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Business Bashing Risk Ruin Russia

October 31, 2003

Artikel i Financial Times

 

Populism and power are running rampant in Russia, no one and nothing is

safe.

 

Yesterday prosecutors seized a controlling stake in Yukos, the Russian

oil giant, comprising of shares belonging to Mikhail Khodorkovsky, the

company's jailed chief executive. Mr Khodorkovsky was arrested at gunpoint

over the weekend and charged on seven counts of tax evasion and massive

fraud.

 

After the arrest, Anatoly Chubais, the head of UES, the country's

electricity monopoly, made a public statement on behalf of Russian business

leaders condemning what had happened.

 

Defending Mr Khodorkovsky is unlikely to have been the driving force behind the group's stance. They felt that if Mr Khodorkovsky could be arbitrarily arrested, they, too, were vulnerable.

 

Moscow now is a curious combination of hothouse of political speculation

and whispering discussions. The fear of microphones is creeping back, and

most observers feel that the heavy-handed crackdown against Yukos and Mr

Khodorkovsky are politically motivated.

 

Indeed, Russia today is as lacking in transparency as it is lacking in

the rule of law.

 

The powerful general procurator is charging Mr Khodorkovsky with fraud in

connection with the privatisations of 1994. Mr Khodorkovsky is unlikely to

qualify as a saint, but then again, it was hardly the era of saints, and if

authorities wish to question what happened back then, there is no end to

what can be done.

 

During his first presidential bid, Vladimir Putin unleashed a vigorous

populist campaign on the issue of Chechnya which contributed to his

success. Now, some brutal business bashing might serve a similar purpose.

 

But the cost could be very high. Russia is struggling to create

conditions for sustainable and strong economic growth. Mr Putin wants to

double the country's gross domestic product within a decade, which requires

a sustained 8 per cent growth rate in the years ahead.

 

This will not be possible unless there are further substantial liberal

economic reforms, a marked increase in foreign direct investment and the

creation of a climate conducive to small and medium-sized Russian

enterprises.

 

All three of these conditions are under mortal threat from the growing

influence of the siloviki faction of old-style security oriented

individuals gaining ascendancy in Moscow. Indeed, it is the power

ministries, not the reform ministries, who are starting to call the shots.

 

After an impressive start, Mr Putin has already put reforms on hold. He

was widely expected to relaunch reforms after the Duma and presidential

elections; after the Yukos affair, however, this is uncertain. Those

in the ascendancy will clearly try to block it.

 

FDI in Russia has been limited so far. For the period from 1990 to 2002

FDI to Russia was equal to the amount to China in 2002. Moreover, FDI in

Russia has been a fifth of what has gone to the countries of Central

Europe.

 

There was a slight possibility of reversing this trend. Big US oil

companies were courting Yukos after BP moved in. But if the very creation

of the companies that the US was intending to do business with is under

scrutiny, everything will change.

 

Domestic investment will suffer. When the Yukos affair began several months ago, capital flight accelerated dramatically. In the third quarter of 2003 capital outflows were more than all of 2002.

 

And if the general procurator  a strong-armed Russian institution  can send

the increasingly powerful FSB internal security service after Mr

Khodorkovsky, any local satrap will be inclined to do the same against

alleged local oligarchs. Instincts from the anti-kulak campaigns of the

past are much too easily revived.

 

Fewer reforms, less investments and fewer entrepreneurs will have a

negative effect on Russia's growth potential in the years ahead. The

siloviki might not complain, but everyone else will pay the price.

 

The impact goes well beyond just economics. Two days before the dramatic

arrest, security spent eight hours searching a consultancy planning the

election campaign of the Yabloko party, confiscating all its computers.

This should have caused an outcry, but the incident was drowned out by the

even more dramatic news.

 

On Tuesday Mr Putin will travel to Rome to attend the European Union-Russia Summit to discuss, among other things, the future development of a common economic space. But if we want to move from an economic relationship towards an evolving economic integration there must be a common understanding of the primacy of the rule of the law.

 

The EU must be clearly on the side of reforms, the rule of the law and

democracy in all of Europe.

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