Is Russia the Next Zimbabwe?

Putin’s crusade against Yukos could be economic suicide.

Over the past year, Russian President Vladimir Putin—a former KGBfunctionary who is no child of capitalism—has achieved what even the most brass-knuckled Master of the Universe could hardly dream of accomplishing over the course of an entire career: He’s radically transformed (arguably, mutilated) the countenance of a $500 billion economy by destroying what was, until a year ago, the country’s largest and most powerful private company.

Of course, near-dictatorial control over the world’s largest land mass and its 145 million inhabitants means that Putin has more control than your average capitalist top dog. And, crucially, Putin doesn’t have to worry about tipping a few boats to get what he wants since, well, it’s his lake.

Russia’s most famous drowning man is Mikhail Khodorkovsky, until recently also its richest individual (with a personal fortune of some $8 billion) and former CEO of Yukos Oil Co., the country’s largest company and one of the world’s largest oil producers. Khodorkovsky first saw a fin in the waves in July 2003, when one of his top associates was jailed on charges of fraud relating to a 1994 privatization. In late October Khodorkovsky himself was arrested at gunpoint for tax evasion and a litany of other offences. Five days later, the Russian government seized a 44 percent stake in the company. Charges of unpaid taxes—$5 billion here, $3.5 billion there—and a dizzying array of other claims and charges have mounted against the company, which warned a few days ago that the freeze on its assets could force it into bankruptcy by mid-August. The Russian government moved to accelerate the process on July 29, ordering Yukos to stop pumping oil. Khodorkovsky is on trial and, given the pea-and-pod relationship between Russia’s judicial system and the Kremlin, looks unlikely to be donning civvies anytime soon.

Throughout the affair, the Kremlin has insisted that it is only doing its job: Tax evaders must pay. But in an economy where cheating the state is a competitive sport, there wouldn’t be any private enterprise left if every business that that didn’t pay the tax man his full due was persecuted with the vigor with which the Kremlin has pursued Yukos. “Taxes are not the issue,” declared the English-language Moscow Times.

The context: During the Neanderthal era of Russia’s post-Soviet economic development—that is, the mid-1990s—Khodorkovsky paid $309 million in a rigged privatization auction for an oil company that controlled about 2 percent of the Earth’s known oil reserves. Several years later, a blend of (more) good luck, strong oil prices, smooth PR, and strong management had turned Khodorkovsky into a multibillionaire with time on his hands. He began to dabble in politics and allegedly hinted that he could be persuaded to run for president in 2008.

For Vladimir Putin, Khodorkovsky’s wealth was deeply irking but tolerable. But the oil man’s plans to convert money into political power was another issue altogether. In 2000, Putin had brokered a deal with Russia’s oligarchs (virtually all of whom had grown wealthy, like Khodorkovsky, by stealing the good bits off the carcass of post-Soviet Russia) whereby the Kremlin promised to let the oligarchs keep their assets—as long as they paid taxes and didn’t meddle in politics and government. When Khodorkovsky began to violate the gentlemen’s [sic] agreement and barge in on Putin’s sandbox, the sledgehammer came out.

Never mind that, according to the Russian constitution, Putin cannot run for a third term come 2008. He may anyway, of course. But if he doesn’t, “Putin will at the very least want to play kingmaker before the Kremlin doors slam behind him,” says one Moscow political scientist. Khodorkovsky, full of his own ideas about where to take Russia, is the antithesis of the mini-Putin that the present president will be looking to fill his Ballys.

On another front, Putin and his cronies also perceived Khodorkovsky as a potential economic threat to the cornerstone of Russia’s economy. In April 2003, Khodorkovsky and Roman Abramovich, a fellow oligarch who owned Sibneft, another large Russian oil producer, agreed to merge their companies. YukosSibneft would have been the world’s fourth-largest oil company, accounting for more than 20 percent of Russia’s total oil exports to outside the former Soviet Union. “With Russia still very dependent on export of petroleum to fill state coffers, allowing one person—not a friend of the Kremlin—to control such a large swath of the oil sector was deemed a national security risk,” said Peter Lavelle, an analyst of the Russian political scene.

“Had Putin not imprisoned [Khodorkovsky] and shut down Yukos he would instead be fighting the oligarchs for political control of Russia, with no hope of steering the country’s economic future,” remarked intelligence provider

Even worse, Khodorkovsky had indicated that he might sell his company to a foreign oil producer if the price was right—tantamount to treason for the Soviet-style xenophobes and economic nationalists that compose Putin’s inner circle. Sibneft’s Abramovich (better known in some circles as the owner of London soccer club Chelsea) suspended the merger in November—even though the deal had legally already been completed.

Khodorkovsky’s bad karma has come back to haunt him. After all, Yukos was constructed on a foundation of state-sponsored mayhem and criminality, and now it’s going back to its roots. Before he reinvented himself in late 1998 as a poster child of good corporate governance, Khodorkovsky allegedly ripped off investors through share dilutions, asset stripping, cash flow diversion, and highly questionable accounting practices that would make Charles Ponzi blush. Now Khodorkovsky is getting hammered by a Kremlin that is playing similarly fast and loose with Russia’s flexible and very porous legal environment.

But the destruction of Yukos is about more than a rich, arrogant jerk getting his deserts and investors in one of the world’s riskiest stock markets getting burned. At stake is the direction of Russia’s ongoing experiment with its unique brand of post-Soviet capitalism and whether the privatization process that forms the foundation of Russia’s economy will be subjected to additional modification. Arguably, this could lay the groundwork for “more competition in the workplace and greater social equality,” says Lavelle.

But once the renationalization genie is out of its bottle, stuffing it back in will be difficult. And competing for the title of the northern hemisphere’s version of Zimbabwe, where Robert Mugabe committed macroeconomic suicide by seizing farms from white landowners, is probably not the way the newest member of the G8 club of supposedly developed nations wants to make its mark. Foreign investment, the lifeblood of the economic growth before which Putin piously pretends to genuflect, will take a holiday far away. Meanwhile, fears that Yukos will stop pumping oil are pushing global oil prices to fresh highs.

Yukos and the Kremlin may still come to an agreement that stops short of renationalization. But there is growing concern that Putin—who as recently as early July publicly stated that his government was “not interested” in seeing a “company such as Yukos” go bankrupt—is not entirely in control of the various strands of his government that are pecking Yukos to death. Guessing which favored oligarch or government entity will be given the opportunity to reassemble Yukos—a $44 billion company at its peak, now worth 80 percent less—is the Moscow parlor game of the moment. State oil company Rosneft is the current favorite, with government gas giant Gazprom the dark horse.

The losers? Khodorkovsky and his ilk—and Russia.