'Restoration' trims Khodorkovsky's chances

By JOHN R. LEMKE, United Press International

WASHINGTON, July 7 (UPI) -- A post-revolutionary "restoration" underpins the Russian government's prosecution of former Yukos chief executive Mikhail Khodorkovsky; with some arguing that this constitutes a partial return to a central-command economy where the government may reacquire some industries privatized during the 1990s.

The government will use the judicial process as a tool for this goal.


The Khodorkovsky trial, suspended until July 12, converges unsettled issues including the proper distribution of vast wealth in a poor country, ownership of natural resources, privatization and the rule of law into a single dispute, said Leon Aron, a scholar at the American Enterprise Institute, speaking last week.

Nikolas Gvosdev, senior fellow at the Nixon Center, a non-partisan center for the study of U.S. national security issues, thinks alterations in Russian President Vladimir Putin's cabinet have signaled a change in government policy. "The balance is shifting to those who believe the government, while not owning the industries, should have a role in operating them," he said.


Late in 2003, Kremlin chief of staff Alexander Voloshin resigned and earlier this year, Prime Minster Mikhail Kasyonov was fired. Both were closely identified with the pro-business policies of former president Boris Yeltsin. They have been replaced by pre-revolutionary political and economic elites attempting to stage comebacks a part of the "restoration," according to Aron. These moves mean the government's partnership with the oligarchs, those like Khodorkovsky who purchased formerly state-owned industries, is over, Gvosdev said. The "restoration" is not intended as a complete reversal of the revolution, but an attempt by pre-revolution elites to regain some political and economic stature.

The theoretical basis for the policy change lies in the government's attitude toward natural resources, Gvosdev said. The government is trying to bring the ownership of resources back to the state with individuals simply owning the rights to utilize the resources rather than owning them in themselves.

Putin recognizes private owners are more efficient than the state, according to Gvosdev, but thinks they must still ultimately answer to the state. The government fears if it doesn't receive some revenue for the licensing of natural resources and is left out of industry negotiations, the oligarchs will continue to use profits made in Russia to purchase foreign assets.


A continuous flight of Russian currency out of the country inhibits Russia's long-term economic viability, according to Ian Hague, cofounder of Firebird Management LLC, which manages $675 million in private funds dedicated to investment in Russia and Eastern Europe. The lack of reinvestment in the Russian economy means that although the gross domestic product and personal wealth have grown, labor productivity has not, he said.

Russia faces the threat of having a stunted economy like Nigeria, Venezuela or Mexico if it fails to reinvest in its infrastructure, according to Hague. Those countries excessively rely on the export of raw materials to the point that much of the reinvestment goes back into extracting resources and almost none to other industries.

In Hague's' view, Khodorkovsky's trial is part of a strategic economic objective. "The Yukos affair is one step along the road to execution of a strategy of diversifying the economy," he said.

Should the government reacquire the ownership of the rights to refine and distribute the share of oil that Yukos currently does, it would be worth about $15 billion, according to Hague. Khodorkovsky paid $309 million in 1995 for 78 percent of Yukos' shares.

In order to achieve its ends, the Russian government may be violating the rule of law, according to Judge Steven Williams of the U.S. Court of Appeals for the District of Columbia. Williams said the rule of law is still being developed in Russia -- it's not yet a parallel with Western systems.


A key element in the rule of law is the independence of the judiciary. Incidents in the Yukos affair indicate that Russia's judicial system is fettered, Williams said. A judge who agreed to hear an appeal from Yukos regarding its $3.4 billion tax bill was removed from the case on June 15. Another judge enforced the bill three days later, a very short time for a new judge to deliberate and rule, indicating possible pressure from outside, Williams said. On June 17 Putin declared that he had no intention of bankrupting Yukos. Williams said a leader's intentions should have no bearing on an independent court's rulings. "This is not a proceeding which can encourage anyone about the rule of law in Russia," Williams said.

Sanford Saunders, a member of Khodorkovsky's legal defense team, is similarly pessimistic about the outcome of the case. "We don't have any hope that we're going to have success at a trial." Khodorkovsky will be convicted because the judiciary isn't independent, he said.

The benefits of the rule of law could be enhanced for the majority of the population even if they are limited for Khodorkovsky and other oligarchs, countered Randy Bregman, an international lawyer at the New York office of Salans.


The point of the rule of law in terms of commerce is to ensure predictability and consistency in property rights and contracts, Bregman said. Tremendous accumulation of capital by a few limits the transparency of business dealings and clogs this process. Bregman said the share of power and wealth own by the oligarchs must be reduced, allowing a broader business class to develop. This, he said, will create a larger middle class leading to more diverse political parties. These parties will ensure the rule of law because more people will have a vested interest.

Khodorkovsky is accused of fraud and theft of state property as a result of the "loans for shares" privatization practice on the early- and mid- 1990s, where the cash-strapped Russian government offered controlling stakes in industrial enterprises as collateral for loans. When the government defaulted shortly afterward, the new titleholders at auction sold the shares of the companies. Khodorkovsky's holding and investment firm, Menatep, bought Yukos, a conglomerated oil production, refining and distribution company in 1995.

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