Putin's Crackdown on Oil Giant Worries Free-Market Advocates

Times Staff Writer

As Russian President Vladimir V. Putin faced the biggest crisis of his leadership, Prime Minister Mikhail M. Kasyanov said Friday that he was "deeply concerned" about the seizure of a vast chunk of shares in the oil giant Yukos by the authorities.

In a rare expression of public defiance, top pro-market officials voiced alarm about Russia's direction. They spoke out at the end of a tumultuous week that saw the country's richest man taken into custody and his company's shares seized, panic in Russia's financial markets and the resignation in protest by the president's chief of staff, Alexander S. Voloshin, a key free-market advocate.

After Thursday's market plunge, Kasyanov said it was difficult to predict the implications of the stock seizure.

"The arrest of these shares in a private company that is trading on the market is a new phenomenon, the consequences of which are hard to assess," he said.

Another leading pro-market figure, Anatoly B. Chubais, head of the UES electricity monopoly, bluntly described Voloshin's departure from the government as "bad and serious."

He said it could be a sign that Russia has embarked on a new and worrying course, extending beyond the apparent power shift in the Kremlin to the authorities' attitudes about democracy and business.

"The events of the last few weeks have elements that have to be interpreted as a change of course," Chubais said. In coming weeks, the meaning of those events would become clearer, he added.

On Thursday, Deputy Economic Development and Trade Minister Arkady Dvorkovich said the arrest of billionaire Mikhail Khodorkovsky of Yukos would force investors to factor in the risk posed by previous financial offenses that linger with Russian companies.

"The risk that past sins will be reexamined exists, and this risk should be included in all investment projects in Russia," he said.

Dvorkovich's comments were a reference to the chaotic privatization free-for-all of the 1990s, when tycoons with Kremlin connections bought up valuable state assets at bargain prices, often cutting legal corners and evading taxes.

Khodorkovsky was jailed Oct. 25 on tax evasion and fraud charges. However, the arrest was widely seen as political.

That incident and the departure of Voloshin are seen by analysts as signaling the rise of a powerful group of former KGB officials in the Kremlin who were appointed by Putin, himself an ex-spy. Voloshin was regarded as a more moderate figure who supported the tycoons -- or "oligarchs" -- and counterbalanced the power of the rising faction in the Kremlin.

The Yukos conflict has shattered the air of economic stability that had surrounded Putin's presidency and attracted foreign investors, with Russia relying on its huge oil reserves to service a hefty foreign debt.

The pursuit of Khodorkovsky, who tried to increase his political clout by funding opposition parties, has also raised fears of a shift to a more authoritarian mode of governance in which no alternative center of power is tolerated.

The plunge in Russia's markets was stemmed Friday after Putin met with a group of large Russian and foreign investors to reassure them that he remained committed to the free market. He reportedly likened the Yukos case to the Enron scandal in the United States.

Putin's decision to appoint a technocrat from his hometown of St. Petersburg, Dmitry Medvedev, to replace Voloshin also allayed market fears that he might give a hard-liner the job.

The benchmark RTS index gained 1.9% after Thursday's 8% drop. Yukos shares, which fell to $10.56 Thursday, recovered slightly to $11.20 Friday, still well down from their Oct. 16 value of $15.63, more than a week before Khodorkovsky's arrest.

Amid mounting criticism that they had gone too far, Russian prosecutors Friday released 4.5% of the frozen Yukos shares because they belonged to shareholders other than Khodorkovsky and two associates who were also charged with fraud and tax evasion -- Platon Lebedev, presently in jail, and Vasily Shakhnovsky.

Putin has said he won't interfere with the prosecutor general's office as long as it acts legally, but Russian business- people and media outlets are calling on the president to rein in prosecutors and end the uncertainty about whether other tycoons would be pursued for past activities.

Russian newspapers also expressed alarm about the Yukos affair. Under the headline "Good Morning Venezuela," Vedemosti said the threat of renationalization hung over every Russian business.

"The president should open his eyes and finally discover that prosecutors are destroying in one day what took years to create. Business can react to such a development only by shutting down," it said.

The Gazeta daily called the pursuit of Khodorkovsky "just the beginning."

The views of some investment analysts were calmer. Fear of a broad anti-business campaign receded, and many market experts were taking the view that Khodorkovsky had broken Putin's unwritten rule that tycoons don't dabble in politics, that he had been warned but called the Kremlin's bluff and ended up in jail for it.

After Moody's Investors Service recently awarded Russian bonds investment grade ratings, an analyst at the Fitch credit rating agency, Ed Parker, told Reuters news service Friday that the week's events demonstrated that Russia did not merit such confidence.

"The events of the past week have tarnished President Vladimir Putin's market and reformist credentials," Parker said, adding that the developments sent a negative signal about the policies to be expected from Putin if he was reelected next year.

In a further sign of authorities' campaign against Yukos, a subsidiary company, Lenaneftegaz, abruptly lost its temporary license to explore rich Siberian oil and gas fields at Talakanskoye.

Authorities are also checking to ensure that Yukos has not breached the licensing conditions for its work near Khanty-Mansiysk in Siberia. Both moves suggest that the authorities are targeting the company as well as Khodorkovsky.

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