Open season on Russia's tycoons

As the Kremlin confronts big business, experts warn of the dangers in revisiting shady 1990s privatizations.

A Kremlin-ordered legal assault on Russia's largest business empire has upset the country's fragile political stability, and some experts warn that the confrontation could spiral into a major crisis.

At the heart of the expanding police investigation into Yukos, an oil-and-banking conglomerate, are questions about the unsavory manner by which its owners - chiefly Russia's richest man, Mikhail Khodorkovsky - acquired their vast holdings through smoke-and-mirrors privatizations in the 1990s. The criminal probe broke a three-year truce in which President Vladimir Putin promised to forgive the past sins of Russia's powerful business kingpins, provided they quit meddling in politics.

Over the past week, the political attack on Yukos has drifted toward a much wider confrontation.

"If we start now to revisit privatization, it will not be easy to stop this process, and it is not inconceivable that it will lead to civil war," the Kremlin's outspoken economic counsel, Andrei Illaryonov, told Ekho Moskvi radio station Monday.

"This [Yukos affair] can easily snowball into a general campaign against the oligarchs, to redistribute or renationalize their property," says Vyacheslav Nikonov, head of the independent Politika think tank. "There are plenty of forces who favor this, including the Communists, public opinion, and the special [security] services," he adds. "The last experiment in nationalization of property, in 1917, resulted in civil war that killed 15 million people. People have a tendency to defend their property.... Russian history teaches that Russia never learns from history."

The confrontation began early this month when prosecutors arrested a top Yukos executive, Platon Lebedev, for fraud in connection with a 1994 privatization, and called in Mr. Khodorkovsky for interrogation. Khodorkovsky hit back publicly, saying that he was the victim of an "inner-Kremlin power struggle" and threatening to cut off oil supplies to Russian regions if the state continued to behave "irresponsibly." The spat has caused Yukos' market capitalization to plummet by 20 percent, or $5.5 billion.

Last week another powerful tycoon, Roman Abramovich, was accused of evading $300 million in taxes by Sergei Stepashin, head of the Russian parliament's Accounting Chamber and a close Putin ally. The implication was that Mr. Abramovich used the money he allegedly filched from the state to fund his high-profile purchase of Britain's Chelsea soccer club and lavish offers to lure top European players. Abramovich had been on the verge of merging his Sibneft petroleum firm with Yukos, a move that would create the world's fourth-largest oil company, second only to Exxon-Mobil in gas and oil reserves.

"We are asking Putin to put a stop to this conflict," says Igor Yurgins, secretary of the Russian Union of Industrialists and Entrepreneurs, which speaks for big business. The group handed Putin a letter last week, signed by several of the top tycoons, urging him to drop the Yukos probe and open a fresh dialogue with them. The letter said: "We thought that rules of the game had been established, but now they've been undermined."

When Western business moguls step across legal lines, courts are usually able to act without triggering serious social consequences. But Russia's handful of hyper-rich magnates lack the legal legitimacy and social acceptance generally enjoyed by their counterparts elsewhere. Most are wealthy today because they heisted the former Soviet economy's crown jewels through insider trading, fixed auctions, and corrupt Kremlin ties during the chaotic '90s.

Half of Russians regard the super-rich with "hatred" or "irritation," found a survey conducted last year by the independent Public Opinion Fund.

Khodorkovsky's Menatep Bank, for instance, bought Yukos for $168 million, a fraction of its actual worth, in a 1995 auction of state assets that most experts agree was rigged. Other Kremlin cronies similarly paid pittances for control over vast swaths of Russia's oil, minerals, industrial, and telecommunications sectors. These "oligarchs," as they were quickly dubbed, banded together in 1996 to back President Boris Yeltsin's uphill reelection bid against a strong Communist challenger, in a campaign marked by massive media abuses and funding irregularities. Following Mr. Yeltsin's victory, the oligarchs were rewarded with broad Kremlin access, and two of them - Boris Berezovsky and Vladimir Potanin - were given high government posts which experts say they used to further their business interests.

The manner of their ascent left Russia's oligarchs mired in political quicksand. "The '90s were a time of extreme legal ambiguity which left almost every Russian citizen guilty of something," says Vladimir Pribylovsky, head of the independent Panorama think tank. "The rich are the guiltiest of all. So when the prosecutors decide to go after somebody today, it's clearly a political decision and not about upholding the law."

Experts say the attack on Yukos could not occur without Putin's approval. But the president, characteristically, has offered contradictory signals. In televised remarks last Friday, Putin said he was opposed to "arm-twisting and jail cells" as a means of dealing with economic crimes. But he also warned that "economic violations must be punished" and lashed out at big business for lobbying parliament against Kremlin-sponsored bills, such as higher duties on natural resource exports.

The biggest worry, experts say, is that Putin may be listening to Kremlin factions that favor wholesale renationalization of Russia's economic base. Putin has publicly pledged to eliminate poverty, make Russia a great military power, and double its economic output within a decade. Yet investment remains stagnant, and growth rates are falling. Last week, Putin seemed to blame the selfish activities of the oligarchs: "A society split into small groups with their own narrow interests cannot concentrate on implementing major national projects," he said.

Even the liberal Yabloko party wants to smash the far-flung empires of the dozen or so super-tycoons who control 70 per cent of Russia's economy. "What we have is a system of oligarchic half-criminal capitalism, and it must be dismantled," says Sergei Ivanenko, a Yabloko Duma deputy. But, he adds that "repressive methods should not be used; they lead us into a blind alley."

Many experts believe that Putin, who has a track record of pragmatism, will slam on the brakes before the confrontation spins out of control.

But it may be harder to revive the hard-won perception that Russia has outgrown its wild and woolly '90s phase and entered an era of predictable normalcy.

"This crisis has demonstrated that Russia still lacks any institutional stability or built-in checks and balances, and is thus completely vulnerable to shifting politics," says Mark Urnov, chair of Expertiz, a private political foundation. "The resolution of any problem depends upon the will of a single man - and that's President Putin."