Putin and the Oligarchs

Marshall I. Goldman

From Foreign Affairs, November/December 2004

Summary:  The jailing of Russian oil tycoon Mikhail Khodorkovsky has revealed the fault lines running through the post-Soviet political economy. The reforms and privatization of the 1990s were so flawed and unfair as to make them unstable. A backlash was inevitable. Given Vladimir Putin's authoritarian tendencies, that backlash has proved equally flawed and unfair-and perhaps equally unstable.

Marshall I. Goldman is Kathryn W. Davis Professor of Russian Economics, Emeritus, at Wellesley College, Associate Director of the Davis Center for Russian and Eurasian Studies at Harvard University, and the author of The Piratization of Russia: Russian Reform Goes Awry.

The return of the statists and their push for redress are bound to unsettle existing and potential private investors, Russian and foreign. Certainly, BP should be worried about the $7 billion it has already invested in a partnership with Tyumen Oil, a company that has been accused of misbehavior similar to Yukos', including abuse of the legal system, unfair payment for state resources, and tax delinquency. The partnership itself has also been charged with violating the official state secrets act by disclosing the extent of the country's petroleum reserves, even though it is information that the partnership's senior executive officers needed to know. State prosecutors and tax authorities have also raided the offices of Sibir Airlines, the metal producer RusAl, and the oil company Sibneft (which paid taxes on only 7 percent of its profits, less than a third of the statutory rate and half of what Yukos paid).

Foreign investors have not been spared, either. A 1993 tender for development on Sakhalin Island by an ExxonMobil-led consortium was suddenly revoked in February after the consortium was accused of failing to invest as much as it had promised. Since almost all the privatization efforts have involved underpayment, cutting corners, tax avoidance, intimidation, or outright physical force, every new owner has to fear that, if he can be identified, someday a government agency will also single him out for harassment. As a result, the crackdown may have unintentionally set back efforts to make Russian business more transparent.

Recognizing the anxiety that these measures have triggered, Putin has tried to reassure the business community. He made a point of meeting with James Mulva, the CEO of ConocoPhillips, to encourage him to bid for the shares the state still holds in Lukoil. In a December 2003 meeting with the Russian Chamber of Commerce, moreover, Putin noted, "If five, seven, or ten people broke the law, that doesn't mean the others did the same. The rest may not have made as much money, but today they sleep soundly."

This is hardly comforting. Who knows which five, seven, or ten of the 5,500 or so privatized businesses Putin was referring to? And if the past is any precedent, it would be unusual, as the State Audit Chamber report suggests, for so few companies to come under scrutiny in the end. So despite Putin's reassurances, most of those who benefited from privatization will see Khodorkovsky's imprisonment as a warning of what could happen to them if they get too ambitious or challenge the Kremlin.

Russia will undoubtedly survive the flawed process of privatization, just as it has survived more serious crises. But the direction Putin is taking is disappointing. By merging state-controlled Gazprom with state-owned Rosneft, he has signaled once again that the state will become a strong if not dominant voice in energy policy and economic planning. Moreover, the new entity has become the most likely suitor for Yuganskneftegaz once, as seems likely, Yukos is forced to sell it. If the purchase occurs, Gazprom-Rosneft will then account for 25 percent of the country's energy production. Combined with Putin's crackdown on the media and his September order to terminate the direct election of governors and members of the Duma, his increased involvement in economic matters is worrisome. It means that, under Putin, Russia is reversing some of the most important economic and political reforms it adopted after freeing itself from the yoke of communism.