The panicked among Western investors includes British Petroleum, which is re-evaluating its $8 billion merger with the Russian oil major TNK, and others selling off their Moscow stock portfolios. With YUKOS listing, reported merger talks with Exxon and Chevron, to create the largest oil company in the world, will be on ice.
Since 1999, YUKOS has increased its market value from $1 billion to over $20 billion, has hired Western executives, raised funds in global capital markets, and won praise for introducing transparency and good corporate governance. However, its Chairman and CEO, Mikhail B. Khodorkovsky, a bespectacled 40 years old, has caused the ire of Putin's entourage by supporting two small liberal parties, Yabloko and Union of Right Forces, in the forthcoming parliamentary elections scheduled for December 7, 2003. Experts said that the Kremlin claims that Khodorkovsky violated a secret agreement between Putin and the Russian oligarchs concluded in 2000, when the ex-KGB lieutenant colonel succeeded Boris Yeltsin: if you stay out of politics, you can keep your businesses. But there is more.
A rumor campaign was launched against Khodorkovsky, alleging that he covets the presidency himself, after Putin's second term expires in 2008. Whether true or not, that may have made Russian president nervous. But two things are certain: first, it makes good politics in Russia to bash "oligarchs", who got their properties in the 1990s in an opaque privatization process. In a recent VTsIOM poll, 75 percent said they believe privatization needs to be revisited. And second, many KGB and military officers around Putin would like to chop up YUKOS and other companies, and put their assets into their own pockets.
Speaking on July 18, on the television channel NTV, Alfred Koch, the former privatization official under Yeltsin, said that some in Putin's Kremlin are planning to revise the results of the privatization. "They are trying to conduct an election campaign under the slogan 'shoot the oligarchs," Koch said. If they want to use this campaign for the victory of Putin's United Russia party in the upcoming elections, the party will win. Koch and other Russian experts, such as Julia Latynina, a leading investigative journalist, are saying that Putin is now facing the hardest choice of his career: support asset-hungry cronies from the former Leningrad KGB, or stay the course of integration with the West, foreign investors, and economic growth. Putin will not be able to do both.
The YUKOS affair allows an important insight into the fascinating interplay of politics and law.
Property rights in Russia are still not protected. While Putin ran in 2000 under the slogan "Dictatorship of the law", in reality, his is a dictatorship of political power, which defines what the law is -- or how it is used. Two politically "undesirable" oligarchs who crossed Putin -- Boris Berezovsky and Vladimir Gusinsky -- were chased out of the country and are living in exile. In the process, the independent electronic media in Russia was effectively destroyed. If the notoriously corrupt and government-dependent Russian courts cannot protect the richest man in Russia -- Khodorkovsky is reportedly worth over $7 billion -- they are certainly unable to protect ordinary Russians or regular Western investors.
With KGB men running the Kremlin, Russia is abandoning its anti-communist, liberal glow. It is a disturbing trend threatening democracy, a group of Russian novelists, musicians and poets warned on July 19 in a letter to Izvestiya. Soviet orthodoxy continues to push out the historical truth acquired over the past 10 years about the totalitarian, repressive regime and its horrible consequences on the people, country and culture, artists said in an open letter to Education Minister Vladimir Filippov. Soviet-era persecuted authors, such as Boris Pasternak and Andrei Platonov and poets Anna Akhmatova and Osip Mandelstam, crucial to the comprehension of Russia's tragic history, have been removed from the reading lists, the letter said.
Russia's ambition to become an alternative oil supplier to the United States instead of the unstable Middle East, and its integration into the global economy may become unglued. Khodorkovsky, together with other oil moguls, has championed the privately-owned and operated oil pipeline to the Arctic port of Murmansk. If YUKOS goes under, it is unclear who will develop the fields and the pipelines for this project. Presidents Putin and Bush will have a lot to talk about at their Camp David summit in September.
In the late 19th and early 20th centuries Russia, with its double-digit economic growth, stood on the brink of a great economic expansion, only to be trampled by the stupidity, viciousness and greed of the czarist regime. A post-World War I recovery in the mid-1920s was starved out, bled and smothered by Stalin's agricultural collectivization, man-made famine, and terror. From the largest grain exporter which supplied one quarter of Europe's wheat and half of Britain's eggs in 1897, Soviet Russia has become a long-term grain importer and pauper. One only hopes that someone in the Kremlin knows Russian history and learns from past mistakes. Until then, forget about doubling Russian GDP.
Ariel Cohen, Ph.D. is Research Fellow in Russian and Eurasian Studies at The Heritage Foundation and author of Russian Imperialism: Development and Crisis (Praeger, 1998).