Putin vs. the Tycoon

• Share

In Russia's first years as a market economy, crooks and businessmen were one and the same. But Mikhail Khodorkovsky, 40, the richest man in Russia, was a self-imposed reform movement. His Yukos Oil Co. enjoys a reputation among foreign investors as perhaps the most Western-like company in Russia. It has a cluster of Americans on its board; among top management, it uses U.S. accounting standards; and it was the first Russian company to detail its precise ownership structure. Yukos has been talking with both ExxonMobil and ChevronTexaco about the possible sale to one of them of as much as 40% of its equity, according to people familiar with the negotiations.

But when Khodorkovsky was arrested last week on tax evasion and other charges, following months of intimidation, alarm bells went off in Russia and around the world. Prosecutors froze a 44% stake in Yukos, the world's fourth largest oil company and the source of Khodorkovsky's wealth, estimated last year at $8 billion. Khodorkovsky denies any wrongdoing, and his lawyers say the charges are purely political.

LATEST COVER STORY Mind & Body Happiness Jan. 17, 2004 Past Issues Tsunami Jan. 10, 2004 ----------------- Person of the Year Jan. 3, 2004 ----------------- Secrets of the Nativity Dec. 13, 2004 ----------------- The Stealth Killer Dec. 6, 2004 ----------------- Coolest Inventions Nov. 29, 2004 ----------------- Battle for Fallujah Nov. 22, 2004 ----------------- Four More Years Nov. 15, 2004 ----------------- The Joy Of Sox Nov. 8, 2004 ----------------- The Morning After Nov. 1, 2004 ----------------- The God Gene Oct. 25, 2004 ----------------- The Vote Battle Oct. 18, 2004 ----------------- Visions of Tomorrow Oct. 11, 2004 ----------------- The Tragedy of Sudan Oct. 4, 2004 ----------------- CBS Controversy Sept. 27, 2004 ----------------- America's Border Sept. 20, 2004 ----------------- Struggle Within Islam Sept. 13, 2004 ----------------- World of George Bush Sept. 6, 2004 -----------------   SPECIAL REPORTS  Coolest Video Games 2004  Coolest Inventions  Wireless Society  Cool Tech 2004 PHOTOS AND GRAPHICS  At The Epicenter  Paths to Pleasure  Quotes of the Week  This Week's Gadget  Cartoons of the Week More graphics >> More photos >> MORE STORIES Advisor: Rove Warrior The Bushes: Family Dynasty Klein: Benneton Ad Presidency More Stories >> CNN.com: Latest News

The arrest could damage international confidence in the Russian economy, which had been rebounding nicely from its slump in the late 1990s. The prospect of Yukos being forcibly renationalized sent the Moscow stock market, which has performed strongly this year, down 10% in one of its biggest one-day declines since the debt crisis of 1998.

Many in Russia view the arrest as the centerpiece of a power struggle between "the Siloviki," as President Vladimir Putin's coterie of security officials and bureaucrats is known, and "the Family," the billionaire oligarchs and top officials who thrived during the wild days of privatization under former President Boris Yeltsin. Putin is a former KGB operative, Khodorkovsky a former Young Communist League official, a platform from which he launched his business empire.

The crisis even split Putin's inner circle. His chief of staff resigned, and Prime Minister Mikhail Kasyanov defied an order to stay out of the affair, saying he was "deeply concerned."

Khodorkovsky's real transgression may have been giving financial support this year to several opposition parties, a move widely viewed as setting himself up as a future presidential challenger. That apparently rankled Putin, whose deal with the oligarchs is blunt: You stay out of national politics; I'll let you be. Two other tycoons who tangled with him, Boris Berezovsky and Vladimir Gusinsky, have fled into exile.

Putin insists the Khodorkovsky case is about rooting out corporate corruption and doesn't herald any shift in the Kremlin's pro-business stance, a view he reinforced at a meeting last week with Western bankers. (Putin was on hand at the opening of the Russian-owned Lukoil's first U.S. gas station, in September, in Manhattan.) For the moment, big foreign players are giving him the benefit of the doubt. "We haven't changed our long-term perspective," says Peter Elam Hakansson, who manages a $250 million Russian-stock fund out of Stockholm for East Capital. "It's still one of the most exciting places to invest your money." And how.

Even if the fight with Khodorkovsky is political, it's a risky one for Putin. The arrest could bolster Khodorkovsky's status, elevating him to the role of de facto opposition leader — or political martyr. "It's very hard to tell how this one can end," says a Yukos board member. "If they let him out of jail, he won't agree to be muzzled, and he doesn't want to leave the country."

Khodorkovsky knows the stakes are high. The big question, he told an American audience last month, is, "Are we going to become a democratic Russia for the first time in our 1,000-year history, or are we going to continue along our 1,000-year-old path of authoritarianism?" Watch this case.