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Capital Markets

The bankers' dilemma

With the Russian state rolling back the liberalization of the economy – notably in its dealings with oil company Yukos – investment banks are faced with a dilemma. They must sometimes decide between defending the rights of private investors and forging and maintaining relations with the Kremlin in the hope of attracting current and future business. It's a tough choice.

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THE RUSSIAN GOVERNMENT'S renationalization of Yukos, once the country's largest oil company and best-performing stock, has depressed Moscow investors. Ian Hague, co-founder of Firebird Management, which has $850 million invested in Russian equities, says: "Outside of 1998, this has been the most confidence-destroying step the government has taken."

The government might well have had a case against Mikhail Khodorkovsky's interference in politics – the problem was that it went after Yukos instead of targeting him, and Yukos didn't belong solely to him but also to many western minority investors. So every illegal act of the government against the company – and there were many – also undermined the rights of western investors.

As Matthias Westman, CEO of Prosperity Capital Management, which has $650 million invested in Russian equities, says: "I understand the Kremlin wanted to avert the political challenge which Khodorkovsky posed, but it should have been able to distinguish Yukos from Menatep [Khodorkovsky's holding company]."

Before the attack, president Vladimir Putin enjoyed a reputation as a clever broker able to balance the liberal and the hardline (Siloviki) clans. Now, observers worry that the hardliners, made up of former KGB and FSB officials, are in control, while liberal ministers are sidelined.

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