Kremlin vs. the oligarchs

Is he a political prisoner, or just a rich crook getting a belated taste of justice?

For the past month Mikhail Khodorkovsky, Russia's richest man, has been sitting in Moscow's squalid Matrosskaya Tishina remand prison on tax evasion and fraud charges while that very debate has swirled around him.

For supporters of the Kremlin, Mr. Khodorkovsky is the dean of Russia's arrogant "oligarchs" who manipulated their way into fabulous riches during the lawless 1990s. Impatient to modernize and energize his country's economy, President Vladimir Putin is using Khodorkovsky to warn the wealthy that they must win the legitimacy of their property by helping to rebuild Russia.

For many human rights activists and Western analysts, Khodorkovsky's fate is another sad chapter in Russia's thousand-year history of arbitrary power, in which an all-powerful Kremlin sets - and changes - the rules at will.

Both sides may have a good case.

Khodorkovsky's troubles stem from his disputed acquisition of the Yukos oil empire during the quick-and-dirty privatizations of the 1990s.

In the legal void after the collapse of the USSR, virtually every Russian committed some infractions, such as tax evasion, smuggling, or currency violations. That leaves just about everyone legally vulnerable today, should tax auditors or prosecutors decide to dig up the past.

But the oligarchs, who today control an estimated 70 percent of the economy, are a special case. Often with nothing more than a vague decree signed by then- President Boris Yeltsin, this small coterie of Kremlin insiders gained control over the crown jewels of the former Soviet economy through a series of rigged auctions known as loans-for-shares.

"If Putin decides tomorrow to put everyone in prison, including his wife, it would be easy," says exiled oligarch Boris Berezovsky, who reigned as Russia's richest man until the Kremlin drove him out of Russia, using a variety of threatened criminal charges, three years ago.

At a meeting with 800 business leaders in Moscow Nov. 14, Mr. Putin made his clearest statement yet that the Khodorkovsky case is an isolated example. At the same time, he laid down tough marching orders for Russian capitalists: "[Businesses] must aim their efforts at developing a system of new social guarantees for the population in line with the new demands of the time," Putin said. "We must make the lives of the people economically sound, so they have plenty to live on."

Oleg Kiselyov, Russia's leading steel tycoon, commented: "It is clear that businesses must cooperate with the state, or it will be impossible for them to exist."

Yet even Kremlin supporters agree that it's a problem - more than a decade after the fall of communism - that the country's direction still depends on the will of a single man. "The key question that faces us in this situation is: How do you establish rule of law?" says Sergei Markov, head of the Center for Political Studies, a Kremlin- connected think tank. "No one has an answer for that."

Mr. Markov, whose center is Kremlin-funded and who has so far accurately forecast the course of the campaign against the oligarchs, insists that Putin is not trying to destroy the rich but to prod them into more patriotic avenues of economic activity. "Whatever form privatization took in the '90s, there was an underlying social contract: People were given property in order to improve the economy and raise the population's living standards," he says.

Markov points to Khodorkovsky's rumored plans to sell a stake in Yukos to a US oil company and the recent purchase of Britain's Chelsea soccer team by another oligarch, Roman Abramovich. "It's not part of the deal to sell Russia's natural assets to foreigners or buy English football clubs," he says.

Opinion surveys show that Khodorkovsky is loathed by most Russians, who regard him and other super-rich individuals as villains. A poll last summer by the independent ROMIR agency found that 77 percent of Russians wanted the government to wholly or partially reverse what they regarded as the oligarch's "theft" of state property.

For example, oligarch Vladimir Potanin acquired the world's biggest nickel producer, Norilsk, in a 1995 auction organized on behalf of the state by his own bank, Oneximbank. He won with a bid just $170 million - which was $140 million short of the government's minimum asking price. Several higher competing bids were mysteriously "disqualified." Similarly, Khodorkovsky's Menatep Bank ran the auction that handed him control of Yukos - and the former Soviet Union's third-largest oil reserves - for just $308 million. The market value of Yukos eventually jumped to more than $30 billion.

Mr. Berezovsky, who acquired major stakes in automobile, oil, airline, and media companies during those years, says the illicit means were necessary to quickly establish a class of capitalists capable of staving off a communist comeback in Russia, which was widely feared. "Privatization was very positive for Russia in the sense that property became diversified," he says. "It did not just belong to the state, but to a lot of owners who competed with each other. For sure, it was a revolution, and every revolution happens with a lot of mistakes. We had a lot of mistakes, but the final result is better."

But as Berezovsky notes, revolutions have a way of eating their children. "The problem is that Putin took power, and that was a counterrevolution," he says. "What Putin is doing is the real way to civil war in Russia. He isn't trying to nationalize property. He is trying to redistribute property in favor of his cronies."

Berezovsky and Vladimir Gusinsky, a media tycoon, were targeted by the Kremlin and hounded into exile three years ago because they refused to abandon their trademark political activism after Putin came to power. Khodorkovsky also appears to have been selected for prosecution due to his funding of opposition parties and critical media outlets.

While some Russian observers and many in the West decry Putin's arbitrary use of state power and declare Khodorkovsky a political prisoner, a mid-November survey by the independent VTsIOM-A public-opinion agency found that Putin's approval rating soared to 82 percent from 73 percent soon after the arrest. The pro-Kremlin United Russia, hoping to dominate Dec. 7 parliamentary elections, has made oligarch-bashing a campaign theme.

"The atmosphere is changing rapidly," says Boris Makarenko, an expert with the independent Center for Political Technologies. "While the president is saying the Khodorkovsky case is a one-time move, officials at lower levels are already talking about revising privatization and toughening punishment for all sorts of economic crimes."

Many worry that the campaign to cut the oligarchs down to size might take on a life of its own. "This could lead to much tougher forms of state control over business, with capitalists being put behind bars" when they don't live up to expectations, says Vladimir Pribylovsky, president of the independent Panorama think tank.

Many experts say that Putin, who came to power four years ago pledging to install "a dictatorship of law," missed his chance to create lasting social stability by legalizing the oligarch's property - either by enacting a formal amnesty or subjecting them to evenhanded prosecution. Instead, he met the oligarchs privately shortly after coming to power and promised that as long as they paid their taxes and stayed out of politics, the state would not "revisit" the illicit origins of their fortunes.

In his speech to business chiefs, the president moved the goal posts, now demanding they use their wealth more "responsibly."

"Putin didn't want to tie his hands by establishing firm legal rules; he preferred an oral agreement with the oligarchs," says Nikolai Petrov, an expert with the Carnegie Centre in Moscow. "This device kept the oligarchs in a state of helplessness before the Kremlin, although they were the most powerful people in the country. By extension, all Russians are helpless."

• Mark Rice-Oxley contributed to this report from London.

• Mikhail Khodorkovsky. Estimated worth: $8 billion. Former Komsomol apparatchik. Started Menatep Bank in the early '90s, later parlayed Kremlin contacts into ownership of Yukos, now Russia's largest company. In jail in Moscow, awaiting trial on tax evasion and fraud charges.

• Roman Abramovich. Estimated worth: $6 billion. Befriended Boris Berezovsky, a powerful Kremlin insider, in the mid-1990s. Acquired major stakes in oil, airlines, and aluminum. Now quietly selling off his Russian properties, including stakes in Aeroflot and aluminum giant RusAl. Bought London's Chelsea soccer club for about $150 million last summer.

• Boris Berezovsky. Estimated worth: $3 billion. Former mathematician. Once controlled an empire including auto factories, media, banks, and oil firms. Publicly took credit for engineering both President Boris Yeltsin's 1996 reelection and Vladimir Putin's 1999 rise to power. Stripped of property; fled to Britain after arrest warrants issued. Granted political asylum in Britain in September.

• Mikhail Fridman. Estimated worth: $2 billion. Former Soviet youth activist who now heads Alfa Group, Russia's third-largest oil and banking empire. Acquired Tyumen Oil Co. for $1 billion in a loans-for-shares auction. This year engineered a $7 billion deal to merge Tyumen Oil with the British firm BP.

• Vladimir Potanin. Estimated worth: $1.8 billion. Former Soviet international trade official who gained control of Norilsk Nickel, the world's biggest nickel and platinum producer, in what experts say was a rigged 1995 auction.

• Oleg Deripaska. Estimated worth: $1.5 billion. Emerged from bloody battles in the 1990s with a major stake in Russian Aluminum (RusAl), Russia's largest aluminum producer. Has branched out to banking, media, and agribusiness.

• Vagit Alekperov. Estimated worth: $1.3 billion. Kremlin's deputy minister of fuel and energy as the USSR broke up in 1991. The next year he became head of petroleum giant Lukoil.

• Vladimir Gusinsky. Estimated worth: $400 million. Founded independent NTV network in 1993. Backed opposition against Putin during 1999 and 2000 elections. NTV was then taken over by state-controlled firm Gazprom. Driven into exile in Israel three years ago. Recently freed by a court in Greece, where he was held on a Russian extradition warrant.