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Putin Reassures Jittery Investors, Defends Arrest of Tycoon

October 28, 2003|Robyn Dixon | Times Staff Writer

MOSCOW — As Russian stocks tumbled Monday in the wake of the arrest of the country's richest oil tycoon, President Vladimir V. Putin called for calm and offered reassurances that there were no plans to reverse the nation's privatization program.

Shares in mogul Mikhail Khodorkovsky's company, Yukos Oil Co., plummeted Monday, and trading on the MICEX stock exchange was suspended for an hour after falling sharply in the morning. After Putin spoke, the markets rallied slightly and the benchmark RTS index ended down 10% from Friday's close.

Although the president's remarks appeared to help contain the damage Monday, some analysts fear that if prosecutors succeed in their tax evasion and fraud case against Khodorkovsky, it will cow other Russian tycoons, spark capital flight and frighten off foreign investors.

Indeed, Putin's remarks left substantial doubt about his willingness to rein in former KGB officials in his administration -- known as siloviki -- who many believe are the real forces behind Khodorkovsky's arrest.

"There's fear of further arrests, there's fear of further charges, there's fear of assets being taken away -- all these types of old fears. It's the ... goblins of the old KGB that have scared the bulls away," said James Fenkner, head of research at Troika Dialog Investment Bank in Moscow.

Khodorkovsky, whose fortune is estimated at $8 billion by Forbes magazine, was arrested Saturday. He obtained Yukos at a rock-bottom price in a controversial 1996 privatization under President Boris N. Yeltsin and recently has been funding opposition parties.

Khodorkovsky's arrest is seen by many as part of a Kremlin power struggle between remnants of Yeltsin's administration, known as the "family," and the siloviki installed by Putin, himself a former KGB agent.

"Khodorkovsky has become a prime target for the new siloviki in the Kremlin. They simply want to redivide property. They just want to be able to sell a lot of the property they seize to strategic investors, not just in packages of 25%, but 100%," said Mikhail Delyagin, a former government economic advisor and now an analyst at the Globalization Programs Institute.

"If they manage to break Yukos, they won't have any problems with anybody else. And that will mean all our business is doomed," Delyagin added. "The latest events demonstrate that private property is not protected in Russia, that it is not safe, that if you work properly and well it is a problem rather than an asset."

But in a Cabinet meeting Monday, Putin insisted that Khodorkovsky's arrest was part of his administration's efforts to apply Russian law to everyone, including the nation's richest man. He ruled out meeting with top businessmen who are alarmed about the arrest.

"There will not be any meetings or bargaining over the activities of law enforcement agencies, as long as these agencies stay within Russian law," Putin said, adding that he believed the court had grounds to jail Khodorkovsky pending his trial.

"I wish to emphasize in regard to the case under investigation, that there will be no generalizations, analogies or precedents, especially in connection with the results of privatization," Putin said. "I would like everyone to stop the speculation and hysteria on this issue."

Khodorkovsky's arrest raises new questions about Putin's presidency, which has been marked by conflicting impulses. He has embraced a pro-Western foreign policy, stabilized the economy and courted foreign investment, but under his rule independent TV stations have been shut down and tycoons who aired opposing views have been charged with tax evasion or fraud. Vladimir Gusinsky and Boris Berezovsky -- two of the so-called oligarchs who acquired much of the nation's wealth in 1990s privatization deals -- were targeted by prosecutors and fled into exile.

Putin has argued that the Khodorkovsky case has nothing to do with the Kremlin and is purely a matter for the courts.

"Everyone should be equal before the law, a modest clerk, a civil servant ... an average citizen, a medium-level businessman or a big businessman, no matter how many billions of dollars he has," Putin said Monday.

But a number of analysts say many tycoons committed financial offenses in 1990s privatizations and believe that Khodorkovsky is being targeted because he backed opposition parties. They reacted skeptically to Putin's argument that intervening on Khodorkovsky's behalf would run counter to the rule of law.

"This demonstration that the state refused to be corrupt is ludicrous because right now there is a big suspicion that this is all being done for reasons close to corruption," Delyagin said.

Fenkner, of Troika Dialog, predicted that Khodorkovsky's arrest would discourage other oligarchs from participating in politics. But he said investors would be back.

"Over the next few quarters, I think people will actually forget who Khodorkovsky was, just like the market's forgotten about Gusinsky and the market's forgotten about Berezovsky."

But Delyagin predicted the case would backfire on the Kremlin. He said Putin had alienated many professionals and businessmen.

"Putin has pushed these people away from him: the most educated, the most socially aware, the people who are responsible for the biggest contribution to the economic development of the country. These people will begin to look for a new leader."

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Times staff writer Sergei L. Loiko contributed to this report.

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