Montrose Journal Winter 03

THE YUKOS AFFAIR: AN END TO PLURALISM IN RUSSIA? -

The recent arrest in Moscow of Mikhail Khodorkovsky, one of the most successful businessmen in Russia and head of the Yukos oil firm, sent shock waves through Russia's fragile political system and its stock markets.It has also acquired significant political resonance in the West, raising a number of questions for both Western businesses and observers of Russian politics.  President Putin's victory in the Duma elections in December only served to make these questions more acute.

Does the treatment of Khodorkovsky mark the beginning of a state campaign to bring an end to the power of the oligarchs and redistribute the property and assets they accumulated through crooked privatisation deals in the 1990s?   To what extent is Khodorkovsky's arrest intended as a powerful message to political, rather than business elites in Russia and the West? And does the manner of his apprehension - with excessive use of force and gross violation of Russian, let alone Western legal standards - represent a significant power shift within the Kremlin from the reformist clans towards the former KGB officials known as siloviki?  Does the arrest and subsequent freezing of 40% of Yukos assets indicate the state's wish to regain control over key assets - such as licences for lucrative oil fields - to prevent them falling into foreign hands?

Khodorkovsky's active participation in Russian politics, at a time when Vladimir Putin had declared an end to the Yeltsin-style oligarchic system of power, was viewed as a direct challenge to the President's authority. It was also a violation of the unspoken rules of the game - subliminal conventions well understood among Russian elites that 'your assets are safe as long as you stay out of politics'.  But the arrest marks the start of yet another worrying trend in Russia - political repression and the rise of authoritarian rule, tolerating pluralism neither in the Duma nor among entrepreneurs seeking to manipulate the political system. For many in Russia and abroad, pictures of Khodorkovsky in prison revived chilling memories, of repression and a return to the police state, that have been almost forgotten since the collapse of the Soviet Union.

For proponents of a better business environment and transparent democratic political systems, each of the above perspectives represents a significant basis for concern.  In the end, however, they do not add up to a radical shift in Putin's policy, or for that matter, to a major change in the environment in which foreign business operates in Russia.  The Yukos affair has had the effect of completing the transition from Yeltsin's Russia to that of Putin, even though formally the new President had taken over as long as four years ago.  Recent developments herald the final arrival of the Putin era.  Having devoted his first term in office to the consolidation of autonomous political power, the President will now focus in his second term on paving the way for his own successor before he is constitutionally required to relinquish power in 2008. This shift will inform both the prospects for domestic reform and determine strategic choices in Russia's foreign policy over the next half decade.

Putin's vision for Russia has been both progressive and authoritarian. This apparent contradiction is a foreign concept for Western Europe but is deeply rooted in Russian history and has been successfully implemented in other parts of the world such as in South Korea, Chile and China. Putin has combined elements of each. On the one hand, his policy choices demonstrate a commitment to the consolidation of Russian domestic economic growth before resorting to 'great power' ambitions, to achieving integration into the community of the most economically developed nations and to promoting development of those sectors of the economy which could most benefit the Russian people. He has tried to diversify a dependency on oil and supported more investment in small and medium size business. And over the past four years the Russian economy has been growing steadily and average real income has increased by 25%.  

At the same time, however, Putin believes above all that Russia's modernisation is a responsibility of the state and must be conducted 'from the top'. Hence we have seen the President's concerted effort to reinforce the so-called 'vertical' power structure and to establish further controlling bodies - such as super governors - to assure that state decisions are implemented throughout Russia's vast territory.

Clearly this provides little room for democratic change, at least not in the short to medium term until the main objective of the modernisation programme - the emergence of a viable middle class in Russia - becomes a reality. And authoritarian modernisation faces many obstacles and contradictions, not least the growth in Russian civil society and the peculiarity of the country's geography: development priorities for the Kaliningrad region are hardly comparable to those of Sakhalin or Tatarstan.
 
Furthermore, such autocratic rule is encouraging large numbers of the new and wealthy elites either to leave Russia or remove their money - as indicated by the recent surge in volume of capital flight after the Yukos affair. Khodorkovsky embodies many of these challenges. His belief in the power and independence of big business, and commitment to promoting grass-roots change in Russian society and political system contradicted Putin's top down vision: the oligarch not merely threatened the President's personal power and that of his close associates, but also Putin's modernisation programme as a whole.

For many Western investors, however, Putin's vision does not represent such a challenge. If anything both leverage and profile within Russia are likely to increase as a result, particularly in the case of large scale foreign investment. The President views the goal of attracting foreign investment into Russia not simply as an economic objective but rather a symbol of the efficacy of his domestic modernisation programme, indeed it brings him closer to achieving his chief foreign policy objective: the integration of Russia into the international economic system. In the post-Yukos period many Russian companies therefore will actively seek foreign investors for their companies, as a sort of insurance against domestic political risk.

'Putin's vision for Russia has been both progressive and authoritarian.'