In Russia, wealth vs. power

Russia's President Vladimir Putin is seeking to limit damage from the Saturday arrest of the country's richest businessman, even as Russian markets slumped Monday and some analysts predicted a surge of capital flight.

But at issue now - beyond the future of jailed oil tycoon Mikhail Khodorkovsky - is a crisis that could define the rules in the game of wealth versus power in post-Soviet Russia.

In a cabinet meeting Monday, Putin demanded a "halt to all speculation and hysteria" about the possibility of a reversal of privatization, saying he "understood the business community's concern." But he also ruled out meeting key Russian business leaders, vowing that there would be "no bargaining" over enforcement of Russian law. Now in jail, Mr. Khodorkovsky - the head of Russia's largest oil firm, YukosSibneft - has been charged with tax violations and fraud.

While critics say the arrest is politically motivated and returns Russia to the lawless economic era of the 1990s, analysts are divided over its impact. The observers also wonder how Putin can pull out of the crisis and continue creating a framework that eases capital flight and attracts investors.

Monday, Yukos shares lost 20 percent of their value within hours of opening, helping drag Russian bourses down 10 percent for the day. Amid criticism of the arrest from business chiefs, and the US ambassador to Russia, the ruble lost half a percent against the dollar.

A roller coaster analogy is apt, says James Fenkner, head of research for the Troika Dialogue bank in Moscow, for a country that earlier this month received an improved investment grade from a major ratings agency for legal and economic improvements.

"This is where everyone throws up their hands and starts screaming," says Mr. Fenkner. "We've seen this type of reaction before, in which everyone runs for the doors without knowing if there is a fire or not."

Putin marked the early part of his presidency three years ago by attacking the political aspirations of the so-called "oligarchs," the handful of Russians who grew fabulously rich during the rigged privatizations of state assets in the 1990s. Putin made a deal: Keep the money but pay your taxes - and keep out of politics.

"The game here is no surprise: Those in the government who don't want Khodorkovsky involved in politics made their position loud and clear, and he refused to listen to them," says Fenkner.

The oligarch, who had supported opposition parties, is being made an example ahead of Parliamentary elections in December and a presidential vote next March, in the same way that police pull over a red Ferrari "racing down the street," he adds. "They simply selected the guy who's driving the flashiest car," Fenkner says. "I don't see this as the beginning of the end."

The arrest saga shows that finding a middle way, of market capitalism based on transparent rule, remains elusive for Putin.

Many are arguing that Putin is jeopardizing progress made over the past three years. US Ambassador Alexander Vershbow was quoted by the news agency Interfax as saying that "Russian law is being used selectively," and that Washington "was disturbed by the escalation of tensions around Yukos" that could raise "new doubts" about the Russian market.

In the case of Yukos, US oil firms ExxonMobil and ChevronTexaco are believed to be negotiating to buy a stake in the company, which, with recently acquired rival Sibneft, exports more barrels of oil a day than Kuwait. Anatoly Chubais, the head of Unified Energy Systems, met with other key Russian business leaders hours after Khodorkovsky's arrest on Saturday, and went on television to urge Putin to spell out his aims with business. "The conflict has grown to such a scale that we need direct intervention from the president," Mr. Chubais said. "I want business to understand the authorities' position on business. I want business to understand whether it has a future or whether its future is similar to Khodorkovsky's fate."

In a statement, the business leaders said: "The business community's trust in the authorities is ruined ... Companies are being forced to reassess investment strategies."

But not all analysts and potential Western investors are alarmed. Some see it as Russia cleaning house against the oligarchs, who are widely despised by ordinary citizens.

Liliya Shevtsova, an analyst with the Carnegie Endowment's Moscow office, says that top European businessmen she has canvassed since the arrest are divided evenly between those who are cheering the move, and those who say they will invest no more. "This is really about the crisis between power and business in Russia," Ms. Shevtsova says. Putin "failed to find a model ... and now it's very difficult to draw the line, because everything is becoming hot politically," Shevtsova says. "Now it's too late: Every economic decision is now a political decision."

Other analysts say the arrest has sparked a crisis that a research brief from the brokerage United Financial Group (UFG) in Moscow describes as a "disgraceful setback" in Russia's post-Soviet development. "Everyone is a loser, very much including President Putin himself," who has created a "dangerous political trap."

The UFG report says that "by opening the way for the warning to Khodorkovsky to be delivered by the FSB [formerly the KGB] and its agents in the prosecutor's office - the most unreconstructed Soviet-era agencies desperate to restore their former power - Putin has left himself face to face with a 'due process' which is in fact a travesty."