Russia 's Prisoner

Editorial

It's been one year since the arrest of Russia 's wealthiest oligarch, and the resulting economic damage is growing in line with the Kremlin's steady descent into its old statist ways.

The jailing of Mikhail Khodorkovsky and the imminent dismembering of his oil giant Yukos for a pittance have perked eyebrows in Europe and the U.S. But there are few signs so far that Western concerns are forcing Russian President Vladimir Putin to change course. Perhaps he will be influenced more by his slipping popularity at home. Russians are growing less sanguine as well, judging from reports of new capital flight, to the tune of $12 billion this year, and slowing capital investment.

The fallout for Russia and its investors, both domestic and foreign, is already measurable in the tens of billions of dollars, according to some estimates. That includes lost revenue for Yukos, which until recently was having trouble making oil deliveries to China because of the turmoil wrought by the investigation.

Then there's the fire sale of its subsidiary, Yuganskneftegaz, for as little as a quarter (if not less) of its estimated worth to pay the nearly $4 billion in back taxes Russia says Yukos owes the government. The odds-on favorites to end up with Yuganskneftegaz? The state-owned giant Gazprom or Kremlin-friendly Surgutneftegaz, of course.

If world leaders aren't watching the situation closely enough, their nations' investors certainly are. Foreign companies are clearly on the outside looking in when it comes to Yuganskneftegaz -- many of them could easily outbid Gazprom if allowed. They'll be loath to plunk down cash in other sectors of Russia 's economy if they fear similar governmental takeovers in the future. Aside from the export of natural resources, Russia 's economic development was sluggish even before the Yukos affair.

So why is Mr. Putin apparently so oblivious to the risks he is running? Mr. Khodorkovsky's attorney, Yuri Schmidt, has two theories. First, the Kremlin has a "present from the devil" in oil prices now hovering around record highs -- masking weaknesses throughout the rest of Russia 's economy. Second, he says, Russian politicians have a long tradition of placing personal interests above the good of the nation, "and for money to be no object when gaining political advantage."

Yukos of course isn't the only example of the Kremlin's slide back toward old Soviet habits. Mr. Putin's response to the tragedy in Beslan -- ending the direct election of regional governors and members of the Duma -- is another reverse for Russia 's attempt to turn itself into a democracy with a truly representative government. Mr. Putin hasn't even bothered to explain how consolidating power into an administration incapable of preventing Beslan in the first place is going to make the country any safer from terrorism.

A man of Mr. Khodorkovsky's wealth and connections probably could arrange a relatively comfortable plea bargain. As with other oligarchs, his past record is not entirely spotless, notwithstanding his admirable latter-day attempts to turn Yukos into a Western-style company with transparent accounting and fair treatment of minority shareholders. But Mr. Schmidt doubts that his client would go that route, giving up any chance to play a future role in Russian politics. According to his attorneys, his real crime was political -- the support of opposition parties in Russia . He's "a strong man with strong convictions," says his lawyer.

Judging from the visit of his legal team to the U.S. last week, one of his tactics now is to attract more international attention to his plight and the general course that Putin's Russia is taking. He's having some success. Although George W. Bush has attempted to maintain good relations with Mr. Putin, the mood in Washington is souring. Last week, the U.S. State Department issued its sternest statement yet on the Khodorkovsky case, accusing Russia of "coercion" and a "forced sale" with Yuganskneftegaz. The Khodorkovsky case, State says, doesn't bode well for the perception of Russia 's human-rights record.

Government chiefs at next month's EU-Russia summit at The Hague are expected to discuss relations between the two without moving to strengthen them, which will perhaps be a disappointment for Mr. Putin's hopes to become a more important player in European affairs. To that end, he joined with Germany and France in opposing the U.S. invasion of Iraq last year. But being on good terms with those two countries is not quite the same as enjoying the good opinion of Europe as a whole. If Cold War suspicions are still alive in Russia , they haven't been put entirely to rest in Western Europe either.

Mr. Schmidt, a Russian with a long record in dealing with civil rights cases, says that Russian leaders are more sensitive to world opinion than they sometimes seem to be. We'd guess he's right about that. For that reason, Western nations are correct in showing their concern and displeasure about the steps Mr. Putin has taken to turn back the clock. If he heeds those cautions, he will be doing everyone a favor, including the Russian people, and especially himself.

(From The Wall Street Journal, 26.10.2004)