#3 - JRL 7283
Toronto Star
August 10, 2003
Russian scandal reads like bestseller
Yukos oil giant at centre of political, business turmoil
`Putin is too smart to let this go on much further'
MICHAEL MAINVILLE
SPECIAL TO THE STAR

MOSCOW—The normally sleepy Russian political summer has erupted into a political drama with all the ingredients of a John le Carré novel: a billionaire financier with a shady past, power-hungry ex-KGB men in the Kremlin, Kalashnikov-toting police raiding corporate offices, even allegations of murder.

Experts say that what began as a warning to a potential Kremlin rival has mushroomed into a scandal that threatens to undermine Russia's political stability and economic growth.

And they expect President Vladimir Putin soon will step in to quell the conflict.

"Putin is too smart to let this go on much further," says Lilia Shevtsova, a senior associate at the Moscow Carnegie Centre and author of a recent book on the Putin presidency.

"He wants to show who is master of the house. He'll call off the dogs when he feels he has made his point."

The saga began on July 2 with the arrest of Platon Lebedev, a top shareholder in the powerful Yukos oil firm and right-hand man to Yukos' chief executive Mikhail Khodorkovsky, Russia's richest man with a fortune estimated at $7.2 billion (U.S.).

Lebedev was charged with embezzlement in the 1994 privatization of fertilizer company Apatit and is being held in a Moscow prison.

Soon after his arrest, black-clad officers wielding automatic weapons raided Yukos' corporate archives, seizing documents and videotapes. The general prosecutor's office then announced it was opening seven separate investigations involving tax evasion and murder.

The office alleges that company employees were involved in murdering a number of public officials who had conflicts with Yukos and has arrested Yukos security official Alexei Pichugin on double murder charges.

On Wednesday, police in combat fatigues raided the offices of Yukos-affiliated computer firm Sibintek, which handles the oil giant's information-technology projects.

Prosecutors did not comment on the reasons for the search.

Observers say the raids were meant as a warning to Khodorkovsky and other business leaders to stand by an implicit agreement with Putin: that the president would not inquire into the origins of their fortunes as long as they stayed out of politics.

But Khodorkovsky broke the deal by donating millions of dollars to political parties opposed to the Kremlin ahead of December's elections to the State Duma, the lower house of the Russian parliament.

Yukos has admitted to funding the liberal Yabloko and pro-business Union of Right Forces parties, but it denies reports that it also gave money to the Communist party.

"The Kremlin was afraid Yukos was in the process of buying up the Duma," says Yabloko deputy chief Sergei Mitrokhin, who refuses to disclose how much Khodorkovsky donated to his party.

Speculation has been rife that Khodorkovsky is either positioning himself to take over from Putin in 2008 or to become prime minister and push for a shift to a parliamentary republic.

Of all of Russia's so-called oligarchs — the small group of businessmen who control most of the country's wealth — Khodorkovsky seems the least likely target for a criminal investigation.

Like his fellow tycoons, he made his fortune during the chaotic privatizations of the early 1990s, when politically connected business leaders snapped up state assets for bargain prices at dubious auctions.

But in the years since, Khodorkovsky has turned Yukos into a company frequently praised as a model for other Russian businesses. The oil giant was the first to introduce Western accounting standards and release detailed information to its shareholders.

Khodorkovsky himself is mild-mannered in comparison with most other oligarchs and has poured money into charitable foundations.

"He is one of the most civilized businessmen in Russia and has shown a desire to work by honest rules," says Mitrokhin. "But he wasn't careful enough — he made it clear he had an interest in politics."

Khodorkovsky has clashed publicly with Putin on a number of occasions, criticizing the president for government corruption and his position on the war in Iraq.

Putin shot back during a televised meeting in February, pointedly asking Khodorkovsky how Yukos had acquired its vast oil reserves.

"It's clear that these two men do not like each other," Shevtsova says.

Khodorkovsky has made no secret of his belief that the attacks are politically motivated.

"These cases have absolutely nothing in common with reality and come from political orders," he told reporters. Putin has been cagey about the investigations, saying only that economic crimes must be fought without "arm-twisting and jail cells."

Political observers say the attacks are being fuelled by a power struggle between two rival clans of Kremlin insiders over which one will steer the country after next year's presidential election, when Putin is widely expected to sail into a second term.

One group — the so-called "family" Putin inherited from Boris Yeltsin when he took power — has close ties with the oligarchs and has been critical of the attacks. The rival group is made up largely of security and defence officials who accompanied Putin, a former KGB man, into the Kremlin.

This group has remained silent and supporters of Khodorkovsky allege that two of its members — Viktor Ivanov and Igor Sechin, both Putin aides and former KGB agents — are behind the investigations.

Analysts say there's no way the probe could have been launched without Putin's support, but many also believe he has been surprised by how far things have gone.

"I think he gave the nod to giving a warning to Khodorkovsky to stay out of politics," says Christopher Granville, chief strategist at United Financial Group investment bank here.

"But the signals are that the president is not happy with the scale and intensity of these attacks."

There's no question the attacks have been damaging, both to Putin's image and the Russian economy. The Yukos affair has raised doubts about how much control the president has over his entourage and whether he can maintain the political stability that has been one of the key factors in his success.

It has also shaken investor confidence. Since the start of the crisis, the Russian stock market — booming earlier this year — has fallen by about 15 per cent and the Central Bank's foreign currency reserves have dropped by $1 billion (U.S.) as jittery investors pulled their money out of the country.

"If left unchecked, this could have dire consequences for the Russian economy," Granville says.

A diverse group of critics — including some unlikely defenders of corporate Russia — have stepped forward to warn the government not to infringe on the rights of private businesses.

Last month, the Helsinki International Human Rights Federation, the Glasnost Defence Foundation and other groups joined Russia's main business lobby in publishing an open letter calling on the government to respect the "independence of business."

Communist party leader Gennady Zyuganov — hardly a friend of wealthy tycoons — also attacked the investigations, saying that "such actions not only destabilize the situation but also sow complete chaos and could paralyze the financial and economic system."

Some observers say the scandal has already peaked — that the Kremlin has made its point and soon will let the matter rest.

"As long as there are no major confrontations over the next few weeks, this issue should slowly die out on its own," says Mitrokhin.

"But what this has shown once again is that Russia still has a `managed' democracy, where public institutions can be manipulated by powerful figures."

Michael Mainville is a Canadian journalist based in Moscow.