The Yukos Affair—A Debate

T he Putin administration’s recent measures against some oligarchs, particularly the criminal investigations launched against some leading business people of oil giant Yukos, generated lively discussion in the Russian press. We selected two opposing views represented by two distinguished authors: Ajay Goyal is publisher, editor, and columnist for the Russia Journal, a Moscow-based English language daily, and Anders Aslund is director of the Carnegie Endowment for International Peace. Their respective articles were published in the Russia Journal and the Moscow Times.

Ajay Goyal: "Worries that the Yukos affair will somehow lead to the death of the new Russia are totally misplaced hysteria."

Russians hate their oligarchs. The dozen or so people connected with the regime of former President Boris Yeltsin who divided all the natural resources, industry, and wealth of Russia among themselves have not done anything to earn the love and respect of their fellow citizens. Many remain criminally disposed, laundering money abroad at every available opportunity, while others have already abandoned Russia and adopted new homelands. And, while they may be despised locally, they are doted upon abroad.

Ordinary Russians hate them for a variety of reasons, but the primary one is that they did not want the wealth of their country to end up in the hands of a coterie just as sinister as the upper echelons of the Communist Party. The Russian revolution against the communist apparatus failed, and the inheritors of the latter sneer at the Russian population each day by flaunting their ill-gotten wealth. A very few do seem to have acted professionally to build value in their companies. Yukos Chief Executive Officer Mikhail Khodorkovsky—currently on the outs with the Kremlin—is the first that comes to mind. Yukos is a genuinely well-run enterprise.

The oligarchs have hampered genuine direct investment in Russian industry. Yet, slowly, thanks to the reformist and business-friendly laws drafted by President Vladimir Putin’s government, many foreign corporations have managed to build industrial bases in Russia. Their businesses foster the economic lives of a majority of the population and not just the addition of extra zeros to the personal assets of a dozen. Self-starting Russian entrepreneurs have only the monopolies controlled by these oligarchs standing in their way, with taxes and government burdens on the decline.

The corporations and holding companies of the oligarchs—who gobble up industries, land, and resources without ever paying anything for them—are monopolistic, anticompetitive giants that stand in the way of the creation of new businesses, direct foreign investment, liberalization of the economy, and the availability of competitive and quality products in the market. Worries that the Yukos affair will somehow lead to the death of the "new Russia" are totally misplaced hysteria. The Russian economy has its troubles, and oligarchs are one of them. There is nothing good they can do for the country in the long run.

The Russian oligarchs are used to attaining ownership of whatever effectively free-of-charge privatized industry comes their way by means of politicking, bribery, embezzlement, and back-room deal making. Then they usually control the company as long as it is possible to manage its cash flow, do transfer pricing, and move capital into offshore accounts. The minimum amount of money necessary to keep the industry afloat is brought back in, but that’s about it—there is no attempt at real value-building.

If the Kremlin has decided to clip the political ambitions of some members of the oligarchy, it can only benefit the market, the economy, foreign investors, and consumers. The "chaebolization" of the Russian economy has hindered the development of new industry. [Editor: chaebols are huge networks of South Korean companies that operate as one.] Oligarchs have been able to keep protectionist policies in place, forcing poor-quality goods on Russian consumers. But in the last three years Putin’s administration has taken decisive steps toward the creation of a civilized legal space. With a good economic and legal framework already in place, the Russian economy is ripe for investment, and great opportunities lie in new industrial enterprises—not in cavorting with thieves.

Anders Aslund: "This destabilizing conflict will cause capital outflow and reduce investment, economic growth, and Russia’s credit rating."

Since July 2, a campaign has been pursued against Yukos, Russia’s biggest private enterprise and one of its best managed. This serious drama involves many issues, but the most important is probably that the ruling party, United Russia, is in tatters, with no program and little popularity five months before the parliamentary elections. Meanwhile the communists have gained new popularity because of left-wing concerns about oligarchs and corruption. Sensibly, Interior Minister Boris Gryzlov is pursuing a campaign against corrupt police officers, but United Russia also needs to beat up on the oligarchs.

At the same time, this campaign must not go too far, because then three major planks in Putin’s platform would be lost. Both the political stability he has achieved and the nation’s economic welfare would be jeopardized. Furthermore, hostile reaction among foreign investors could endanger the planned Putin-Bush summit in the United States at the end of September. Therefore the campaign must not run beyond the "silly season" of July and August. If it continued for longer it would harm economic growth, political stability, and Russia’s international standing, undermining Putin’s authority.

The oligarchs’ main concern is that their property rights are not secure, which lays them open to extortion from political parties and the authorities. Reportedly, the Kremlin has extorted a total of $200 million for United Russia’s campaign this year, $20 million from each of the big oligarchs. Even if other oligarchs are or were jealous of Khodorkovsky, they all suffer from this attack and are prepared to act with Yukos through the Russian Union of Industrialists and Entrepreneurs.

Being responsible for the economy, Prime Minister Mikhail Kasyanov and his government have every reason to oppose this destabilizing conflict. It will cause capital outflow and reduce investment, economic growth, and Russia’s credit rating. The bottom line is that to tamper with the outcome of mass privatization—one of Russia’s main accomplishments that has laid the foundation for five years of strong economic growth—would be extremely dangerous. The campaign has seriously shaken any belief in the sanctity of property rights in Russia. A sensible suggestion is the three-year statute of limitations on privatization disputes for which Arkady Volsky, chair of the Russian Union of Industrialists and Entrepreneurs, is now campaigning. It should include not only enterprises, but also land and real estate. Yet foreign investors will be deterred for quite some time.

The oligarchs’ huge political contributions remain a sore spot. As this financing cannot be prohibited, it should be legalized, but made public and transparent. The oligarchs would be less keen to fund politicians then, while also becoming less vulnerable to extortion. Politically, United Russia is likely to benefit from this campaign against oligarchs and corruption, but so are the Union of Right Forces and Yabloko, which are mobilizing in defense of the rule of law and democracy. Clearly civil society is being energized.

There is no escaping it: Putin is the master of this drama, and he will be judged by how soon he brings this tragedy to an end, how severely he punishes the culprits, and whether he disciplines the secret police.