Recent dramatics in Russia provide a useful reminder that, after a dozen years of economic and political liberalization, the land of the czars is still no Switzerland. The same, of course, can be said of most countries in which oil and gas companies conduct expatriate operations.
As evidence builds of Moscow's determination to bury OAO Yukos after assurances to the contrary, speculation has surged that foreign oil and gas companies in Russia might look for the exits. Quickly if only partially, however, President Vladimir Putin eased those worries with soothing words to James Mulva, chief executive officer of ConocoPhillips, about the company's hopes to broaden its investment in OAO Lukoil. At a July 23 meeting in Krasnodar with Mulva and Vagit Alekperov, Lukoil's chief executive, Putin wished Mulva's company success when the government auctions its 7.6% Lukoil interest in September (see related story, p. 20).
Putin's gesture seemed to isolate the Yukos crackdown as a unique, strictly Russian dispute. But what a crackdown!
Unsubtle message
Mikhail Khodorkovsky, the former Yukos chief executive, is on trial for forgery, tax evasion, and fraud. The government won't let him surrender his interest in Yukos to settle claims that might eventually exceed $10 billion. It also has rejected the company's proposals for paying what the government says it owes.
On July 20, the Ministry of Justice tightened the noose by announcing the forced sale of a key producing subsidiary, Yuganskneftegas, a move Yukos says might force it into bankruptcy. And on July 26 a Moscow court jerked the rope by issuing a warrant for the arrest of Leonid Nevzlin, a major Yukos shareholder living in Israel, on charges of murder.
There's nothing subtle about the message here. Companies work at Moscow's pleasure. Yukos fell from grace because of Khodorkovsky's political activities, which didn't favor Putin and contradicted his warnings to business leaders to stay out of politics. None of this has blown over, as observers speculated it might, since Putin's predestined reelection in March. In fact, Khodorkovsky's freedom looks nowhere close at hand, especially after the new murder charge. And the fate of Yukos depends now more than ever on a government showing no interest in its survival.
Outside Russia, this trampling of laws and property rights is appalling. Inside Russia, however, Moscow's heavy-handedness has strong support. Russians might welcome freedom, but they crave stability. What many of them cheered when Khodorkovsky trudged at gunpoint to jail was exercise of the power they see as a stabilizing force.
Many Russians, too, simply resent Khodorkovsky. In the late 1990s, the former Yukos boss and other tycoons made fortunes from business deals with a distressed government that were at best shrewd and at worst illegal. They became rich while other Russians endured the strains of economic transition. By all accounts, jailing Khodorkovsky, who denies the charges against him, strengthened Putin politically.
The important context for these upheavals is a country trying to rebuild an economic system crushed by oppression and extortion of wealth. Transitions like this don't happen smoothly or quickly. Because oil and gas companies know this and recognize Russia's great potential, none of them is likely to bolt over Moscow's squashing of Yukos.
Still, Russia offers reasons to worry. Putin has made clear that one company, Yukos, is out, while another, ConocoPhillips, is in. But what about other international companies interested in Russia, including those, like ExxonMobil Corp., with histories of Yukos flirtation?
The question of succession also looms. Putin can't run for reelection in 2008. His power moves can be interpreted—charitably—as defense of the economic reform he still promotes. If so, a crucial uncertainty is commitment by Putin's successor to liberalization, popular support for which will depend greatly on Russian economic performance between now and 2008.
Power vs. reform
A more troubling interpretation of recent events is that Putin has chosen power over reform and is exploiting an economic holiday born of elevated oil prices to consolidate his authority. In this scenario, reform stalls and Russian economic health, social stability, and embrace of foreign investment become subject to the caprices of oil prices.
Important questions remain unanswered in Russia. Large among them are which economic course Russians prefer for their country and whether Moscow will let them make the choice.