Kremlin and Russia Inc. realign after Yukos trial

By Timothy L. O'Brien and Steven Lee Myers, The New York Times

Even at the end of his trial, Mikhail Khodorkovsky was defiant.

After being handed a nine-year prison sentence for tax evasion and corporate fraud, Khodorkovsky, founder of the Russian oil company Yukos, vowed to appeal the verdict in Moscow. Brazenly jousting with his accusers, he also played to the Western sympathies that he had spent so much time and money cultivating.

"Despite the obvious lack of evidence for my guilt, and numerous witnesses having testified that I was not involved in committing any crime, the court has decided to send me to prison," he said in a statement. "I am aware that my verdict was decided in the Kremlin."

A shrewd billionaire who once was Russia's richest man and controlled an oil empire built through illicit billion-dollar deals and strong-arm tactics, Khodorkovsky also strained to invoke a Russian tradition of a moral cleansing through hardship.

"Even if I'm to spend years in prison, I still feel a great sense of relief," he said. "My fate now holds nothing extraneous, nothing inadvertent, no stains. The future looks bright to me, and the air of tomorrow's Russia seems pure."

Khodorkovsky began his career as an ax-wielding railroad payroll guard. He eventually snared lucrative state holdings in rigged privatizations and built a Western-style conglomerate before government agents arrested him in late 2003 aboard his private jet.

And now he has assumed the role of a political martyr whose authenticity is likely to be forged in a penal camp. But wherever his unusual journey ends, the economic cast of tomorrow's Russia has been shaped by his demise and that of his company, Yukos Oil.

"The central take-away from the Khodorkovsky affair is that the Russian state is taking control of the commanding heights of the Russian economy," said Clifford Kupchan, a research director at Eurasia Group, a consulting firm in Washington that specializes in geopolitical and economic analysis.

"After the tumultuous years of the Yeltsin regime, where hundreds of thousands of average Russians got ripped off, it's an expected political and economic outcome. That doesn't mean, however, that it's good for the economy."

But predicting the path of Russia's economy in the post-Khodorkovsky years is a cut above guesswork. Stephen Cohen, a Russian studies professor at New York University, likes to remind students of the Will Rogers maxim: "Russia is a country that, no matter what you say about it, it's true."

Clearly, the pell-mell and baldly inequitable land grabs that defined state privatizations in Boris Yeltsin's era in the 1990s have ended under President Vladimir Putin.

One reason that he halted them, in the view of many analysts, was the widespread distaste among average Russians - perhaps shared by Putin himself - for wealthy oligarchs like Khodorkovsky. Another may have been the country's seesawing economic fortunes in that decade.

China, whose strong state successfully oversees free-market initiatives, may have supplanted the United States as Russia's guiding economic light. And the Kremlin, as the downfalls of Yukos and Khodorkovsky illustrate, now defines Russia's energy sector as a state-controlled economic zone; foreigners and private companies seen as disloyal to the top need not apply.

While Khodorkovsky's incarceration has been widely interpreted as Putin's crackdown on a potential political rival, some Kremlinologists have also speculated that the entire episode may have been prompted by Yukos's effort to sell part of itself to Exxon Mobil and ChevronTexaco - transactions that the Kremlin may have seen as potential national security threats.

"I don't think Khodorkovsky's arrest had anything to do with politics," Cohen said. "It was about who had control of Russia's natural resources."

Yet even with no-trespassing signs planted around Russia's oil fields, other sectors, particularly the country's booming automobile and consumer goods markets, welcome outside involvement. Coca-Cola recently bought one of Russia's largest juice makers, Multon, which is based in St. Petersburg, in a $500 million joint venture - giving Coke a large stake in the Russian juice market.

"Our belief in Russia stems from the large educated population, huge natural resources and rapidly developing economy," said Grant Winterton, a senior Coke executive in the region. "It's one of our key growth markets for the company, and we are here for the long term."

Other foreign companies, including General Electric, Toyota and DaimlerChrysler, have also waded into Russia.

"We've come to the conclusion that Yukos is, more or less, a one-off for the Russian economy," said Blake Marshall, executive vice president of the U.S.-Russia Business Council, a trade group in Washington representing about 300 companies operating in Russia. "We're not likely to see something of this scale and of this gravity again."

The dismantling of Yukos, ostensibly to right the wrongs of sweetheart deals arranged by moguls like Khodorkovsky, also suggests that insider manipulation, bureaucratic shenanigans and perhaps outright corruption remain alive and well in Russia. In fact, an entirely new oligarchy may be in the making.

Rosneft, a state-owned oil giant, picked off Yukos's huge Siberian oil subsidiary through a shell company that initially won the unit in what analysts describe as a questionable auction nakedly orchestrated by the Kremlin. Rosneft's chairman is Igor Sechin, a senior Kremlin official and a high-ranking member of the siloviki, as those who once served in Russia's security and intelligence services are now known.

Marshall Goldman, associate director of the Davis Center for Russian and Eurasian Studies at Harvard University, said Sechin and the siloviki recently flexed their economic muscles after Putin announced that Gazprom, the state-owned natural-gas giant, would merge with Rosneft. Sechin scuttled the deal, Goldman said, to preserve for himself the wealth and influence that Rosneft commands.

"What is fascinating is that Putin finds he is not the master of his own fate because he's a lame duck and because the siloviki have agendas of their own," Goldman said.

"What I think you'll see are people like Sechin emerging as the new oligarchs, and they are all going to make sure to fatten their pockets."

This month, Putin publicly criticized Anatole Chubais, head of Unified Energy Systems, over recent electricity blackouts in Moscow.

Putin has accused Chubais of managerial lapses at the electricity provider and has called for an investigation into Unified Energy's tax payments - the same kind of inquiry that ultimately ensnared Khodorkovsky.

Chubais is a faded luminary of the Yeltsin years and a widely disliked architect of some privatizations. If the Russian rumor mill is to be believed, the Kremlin has Chubais in its cross hairs.

Perhaps not coincidentally, Chubais, who recently survived an assassination attempt on a highway near Moscow, heaped praised on Putin and his leadership in an interview published on Friday in Moskovskiye Novosti, a newspaper.

Still, as is the case with most things Russian, not everyone agrees with this analysis of the current state of affairs - that is, an ascendant siloviki, a weakened president and Yeltsin-era oligarchs on the chopping block.

Financiers say Rosneft's proposed merger with Gazprom was not unwound by the siloviki but by Yukos lawyers, who blocked the transaction in American courts.

"It's complete nonsense to say the siloviki are making economic policy - their mandate is national security, and it's the liberals who are making economic policy," said William Browder, a veteran money manager in Moscow.

"Putin is trying to balance these two groups, and he remains the ultimate arbiter."

Timothy L. O'Brien reported from New York for this article and Steven Lee Myers from Moscow.

(International Herald Tribune, 6.14.2005)