The president’s clear preference for law enforcement and military figures over business is putting the “Russian economic miracle” in danger. In its battle with the oligarchs, the government is sacrificing economic growth and social stability.

Over the last four years of peaceful growth, we have grown accustomed to the thought that Russia would never stray from democracy and that private capital would remain the material basis for this democracy. The events of the last week destroyed this confidence. It became clear that backsliding was a distinct possibility.

On Saturday October 25, Mikhail Khodorkovsky, the head and primary owner of YUKOS, was arrested. That same Saturday, the leaders of three well-known business organizations—the Russian Union of Manufacturers and Entrepreneurs (RSPP), Business Russia, and OPORa Russia—signed a joint statement. It declared that “the escalation of actions by government and law enforcement agencies involving the Russian business community has severely impacted public sentiment. Business’ trust in government has been undermined.” Furthermore, the statement made it clear that “Russian business today has no trust in the existing law enforcement system and its leaders.” Lastly, it noted that only “a clear and unambiguous stance” on the part of President Putin would be able to calm the public.
This stance was announced October 28. President Putin stated that if the court had decided to arrest Khodorkovsky, it must have grounds to do so, but “there will be no further generalizations, analogies, or much less precedents connected with the results of privatization.” He called for an end to “speculation and hysterics” and forbade the government to “get drawn into to this discussion.” The president also announced that he had no intention of meeting with businessmen or politicians regarding the YUKOS Affair: “There will be no meetings or haggling regarding the actions of law enforcement agencies if, of course, they acted within the bounds of Russian law.”
The majority of charges Khodorkovsky faces could also be leveled at a large, nay, at a huge number of entrepreneurs. If somewhere (in the prosecutor’s office, perhaps, or among the public at large) many people have become convinced that, say, some tax regulations are “correct in theory but a mockery in practice,” then the laws need to change. To charge one person out of many (out of very many) with a crime based on these laws is an outrageous abuse of power.
To what extent the courts sorting out these charges in practice will remain impartial will be determined by the temperament and consistency of public opinion.

The question of why the authorities decided to go after Khodorkovsky has a multitude of answers. The most glaring out of the possible reasons is the likely sale of forty or even fifty percent of YUKOS. The news that negotiations were underway appeared six months ago. Obviously, this sale would not be in Russia’s national interest. It would be much easier to act as an energy superpower if all the capital of the biggest oil company remained in Russian hands.
It is rumored that Putin was very unpleased about the prospect of the sale. When on October 5 the New York Times asked him if he was against it, he replied that the deal would be possible “if preliminary consultations with the Russian government take place.”
If the president had stated that Russia was against the deal, the deal wouldn’t have happened (and the business community would have supported this, we believe). Instead, the Russian government backed itself into a corner over the sale. It can no longer interfere directly, as it already gave its blessing publicly. By trying to interfere, shall we say, indirectly and attacking the company and its directors, it has made the sale even more likely. YUKOS now sees the sale as its only hope in stopping the political repressions.

Another problem connected to YUKOS—the issue of buying seats in the Duma—has been noticeably less discussed. YUKOS is accused of not limiting its lobbying to “one-time” deals, but generously “sponsoring” various parties to cobble together its own Duma “faction.” Other oligarchs do similar things, but not on the same scale as YUKOS. Even if the numerical estimates of big business’ penetration of parliament are highly exaggerated, something serious needs to be done immediately. We believe that this should be done systematically, by adopting laws that severely limit both large contributions to party coffers from both major corporations and individual lobbyists.
The government has decided to take a completely different approach. It is punishing the corporation’s leader using dangerous methods, without even setting reasonable limits for these methods.

The problem of redistributing property has little to do with the YUKOS Affair. It was bound to arise as elites change, a process which began some time ago. However, no one knows how to solve this problem with minimum harm to Russia. Everyone does know what method won’t work: reexamining the results of privatization.
The president has repeated with increasing annoyance that there isn’t and won’t be any reconsideration of privatization in the future. This does not mean that the attack on YUKOS has nothing to do with property redistribution.
There is something else, however, that remains unclear: what would the fate of Khodorkovsky’s or similar future figures’ property be after some form of nationalization occurred? There aren’t many possibilities. Part of it would be put on the market in a way conducive to all sorts of confiscation. The biggest pieces would be divided in two. Perhaps, they would also be distributed to cronies, just as they were eight years ago. Only the names would change. However, most likely things would not proceed with such patriarchal simplicity. Oil, metal, and other major producers would remain in the limbo of state ownership for an undetermined period of time.

In order to fully appreciate what you stand to lose, you have to know what you have. No one has informed the president of the actual state of affairs in the Russian economy, which has never been better.
If we look at growth rates in Russia, we see a new wave of economic expansion. Many were surprised by the 7.2% growth rate for the first half of 2003, and analysts predicted a slowdown for the following six months. According to new data, it never came. On the contrary, in September growth was even higher, 8.3%. Was this only a pleasant coincidence? No. Was it purely the result of single factor, high oil prices? No.
In the years since the devaluation, Russia’s economy has changed fundamentally. In the late 90s Russia’s economy truly resembled that of a colony, completely dependent on natural resource-related companies and prices on world markets. Today, growth in Russia stems from the activities of a plethora of medium-sized companies, mostly those connected to the domestic market. The big natural resource companies’ contribution to this growth is fairly small. The main factor directly determining the current rate of growth in Russia is not oil prices, but the increase in investment in the Russian economy across practically all sectors of the economy. This is the best kind of economic growth.
The new Russian economy creating so much growth today is also extremely competitive. These facts allowed us to predict increasing investment over the next two years and as a result, dramatic economic growth forthe next three to four years. On the eve of the current political crisis Russia was on its way to a “Russian economic miracle.” Now the entire process of healthy economic growth has been upset, and the consequences will only be apparent early next year in the form of an unseasonable and dramatic drop in investment activity.
Nonetheless, after Platon Lebedev’s arrest, capital influx turned to capital flight. After Mikhail Khodorkovsky’s arrest, capital flight will only increase, likely by several times. No amount of return on investments will outweigh the risk of losing everything.
The RTS Index will recover, but it’s no indicator. It makes more sense to look at what is afoot on the corporate bond market. In the near future, it is highly likely that new placements will be completely paralyzed and trading will fall off gradually. This will be a sign that investment plans for the coming year will be very modest.
So, if the situation does not become any clearer in the coming weeks and if the president doesn’t explain to the business world how he envisions Russia’s development during his second term, if he doesn’t say who else under what conditions will be “lawfully” accused of tax evasion for the umpteenth year, Russia will see only a modest 2-3% growth in the best case scenario instead of dramatic expansion.

It’s not that hard to imagine how things could unfold logically. It’s likely that the liberal laws governing the sale of hard currency earnings will be overturned. Control over capital export will become stricter. But the investment situation will not improve fundamentally. The risks for entrepreneurs will not decrease because the rules of the game are changing so dramatically. The next step will be obvious: nationalizing key export companies. We do not think that the YUKOS Affair was seen as the prelude to re-nationalization, but it is likely to return major exporters to the government, simply by virtue of elementary economic ties. There will be no other way to fight the “war on poverty” if there is no trust between business and government.
Many may be thinking: “Well, what’s so bad about all this? Finally, the government will have the means to rapidly modernize the economy and invest in technology, when private business wasn’t willing to spend the money.” Yet private property is not an obstacle to investment. The government today is completely capable of finding money for its projects by issuing bonds, for instance. It is also hard to imagine big business categorically refusing to invest. However, today the government has to prove its effectiveness, but if it will have control of the main sources of income, it won’t have to and Russia will see a situation reminiscent of the Soviet project to reverse the northward flow of Siberia’s rivers. We had a unique opportunity to create one of the most efficient and competitive economies in the world. In the absence of state subsidies, only the best companies on every market would survive in the atmosphere of tough competition. The new and now growing economy would have ended up unusually stable. New rules for receiving investment via the government will directly reduce the Russian economy’s ability to compete. Lastly, as Russia emerged from crisis, we could have outpaced Western countries in forming new and long-term investment paradigms. By wasting time restructuring the economy along the lines of state capitalism, we will lose our time advantage. If this negative scenario becomes a reality, the world will not see a Russian economic miracle and Russia can completely forget about doubling its GDP by 2010.

Khodorkovsky’s arrest was also a watershed, it seems, in the president’s approval ratings. Until recently, the level of support and trust in Putin had less to do with whether people approved of this or that concrete aspect of the president’s actions. Russians didn’t think much about what a president should do or what Putin was actually doing. What is he responsible for? Everything! Are things going okay? Sure, things are pretty good in general, which means that we finally have a decent president! There’s your approval rating.
But for this idyll to continue for four whole years, the president had to avoid saying anything about domestic affairs that might upset someone. How can he if different groups of people are upset by different things? How can he put things so that the blue folks think he’s talking blue, the red red, and the green green? He more or less managed. The public became so used to the notion that the president was building consensus and holding the center that everyone heard whatever they wanted. Even when Putin made unambiguous statements (for instance in his last annual address), everyone understood him in the way they wanted. This brought its own difficulties. Putin had a hard time pushing even the most concrete of orders though his own administration. It also had its advantages: a completely stable approval rating.
However, everyone understood the president’s tough statements about Khodorkovsky’s arrest in exactly the same way. Russia saw its president in one and the same, probably accurate, light. Now whether Putin’s rating rises or falls, it will finally be an actual approval rating, an indicator of the number of his conscious supporters, and not an indicator of some abstract hope in some abstract authority.

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