President Vladimir Putin has characterized the fall of privatized Russian oil giant Yukos as the end of a period of “cowboy capitalism”. It is easy to understand why the Kremlin has humbled Yukos and its owner Mikhail Khodorkovsky. Unfortunately for Putin and his administration, the Yukos affair looks, in its turn, like a case of “cowboy government” for which Russia could end up paying a high price.
Yukos boss Khodorkovsky was Russia’s richest man. He had acquired control of the oil company during the Yeltsin years when important state assets were distributed among the erratic president’s courtiers. When he came to the Kremlin, Putin quickly discovered that Khodorkovsky and his fellow superrich business oligarchs such as Boris Berezovsky believed that their commercial power entitled them to a high degree of influence. Putin rejected their interference and slowly rolled back their power and wealth. Berezovsky, a banking and media magnate, is now in exile and his empire, particularly the media, has been wrested from him.
However, Khodorkovsky as majority owner of Russia’s largest private oil firm, was a harder target, and might have been left alone had he not funded rival candidates when Putin stood for re-election last March. Despite the deep Khodorkovsky pocket book, the president’s dominance of the media plus the genuine high regard in which the majority of Russians hold him, as the strongman the country needs, assured him of his victory.
However, the attack upon Yukos and Khodorkovsky for tax fraud was poorly timed. In Russia’s current buccaneering business climate few companies are not guilty of some fiscal or regulatory wrongdoing. Had Putin moved against Khodorkovsky before the election it might have been different. But now that Yukos boss has been humbled so publicly and his company seized from him after the election, the president looks to be demonstrating his ability to take revenge with an act of unbridled political power.
Most Russians will be perfectly content with what Putin has done. But their opinion does not matter when it comes to the international investment community. In smashing Yukos and its owner, Putin may also have inflicted considerable damage on world business confidence. The repercussions of the Yukos affair may not be felt immediately but foreign investors already in Russia will be re-examining further investment plans. Meanwhile new investors will be thinking twice about moving in to the Russian market. In addition, partners of Russian companies around the world, not least in the oil and gas business, will be wondering about the reliability of deals they have made.
Putin will be calculating that the sheer size of the business opportunities in Russia and the profits to be made will outweigh the concerns of foreign investors. He may be right. But if he is not, the damage that he will have inflicted upon an already struggling Russian economy will be severe. Russia is not the only investment story. Eastern Europe and China are hungry for capital and may both now look far more secure and attractive investments.
