menatep bought a controlling stake in Yukos (now worth
$30bn) for $168m. And so on.

Critics said the national wealth had gone for peanuts at a rigged auction.
Accompanying economic measures - such as convertibility of the rouble and
abolition of price controls - helped bring about the biggest peacetime
industrial collapse in history. Between 1990 and 1995, Russian national
income (GDP) dropped by 50%.

The "market Bolsheviks" believed that the more they could privatise, the
less economic power the state would wield - but that was naive. The vast
Soviet state apparatus did not disappear in the Yeltsin years; it adapted.

Putin himself moved from the KGB to a foreign economic relations job in St
Petersburg, and then to the Kremlin. He took with him other key senior KGB
officers such as Sergei Ivanov, now defence minister. Putin associates from
St Petersburg got key jobs in government and the remaining state-controlled
companies, such as Gazprom, the world's biggest natural gas producer.
Analysts in Moscow reckon that the "boys from St Pete" are putting the heat
on Yukos because they want a bigger slice of the pie for themselves.

But this is not simply about individuals at the top of the machine. In
research to be published soon, Olga Kryshtanovskaia and Stephen White show
that hordes of career KGB and military people, thrown into the business
world after the Soviet collapse, are gravitating back into state service.
These people want to curb the oligarchs' power, and they have
representatives in high political positions: people who started in the KGB
or military comprise 58% of Putin's security council, compared with 5% of
the politburo under Mikhail Gorbachev.

Putin's first-term success has been to forge a team that unites these
statists with representatives of the business class. Now, with the
president's second term apparently assured, a struggle for power and wealth
is starting between these two wings of his regime.

Simon Pirani is a writer on business affairs in the former Soviet Union