Putin vs. Russian capitalism? (Guardian)

John M Cox coxj at email.unc.edu
Sun Nov 2 07:36:21 MST 2003


Putin launches assault on Russian capitalism

The arrest of the country's richest man and the freezing of his assets
threatens to re-Sovietise the economy, says Conal Walsh in Moscow

Sunday November 2, 2003
The Observer

Mikhail Khodorkovsky couldn't make a long-arranged appointment with The
Observer last week. Even Russia's richest man can't be interviewed when
he's in a prison cell. But in Moscow we found no shortage of business
people howling in protest at his incarceration.
Few other Russians are. Inhabitants of this still-poor country have no
sympathy for billionaires and the arrest has boosted President Vladimir
Putin's popularity ahead of forthcoming elections. As chief shareholder of
Yukos, the oil giant sold for a song in the murky privatisations of the
Nineties, Khodorkovsky is an easy target.

But the sudden escalation of Putin's feud with the tycoon - and the
freezing of all Yukos shares belonging to him and his associates - is
causing genuine alarm among investors. Fearful of the conservative 'grey
cardinals' now advising Putin, many worry that the state has a secret plan
to seize its former assets back. Could Russia's fast-expanding economy yet
be re-Sovietised?

Absolutely not, say the president's men. Khodorkovsky's dramatic arrest on
a Siberian airstrip last weekend reflects the seriousness of the charges
against him, which include personal income tax evasion, overseeing
corporate tax evasion, and embezzlement to the tune of $1 billion - all of
which he denies....

The Khodorkovsky 'crisis' comes as the country stands at a kind of
crossroads. Russia is interested in joining the World Trade Organisation,
but much of its economy remains unliberalised. State-owned Sberbank
remains Russia's biggest lender to industry and its only significant
retail bank; and Gazprom is largely out of bounds for foreign investors,
despite being the world's biggest gas company.

Those few shares that are publicly available nearly always derive from the
oil industry. Russian wells now pump out 9 million barrels a day and
represent a quarter of the national economy. The country is dangerously
overdependent on one sector, and if world oil prices were to collapse,
economic growth, inward investment and Putin's budget surpluses would go
into reverse.

This, rather than the president's little local difficulty with
Khodorkovsky, is what really exercises the minds of Russia's economic
star-gazers. On the other hand, the two issues could be connected. What is
happening to the Yukos chief executive may reflect Putin's determination
to take a firmer grip on Russia's oil economy.

Besides, Khodorkovsky's patronage of opposition politicians was such that
he would soon have 200 MPs in his pocket, some commentators said. Putin
has tough decisions ahead, and could do without billionaires getting in
his way. What foreign investors and Russia's rich will make of his methods
remains to be seen.

How Yeltsin enriched the oligarchs

The first half of the 1990s was bonanza time for Russian entrepreneurs as
the country emerged from the communist era; and they found a willing
accomplice in the government of Boris Yeltsin.

Yeltsin's rush to liberalise the Russian economy - seen as vital to
political modernisation - led to a sell-off of state assets on an
unprecedented scale. By spreading assets previously held by the state
among the people, Yeltsin hoped to create a vast 'popular capitalism' to
fit in with Russia's collectivist tradition. In fact, he got just the

The first mass sell-off of industrial, agricultural, commercial and
service sectors was sparked by a 1992 decree which gave each Russian adult
vouchers to the value 10,000 roubles to buy shares in the firms which
employed them. 'What we need is millions of property owners, not merely a
handful of millionaires,' said Yeltsin.

Shrewd entrepreneurs quickly realised that the assets being sold were
massively undervalued. They bought the entitling vouchers from the workers
and gained control of the state's most prestigious industries. For
example, Gazprom, the biggest energy company in Russia, was valued at only
$250 million on privatisation, but in 1997 had a stock market value of $40

The oligarchs cemented their control and their wealth during the 1996
election. Yeltsin needed campaign funds, and effectively hocked state
interests in the mining industries to the oligarchs in exchange for loans.
When the state failed to repay the oligarchs ended up with control of
Russia's vast natural resources - and the billions they could command on
world markets.

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