Johnson's Russia List
5 November 2003
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A CDI Project
Los Angeles Times
November 5, 2003
More Than a Moscow Morality Play
Seeing the face-off between an oil tycoon and the Kremlin as a clash of
good and evil is just too simplistic.
By Fiona Hill
Fiona Hill is a senior fellow at the Brookings Institution and co-author
with Clifford Gaddy of "The Siberian Curse: How Communist Planners Left
Russia Out in the Cold" (Brookings Institution Press, 2003
A seemingly classic morality play has unfolded in Moscow. Mikhail
Khodorkovsky, Russia's richest man and head of its largest oil company,
Yukos, was arrested Oct. 25 on charges of fraud and tax evasion. The main
protagonists were cast in black and white. Good - democracy, private
enterprise and pro-business types in the Kremlin - was pitted against Evil
- authoritarianism, re-nationalization and the so-called siloviki,
President Vladimir V. Putin's KGB hangers-on.
The audience consensus was that Evil won - that Putin was turned to the
dark side by KGB siloviki who wanted to quash democratic forces on the eve
of Russia's December parliamentary elections and again exert state control
over the economy. His chief of staff, Alexander Voloshin, quit in protest.
In a second act this week, Khodorkovsky resigned as head of Yukos.
From Putin's perspective, though, things were never so black or white. No
one won. He did what he had to do to rein in a wayward oligarch. The
morality play was an unfortunate deviation from a script that Khodorkovsky
had already thrown out the window.
Putin has consistently made it clear that private methods and incentives
are superior to public ownership and management. To jump-start Russia's
economy, he has balanced market efficiency with state intervention to set
The energy sector has been central in his calculations. Russia's abundance
of hydrocarbons is its greatest economic and strategic asset, the family
jewels. In Kremlin strategies, oil and gas revenues - which provides
one-third of all tax revenues - will be tapped in the future to revitalize
Russia's moribund manufacturing industry. Meanwhile, Putin needs oligarchs
to manage energy assets effectively, not just in the interests of owners
and shareholders but also in the interests of the state.
Khodorkovsky stole Yukos from the state in the free-for-all of Russian
privatization in the 1990s. But, from Putin's point of view, he had all the
right qualifications to run it. Although ruthless and self-interested, he
was well connected to Kremlin operatives from his days as a young Communist
activist. He knew how to take advantage of the devaluation of the ruble and
a surge in world oil prices to increase production and turn Yukos into a
major player. He set the tone for a new wave of Russian business, becoming
the poster boy for good corporate governance and new corporate
philanthropy. He supported the development of civil society at home, and he
bought attention, if not respect, abroad with savvy public relations and
carefully selected giving to prestigious institutions.
Khodorkovsky's stellar performance boosted the Russian stock market, in
which Yukos and five other big companies account for more than 90% of
shares traded. In return, Khodorkovsky made $8 billion.
His personal success even made Russia look good - it was seen as a country
where vast fortunes could be made. For a while, he was the model of the
"good" oligarch. He enriched himself and Russia, and he proved that Kremlin
capitalism could work.
Unfortunately, Khodorkovsky lost sight of Putin's parameters. He seemed to
have forgotten that he had seized Yukos by nefarious means and managed it
at the state's pleasure. He referred to Yukos as his asset to use as he
At a public meeting at the Carnegie Endowment in Washington only two weeks
before his arrest, Khodorkovsky declared: "Russian society is going to have
to get used to the fact that people can do whatever they feel like doing
with their money."
He spoke of selling Yukos and moving on to other things, including
politics. He flirted with U.S. oil companies Exxon and Chevron as potential
buyers. Instead of acquiring more assets for Yukos and Russia, he seemed
willing to sell out for personal gain.
In Putin's terms, Khodorkovsky let him down. And in spite of repeated
pressure, including the arrest of close associates, Khodorkovsky never got
the message. He kept on upping the ante until Putin had to intervene,
seizing him and a controlling portion of Yukos shares.
Still, the reassertion of such draconian state control is a genuine setback
for Putin. And re-nationalizing Yukos or any other major privatized company
would be an inferior alternative to his innovative state capitalism
approach. Although the state's interests are paramount in Putin's view of
the Russian economy, he has always preferred persuasion over force.
Now Putin has a dilemma. He does not want to change course, but he backed
the wrong horse with Khodorkovsky.
Putin's forceful intervention has created a political martyr and upheaval
in the economy. He can counter Khodorkovsky's political appeal, and the
economic upheaval will probably subside, but, unfortunately, Russia doesn't
boast a large stable of capable oligarchs. Putin does not have many others
he can trust to manage the family jewels.