Crisis at Yukos casts doubt on doing business in Putin's Russia

Even for its biggest oil firm and its richest man, a year is a long time in Russia, writes Daniel McLaughlin in Moscow

Even for its biggest oil firm and its richest man, a year is a long time in Russia, writes Daniel McLaughlin in Moscow

Last July, no one predicted the stunning demise of the Yukos energy giant and the man who created it, billionaire "oligarch" Mr Mikhail Khodorkovsky.

But now bailiffs have started seizing the company's assets in lieu of $3.4 billion (€2.7 million) in unpaid tax. Mr Khodorkovsky, apparently impotent behind bars despite his $15 billion fortune, is facing 10 years in a labour camp for alleged tax evasion and fraud.

For President Vladimir Putin, these are ambiguous times.

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The plight of Mr Khodorkovsky and Yukos represents the triumph of state power over a tycoon who fiercely criticised the Kremlin for the man who came to power pledging to "destroy the oligarchs as a class" and submit Russia to a "dictatorship of the law". But for the leader who wants to double the size of Russia's economy by 2010, and attract unprecedented investment to the world's largest country, the international unease at the motives and methods behind the crackdown on Yukos are deeply troubling.

Russia's stock market has fluctuated wildly in recent weeks, rising on hopes that Yukos will survive the prosecutors' onslaught, plummeting on fears of collapse and possible re-nationalisation.

The market took its greatest hope from Mr Putin's public assurance that the government did not want to bankrupt a firm that accounts for a fifth of national oil output, employs 100,000 people, and was seen as Russia's most efficient and transparent company until investigators moved in last summer.

But a growing chorus of international angst over the case greeted this week's move by bailiffs to enforce a court order for repayment of the first tranche of about $7 billion in alleged back taxes.

"The appearance of lack of due process and possible threat to private property rights have put domestic and international business communities somewhat on their guard," US State Department spokesman Mr Richard Boucher said, amid a flurry of comment from flustered politicians and financiers.

Britain's foreign minister, Mr Jack Straw, this week underlined the need for "a predictable and stable climate" in a country where Shell and British Petroleum have major operations.

Mr Putin has presided over strong and steady growth since taking power in 2000, much of it due to high crude prices and increasing oil exports from a country that now ships almost as much oil as market leader Saudi Arabia.

The International Monetary Fund and other leading financial organisations have urged Russia to diversify away from the export of raw materials like oil, gas and metals.

That diversity, however, will be hard to achieve without foreign investment, and the apparently arbitrary use of executive power against Yukos is scaring that cash away.

In its latest report on Russia, the World Bank said the country's prospects were "marred by the ongoing uncertainty over the fate of Yukos, leaving the first visible imprints on financial markets and short-term capital flows." The Organisation for Economic Co-operation and Development said this week that Russia's gross domestic product had grown at an annual average of 6.7 per cent since 1999, but was scathing over the Yukos case and its consequences.

"Whether the charges against the company and its core shareholders are true or not, it is clearly a case of highly selective law enforcement," the OECD said.

Many analysts see a battle raging behind Mr Putin between liberals who want a chastened and much smaller Yukos to survive, and hardliners - many of them old KGB comrades of the president's - who want to deal knockout blows to Mr Khodorkovsky and his firm, and divide the spoils amongst themselves.

Mr Putin urged investors to keep faith with Russia this week, but gave no hint as to the Kremlin's final decision on the fate of Yukos - or that of the billions of dollars of potential investment that ride on it. "The situation is still extremely uncertain," said Mr Bruce Misamore, Yukos' chief financial officer.

"There is just one person in this entire country who must be held responsible: Mr Putin. He started the problem and only he can solve it."

Daniel McLaughlin

Daniel McLaughlin

Daniel McLaughlin is a contributor to The Irish Times from central and eastern Europe