West should give Putin an ultimatum

The arrest of Russia's richest man, oil tycoon Mikhail Khodorkovsky, is a poignant reminder of President Vladimir Putin's limited commitment to democracy and a liberal market economy.

The Russian president depicts the arrest as the functioning of a "democratic and legally well-balanced system."

Who's he kidding? Continued declines on Russia's stock market should convince the Kremlin that no one is buying Mr. Putin's line. The showdown with Mr. Khodorkovsky, CEO of Russia's largest oil company, Yukos, is primarily a political affair. Khodorkovsky was getting too involved, becoming a political problem.

So Putin reached for a KGB solution: Lock him up on fraud charges. In reality, Khodorkovsky is being punished for breaking Putin's pact with the oligarchs. Upon assuming office, he promised not to investigate the oligarchs' capital gains during the 1990s economic free-for-all in return for their political neutrality.

If having political ambitions constitutes a crime in Putin's Russia, then Khodorkovsky is certainly guilty. He was arrested while on a tour of the country meeting with students, staff, and residents in different cities, lecturing them on democracy, good governance, economic liberalism, and property rights. Nor is it a secret that Khodorkovsky contributes heavily to the liberal Yabloko party.

By lifting an iron fist over Khodorkovsky, Putin has taken a gamble that he may be regretting already. The RTS index - Russia's equivalent to the Dow Jones industrial average - shows little sign of recovery after immediately dropping 14 percent upon Khodorkovsky's arrest, and foreign capital is again fleeing the nation.

When he came to power, Putin seemed to embrace the values of fiscal austerity, legal transparency, respect for property rights, and market stability. Though always a questionable democrat, he had it straight on the economics. But with the exit from the Kremlin of Alexander Voloshin, Putin's chief pro-market adviser, who resigned over the Yukos scandal, Russian capitalism's future is grim.

Putin saw the need for Russia to strike strategic partnerships with key global players - and energy was his gambit. Forgoing new weapons systems, he promoted new energy projects and the energy giants.

So why is the Kremlin backtracking and jailing the poster child of Russia's economic success? The brutal fact is that when Putin struck his deal with the tycoons, he miscalculated on who needs whom more. The tycoons needed him to leave them alone so they could have time to consolidate their businesses and become competitive on the international stage. But a major beneficiary of their success was Putin's economic strategy.

Sept. 11 brought Russian energy into the international spotlight. Trading at 6 million barrels a day, Russia has caught up with Saudi Arabia as a leading oil exporter, and Russia's GDP has enjoyed growth close to 4 percent. Nonetheless, there's a difficult fact about Russian oil often overlooked: the frozen terrain that makes exploration and drilling costly. Western technology is necessary if the price of the Russian barrel is to remain competitive. Drilling with backward Russian technology would add $4 to $6 to the Russian barrel price, making exploration an ordeal of inefficiency. By hiking production costs, output would decline, and Russian energy as a world market alternative would lose its appeal (considering the Saudis pump their barrels at less than $2 a piece).

With foreign investors backing away, Russian oil has an uncertain future - and that casts doubt on the whole Russian economy. The Kremlin's antibusiness crackdown just compounds that prospect. Why would investors keep their capital in that kind of environment?

A Russian economic collapse is a security threat to Europe and America. How will the two manage a Russia regressing into the hands of a police state with unrequited imperial ambitions? What does this mean for the international war on terror? A bankrupt Russia is a black hole between Europe and Asia. No European or American politician in his right mind would tolerate this kind of risk.

It's time for preemptive political action. Putin should be given an ultimatum: Either follow through with Russia's economic and democratic reforms, including the release of Khodorkovsky and a halt to the attack on the free media, or lose cooperation from the West. A united EU-US stance against Putin's authoritarian habits is essential if the Russian market is to rebound. If the message from Washington and Brussels isn't clear this time , the next time may be too late.

• Borut Grgic is a nonresident visiting fellow at the Atlantic Council, and a foreign policy consultant to the Slovenian foreign minister. Janusz Bugajski is the director of the East Europe program at the Center for Strategic and International Studies. The views reflected here are the authors' own, and do not reflect those of the organizations they work for. [Editor's Note: The original version did not clarify that this article reflects only the authors' own views.]