Russian Oil Magnates Arrest Marks Shift In Power

Updated: Nov 3 2003, 05:30am hrs
The arrest of oil magnate Mikhail Khodorkovsky in Russia last week could have been dismissed as a normal event in a country that is going through a painful transition to a market economy, particularly after what, at best, can be described as a murky privatisation process in the mid 90s. Khodorkovskys arrest is a watershed event marking the shift of power in Russia into the hands of those who consider it necessary to make a course correction towards greater state control over the economy.

Initially, the move against YUKOS was seen as merely an attempt to put Khodorkovsky in his place for openly displaying his political ambitions and using his wealth to support parties opposed to United Russia, the Kings Party in the forthcoming Duma elections. Some also suggested that the attack on YUKOS was engineered to win support as any move against the so-called oligarchs would prove to be popular with the people. But a deeper analysis shows that the parties Khodorkovsky financed are minor players.

There was no doubt even before the arrests of Khodorkovsky and his close associate, Platon Lebedev, earlier in July, that Vladimir Putin would sail through in next years presidential elections. Therefore, it appears highly unlikely that these factors alone could have pushed the authorities to endanger the flow of foreign investment and the perception that Russia is an emerging democracy. The resignation of chief of the Presidents staff, Alexander Voloshin, who is closely linked with former President Boris Yeltsin, the oligarchs and others, also underscores the depth of the current crisis. Khodorkovskys arrest and Voloshins departure are an indication of the end of an era.

The rise of the hard-liners is significant for Russias economic development and foreign policy. This group is upset over Russias marginalisation in international relations and believes it has a great role to play. But, with the erosion of its military might, Russias abundant natural resources, pipelines and arms sales have become its strategic assets to achieve this aim.

Khodorkovsky was much more than just a political challenge to Putin. He represents the forces that believe that the success of Russias economic development lies not only in greater integration with the world economy, but also in closer links with the US. The so-called liberals also believe that strategic decisions about economic development shou-ld be made on economic, rather than strategic, considerations. This premise for economic development, along with Khodorkovskys plans to sell a major stake in YUKOS to an US oil major, are anathema to the hardliners, who see this as a sell-out of strategic infrastructure assets.

President Putin and his advisors clearly understand the fall-out of Khodorvkoskys arrest, as is evinced by the damage-control exercises that have been undertaken. Putin told a group of top financiers that the recent developments were not a move towards re-nationalisation, that the YUKOS investigation was not an attack on a corporate entity, but rather some individuals and wouldnt spill over to other companies.

It is too early to say whether this will reassure investors although the Russian stock exchange, which lost billions of dollars in the past few days, picked up a bit and Moody reiterated its upgrading of Russia as an investment destination. There were reports that some Asian investors had decided to pick up shares while the values were falling. On the other hand, talks between YUKOS and an US oil major about a deal worth billions of dollars are reportedly suspended. The busines communitys unease is also reflected in the flow of funds into and out of Russia. According to the World Banks chief economist, the second quarter of this year saw a net inflow of $2.3 billion, while the next quarter saw an outflow of $9.8 billion.

The coming days are likely to see new laws enacted to make it more difficult for Russian businessmen to en-cash their assets and move their funds abroad. The lack global outrage over the arrest of Khodorkovsky and muted domestic criticism suggest that President Putin is likely to succeed in his attempts to restructure the ownership patterns in some strategic sectors of the economy and could be viewed as a course correction for some of the evils of the mid-90s privatisation process. However, it doesnt mean that Russias movement towards building a democratic society and market-based economy will be any easier.

The writer is a freelancer, specialising in Russian foreign affairs