What now for Russia?
The indelicate jailing of Mikhail Khodorkovsky, chief executive of OAO Yukos, and freezing of shares in the company reminded a hopeful West that authoritarian traditions linger in the land of the czars. It did not, however, change Russian geology.
Any outbreak of old-style thuggery is disappointing in a Russia thought further along in liberalization. Yet Russians support the heavy-handed treatment of Khodorkovsky by the administration of President Vladimir Putin. The Yukos chief, who resigned from jail on Nov. 3, belongs to the unpopular class of so-called oligarchs—murkily financed opportunists who acquired state assets cheap during the chaotic privatization of the 1990s. When armed and masked officials boarded a private airplane in Novosibirsk on Oct. 25 to arrest Khodorkovsky, international investors were horrified. Russians, however, cheered.
Political rivalry
At that point, the arrest looked like the culmination of a political rivalry building through much of the year. Soon after his inauguration in May 2000, Putin, who stands for reelection next year, warned the oligarchs to stay out of politics. Two tycoons not invited to that meeting went into exile. Among those who stayed in Russia, Khodorkovsky was the most flamboyant and most willing to confront the Kremlin. He has complained about corruption, contributed to political parties opposing Putin, and hinted about running for office.
The apparent retaliation began in June with the arrest of a Yukos security guard charged with involvement in a privatization-era murder. In July, officials arrested Platon Lebedev, a major Yukos shareholder, and began investigating Khodorkovsky. In August, investigations began of shareholders in Group Menatep Ltd., through which Khodorkovsky holds—or held—his share of Yukos. One of them, Leonid Nevzlin, was in Israel when the investigations began and hasn't returned to Russia. A week before Khodorkovsky's arrest, prosecutors charged a key Menatep shareholder in Russia with tax evasion. The charges against Khodorkovsky are fraud and tax invasion.
Still uncertain is where this crackdown will end (see related story, p. 38). Politically, the heavy-handedness has benefited Putin, who has tried to portray it outside Russia as a judicial matter confined to a specific company and its owners. So far, other companies, with leaders less politically active than Khodorkovsky, have escaped pressure.
Even inside Russia, however, alarms sounded when the power play escalated into a freezing of 44% of Yukos shares controlled by Khodorkovsky and Menatep. It was unclear at this writing whether the Kremlin intended for the freeze to become outright confiscation. But it evoked warnings from Kremlin progressives, provoked a diplomatic spat with the US, and worried investors. "At the very least," said Moody's Investors Service, "these events may make Yukos's ability to raise finance problematical and will delay any plans new investors may have had to take share ownership in the group until there is clarity on the validity of Khodorkovsky's shareholding." Before Khodorkovsky's arrest, ExxonMobil Corp. and ChevronTexaco Corp. were considering acquisition of 40% of Yukos. Moody's cited "other scenarios with more negative consequences for current and potential investors" and said "it could be some time before potential outcomes are realized."
Investment outlook
None of this dooms international oil and gas investment in Russia. It does mean that BP PLC, with its $6.8 billion investment in TNK-BP, likely will remain the only outsider with a multibillion-dollar stake in a Russian company until others see where the Kremlin ends its incursion into ostensibly private enterprise. Strong indications will come from the government's treatment of the frozen Yukos equity and its decisions in a dispute over company licenses in Siberia. Also, non-Russian companies probably will revive calls for a legally sound production-sharing contract as a vehicle for foreign investment. Khodorkovsky strongly opposed PSCs in favor of investments through Russian companies such as his own.
Serious as the uncertainties in Russia are, however, oil and gas companies have experience with authoritarian regimes. Where governments subvert the rule of law and abuse property rights, companies assessing investments add weight to the potential for loss, otherwise known as risk. The Yukos saga has no doubt touched off a frenzy of risk-reward recalculations about Russia. The geological dimension of the potential reward remains huge. The newly elevated risk means companies will demand compensating elevation of potential financial returns. The question is how Moscow responds.
