WORLD AFFAIRS

The Kremlin strikes

CHARU SINGH
in Moscow

The arrest of Russia's richest oligarch, Mikhael Khodorkovsky, heralds a new era in the country's economy and in the power equations in the Kremlin.

MAXIM MARMUR/AFP

Mikhael Khodorkovsky.

THE clash between the Russian state and the country's richest oligarch, Mikhael Khodorkovsky, took a dramatic turn with the latter's arrest on October 25 from his plane at Novosibirsk. He was on a business trip when heavily armed Federal Security Bureau (FSB) agents stormed the plane. He was immediately flown to Moscow and questioned by prosecutors and by nightfall he was lodged in the over-crowded Matrosskaya Tishina prison. Successive developments indicate that this single event may herald a new era in Russia's economy and also the equations within the corridors of power in the Kremlin.

The prosecutors have issued seven charges against Khodorkovsky, which include evading income tax, overseeing corporate tax evasion, falsifying documents, cheating the state of millions, and thieving. The Prosecutor-General's office has asserted that Khodorkovsky and his associates deprived the state of $1 billion worth of revenues.

Importantly, the sting operation initiated by hawks in Kremlin against the oligarch has met with public approval. The public holds the oligarchs responsible for robbing the state and causing poverty among the people. The business elite in Russia today made its fortunes in the mid-1990s when state-owned industries were privatised through a series of carefully engineered auctions. State resources were acquired by the oligarchs and wealth got concentrated in the hands of a few, there was a major flight of capital from the country, and the majority of the country's people found themselves without any means of sustenance. The result is that a section of the population would support a revision of the "murky" privatisation deals of the mid-1990s.

Analysts point out that the prolonged battle between Khodorkovsky and the government is the result of the former reneging on a tacit pact that President Vladimir Putin had entered into with the oligarchs on his coming to power. The deal was that the state would not interfere in their workings as long as they stayed out of politics and paid their taxes. Khodorkovsky, of course, failed on both counts. He declared his political ambitions and financed key Opposition parties in a bid to create his own loyalist faction in the Duma (Russia's Parliament). The acquisition of a liberal newspaper to push his ambitious agenda and his aggressive lobbying to build new oil pipelines in the region were factors that set the Kremlin up against him.

REUTERS

Dmitry Medvedev, the new Kremlin Chief of Staff.

Putin has come out strongly against any criticism by the business community or liberal politicians of Khodorkovsky's arrest. He said: "Everyone should be equal before the eyes of law, irrespective of how many billions of dollars a person has on his personal or corporate account. Otherwise we shall never teach and force anyone to pay taxes... and defeat organised crime and corruption."

After the arrest, the business community went into panic, and the top three business associations issued a strong appeal to the Kremlin, urging Putin to restrain the prosecutors. Further, liberal and right-wing political parties such as the Union of Right Forces and Yabloko denounced Khodorkovsky's arrest and issued appeals for his release. Putin, however, has said that "there will be no meetings and no bargaining over the work of law-enforcers, provided they acted within the Russian law, of course". He told a Cabinet meeting: "No conclusions, comparisons and precedents, particularly those that can trigger the revision of privatisation results, should be sought. I would, therefore, ask to end hysteria and speculations over the matter. And I request the Cabinet not to get engaged in related discussions."

Reports indicate that within hours of Khodorkovsky's arrest, the Kremlin's Chief of Staff, Alexander Voloshin, offered his resignation to Putin. Voloshin is a powerful man in the Kremlin hierarchy and a fixture in the Kremlin from the heyday of Boris Yeltsin's presidency. He is viewed by analysts as an avid supporter of liberal reforms and big business interests and was known to be close to Khodorkovsky. Putin accepted Voloshin's resignation on October 28 and within days he was replaced by Dmitry Medvedev, the chairman of the state-run energy company Gazprom who hails from St. Petersburg. With this development, the Khodorkovsky-Kremlin battle has spilled out onto the corridors of power in the Kremlin. It is being hailed by analysts as a very significant development with wide-ranging impact on Russia's future. Analysts Tatiana Malkina and Vladimir Gurevich wrote recently: "Many politicians and companies regard the prospect of Alexander Voloshin's resignation as more dramatic and important than anything that is being done to Yukos (The oil major run by Khodorkovsky). Some of them even view it as a milestone in the history of Russia. This is a milestone that is to be followed by new history - unclear, and therefore scary. A milestone that marks a new vector of development, not just another replacement of elites and oligarchs."

A SUBTLE battle for supremacy is on behind the Khodorkovsky-Kremlin clash. On the one hand, there is the administrative clan known as the "Family", which has established influence within the Kremlin from Yeltsin's period. Voloshin was a powerful factor within the Kremlin representing the "Family's" interests. The "Family" has supported the oligarchy's interests and Russia's liberal reform process. Its rivals belong to the hawkish "Siloviki" group from St. Petersburg. They are colleagues of Putin from his secret service days and are hard-liners favouring the return of a "strong Russian state". With the latest turn of events, they have acquired considerable influence within the Kremlin. Voloshin's exit and Medvedev's entry have to be seen in the light of this turf battle within the Kremlin. Interestingly, Medvedev is not a secret service man and is reformist in his outlook, though he is part of the St. Petersburg faction. The United Financial Group (UFG) has heralded the development as positive. "The choice of Putin's own man to succeed Voloshin is an encouraging one. In neo-Kremlinological terms, the 38-year-old Medvedev is from the reformist `St. Petersburg liberal' group, rather than from the `St. Petersburg KGB' faction," it said.

ALEXANDER NATRUSKIN /REUTERS

Alexander Voloshin, who resigned as Kremlin Chief of Staff.

Meanwhile, bad news continues to come in for Khodorkovsky. On October 30, prosecutors froze the controlling stake of Khodorkovsky and his jailed associates in Yukos. Khodorkovsky owned 9.5 per cent of Menatep, a holding company that controls 61 per cent of Yukos shares, and another 50 per cent through a trust. His partners, Platon Lebedev and Vasily Shakhnovsky, who were imprisoned earlier, held 7 per cent each. The prosecutors have taken this step to prevent Khodorkovsky from selling his stake in the company. In view of these developments, Khodorkovsky resigned as the chief executive of Yukos and issued a statement declaring that he wanted to concentrate on charity work for the Open Russia Foundation, a body that he had helped build. He said: "Wherever I work, I will dedicate all my energy to my country, Russia, in whose great future I firmly believe."

Criticism about the arrest has come in from several quarters. The business community, liberal and rightist political parties and even Prime Minister Mikhael Kasyanov censured the prosecutors for their zeal in proceeding against Yukos. Kasyanov is perhaps the only surviving high-level player within the Russian hierarchy who curries favour with the "Family". The U.S. State Department criticised the Kremlin on the Yukos issue and expressed "concern" about "rule of law in Moscow". Germany and the rest of the European Union too have expressed concern about Khodorkovsky's arrest.

The Kremlin has followed a two-pronged policy vis-a-vis the negative publicity. It communicated its anger to the U.S. on the latter's comments on the Yukos issue. Foreign Minister Igor Ivanov criticised the U.S. State Department and said its comments were "another manifestation of its policy of double standards". He declared that the State Department's statement was a case of "interference" with the judicial affairs of a foreign state. On the other hand, Medvedev, in a bid to mollify rising international concern, censured the prosecutors, saying that they should think twice on the economic impact of their actions.

The Russian market has reacted shakily to this development. Following Khodorkovsky's arrest, Yukos' shares dropped by 14 per cent to $12.40 in Moscow, while that of Sibneft plunged 19 per cent. The market value of the company that resulted from their merger, YukosSibneft, has fallen by about $7 billion to $38.6 billion since early October. Reports indicate that international investor confidence has shaken following the arrest of Russia's richest man, and the developments in the country are being watched eagerly by investors, particularly U.S. oil giants Exxon Mobil Corp and Chevron Texaco, which were planning to invest in Yukos. However, financial analysts are not overly worried; they feel that in the long-term investors will remain interested in Russia. The massive Russian oil reserves are of great interest to investors, owing to the instability in West Asia.

The imprisonment of Khodorkovsky is the result of over four months of sustained appreciation of pressure by the prosecutors on Yukos. Earlier, core Yukos share-holders Platon Lebedev and Vasily Shakhnovsky were imprisoned. A series of intensive raids have been conducted on Yukos' holding companies. The current development is merely the logical culmination of a move begun in July (Frontline, August 29). YukosSibneft faces several charges on different counts and its licences to operate key oilfields are being revoked. Some analysts interpret these moves as steps that could eventually lead to the "re-nationalisation" of Yukos. There is no doubt that the drama will have a far-reaching impact on the future of Russia.

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