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Russian Government Will Not Take Over Economy, Putin Says

But the president tells prominent businessmen he won't shield oligarchs from investigation.

November 15, 2003|Kim Murphy | Times Staff Writer

MOSCOW — In the elegant hall of chandeliers and columns where Josef Stalin's body once lay in state, President Vladimir V. Putin on Friday met with many of Russia's most powerful businessmen, attempting to calm fears that the federal investigation of oil giant Yukos will mean a return to the era of a state-managed economy.

"Any criminal investigation into business raises concern and alarm

Cheers broke out in the hall, but the voices fell silent when Putin said he would not halt criminal investigations of the kind that resulted in the arrest last month of former Yukos chief Mikhail Khodorkovsky. In fact, the president declared, the same Russian businessmen who are complaining about the intrusion of law enforcement into business have often solicited police investigations of their competitors.

"In general, I must say that sometimes it is very difficult to understand in our country where business ends and the state begins," Putin said. "The task of making this differentiation is of a fundamental but permanent nature."

Putin was outlining a central dilemma Russia faces as it attempts to move its economy beyond the domination of half a dozen wealthy oligarchs who control not only the bulk of the country's mineral wealth but also a significant share of its political power.

No one intended that businessmen like Khodorkovsky, when they bought control of the state's richest assets in the mid-1990s, would seek to use their wealth to grab political power. The influence of the oligarchs has in fact diminished since Putin became president in 2000 and in effect exiled two of the biggest moguls, Boris A. Berezovsky and Vladimir A. Gusinsky. They came to prominence during the administration of former President Boris N. Yeltsin and now live abroad.

At the same time, businessmen such as Khodorkovsky were able to parlay the initial assets they took from the state into such huge personal fortunes that they would become challenges to the state itself.

"The irony of the situation is that by improving private property rights and security of title, the government incentivized good behavior, and that in turn resulted in the leading companies being valued by the market 10 to 15 times higher than they were in the late 1990s -- hence the now fabled wealth of these oligarchs," said Christopher Granville, a strategist for the Moscow-based United Financial Group.

"The trouble is, you now have a political problem," he said. "The state itself is vulnerable to capture by these huge concentrations of wealth."

Khodorkovsky made no secret of his intention to use his $8-billion fortune to counter what he saw as an increasing trend toward authoritarianism in the Russian government.

"I'm going to try to buy a democratic future for my country," he told Fortune magazine in August. "And I have enough money and energy to do that."

Khodorkovsky was supporting liberal parties seeking to oppose the pro-Kremlin United Russia party in parliament. But Yukos lobbyists earlier this year also were active, and successful, in protecting loopholes connected with offshore tax havens, blocking production-sharing agreements that would ease foreign participation in oil and gas production, and nixing an increase in the unified royalty tax on natural resources.

Putin made it clear in 2000 that the era of the oligarchs was coming to an end, and Khodorkovsky's arrest only reinforced the point, said Vyacheslav A. Nikonov, president of the Politika Foundation, a Moscow think tank.

"Putin came in and said: 'I'm going to run the country,' " Nikonov said. "Message No. 1 is: Politics is for me. Message No. 2 is: At least pretend to pay your taxes. Message No. 3: You are not saints, and all of you are under investigation. So if you misread Message No. 1, look at Message No. 3."

The oligarchs are a unique class, Nikonov said, because they are creations of the state, and one of its most serious threats.

"The Kremlin appointed these guys to be oligarchs. They were hired by the Kremlin to be the billionaires and run the big businesses of the country," he said. "They're our creatures, and now they're trying to undermine their creator."

Most of the biggest oligarchs have adopted a low profile, declining to defend Khodorkovsky.

Alexander Livshits, deputy director of the oligarch-owned Russian Aluminum mega-company and a former Yeltsin economic advisor, said the oligarchs knew that they were operating under a mandate: "You can influence politics only through the established mechanisms. Through lobbying, through unions of businessmen. But don't encroach upon the sacred things."

In Russia now, Livshits said, "a process of demoting oligarchs is underway. A process of demoting them from oligarchs back into tycoons. As a tycoon, you can make money, invest and do other things, but you shouldn't poke into things which don't concern you."

Some seem to be following the example of Gusinsky and Berezovsky and leaving the country. Roman Abramovich this year agreed to sell half his 50% stake in Russian Aluminum for about $2 billion, then sold his huge oil company, Sibneft, to rival Yukos, which became YukosSibneft. Having purchased London's Chelsea soccer club in July, Abramovich is widely believed to be preparing to leave Russia for his English country estate.

Khodorkovsky, say those who know him, appeared to know that he was risking arrest but chose to make the point that in a mature state, business has a legitimate voice in politics.

"The level of meddling in politics that [my opponents] believe to be unacceptable is a completely normal thing for any normal country," Khodorkovsky told The Times in an August interview. "I'm not trying to wear two hats at once, that of businessman and politician. But I have no intention of denying myself the ordinary rights that civil society gives me."

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