Montrose Journal Winter 03


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THE YUKOS AFFAIR: AN END TO PLURALISM IN RUSSIA? -

OKSANA ANTONENKO, INTERNATIONAL INSTITUTE FOR STRATEGIC STUDIES

The recent arrest in Moscow of Mikhail Khodorkovsky, one of the most successful businessmen in Russia and head of the Yukos oil firm, sent shock waves through Russia's fragile political system and its stock markets.It has also acquired significant political resonance in the West, raising a number of questions for both Western businesses and observers of Russian politics.  President Putin's victory in the Duma elections in December only served to make these questions more acute.

Does the treatment of Khodorkovsky mark the beginning of a state campaign to bring an end to the power of the oligarchs and redistribute the property and assets they accumulated through crooked privatisation deals in the 1990s?   To what extent is Khodorkovsky's arrest intended as a powerful message to political, rather than business elites in Russia and the West? And does the manner of his apprehension - with excessive use of force and gross violation of Russian, let alone Western legal standards - represent a significant power shift within the Kremlin from the reformist clans towards the former KGB officials known as siloviki?  Does the arrest and subsequent freezing of 40% of Yukos assets indicate the state's wish to regain control over key assets - such as licences for lucrative oil fields - to prevent them falling into foreign hands?

Khodorkovsky's active participation in Russian politics, at a time when Vladimir Putin had declared an end to the Yeltsin-style oligarchic system of power, was viewed as a direct challenge to the President's authority. It was also a violation of the unspoken rules of the game - subliminal conventions well understood among Russian elites that 'your assets are safe as long as you stay out of politics'.  But the arrest marks the start of yet another worrying trend in Russia - political repression and the rise of authoritarian rule, tolerating pluralism neither in the Duma nor among entrepreneurs seeking to manipulate the political system. For many in Russia and abroad, pictures of Khodorkovsky in prison revived chilling memories, of repression and a return to the police state, that have been almost forgotten since the collapse of the Soviet Union.

For proponents of a better business environment and transparent democratic political systems, each of the above perspectives represents a significant basis for concern.  In the end, however, they do not add up to a radical shift in Putin's policy, or for that matter, to a major change in the environment in which foreign business operates in Russia.  The Yukos affair has had the effect of completing the transition from Yeltsin's Russia to that of Putin, even though formally the new President had taken over as long as four years ago.  Recent developments herald the final arrival of the Putin era.  Having devoted his first term in office to the consolidation of autonomous political power, the President will now focus in his second term on paving the way for his own successor before he is constitutionally required to relinquish power in 2008. This shift will inform both the prospects for domestic reform and determine strategic choices in Russia's foreign policy over the next half decade.

Putin's vision for Russia has been both progressive and authoritarian. This apparent contradiction is a foreign concept for Western Europe but is deeply rooted in Russian history and has been successfully implemented in other parts of the world such as in South Korea, Chile and China. Putin has combined elements of each. On the one hand, his policy choices demonstrate a commitment to the consolidation of Russian domestic economic growth before resorting to 'great power' ambitions, to achieving integration into the community of the most economically developed nations and to promoting development of those sectors of the economy which could most benefit the Russian people. He has tried to diversify a dependency on oil and supported more investment in small and medium size business. And over the past four years the Russian economy has been growing steadily and average real income has increased by 25%.  

At the same time, however, Putin believes above all that Russia's modernisation is a responsibility of the state and must be conducted 'from the top'. Hence we have seen the President's concerted effort to reinforce the so-called 'vertical' power structure and to establish further controlling bodies - such as super governors - to assure that state decisions are implemented throughout Russia's vast territory.

Clearly this provides little room for democratic change, at least not in the short to medium term until the main objective of the modernisation programme - the emergence of a viable middle class in Russia - becomes a reality. And authoritarian modernisation faces many obstacles and contradictions, not least the growth in Russian civil society and the peculiarity of the country's geography: development priorities for the Kaliningrad region are hardly comparable to those of Sakhalin or Tatarstan.
 
Furthermore, such autocratic rule is encouraging large numbers of the new and wealthy elites either to leave Russia or remove their money - as indicated by the recent surge in volume of capital flight after the Yukos affair. Khodorkovsky embodies many of these challenges. His belief in the power and independence of big business, and commitment to promoting grass-roots change in Russian society and political system contradicted Putin's top down vision: the oligarch not merely threatened the President's personal power and that of his close associates, but also Putin's modernisation programme as a whole.

For many Western investors, however, Putin's vision does not represent such a challenge. If anything both leverage and profile within Russia are likely to increase as a result, particularly in the case of large scale foreign investment. The President views the goal of attracting foreign investment into Russia not simply as an economic objective but rather a symbol of the efficacy of his domestic modernisation programme, indeed it brings him closer to achieving his chief foreign policy objective: the integration of Russia into the international economic system. In the post-Yukos period many Russian companies therefore will actively seek foreign investors for their companies, as a sort of insurance against domestic political risk.

'Putin's vision for Russia has been both progressive and authoritarian.'

The second important factor which defines the Putin era is his team. Russian domestic politics, revolving around the changing balance of power between different clans surrounding the President, rather than between political parties in parliament, resemble more a Byzantine court than a modern Western democracy. The Yukos affair and subsequent resignation of Alexander Voloshin, the Presidential Chief of Staff, signified the end for one very powerful clan - the Yeltsin 'family' - which presided over the privatisation deals of the 1990s and brought Putin to power in 2000 to replace Boris Yeltsin.

It is well known that this transfer of power was undertaken on the basis of an explicit promise of immunity and security guarantees for Yeltsin's immediate family and a pledge not to re-open privatisation deals already secured for Yeltin's wider 'family' clan.  These assurances notwithstanding, the very first day of Putin's arrival in the Kremlin signified the beginning of the end for Yeltsin's clan. The cautious and politically inexperienced Putin took an entire first term to complete this process and to feel mature enough as a leader to preside over his own power base, represented by the so-called 'St Petersburg clan'.

This includes the President's colleagues and friends who go back to his 'previous' life - as a law student at Leningrad (now St.Petersburg) University, later as a KGB officer and finally as a middle ranking official in the administration of Anatoly Sobchak, the former mayor of St Petersburg. The clan, however, is much less homogeneous than the one which it has now replaced: the group unites people bonded to Putin by personal trust and loyalty rather than ideology.

In fact the new clan has two distinct factions.  The first comprises moderates promoted to senior positions after Voloshin's resignation and includes Dmitri Medvedev as new head of the Presidential Administration, Dmitri Kozak as his deputy and Igor Shuvalov as a new economic strategist. Vladislav Surkov, a reformer with a business background who represents the last remnants of Voloshin's team, remains in the Administration in charge of the crucial areas of elections and domestic politics. But both Surkov and the Mikhail Kasyanov, the Prime Minister, are likely to be replaced by 'St Petersburg' people, perhaps once Parliamentary and Presidential elections are over by mid May 2004.

Moderates in the St Petersburg clan believe in the continuation of reform and in the need to reinforce the rule of law. Kozak, who has taken a lead on legal reforms in Russia and promoted a radical curtailing of the prosecutors' power, is now in charge of overseeing the activity of the Prosecutor General's office, widely viewed as having gone too far in its aggressive pursuit of Khodorkovsky. The new team of moderates in the Kremlin has already established and maintained links with both Russian and foreign businesses and is likely to be as responsive to their concerns as in the previous administration led by Voloshin.

On the other side of Putin's clan, are the so-called siloviki, or former KGB (security and military) officials, such as Viktor Ivanov and Igor Sechin, widely believed to have initiated the Yukos affair and executed it with unprecedented vigour. Siloviki enjoy the President's trust and have preserved roles in the Administration despite signs that Putin was unhappy with the heavy-handed way in which the Yukos affair was conducted. Nonetheless, it is significant that no siloviki were promoted in the reshuffled Presidential Administration, a sign perhaps that Putin is unwilling to rely  excessively on siloviki and prefers the reformists within his team.

However, it is important to note that Putin's continuing reliance on siloviki is based not merely on personal trust but because former KGB officials always saw themselves as the guardians of the state. They thus eagerly support the President's efforts to strengthen state power across all spheres of Russian political, economic and social life. Like Putin, the siloviki see any independent power of the oligarchs, backed by money and foreign business, as a threat to strong state authority: in their view, and certainly his, the Yeltsin years were an aberration, allowing capitalists to think they really were in control and encouraging a feeling of anarchy that was not in the Russian tradition. Putin was determined to end this. On the other hand, Putin has not been as ready as some of the siloviki to crack down on big business more generally, as this would be bound to undermine any prospect of internal modernisation.  

In any case, the power of the former KGB lobby should not be exaggerated despite its clear devotion to a stronger government ideology. Many in the former security apparatus now work for big business in Russia and thus do not represent a united and powerful group able to shift the balance of power by challenging the moderates within Putin's new administration. At a regional level, however, they are much more united, conservative and powerful. If the presence of siloviki in the Kremlin represents less of a threat, both foreign and Russian investors should be much more concerned about mid-level siloviki in the regions, further empowered by the Yukos affair. In the near future, we may see them trying to enact similar Yukos-style coup attempts against major provincial business interests. But in the long run, as the middle classes develop beyond Moscow and other major cities, and generational change occurs in regional administrations, even the power of siloviki in the provinces must be marginalised.

The Yukos affair has demonstrated what everyone in Russia and the West already knew all too well: namely that public sector reform and the rule of law are the two key factors determining the ultimate success of Russian domestic change. These remain the two areas where progress has been at its slowest, despite the passing of numerous government laws and reform programmes. Beyond anything else in coming years, they represent the most difficult challenge to Putin's second term and should be seen as the two biggest areas for EU and other foreign assistance to Russia.  

Yukos certainly represents an historic development for Russia but should not be seen as paving the way for a new trend in Russia's history. The Russian people and elites must draw the right lessons from this experience about the importance of democratic reforms and transparent political systems. The demise of Yukos should sound a note of caution for foreign investors - particularly for business deals at a regional level - but should not be seen as a deterrent for engaging with Russia. Indeed, as we look forward to 2004, the affair should empower foreign business to take this opportunity to invest in major Russian companies and bring them deeper into the multinational corporate fold. In contrast to its political upheavals, Russia's economic fundamentals remain strong.

Oksana Antonenko is Senior Fellow (Russia and Eurasia) at the International Institute for Strategic Studies in London.

Russia's poor: Forty million below the poverty line

2000
2001
Population with money income below the minimum subsistency level


min. persons
42.3
39.9
percentage of total size of population
29.1
27.6
Source: State Committee of the Russian Federation on Statistics.


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4.3
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3.8
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3.2
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Koch, David Hamilton
3.2
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2.5
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2.4
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2.3
United States
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2.3
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Kaiser, George B.
2.3
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1.6
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