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Monday, October 27, 2003

Russia's Illiberal Recovery, Oligarch Arrests and All: "Buy on Weakness!"


Putin and Khodorkovsky and Yukos

Evidently this is not the best moment to be the richest oil barron in Russia. Just ask Mikhail B. Khodorkovsky, the 40-year old Chairman and largest shareholder of Yukos/Sibneft Oil, Russia's largest oil company, and the fourth largest oil company in the world. On Saturday October 25, his private plane was surrounded by armed agents for Russia's Federal Security Bureau, after it landed in Novisibersk, Siberia, and he was unceremoniously hauled off to a five-person Moscow jail cell at gunpoint, charged by the Federal Prosecutor with a litany of white collar crimes, including embezzlement, tax evasion, fraud, and forgery of public documents.

This latest move was not entirely unexpected. The confrontation between Yukos and President Vladimir Putin's government has been building for months, with Yukos' chief financier, Platon Lebedev, already in jail awaiting trial on charges of defrauding a state company in 1994, and Vastly Sharkhnovsky, Yukos' chief auditor, arrested just this month on tax evasion charges. But apparently most investors expected that Khodorkovsky's $8-$15 billion in wealth (15-20% less now) would protect him, and that, in any case, a pending ExxonMobil investment in Yukos was just too juicy for Russia to pass up. So the arrest surprised many investors -- Russia's stock market fell 10 percent on Monday October 27th. Its currency also declined slightly, as traders anticpated a surge in capital flight from other nervous "'garchs."

The USG was quick to condemn the arrest as an assault on fair play and the hallowed veritudes of free markets -- Alex Vershbow, US Ambassador to Moscow, warned that such a "selective" prosecution could "negatively affect" foreign investment. And President Yeltsin's former economic czar Anatoly Chubais, now head of the country's leading electricity company -- and, as one Russian critic recently noted, perhaps the "real" US Ambassador to Moscow -- had even harsher things to say.

Curious. After all, it is not as if the USG and its local comrades in arms ever voiced such vociferous objections when a handful of less than two dozen oligarchs, including Khodorkovsky, Boris Berezovsky, Vladimir Gusinsky, Roman Abramovich, Vladimir Potanin, Mikhail Fridman, and a few others, managed to seize control over 60-70 percent of the Russian economy in the early 1990s, in that period's world-record setting series of scandalous "pirate privatizations." Nor did they voice any objections when these asset ripoffs, on top of the wide-open capital markets introduced by Chubais' "reforms" and a fifty percent real decline in Russia's domestic economy from 1992-98, helped to kick off a massive exodus of capital flight from Russia. This averaged at least $20 billion a year from 1993 on, with almost all of it winding up in private bank accounts and other foreign investments belonging to these magnates and their criminal associates, in First World banking centers like New York, London, Cyprus, Israel, and Switzerland. So much for the salutory effects of free markets on foreign investment in Russia.

Nor did the neoliberals voice concern when Yukos' top managers stubbornly pressed ahead with the sale of a large portion of the company's energy reserves to global oil giants like ChevronTexaco and ExxonMobil, over the objections of Putin's senior economic advisors. Not only were they miffed at ExxonMobil's rather high-handed behavior, but as economic nationalists, they would also prefer to see a larger share of Russia's oil reserves remain in the ground, permitting the country to follow a developmental path that is less dependent on the sale of basic commodities like crude oil and natural gas, which encourages the "Dutch/Venezuelan" disease -- overvalued currencies and weak industrial exports.

Of course, if we really compare the economic track records compiled by neoliberals like Chubais, Yeltsin, and their "not too free market" garchs with the record of Putin's administration, it becomes even harder to see any merit in the USG/Chubais critique. Since abandoning the neoliberal agenda in late 1998, Russia's economic growth has surged by nearly 25 percent, making up half of its 1990s losses. It will grow this year at 5-6%, and it is likely to continue to grow at even higher rates through this decade -- perhaps even realizing Putin's objective of doubling GDP by 2010 (compared with 2000).

True, part of this growth is due to favorable conditions in world energy markets. But as this author correctly predicted in 1998, the progress is also due to the abandonment of the neoliberals' simple-minded, "strong ruble/" anti-inflation obsession. This path, chosen by Putin's government as much out of desperation as insight, has led to a sharp improvement in the growth and competitiveness of basic industry, and to a more balanced, controlled strategy with respect to Russia's foreign debt.

Together, these illiberal policy changes, and the economic recovery they've produced, have already done far more to boost foreign investment in Russia from its lows of the mid-1990s than anything that Chubais and most of the oligarchs ever did. Indeed, one key reason why Putin can well-afford this crackdown on the oligarchs right now is that the economy is in such good shape. Just this month, even in the midst of the swelling Yukos controversy, Russian securities received an "investment grade" rating from Moody's.

Of course Putin has political as well as economic motives for his moves against Khodorkovsky. He faces a Duma election in December and a Presidential election next year, and Khodorkovsky was rather unique among the garchs in openly sponsoring some of Putin's political opponents. And in a country where more than 10 percent of the population remains underemployed, and expected lifespans for most Russians have fallen by a decade since 1990, taking on the 'garchs is overwhelmingly popular, with 75 percent of Russian adults favoring the complete reversal of the corrupt 1990s privatizations.

Putin is not likely to go that far -- after all, he is an ex-KGB pragmatist, not some radical socialist, and a few of his former friends in St. Petersburg are rumored to be members of the "semi-garch" classes themselves. He is also eager to demonstrate to world opinion that, indeed, the rule of law does prevail in Russia, and that the Chairman of Yukos was just one bad apple; indeed, rather than rail-roading him to jail with a show trial, the smooth move for Putin would be to bend over backwards to give him a fair trial, and, indeed, goes free!

Still, investors should be for prepared for a bit of choppiness in this market. But this can be a good thing -- a perfect opportunity to trade against the wind and snatch up those shares and bonds that nervous 'garchs and faint-hearted neoliberals will be shedding, as they head for the exits.

(c) James S. Henry, October 2003. Not for reproduction or other use without express consent of the author.

October 27, 2003 at 06:27 AM | Permalink


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Hey Jim: My buddies and I over at LA Crimefile are curious when exactly is the "Pirate Bankers" coming out. your talking about exactly what we`re talking about.


Posted by: Kevin Tyree at May 6, 2007 6:42:31 PM