DENIS SINYAKOV/AFP-GETTY IMAGES DETERMINED: Khodorkovsky is fighting the charges

Posted Sunday, November 2, 2003; 13.45GMT
By imprisoning Khodorkovsky, Putin hopes to neutralize him and silence the other oligarchs — but it's a risky move. He wants to wreck his rival but not the Russian economy. Yet the arrest could actually bolster Khodorkovsky's position, elevating him to the role of political martyr and giving the fractious opposition a figure around which to rally. "If we see that the President goes along only with the Siloviki," says Boris Nadezhdin, deputy chair of the Union of Right Forces faction in the Duma, "we must topple such a President or else leave the country." Determination like that, if it lasts, would put Putin in a bind. Khodorkovsky "is no timid rabbit," says Boris Berezovsky, an oligarch who left Russia in 2000 when investigations were launched into his business practices. "He has made Putin fear him. From now on, Putin will fear him even more."

The U.S. and German governments have also raised concerns about the Khodorkovsky case, asking for assurances that the arrest was legal. "It looks more and more like this is a very selective prosecution, for political reasons," says a senior U.S. State Department official. "These things get expressed. They get raised with the Russians." The Kremlin took offense at this, saying through the Foreign Ministry that such protests are "tactless and disrespectful."

Putin himself took pains to downplay the significance of the arrest. "I would ask that all speculation and hysteria about this be stopped," he said in a televised address. Three days later, he met in an opulent conference room at the Kremlin with a group of international bankers, including representatives of Deutsche Bank, Morgan Stanley and Goldman Sachs. He assured them that he wasn't nationalizing the company, but simply freezing its assets so they would be available to settle the criminal claim. He said the moves against Khodorkovsky don't herald any shift in the Kremlin's pro-business policies. Indeed, he said he hadn't known about the Yukos stock seizure in advance, and was 10 minutes late for the meeting because the prosecutor general's office had just briefed him on it. But the businessmen weren't assuaged, and many Russians are skeptical. "Nothing of this kind can happen at the Kremlin without the President's knowledge, order or acquiescence," says Lilia Shevtsova, a political analyst with the Carnegie Moscow Center.

Khodorkovsky is no timid rabbit. He has made Putin fear him. From now on, Putin will fear him even more — BORIS BEREZOVSKY, Russian businessman

Khodorkovsky's arrest could take a toll on growing international confidence in the Russian economy. The ratings agency Moody's recently upgraded Russia's sovereign credit rating in a move that seemed likely to encourage greater foreign investment. But any further signs that Russia is backsliding could have a chilling effect on foreigners and accelerate capital flight out of the country. Indeed, in the four months since Yukos has been in the firing line, an estimated $7.7 billion left Russia, a shocking reversal from the net $3.7 billion that entered the country in the second quarter. Yevgeny Yasin, an Economics Minister under Yeltsin in the 1990s, estimates that the flight will now accelerate.

For the moment, big foreign players continue to give Putin the benefit of the doubt. "Nothing that has happened over the past few days will change our attitude," said Lord Browne, the chief executive of British oil giant BP, which recently finalized a $6.8 billion Russian venture. "We haven't changed our long-term perspective," concurs Peter Elam Håkansson, who manages a $250 million Russian stock fund out of Stockholm for East Capital. The fund is up about 100% this year to date, and Håkansson was using the market declines last week to buy up more stocks. "We know we have to handle risk," he says, but "it's still one of the most exciting places to invest your money."

Russia's super-rich oligarchs have been frequent political targets over the past decade; attacking them can be a vote winner because many Russians are deeply suspicious of the loans-for-shares scheme under which Russian industries were privatized — and through which these businessmen got their wealth. Two big players during the '90s — Boris Berezovsky and Vladimir Gusinsky — have fled into exile. More recently, Roman Abramovich, a Siberian provincial governor, sold his oil company Sibneft to Yukos and bought Chelsea Football Club. (So far, Putin's remarkable popularity is holding up: in a VTsIOM-A poll conducted last week, the President had a 73% approval rating.)

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