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Volatile Politics Roil Russian Market

Times Staff Writer

Vladimir V. Putin faced one of the most challenging moments of his presidency Thursday after prosecutors froze a huge block of stock in giant Yukos Oil Co. and his chief of staff resigned.

The announcement of the resignation of Alexander S. Voloshin and the stock seizure sent shivers through the already battered Russian stock market, which fell another 8% on Thursday. The move against Yukos came after last weekend’s arrest of the company’s chief executive, billionaire Mikhail Khodorkovsky, on charges of fraud and tax evasion.

Both actions frightened the financial community, one of Putin’s most important sources of support. Businesspeople see Voloshin as an ally and worry about the stock seizure, which marked the first time since the collapse of the Soviet Union that the state had reclaimed some control over a company it had privatized.

Khodorkovsky’s arrest follows his support of opposition parties, and many see it as a political case initiated by the siloviki -- a Kremlin faction comprising former KGB associates of the president, himself an ex-spy.

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In recent years, two other tycoons who opposed the Kremlin line went into exile to avoid prosecution. When rumors of Khodorkovsky’s arrest circulated recently, however, he vowed he would not run.

Before the Russian prosecutor general’s office began its pursuit of Khodorkovsky and close associates this summer, he was listed by Forbes magazine as the country’s richest man, with personal wealth estimated at $8 billion. He was reported to be in talks about selling a stake in Yukos to Exxon Mobil or ChevronTexaco, and there was talk of building an oil pipeline to China.

The sense of chaos and uncertainty deepened after the resignation of Voloshin was confirmed late Thursday. Experts said his departure signaled a dramatic power shift at the Kremlin, linked to the rise of the little-known siloviki.

Voloshin reportedly resigned in anger at not being warned of Khodorkovsky’s arrest. An advocate of free markets who is said to have supported Khodorkovsky, Voloshin was a holdover from the era of former President Boris N. Yeltsin.

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The political maneuvers come amid concern that during Putin’s presidency, the country has taken several steps backward. The last independent television station closed in June, and there has been an erosion of democratic institutions, with observers reporting irregularities, intimidation and even falsification in elections in Chechnya and St. Petersburg, both won by Kremlin-backed candidates.

Andrei Piontkovsky, director of the Center for Strategic Studies in Moscow, said Voloshin’s exit left only one powerful group in the Kremlin: the former KGB officers, who are also known as “Chekists.”

“The construction of an authoritarian system is very much underway now,” he said. “The economic system will grow very static, but the sacred principle of private ownership will be preserved because these Chekists want to become very rich people too.”

He predicted that Putin’s policy of pursuing warm relations with the West would fade “because it was the Voloshin group who promoted this closeness.”

In Washington, State Department spokesman Richard Boucher said the United States had been watching the Khodorkovsky situation carefully and was concerned about the rule of law and basic freedoms in Russia, but viewed the events as an internal Russian matter.

“As far as what the fallout and the effects might be, the economic or political, I think I’d have to leave that for the Russians to deal with and explain,” Boucher said.

Putin named Dmitry Medvedev to succeed Voloshin. Medvedev, who went to the same university as Putin, is one of a large group the president brought to Moscow from his hometown of St. Petersburg.

On Saturday, Khodorkovsky was arrested at gunpoint on his plane in Siberia and jailed pending trial. He and associates Platon Lebedev and Vasily Shakhnovsky face charges of tax evasion and fraud against the state amounting to about $1 billion.

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The prosecutor general’s office said the Yukos stock was seized as security for the financial damage the three men had caused the state, implying that the shares could revert to the state if the Yukos officials were found guilty. The move blocks shareholders from selling their stock.

Yukos spokesman Alexander Shadrin called the action a gross violation of ownership rights.

Earlier Thursday, Yukos announced a $2-billion dividend to shareholders, which would net Khodorkovsky $730 million.

The frozen shares -- initially reported as a controlling stake but later confirmed to be 44% -- sent Russia’s benchmark RTS stock index plunging 8% and Yukos shares plummeting 12.4% to $10.56 each. On Oct. 16, they were selling for $15.63.

After the market shocks, Putin held talks with a group of Russian and foreign investors, a meeting set before Khodorkovsky’s arrest.

Participants later told reporters that Putin had reaffirmed his commitment to the market economy and said the Yukos case did not signal a campaign against business.

Putin’s televised remarks before the closed meeting began were bland. “Of course, we don’t consider the work in creating conditions for investment activity in Russia to be complete. We understand the process is rather difficult, and we will continue efforts in that direction,” he said.

Still, the crisis has alarmed foreign investors. The London Financial Times reported that French food company Groupe Danone has delayed a planned $900-million takeover of Russian juice and dairy producer Wimm-Bill-Dann Foods.

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Analysts are divided on the motives of the siloviki in pursuing Khodorkovsky. Some believe the tycoon’s support for opposition parties was perceived as a potential threat in future presidential elections. Others speculate the siloviki were alarmed at reports that Yukos could sell a large stake to a foreign oil company, a deal now seen as unlikely.

Yevgeny G. Yasin, an economics minister under Yeltsin, said the Yukos scandal would scare off investors and provoke capital flight.

“The seizure of Yukos shares is a direct step toward a plausible excuse to put them up for sale and to hand them over to the people who started this process to redistribute property,” Yasin told the Interfax news agency.

He predicted other Russian tycoons would lose their property -- after a lull. “Khodorkovsky will be followed by somebody else. But not immediately. The wolf still has to digest its first victim,” he told the Financial Izvestia newspaper.

Yulia Latynina, a political analyst at the Echo of Moscow radio station, said Putin had become a hostage to the siloviki.

“Putin has just cut off one wing of his presidency plane, which means it will ultimately crash,” she said in a phone interview.

Latynina added that the Russian people hated oligarchs, including Khodorkovsky, and supported Putin’s moves against them. “But once oil prices go down and capital flight reaches an unprecedented level, it is not so clear that they will continue to support him,” she said.

From now on, Putin will get information from one source -- the siloviki, Latynina said.

“All the oligarchs remaining in the country are beginning to understand that they have nothing ... but the chance to end up in prison. By now most of them must have understood that the most obedient of them will be eaten the last.”

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Times staff writer Maura Reynolds in Washington contributed to this report.


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