Posted on 07/25/2003 9:13:34 PM PDT by DPB101
The arrest on July 2 of Platon Lebedev, a top executive of Group Menatep and Yukos Oil, has created uncertainty not only about Russia's largest petroleum producer but also about whether the country has shaken off the legacy of its past.
Denied release after more than three weeks in prison, Mr Lebedev, a Russian billionaire, is accused of not paying enough for a fertiliser plant in 1994. The authorities also arrested the head of Yukos's security department, raided Yukos's offices with masked and armed men and ordered an investigation of Yukos for seven other cases of murder, attempted murder, tax evasion and theft.
All of this comes just as a growing number of foreign and domestic investors have come to accept Russia as a haven for investment. President Vladimir Putin - whose leadership has been credited with creating the new "stable" environment - recently announced that, for the first time, capital inflows were exceeding capital flight.
Reflecting the new international confidence in Russia, BP recently signed a deal to put Dollars 6.75bn (Pounds 4.28bn) into a partnership with Tyumen Oil; only two years ago, BP was suing Tyumen for theft. Perhaps the most impressive sign of confidence was the announcement by Mikhail Khodorkovsky, Mr Lebedev's boss, that Yukos would merge with Sibneft to form the world's fourth largest oil company. As of July 2, their market capitalisation totalled Dollars 46bn.
This made Mr Khodorkovsky worth close to Dollars 11bn and his counterpart at Sibneft, Roman Abramovich, worth about Dollars 7bn. With so much wealth to spare, Mr Abramovich's Dollars 240m purchase of Chelsea Football Club, the English Premier League side, was a mere trifle. Investment in Russia seemed to have come of age.
But the arrests and raids on Yukos, together with criticism from the head of the state audit committee to the effect that Mr Abramovich should have used that Dollars 240m to pay his Russian taxes, are a reminder that things in Russia are often not what they seem.
This applies in particular to the post-Soviet reforms. The moves against Yukos reflect an effort by senior officials in the Kremlin - perhaps including Mr Putin - to force re-examination of the whole reform effort.
Those responsible for implementing the mid-1990s privatisation of Russia's state-owned industries, especially Anatoly Chubais, its chief architect, justify their efforts by insisting that it was important to privatise quickly.
They feared that if they hesitated, the communists would sweep back into power. Any flaws in their programme would gradually work themselves out. That was a serious mistake. As some critics argued at the time, if privatisation was not carried out equitably, it would come back to haunt not only those who drew up the reforms but also the new owners of Russia's industrial assets.
Given 70 years of propaganda on the evils of capitalism, it was essential that the new owners pay a fair price for their acquisitions.
As it was, the reforms turned out to be anything but fair.
Seventeen of the new owners are included in the 2003 Forbes list of the world's billionaires - pretty good, considering that, in 1985, none was worth more than a few thousand dollars.
Moreover, while wealth was being concentrated in a few hands, Russia's gross domestic product shrank to about half of what it had been in the late 1980s. A third of the population found itself below the poverty line. Conditions improved when the economy began to recover in 1999 but with so many so poor and so few so rich, there was bound to be resentment of the oligarchs and the controversial way in which they acquired their wealth.
Mr Khodorkovsky paid a mere Dollars 300m - in a tender in which there were no serious competitive bidders - for Yukos, which as of July 2 had a market capitalisation of Dollars 20bn.
Similarly in 1995, Boris Berezovsky acquired Sibneft for slightly more than Dollars 100m before selling some or all of his several-billion-dollar asset to Mr Abramovich.
Not only did the oligarchs acquire their companies at a fraction of their real value; along the way, many were sued by minority shareholders claiming theft of their investment. No wonder polls indicate that 70 per cent of Russians favour a reconsideration of the privatisation process.
Some say the oligarchs are similar to the 19th-century American robber barons, with some of them willing to resort to violence and stock manipulation, and a penchant for conspicuous philanthropy.
But when it comes to business practices, there are fundamental differences. The barons built new businesses such as oil refineries, steel mills and railroads. With the exception of Vladimir Gusinsky, who created his own media network, the wealth of the oligarchs came from acquiring existing state enterprises, especially raw material concerns. The barons also reinvested their money at home, unlike the oligarchs, who sent it abroad as flight capital.
Yet while it is hard to sympathise with the oligarchs, it is more difficult to forgive Mr Putin and those around him. The first oligarchs his government has attacked are those who have either criticised Mr Putin on their television networks - such as Mr Gusinsky, who was arrested in 2000 and is now in exile - or have supported opposition political parties.
Moreover, Mr Gusinsky and Mr Lebedev were jailed before they had been convicted of any crime. Jailing was apparently intended to force both men to co-operate with the state's plans for their respective sectors. It is unclear who has ordered the recent harassment. According to recent reports in the Russian press, two former senior KGB officials now working in the Kremlin were overheard on their cell phones discussing the need to put these upstart oligarchs in their place. But the arrests and raids certainly show that arbitrary executive decisions in Russia still prevail over the rule of law. That has already had a negative effect on investment.
Since Mr Lebedev's arrest, the RTS index of Russian stocks has fallen 17 per cent and Yukos shares by 28 per cent. This is unlikely to entice the foreign investors that Mr Putin needs if he is to generate the high growth he has promised. However the Yukos crisis is resolved, this incident should serve as a reminder of how controversial privatisation remains in Russia.
There is no guarantee against future raids and harassment of other oligarchs and those who invest in their companies. In the eyes of the Russian public, these oligarchs and their holdings lack legitimacy - a situation fraught with uncertainty, and one that foreign investors ignore at their peril.
The writer is associate director of the Davis Centre for Russian and Eurasian Studies, Harvard University, and author of The Piratization of Russia: Russian Reform Goes Awry [FTI [The Financial Times]]
I'm wondering if Putin and Bush had a little talk about this in Texas. It would be typical of Bush. Clinton was diligent in cleaning up paper trails but Putin doesn't labor under the restrictions Ashcroft does.
The Bolsheviks stole Russia from the people in 1918. I do not believe Russians will allow the oligarchs to keep what they stole in the 1990s.
Interesting enough, from 1920 on, the Bolsheviks fenced their swag in New York City. In the 1990s, the oligarchs laundered their loot in New York City.
I believe Putin and GWB have an understanding on several key issues. Russia's Parliamentary elections will soon be in play, and then the Presidential election. The cost of living is increasing rapidly, and there's a tenor of unrest about housing and education reform. Both issues will play large in the campaign against Putin.
Change makes people nervous. Many Russian reforms were pushed through as 'this alternative is better than what we had', but without a full understanding of the nitty gritty details required to make reform manageable.
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