Sunday, Nov. 09, 2003

Business As Usual

By PETER GUMBEL

You might think the arrest of Russia's richest man — and the seizure of some $13 billion of his company's stock — would have a chilling effect on business investment in the country. But you'd be wrong. When Russian President Vladimir Putin visited Rome last week for a European Union summit, Fiat used the occasion to sign a deal with a Russian car distributor and announce that it was thinking about building an assembly plant in Russia. Oligarch Mikhail Khodorkovsky, charged with tax evasion and other crimes, awaits trial in a Moscow jail, and his assets in Yukos — the firm he built into Russia's biggest oil producer — remain frozen. But if Fiat had any qualms, it wasn't letting on. The company "is undertaking the new venture in the same spirit as its initiatives in the past," said Fiat president Umberto Agnelli.

Putin's critics believe Khodorkovsky's arrest smacks of past initiatives too: the arbitrary detentions and state control of the economy that characterized Soviet times. Khodorkovsky is just the latest among a group of oligarchs — the businessmen who shot to fame and fortune during the wild privatizations of the 1990s — to have been imprisoned or flee the country. Some see these prosecutions not as an effort to clean up Russian business, but as the Kremlin's attempt to break the power of the tycoons — especially Khodorkovsky, who had been funding anti-Kremlin parties and hinting at a political career of his own. "It's capitalism with Stalin's face," says Grigory Yavlinsky, leader of the opposition Yabloko Party. "Similar things have been happening to thousands of entrepreneurs all over the country. Business and power are Siamese twins in this country. When these twins come into conflict, grave developments like this result."

Since he became President in 2000, Putin has suppressed the independent media at home, centralized power in the executive branch, pursued a brutal war in Chechnya and bullied the countries along Russia's southern borders. "The United States cannot enjoy a normal relationship, much less a partnership, with a country that increasingly appears to have more in common with its Soviet and czarist predecessors than with the modern state," U.S. Senator John McCain said last week. Is Putin really out to turn back the clock?

Western governments and businesses are reserving judgment. In Washington, the Bush Administration has limited its public criticism to a statement of concern about the rule of law in Russia. At a joint press conference in Rome, Italian Prime Minister Silvio Berlusconi delivered a passionate defense of Putin — then jokingly offered to become his lawyer — though other E.U. leaders later rejected Berlusconi's comments. A spokesman for European Commission President Romano Prodi announced that Prodi had told Putin he was concerned about the security of foreign investment in Russia. But by then, Putin had moved on to Paris for a cordial visit with French President Jacques Chirac. Western investors, meanwhile, are voting with their wallets. Besides Fiat, another big European company announced a Russian deal last week: Germany's Deutsche Bank said it is buying 40% of a Moscow-based stockbroker called United Financial Group. It hopes the $70 million move will make it a leading player on the Russian stock market, which has been roller-coastering since Khodorkovsky's arrest. "We see it as a commitment to a country with good long-term prospects," says a bank spokesman.

Executives at Yukos are far less confident about their own prospects. Last week about 60 employees who had applied for passports over the past three months received letters saying that their applications were being passed to the Russian security services, signaling a likely delay of approval. Many managers suspect their phones are tapped and think they're being tailed, just like in the bad old Soviet days. "They plan to destroy the company," a senior executive told Time.

From his jail cell, Khodorkovsky resigned as chief executive of Yukos to protect the company from further attacks. His successor: Simon Kukes, 56, a Russian-born U.S. citizen with a wealth of oil-industry experience. But Yukos remains vulnerable because it may not have been sticking to the exact terms of many of its oil-exploration and production licenses. When the contracts were drawn up in the mid-1990s, Russian authorities used criteria from the Soviet era to stipulate the number of wells to be drilled, according to people familiar with the contracts. But Yukos brought in Western oil-service companies, which have made the process far more efficient. As a result, these sources say, Yukos has been extracting far more oil from far fewer wells than agreed. The fear inside Yukos is that its existence could be jeopardized if the government starts revoking the licenses, as Vitaly Artyukhov, Natural Resources Minister, threatened last week. But if Yukos' dominance of the oil industry — the engine of Russia's economy — made Putin and his deputies hungry for control of the company, as some critics charge, it may also make the Kremlin want to avoid demolishing the firm outright. Putin is signaling as much. Asked in Rome about a possible license revocation, he said, "I expect the government to refrain from such steps. The state surely does not want to destroy the company." But the ministry continues to examine the licenses.

Some Western business analysts think Putin's getting a bum rap. "It's easy to attack Putin," says Jamie Richard, a principal at New York-based Firebird, which manages about $500 million in equities in Russia, Eastern Europe and Central Asia. He says Putin's achievements are overlooked: a massive cut in Russian debt, a budget surplus, a freely traded and stable currency, growing reserves, foreign investment, functioning stock and debt markets and low corporate taxes. "If any of us were in a U.S. jail for alleged tax evasion and fraud," he says, "the sec would freeze our shares, too."

Others take a far darker view. While Deutsche Bank was announcing its deal, Yelena Bonner, the widow of Soviet-era dissident Andrei Sakharov, was asking Amnesty International to consider officially naming Khodorkovsky a political prisoner of conscience. And Khodorkovsky is fighting back. One of his lawyers, Anton Drel, is preparing to release a detailed refutation of the prosecutor's charges, while another is planning to take the case to the U.N.

New explanations for Khodorkovsky's detention are also emerging. According to a senior official in the federal government, Putin hastily ordered the arrest after learning that Khodorkovsky was headed to the remote Siberian republic of Evenkia to be nominated as its Senator to the Federation Council, the upper house of the Russian parliament. Such an appointment would have given Khodorkovsky immunity from prosecution and allowed him to pursue politics, if that's what he intended. Duma Deputy Alexei Mitrophanov repeated the tale — but a Yukos spokesperson categorically denied it, saying Khodorkovsky was simply traveling to Irkutsk to visit oil installations and local branches of his Open Russia charity. Just two days after Khodorkovsky's arrest on Oct. 25, Vasily Shakhnovsky — a big Yukos shareholder and then top executive with the firm — made a bid for Evenkia's senate seat and was nominated in absentia. But last week a Siberian court officially stripped him of the seat on a minor technicality, permitting the continuation of a tax-evasion case against him. He denies the charges.

Scenarios like this make many — inside and outside Russia — believe that a more drastic crackdown may be on the way. "What is going on now is just the beginning of a major shift," one veteran Russian security officer told Time. "That a dictatorship is coming is no question." According to the senior federal government official, the next steps include further tightening of the Kremlin's control of the Duma, increasing the power of security and law-enforcement agencies, and clamping down on civil society. Last Friday, armed men in combat fatigues raided the Moscow headquarters of the Open Society, the philanthropic organization run by U.S. financier George Soros, in what was described as an ownership dispute over the premises. "What you've got to understand about Putin," says this official, "is that he's a statist who feels he has a mission from God to save Russia from disintegration."

For a few days after Khodorkovsky's arrest, Putin's political enemies dared hope the crisis might unite the opposition. That hasn't happened. At noon last Friday, the 86th anniversary of the coup that brought the Bolsheviks to power, about 900 Yabloko supporters gathered in Pushkin Square with posters proclaiming free khodorkovsky. An attempt to stage a joint rally with the other main opposition group, the Union of the Right Forces, foundered on old rivalries. Both parties were funded by Khodorkovsky. Meanwhile another demonstration — organized by communists — attracted at least 10,000. At one point, members of the crowd climbed on top of the Duma building and replaced the Russian tricolor with the hammer and sickle.

Despite the feuding, some analysts believe this crisis has cleared the space for a credible opposition, though probably not in time for the Dec. 7 Duma elections. "The Khodorkovsky case created the niche for a serious challenger," says the Russian official. "He broke the ground for someone else to emerge." If one does appear, Putin's response to him will say a lot about the future of democracy in Russia.