#3 - JRL 7301
FEATURE - Russia's leaders tilt at a top businessman
August 26, 2003
By Andrew Hurst
MOSCOW (Reuters) - Communism may have faded into history, but Russian leaders are discovering there is no quicker way to win popular applause than to throw a capitalist in jail.
And investors have been given a sharp wake-up call that life, even for the rich and powerful, can turn ugly in Russia with dizzying speed for those who fall foul of the centuries-old seat of state power, the Kremlin.
The arrest on July 2 of Platon Lebedev, a key shareholder of oil industry giant YUKOS, on charges linked to a 1994 privatization deal has been seen as a warning by the Kremlin directed at the oil company's powerful chairman Mikhail Khodorkovsky.
Khodorkovsky, Russia's richest man with a fortune estimated at $10 billion, is believed to have incurred the wrath of hardliners in the Kremlin because of his thinly disguised political ambitions and a suspicion that he is bankrolling liberal opposition politicians in an election year.
Investigators, thought to be acting at the Kremlin's bidding, have followed up on Lebedev's arrest by ordering repeated searches of YUKOS' offices.
"The idea is to give Khodorkovsky a bloody nose. People around the President (Vladimir Putin) want to show who is master of the house," said a senior Russian banker who asked not to be named.
The public appears to be shedding few tears for YUKOS' plight.
Khodorkovsky is one of a handful of Russians who grew fabulously rich by buying up state oil and metals companies in the 1990s at bargain basement prices.
Although Moscow and St Petersburg have seen the rise of a thriving middle class, the majority of Russians have been left well behind and appear to be ensnared in a low-wage economy.
PUTIN APPROVAL RATING RISES
A recent opinion poll showed public approval for Putin jumping to 78 percent in July from 70 percent in May, a fact which some analysts attribute to the YUKOS investigation.
The pro-Kremlin United Russia party's approval ratings have crept up to 27 percent from 23 percent over the same period. Elections to the State Duma are scheduled for December, followed by a presidential election in March, which Putin is expected to win comfortably.
Putin has adopted a statesmanlike pose, keeping above the fray and assiduously avoiding any comment on the investigations.
The affair appears to be playing into his hands, at least in the short term.
"Watching the campaign against YUKOS from the sidelines, many Russians feel a deep sense of satisfaction," said Evgeny Gavrilenkov, chief economist at Moscow investment bank, Troika Dialog. He said was disturbed by the investigation.
Analysts believe YUKOS' troubles are unlikely to ease before the December elections, even though the authorities have not stood in the way of a planned merger with rival firm Sibneft to create the country's biggest oil company.
One scenario is for public prosecutors to quietly shelve the case when it is judged politically expedient to do so.
But who will gain from the affair?
"Until the conflict is resolved, which will probably not be until the elections, it is difficult to identify who will be the real beneficiaries," said Troika's Gavrilenkov in a note.
The people thought to be behind the investigation into Lebedev and YUKOS are members of Putin's entourage linked to security services, men known as "siloviki," literally representatives of power structures.
Analysts say the 'siloviki' are at odds with free marketeers in the Kremlin, among them Prime Minister Mikhail Kasyanov and Finance Minister Alexei Kudrin, and are jostling for influence as they look forward to a second term in office for Putin.
MAGNATE'S GROWING POWER
The 'siloviki' are said to be unnerved by the growing power of Khodorkovsky, who has let it be known he might even run for the presidency in 2008, and the free-market philosophy he espouses.
Putin, who says he is anxious to transform Russia into a dynamic free-market economy dominated by the rule of law, may find there is a price to pay if the judiciary is seen to be acting arbitrarily at the behest of the Kremlin.
Some investors have taken fright and YUKOS has lost more than one-sixth of its stock market value since the affair broke.
"I do not think they have a good enough understanding in the Kremlin of these actions on what are very fragile capital markets," said a sovereign credit analyst who asked not to be identified.
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