Politics & Policy

Code Red

Killing the oil company that laid the golden eggs.

Russia’s ambition to become an alternative oil supplier to the United States (in lieu of the unstable Middle East) and its integration into the global economy are both becoming unglued.

The Putin administration has begun a methodical dismantling of YUKOS, the fourth-largest oil company in the world and the flagship of the Russian oil industry. YUKOS is controlled by its chairman and CEO, 40-year-old billionaire Mikhail Khodorkovsky. Together with other oil moguls, Khodorkovsky has recently 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 pipelines for this project. Presidents Putin and Bush are going to have a lot to talk about at their Camp David summit in September.

In the late 19th to early 20th century, Russia, with its double-digit economic growth, stood on the brink of a great economic expansion, only to be trampled down by the stupidity, viciousness, and greed of the czarist regime. In turn, the post-World War I recovery of 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 can learn from past mistakes. Until then, forget about doubling Russian GDP.

Among the panicking Western investors are British Petroleum, which is re-evaluating an $8 billion merger with the Russian oil major TNK, and others which are selling off their Moscow stock portfolios. With YUKOS in jeopardy, reported merger talks with Exxon and Chevron, which would create the largest oil company in the world, will be put on ice.

Since 1999, YUKOS has increased its market value from $1 billion to over $20 billion and has hired Western executives, raised funds in global capital markets, and won praise for introducing transparency and good corporate governance. However, young Mr. Khodorkovsky, who prefers blue jeans and turtlenecks to business suits, has in the process roused the ire of Putin’s entourage by supporting two small democratic parties, Yabloko and Union of Right Forces, for the forthcoming parliamentary elections scheduled for December 7, 2003.

Moscow-based experts said that the Kremlin claims Khodorkovsky violated a secret agreement between Putin and Russian oligarchs that was 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, for after Putin’s second term expires in 2008. Whether true or not, this may have made the Russian president nervous. But two things are certain: First, it’s good politics in Russia to bash “oligarchs,” who got their properties in the 1990s through the opaque privatization process. (In a recent VTsIOM poll, 75 percent said they believe that 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 the assets into their own pockets.

Speaking on July 18 on 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 Leningrad KGB, or stay the course of integration with the West and foreign investors. Putin will not be able to do both.

The YUKOS affair provides some important insights into the fascinating interplay between 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, it is a dictatorship of political power that defines what the law is — or how it’s used. Two politically “undesirable” oligarchs who crossed Putin, Boris Berezovsky and Vladimir Gusinsky, were chased out of the country and are now living in exile. In the process, the independent electronic media in Russia were 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 certainly will be unable to protect either ordinary Russians or regular Western investors.

And with KGB men running the Kremlin, Russia is abandoning its anti-Communist, liberal glow. It is a disturbing trend that threatens democracy, a group of Russian novelists, musicians, and poets warned on July 19 in a letter to Izvestiya. In an open letter to Education Minister Vladimir Filippov, the artists warned that Soviet orthodoxy is continuing to push out the historical truth about the totalitarian, repressive regime and its horrible consequences for the people, country, and culture. Soviet-era persecuted authors crucial to the comprehension of Russia’s tragic history — among them Boris Pasternak and Andrei Platonov, and poets Anna Akhmatova and Osip Mandelstam — have been removed from the reading lists, the letter said.

In Russia, politics and economics are always more interconnected than they are in the West. The result: The Kremlin is destroying the country’s largest oil company, and plunging the Russian stock market, until recently one of the world’s most lucrative, into a 5-percent-a-day, $20 billion tailspin.

The doubling of Russia’s GDP by 2010, which President Putin announced in his state of the federation speech on May 16, is unlikely to happen if the flagships of Russian industry continue to be sunk by its own government.

— Ariel Cohen is a research fellow in Russian and Eurasian studies at the Heritage Foundation and author of Russian Imperialism: Development and Crisis.

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