TCS Daily

Russia's Watershed

By Ariel Cohen - November 5, 2003 12:00 AM

The attack on the major Russian oil company, YUKOS, which led to the arrest of its chairman and CEO, Mikhail Khodorkovsky, and his shares, and subsequently to his resignation, is a watershed event in post-communist Russian history. This development has negative implications on several levels, and its ripple effects are far from over. Obviously, President Vladimir Putin has been listening to those who do not care about Russian integration into the global economy, and who are undermining his stated goal to double the GDP by the year 2008.


Politically, the Kremlin's attempt to dismantle YUKOS is a repeat of the catastrophic mistakes made by previous Russian leaders, who in the twentieth century destroyed the national economy twice. The first time was when the ill-conceived declaration of war against Austria-Hungary in 1914 ended Russia's unprecedented economic growth; led to the demise of the House of the Romanovs; and the Bolshevik coup in 1917. The second disaster struck when Stalin has launched his genocidal collectivization of agriculture, which abruptly ended the New Economic Policy in 1928.


The Kremlin, through an orchestrated "black PR" campaign, has accused Khodorkovsky of preparing a constitutional coup by inundating the Duma with his loyalists, supporting opposition political parties financially, and harboring presidential aspirations for the year 2008. The Kremlin was miffed that YUKOS supported several political parties, but not the pro-Putin United Russia. Furthermore, Khodorkovsky was considered a part of the Yeltsin-era "crony capitalism" -- a free-wheeling combination of politically active billionaire "oligarchs" and Yeltsin's family members, who are now being purged. Alexander Voloshin, Yeltsin's chief of staff, whom Putin retained until October 30, 2003, when he resigned, was a political leader of the Yeltsin "family."


The St. Petersburg KGB men with whom Putin is siding ("chekists" or siloviki -- men of force) and their associates from the business world have a different view of politics than the Yeltsin "family." While wrapping themselves in the flag and patriotic rhetoric, they do not hesitate to abuse law enforcement and courts to achieve their goals.


Their main goal is to translate power into wealth. Some among the St. Petersburg faction want to chop up YUKOS, Russia's most successful oil company, which just a month ago merged with Sibneft to form the fourth largest oil company in the world. It was also the most independent from the government. Over the years, YUKOS paid billions of dollars in taxes and gave hundreds of millions in charity. Other companies may be next on the chopping block.


YUKOS has become the industry leader, introducing Western accounting standards and management, and buying hundreds of millions of dollars worth of U.S. oil equipment. It pioneered shipping Russian oil to the U.S. market and launched a private consortium to build a pipeline from Western Siberia to the arctic port of Murmansk.


Politically well-connected businessmen, associated with government-dominated oil companies and banks, have conspired to dismantle YUKOS by bringing up apparently trumped-up charges of past irregularities against YUKOS's principal shareholders. In the 1990s the Russian economy was plagued with lawlessness, and any consistent retroactive application of today's law would have caused an absolute majority of Russia's current politicians, bureaucrats and businesspeople to serve long jail sentences. Such abuse of the law, however, causes irreparable damage to the Russian economy, its court system, and to Western and Russian investors.


The attack on YUKOS has done multi-billion dollar damage to the Russian stock market, including to American shareholders, as the Moscow RTS index plunged over 20 percent, triggering massive capital flight. YUKOS shares plunged 10 percent on the news of Khodorkovsky's arrest alone. Moreover, Putin, by jailing Khodorkovsky and his partner Platon Lebedev, is sending a clear signal that the Russian state can be hijacked, and its legal system subverted, by unscrupulous bureaucrats, businessmen, prosecutors, law enforcement officers. Today, the positive investment climate that Russia enjoyed since the 1998 evaporated overnight.


The Bush Administration is facing a dilemma: it wants to keep Russia as a strategic partner in the war on terrorism and an alternative source of oil. However, as Russia is moving toward the destruction of independent centers of power and increasing authoritarianism, and as the future of economic reform is at stake, decisive measures may be necessary. The Bush Administration should re-evaluate its energy dialogue with Russia until Khodorkovsky is released and an impartial investigation examines the charges. U.S. companies should not endanger their stockholders by investing in an unstable Russia.


The White House should suspend temporarily U.S. Export-Import Bank and Overseas Private Investment Corporation (OPIC) financing of oil and gas projects in Russia, in which state-owned entities, such as the oil monopoly Gazprom, participate. This will send a signal that the state cannot abuse its power when dealing with private sector competitors.


U.S. Secretaries of Commerce, Energy and State, should issue a joint statement by the expressing concern over the crackdown on the private sector and abuse of the legal system.


Finally, the White House should provide some U.S. Government funding and encourage private charitable giving to foundations and projects supported by YUKOS charities until now. Support of democracy and an open society in Russia should not be allowed to stop.


With the attack on YUKOS, the ex-KGB faction in the Kremlin has reverted to state-led repression against private capital and independent power centers. A crackdown on the independent media has been ongoing for three years. The U.S. should send a strong signal to President Putin that such policies may cost Moscow America's good will and cause damage in tens of billions of dollars.


Ariel Cohen, Ph.D. is Research Fellow in Russian and Eurasian Studies at the Heritage Foundation. His expertise includes international energy security.


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