TWO WEEKS AFTER Yukos boss Mikhail Khodorkovsky was arrested, a company official spoke out. "The relationship between government and big business has changed," said Yukos CFO Bruce Misamore, standing at the back of a press conference held early last November. "The way that Yukos is run now depends on the way that Russia is run," he predicted.
The press conference had been called to celebrate the first meeting of the joint board of YukosSibneft as the merger between oil majors Yukos and Sibneft neared completion. But at the start of December the merger was abruptly called off by Sibneft owner Roman Abramovich on what is widely believed to be Kremlin orders.
Since the arrest of Khodorkovsky by the federal security services the Kremlin has increased its grip on the country and the relations between big business and government have been put on a new basis, with business definitely on the back foot.
President Vladimir Putin effectively carried out a mini coup d'état at the end of last year and rapidly consolidated his position. The same day that Russia's richest man was arrested, Alexander Voloshin, a powerful big business ally at the heart of government, quit his job as head of the presidential administration and was replaced by two Putin loyalists.
A little over a month later, Putin's victory was complete when the pro-Kremlin forces routed the opposition and took a super-majority in the country's fourth Duma elections. With a majority in the legislature, Putin now has the power to change the constitution at will if he chooses.
Whether all these events were connected or pre-planned is a matter of speculation, but the result is that a new phase in Russia's turbulent development has opened. The empowered state was already flexing its muscles and looks poised to play a more assertive role in industrial policy over the four years that will follow Putin's near certain victory in the March presidential elections.
The Yukos affair has shaken markets and rattled investors' confidence. Some observers speculate that Russia is on the cusp of a new authoritarian era and the rolling back of free-market reforms. However, over the past four years Putin has been consistent in promoting a reform agenda and at the height of the scandal repeatedly asserted that the attack on Yukos was specific and not the start of a general campaign. Still, the relationship between government and big business will now change.
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Putin: will let the oligarchs keep their
companies but tax them more heavily
and dictate industrial policy |
Famous encounter
The transformation is epitomized by Putin's two meetings with Russia's big business – his famous encounter with the oligarchs in July 2000 a few months after taking office, and the meeting at the end of November 2003 when he renewed his deal with Russia's richest men and added some new conditions.
At the first meeting Putin told the oligarchs: "You can keep your companies – just stop stealing from the state." He backed this up with the threat of banishment; oligarchs Boris Berezovsky and media mogul Vladimir Gusinsky had been driven into exile and lost control of their companies in the months before.
The stealing did stop, but the oligarchs continued to interfere in politics through what is politely referred to in Russia as lobbying. Khodorkovsky's offence was not that he was actively backing opposition parties – all big business backs most of the parties – but that he was actively trying to push the country in a direction that was at odds with Putin's own view of what Russia Inc should be doing.
Despite Russia's being the second-largest producer of oil in the world after the Middle East region (and the fourth-largest oil producing country), oil makes up only a third of its GDP. Although oil is an important source of budget revenue, Putin has been pushing hard to diversify the economy and create more jobs for the country's 145 million citizens.
Strength for strength's sake
To do this he wants to recreate a strong state – a force that was almost completely destroyed after the collapse of the Soviet Union. Mike McFaul, a political science professor at Stanford University, argues that this goes further: because of his KGB background, Putin wants a strong state for the sake of having a strong state, in the style of Mahathir Mohamad's Malaysia.
Over the past year, Khodorkovsky had been pushing hard for new pipelines that would open up the burgeoning Chinese and US markets to Russian oil exports. A nasty row was raging all year. The oil companies said they were willing to pay for construction and could have the pipelines up and running by 2006; the state preferred to put the project in the hands of state-pipeline monopoly Transneft, which will only complete its feasibility study in 2006.
Building these pipelines quickly would make more money for the already super-rich oil companies and take Russia towards the Venezuelan model – a poor country dependent on oil exports. It would also have bolstered an already outspoken and independent Khodorkovsky's position on the world stage.
On the face of it, Putin's first Faustian deal with the oligarchs has been a big success, with all the leading companies investing heavily in production and priming the pump that led to Russia's first strong economic growth in three decades.
Charles Ryan, CEO and chairman of United Financial Group, was among a group of bankers called in to meet Putin shortly after Khodorkovsky was arrested.
"Putin opened the meeting by quoting the latest fixed investment numbers, which have grown by a strong 12% in November," Ryan says. "He went on to say that he understood that his biggest success has been to ensure the stability that led to this investment and intimated that he wouldn't do anything to undo that achievement. In the short term Khodorkovsky's arrest will hurt sentiment, but he said that in the long term business had to understand that they have to follow the law."