Global View: Troubled Russian property

By IAN CAMPBELL, UPI Chief Economic Correspondent

Take two Russian billionaires. This summer one, Roman Abramovich, buys a British football team, Chelsea, and proceeds to spend some small change in his well-oiled pocket, about 100 million pounds ($165 million), on some of the world's most expensive football players.

Another, Mikhail Khodorkovsky, is arrested days ago on charges of corruption and jailed. His future becomes unclear and so does that of foreign investors who have put their money into the new Russian economy which had been advertised, above all by Khodorkovsky himself, as a private, free-market economy.


What is going on?

Part of the problem is newness: new found wealth in a newly private economy in a new and only partial democracy: a "managed democracy" as it is sometimes called.

The Russian billionaires or "oligarchs" made most of their money in the 1990s, but not because they came up with anything new or even managed anything particularly well. They were in the right place at the right time. They knew the right people. They scrapped. They won the lottery that was the privatization of the assets of the Soviet Union after the union and communism fell.


And they have since been a part, a major part, of the rapid change in Russia as the country has moved away from the Soviet economy towards a free market one. The lottery winners are Russia's biggest industrialists, its plutocrats. They are rich and powerful, yet, it seems, vulnerable.

Khodorkovsky is not the first "oligarch" to find himself in trouble with the Russian state. Boris Berezovsky, architect of the privatizations, and Vladimir Gusinsky, the media magnate, both fled from Russia in 2000. Abramovich, meanwhile, by buying into Chelsea football club, may not simply be seeking respectability, as The Economist magazine wrote in articles in the summer, but preparing a new base for himself and his hardly-earned millions should Moscow become unusually hot.

Yet Abramovitch may have less to fear than others. He has played the oligarch game more by the "rules" than others. When does Abramovitch opine on Russia's politics? He does not do so. He sticks to business -- and to football in London.

Khodorkovsky, on the other hand, has voiced opinions. To a degree he can't help but do so. His business, oil, is the heart of the Russian economy and the apple of foreign investors' eyes. And to foreign investors government policies and rules matter.


Khodorkovsky's views on Russian business and politics were ones foreign investors appreciate. He has been a person comfortable among leaders of the Western economy and an advocate of changes in Russia that most in the West would welcome. He criticized what foreign investors criticize and even what they would not normally criticize: the leadership of Russia's President, Vladimir Putin.

At the time of Gusinsky's arrest in June 2000, for example, Khodorkovsky said, "I think there is a lot in himself that Mr. Putin must eliminate if he wants to be the president of a democratic country. He must reject a lot of himself and force many others to do the same."

Khodorkovsky thereby referred back to Putin's past as head of the KGB intelligence agency: his role in the totalitarian Soviet machine. You must change Russia and yourself was his message to Putin. Putin's response, three years on, is to send Khodorkovsky to jail, facing a possible term of 25 years on charges that include forgery, tax evasion and embezzlement.

There may well be substance in some of those charges but that is not the point. Khodorkovsky, like the other oligarchs and Putin himself, has plenty of murk in his past. The Russia of the 1990s was in violent upheaval: a disorganized mafia fighting over the remains of the organized Soviet mafia.


Khodorkovsky is in deep trouble now not for any particular crime but because he has upset Putin.

In the West he and his lawyers would be able to mount a defense. What his arrest highlights is that Russia is still far from being a western democracy. It does not have a healthy justice system. Neither human nor property rights can be guaranteed. According to Peter Lavelle, a Moscow-based writer and consultant, Khodorkovsky's mistake was "to believe that Russia is ruled by known and enforceable laws."

For foreign investors all this is alarming. Putin is a man to be feared. He has power. Slapping down the rich oligarchs is popular with the Russian public. Putin is likely to be re-elected in 2004. And there is no system of checks and balances to protect Russian citizens from state abuse of power.

What Putin would point to, however, is abuse of power by the oligarchs themselves. Whose money is Abramovich spending when he buys a toy called Chelsea? Whose money is Khodorkovsky wielding? Is it really his? Did he make it?

Dr. Vlad Sobell, an economist at Daiwa Institute of Research who escaped from Soviet-controlled Czechoslovakia decades ago, points to comments made by Putin in an interview with the New York Times earlier this month. "The state has appointed them (the oligarchs) billionaires: simply by giving away the state assets for free," Putin said. This "appointed them" reveals Putin's position. The appointed billionaires can find their appointments taken away. No wonder Abramovich has taken to football and Chelsea.


What does this mean for Russia? Is it going forwards or backwards?

What has happened is a slap in the face not just to Khodorkovsky but to foreign investors. Moody's ratings agency recently gave Russia investment grade. That looks wrong, first and foremost on the grounds that the rule of law is not established in Russia and the rules are what Putin makes them. And not even Putin can be sure of the consequences of his confrontation with Khodorkovsky. Putin looks uncertain about the role the private sector and foreign investors should play in the Russian economy.

Oct.10 he said that the state would retain control of the gas transport system. He has also said Gazprom, the huge oil and gas conglomerate, "will not be dismembered." He retains a liking for the old state-run companies. They, after all, know their place.

On macroeconomic grounds, too, foreign investors may have been too confident. Default on debt in 1998, huge devaluation of the rouble, high world oil prices: all these factors have bolstered the finances of Russia's government and have enlivened its economy. A secular change, too, is taking place as the state-controlled economy is replaced more and more by a dynamic private one; that will go on.


It is still the case, too, that much of the money made in Russia moves out of it, in capital flight: $7.7 billion was the net capital outflow in the third quarter. Russia is not the prettiest or safest of homes for investors, including domestic ones. And the dependency on oil is still great. If the world oil price falls neither the government nor the private economy will be as buoyant.

Yet this is not to say that Russia is going backwards. Sobell, for one, sees it as moving forwards. In his view, the collapse of communism was an earthquake; the battle now between Putin and Khodorkovsky an after-shock. It won't be the last.

The privatizations of the 1990s are not about to be reversed. The free market economy will keep developing. One day, too, a true democracy with full respect for property rights may develop. But that time still looks far away. For now Putin makes the rules and investors are like flies to his whims. Russia's march was always a slow one.

Global View is a weekly column giving a personal view on issues of importance for the global economy. Comments to [email protected]


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