#13 - JRL 7282
The Economist (UK)
August 9, 2003
Russia
Who's in charge?
The risks that the latest scandal poses to Russia's business may be
overstated but they reveal cracks in the system
INVESTOR panic, capital flight, even civil war—the battle between
Yukos, Russia's biggest oil producer, and the authorities has given
rise to the direst predictions. Since arresting Platon Lebedev, one
of Yukos's main shareholders, on July 2nd, prosecutors have linked
the company to everything from tax evasion to extortion to murder.
The stockmarket index, the RTS, has dived.
Doomsayers, not least Mikhail Khodorkovsky, the Yukos boss, talked it
all down with warnings that if the privatisations of the lawless
1990s were to be revisited, then the entire foundation of Russian
capitalism would be under threat. More sober admonitions about the
damage to investor confidence have come from everyone from Communist
politicians to government officials, including the prime minister,
Mikhail Kasyanov—whom prosecutors promptly told to mind his own
business.
But so far the panic seems overstated. The RTS had hit a five-and-a- half
year high before the scandal, and has since recovered more than
a third of its losses. Yukos's own shares led both the fall and the
recovery, and the contagion to others was slight, suggesting that
investors do not see much of a risk beyond Yukos itself. Bond
spreads, usually a measure of country risk, had been rising well
before the trouble began, in response to an increase in American
Treasury-bond rates. The apparent capital flight—a $1.1 billion drop
in central bank reserves—is no bigger than other blips in recent
months and even so is an illusion, says Christof Rühl, the World
Bank's chief economist in Moscow: unrelated things, such as bond
interest payments and Russians buying hard currency for their summer
holidays, more than account for it. Last week Moody's, a rating
agency, even put Russia's foreign debt on review for an upgrade.
If the uncertainty continues, investors could yet lose their nerve,
particularly those making fixed, longer-term investments. But they
are a hardy breed who already knew the country's risks. The latest
row is just an uncomfortable reminder that the law in Russia is still
a weapon for the powerful rather than a shield for the weak. And as
the days tick by and the prosecutors' attention remains on Yukos, the
fear of a generalised witch-hunt against Russia's plutocrats is
receding.
A bit whiffy
Even if the economy stays unscathed, the affair sheds unpleasant
light on the political system. The mere fact that after more than a
month nobody can explain what is going on, just as in the days of
Soviet kremlinology, shows how much the bad old ways still lurk
beneath Mr Putin's economic boom and political stabilisation.
Some theories focus on a power struggle within the administration,
between people with links to the security services, brought in by
President Vladimir Putin, and those from Boris Yeltsin's era with
ties to business magnates. Mr Khodorkovsky, keen to portray this to
the West as a fight between good (capitalism) and evil (statism and
secrecy), and as a threat to the country as much as to himself,
favours such a reading. Others see it as a direct clash between him
and a political class, perhaps including the president, worried by
his increasing economic and political power. Still others think it is
merely a private settling of scores between Yukos and individual
officials who have managed to drag Mr Putin into it.
Through the murk are glimpses of something more worrying: a loss of
control. Mr Putin's own near-silence on the issue suggests that he
either approves of the attack on Yukos (but won't explain why) or
does not know what to do. Conflicting messages from members of his
government hint at splits. Only last week, a full month into the
crisis, did the administration call a high-level briefing for the
foreign press, and as a damage-limitation exercise the four-hour
discussion was a failure.
Mr Putin, said the anonymous official, knew that the affair was bad
for the economy and did not want to undo privatisations. But he would
not explain why the president does not say so publicly (insisting
weakly that he has done so several times privately). He could not
explain who was behind the attack. He said repeatedly that the
Kremlin has "no formal influence" over prosecutors, but avoided the
question of why it cannot, or will not, use informal influence, when
whoever launched the prosecutions evidently did just that. And he had
no solutions to offer.
If indeed Mr Putin is less in command than he pretends, it would not
be the first time. His inability to carry out complex reforms to the
armed forces and the bureaucracy has shown that his influence on
deeply embedded interests is limited. And he has often let disputes
be resolved by maintaining a lofty detachment while opposing groups
slug it out. But when the stakes are as high as in the Yukos case,
that is a risky policy. If this is a fight between rival groups, then
the balance between them that Mr Putin had maintained has been upset,
and their squabbling is likely to dog his next term in office.
If, instead, the attack on Yukos is all part of his plan, it may in
fact be less worrying. Mr Khodorkovsky has sometimes compared
Russia's business elite to America's robber barons of a century ago;
in fact, points out Roland Nash of Renaissance Capital, a Moscow
investment bank, J.P. Morgan and John D. Rockefeller attained much
greater economic clout than he has. But whereas America's legal
system kept the magnates' power in check, Russia's does not. If the
state is simply reacting to what it sees as excessive power by
reining it in, then that is an unnerving and messy way to run an
economy but it does not mean that other businesses are at risk.
Aug. 9, 2003:
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