Russian Firm’s Woes Raise Fears for Big Business

When key Washington policy advisor Richard Perle sat down this week for a meeting with leading Russian political analysts, he had an unsolicited word of advice: Lay off Yukos Oil Co., the Russian energy giant locked in a showdown with criminal prosecutors. Many believe that the outcome of that battle could determine the future of big business and foreign investment in this nation’s still-fledgling free-market economy.

“It’s possible already to say that real damage is being done to the prospects for future Russian economic growth and development by what appears to be an arbitrary, capricious and vindictive campaign against a private company,” warned Perle, adding that “it will get very bad” if the Kremlin decides to move decisively against Yukos.

For nearly three weeks, Moscow has been politically shaken by the face-off between prosecutors and Russia’s richest man, 40-year-old Mikhail Khodorkovsky, whose Yukos empire has been threatened by the arrest of a key shareholder, searches at company offices and announcements that prosecutors are examining company officials for suspected crimes from tax evasion to murder.

The fact that U.S. interests are quietly weighing in on Khodorkovsky’s behalf -- Perle emphasized that he was not speaking on behalf of the government, but U.S. Ambassador Alexander Vershbow clearly was when he said the affair “raises a number of questions for us” -- is testament to Khodorkovsky’s role as a powerful advocate for Western interests in a country still deeply troubled over issues such as U.S. policy in Iraq and the future of free-market capitalism within its own borders.

The outcome of the Yukos crisis is crucial for Russia, not only because it will signal whether free-enterprise advocates in the Kremlin will hold out against an apparent assault from the state bureaucracy’s old guard but also because the dogfight has already proved costly.

Yukos, which is expected to become the world’s fourth-largest oil company after a planned merger with Russian company Sibneft, has lost $10 billion in market capitalization over the last two weeks, or about a quarter of its value. Its slide pulled down the stock market, which has lost more than $20 billion.

More alarming are the fears that Kremlin hard-liners may be itching to revisit the large, mostly crooked privatization deals of the 1990s in which companies like Yukos launched the nation’s first private businesses.

“If we start now to revisit privatization, it will not be easy to stop this process, and it is not inconceivable that such action will lead to a new civil war,” Andrei Illarionov, economic advisor to President Vladimir V. Putin, warned last week.

Most analysts think that Putin is not inclined to grab back once-public assets from powerful oligarchs such as Khodorkovsky. The problem is, no one knows what the president’s intentions are, because he hasn’t spoken about them.

It is not known to what extent Putin may have been involved in approving the July 2 arrest of Platon Lebedev, 43, a billionaire and a key member of Khodorkovsky’s financial empire, on embezzlement charges stemming from the privatization of a fertilizer plant nearly a decade ago.

Some analysts believe that Putin simply wants to warn Khodorkovsky and the other oligarchs to stay out of politics and is not seeking to reverse liberal economic reforms. Not only has Khodorkovsky given millions of dollars to two liberal parties that might block Kremlin policy in parliament, but he also urged Russia not to oppose the U.S. in the war on Iraq. Some have touted him as a potential challenger to Putin in 2008 presidential elections.

“I think the perception that Khodorkovsky is politically ambitious is the major driving force of the Yukos affair,” said Vyacheslav A. Nikonov of the Politika Foundation think tank. At the same time, he said, “Putin definitely was not planning this, and he definitely doesn’t like the scale of damage already done.”

That leaves the real culprits, in many people’s minds, as a powerful network of old-guard bureaucrats inside the Kremlin who are seeking to push out the pro-reform remnants of former President Boris N. Yeltsin’s entourage.

Putin, a former KGB official, moved thousands of ex-KGB officers into the government. Many believe that these operatives persuaded the prosecutor to move against Lebedev.

It’s not clear whether the old guard wants to reimpose the kind of state control over the economy that existed in the Communist past, gain a greater share of the nation’s business assets, or both.

“They want to convert their position close to the president into a position of major control over the wealth. This is about redistribution, and not only redistribution of private property, but about redistribution of the leverage around Putin,” said Liliya F. Shevtsova, an analyst at the Moscow Carnegie Center.

The prosecutor’s office has not been cowed by the outcry. Agents searched Yukos offices for 16 hours last week. Not long afterward, prosecutors said they would review the company’s tax payments and open four new investigations involving murder or attempted murder.

The investigation comes to a crucial juncture today, when a Moscow judge is expected to rule on Lebedev’s request to be released pending trial.

On Tuesday, the nation’s top businesspeople urged Putin to step in and provide protection for democratic institutions and what amounts to amnesty for the privatization deals of the 1990s. In turn, they pledged to ensure transparency in their business dealings, fight corruption, pay all taxes and help the government on its social agenda.

Yukos officials have said there is no merit to the prosecutors’ allegations and insist that the company, with revenue of $11 billion a year, has paid all required taxes, now totaling $3.5 billion a year.

Khodorkovsky broke his silence over the weekend, warning Russian reporters that the future of the nation’s economy was at stake.

“After 15 years of reforms, we at last began to get the feeling that we live in a normal country. The entire world in 2003 saw Russia developing. We began getting serious [foreign investments]: a billion dollars a month,” he said. “Now, at best, we can forget about it until 2006.”

Khodorkovsky defended his right to political participation.

“I never said big business must be outside politics,” he said. “As much as every citizen of the country, every big businessman has the right [to] engage in politics.”