Business Interests Fearful in Russia

Times Staff Writer

Mikhail Khodorkovsky, the billionaire head of the Russian oil giant Yukos, recently described himself as having three lives: first as a credulous Communist youth leader, then as an unethical businessman who rose fast and cut out small shareholders, and finally as an honest tycoon who gave money to charity and adopted Western business standards.

Now Khodorkovsky, 40, has begun an uncertain fourth life -- in a jail cell, sipping thin fish soup and facing tax evasion, fraud and embezzlement charges.

Compared to Khodorkovsky, real estate agent Vitaly, 46, is a minor player; he prefers to leave his second name unstated in these uncertain times. Like all Russian businessmen, big and small, he is watching Khodorkovsky's fate with trepidation -- because the oil tycoon was the first entrepreneur in the nation to open his company accounts and ownership structure to public scrutiny.

"My business is about 20% legal, that is open," Vitaly said. "I was thinking about going more open than that. But now I am amazed at myself. How could I have been so dumb? How could I have forgotten where I live?" He was referring to Khodorkovsky's arrest and the subsequent government freeze on more than 40% of Yukos stock.

"I won't have such a fit of craziness again," he added. "I am afraid I will have to go back into the dark. The more open you are, the more questions you get from the tax police, the economic crimes department and even the fire safety inspector who comes and checks your office or shop and always gets away with a bribe."

Vitaly's gut reaction might not be rational -- the charges against Khodorkovsky relate to his activities in the mid- to late 1990s, before he cleaned up his act and opened his books in a bid to attract foreign investors. But it is an instinctively Russian response, born of the uncertainty of successive lives under socialism, free-for-all privatization and the current system that President Vladimir V. Putin terms "managed democracy."

"I hope to God that Khodorkovsky was picked out because of his political ambitions and that will be the end of it," Vitaly said. "But something tells me that this is not the end and we should be ready to expect the worst. In Russia you always expect the worst from the authorities."

Vitaly's reaction illustrates how the Khodorkovsky case could affect Russia's business and political climate in unpredictable ways.

In the 1990s, if you asked the size of a company's profit, the growled reply would be that it was "a commercial secret." Khodorkovsky changed that, realizing that the key to success was attracting investment from abroad.

But the events of the last week may well affect many small and medium-size businesses on the verge of opening up their books, said Mikhail Berger, editor of the liberal Yezhenedelny journal."Their reaction is simple. They are going back into the shadows with their books and their taxes," he predicted.

The move against Khodorkovsky sent alarming signals in a nation that has also recently seen the shutdown of independent TV stations and the election of Putin's favored candidates to office amid allegations of intimidation, irregularities and, in the case of Chechnya's presidential election, vote rigging.

The worries about increasing authoritarianism in Russia also coincide with the rise of the siloviki, former Putin colleagues in the KGB, whom he installed in the Kremlin and in other powerful posts. Many see them as being behind the arrest of the oil baron, who has been funding opposition candidates.

Putin's presidency has been plagued by a sense of ambiguity -- the sense that after three years, no one is entirely sure what he stands for, even when he insists on his support for a liberal market.

The Yukos case appears typical: Putin assured a meeting of foreign investors that there would be no anti-business campaign. But he also said he would not rein in prosecutors, unless they acted illegally -- leaving open the possibility that other businessmen could be jailed for offenses like those Khodorkovsky was accused of, which had been common in the 1990s. It is this ambiguity -- enough to give the siloviki maneuvering room -- that has investors trembling.

With business leaders and pro-market figures expressing strong concerns about the arrest and the stock freeze, Putin's hands-off stance sends a strong message not just to Russian business, but also to law enforcement officials all over the country, on how the government treats businessmen.

"An attack on business has just been called on, at the top federal level. We can only imagine how doggedly regional officials and power structures will respond to this call," said analyst Mikhail Delyargin, until recently a government economic advisor and now at the Moscow think tank Globalization Programs Institute.

The Bush administration has watched the developments with disappointment and worry.

State Department spokesman Richard Boucher, for example, said that the U.S. had been watching the Khodorkovsky situation carefully and was concerned about the rule of law and basic freedoms in Russia.

Such comments elicited a strong response from Moscow on Saturday.

"This statement is a continuation of a notorious policy of double standards," Alexander Yakovenko of the Foreign Ministry told Russian television. "It is, at the very least, tactless and disrespectful toward Russia."

Some in the foreign investment community embraced Putin's argument that the Yukos shakeout would be good for Russia's economy in the long term, taking comfort in the view that Khodorkovsky is being reined in for trying to form a power bloc in the State Duma, the lower house of parliament, by funding such a range of political parties that he might have challenged Putin's control over the legislative body in December parliamentary elections. Putin reportedly saw it as buying votes, and a breach of the deal he made with tycoons after his election in 2000 for them to stay out of politics.

Khodorkovsky had also made it clear that he would leave business by 2008 -- when Putin would probably be finishing a second presidential term, with the constitution barring him from a third run. The siloviki hope to control that transition of power and don't want Khodorkovsky muddying the waters.

For Western investors, suggestions of increasing authoritarianism are not always alarming: In some cases, stability can be a more important investment standard than democracy. There is some support in the foreign investment community for Putin's view that Khodorkovsky went too far -- and that so-called oligarchs, who got hold of prime state assets cheaply in the 1990s, have no right to use their cash to build alternative centers of power. If they did, the result could be a bidding war for Duma votes, a struggle for political control between economic titans under which Russia could slide into chaos and uncertainty -- not what investors want.

Putin's longtime chief of staff, Alexander S. Voloshin, resigned, reportedly in anger, over Khodorkovsky's arrest. Voloshin was seen as the main pro-market force within the Kremlin balancing the power of the siloviki. The big question hanging over Russian business now is what the siloviki stand for, what they want and how much influence they have over Putin.

The most powerful of the siloviki include Viktor Ivanov, deputy head of the presidential administration and former deputy director of the Federal Security Service, or FSB, the main successor agency to the KGB. In 1999 and 2000, he ran the agency's Economic Security Department -- responsible for keeping an eye on big business and the country's resource riches.

Others include Igor Sechin, deputy head of the presidential administration, who controls access to the president; Vladimir Ustinov, the prosecutor general who has led the charge against the oligarchs; and Yuri Zaostrovtsev, who heads the FSB. Interior Minister Boris Gryzlov is seen as closely aligned with the group.

The siloviki had become alarmed to see the empire jewels, the biggest oil companies, drifting out of their reach, according to liberal analyst Yevgenia Albats, commenting recently in the newspaper Novaya Gazeta.

Gryzlov last week gave a clue to the siloviki's thinking about business and the country's strategic economic resources. He said Russia's resource riches belong to the people, and a company's license to explore "doesn't give [it] the right to privatize our profits."

The siloviki see Russia's huge oil reserves as the key to reasserting the nation's global dominance, giving it leverage at a time when the U.S. wants to diversify its sources of oil. But to exert leverage, the state must have direct or indirect control over resources.

Many believe that the siloviki were not about to watch Khodorkovsky sell 40% of his company -- the country's biggest oil giant -- to U.S. oil company ExxonMobil, as was planned, and see him pocket the cash. Yukos merged with rival Sibneft to become YukosSibneft last month.

"When Russia began privatizing property, it was done with the understanding that privately owned property would be more effective than state-owned property," Sergei Markov, an analyst close to the Kremlin, was quoted as saying in the Moscow Times recently. "We did not privatize so that property could be sold to the United States and Khodorkovsky would get the money."

Fiona Hill of the U.S.-based Brookings Institution said the oil and gas sector in Russia accounted for 25% of the nation's gross domestic product, half of its export earnings and one-third of all government tax revenue. She said Putin believed that state assets should be used for the benefit of the state, and, to him, Khodorkovsky's plan to sell 40% of YukosSibneft to ExxonMobil was "like someone selling off the family silver or the family jewels."

"The real issue is that [Khodorkovsky] started thinking of Yukos' assets as his own and forgot at whose behest he was operating. Khodorkovsky was thinking of Yukos as his kitty, not the government's kitty. What they are saying is, 'This is our golden goose, not yours,' " Hill said.

If Khodorkovsky and his associates lose control of Yukos, which many now see as likely, the investor community will be watching closely to see how the seized package of shares is disposed. Will it go to international tender, or will it be moved under the control of interests friendly to the Kremlin and siloviki?

If it's the latter, it would signal a new line in the sand -- that Putin and his team has no intention of surrendering control over oil and other strategic resources to big businesses, especially those run by foreigners.

Times staff writers Maura Reynolds in Washington and Sergei L. Loiko in Moscow contributed to this report.

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