A cautionary tale of the oligarchs

Russian’s tycoons have been ravaged by the credit crunch, and need state aid to stay afloat. And for the first time, prime minister Vladimir Putin is under pressure, being blamed for the effects of the global downturn on Russia’s economy

TO A MOSCOW badly shaken by the economic crisis, Mikhail Khodorkovsky returned like a Shakespearean ghost, bespeaking past wrongs and dark days ahead. Once Russia’s richest man, Khodorkovsky has been brought from his Siberian cell to the capital to answer new charges of embezzlement and money laundering. Already serving eight years for fraud and tax evasion, the question hanging over his latest court appearance is: why now?

Khodorkovsky is being tried at a time of troubles for Russia, of factory closures, rising unemployment and the slowing of oil revenues – its economic lifeblood – to a relative trickle. The country’s tycoons have been ravaged by the credit crunch, and need state aid to stay afloat; and, for the first time, protesters are personally blaming prime minister Vladimir Putin for their problems and opponents see signs of a potential power struggle with his protege, president Dmitry Medvedev.

It is 10 years since Putin came to power, as a little-known former KGB agent-turned-administrator ushered into the presidency by the ailing Boris Yeltsin. Putin’s rule coincided with soaring prices for Russia’s main exports – oil, metals and other raw materials – which fuelled a steady rise in living standards, ensuring his popularity. He used that financial and political muscle to create a system that is now recognised as “Putinism”, in which the state seized major industrial assets from “unreliable” owners such as Khodorkovsky and gave them to Kremlin-controlled firms or loyal tycoons; political power, in turn, was given largely to trustworthy figures who shared Putin’s security service or St Petersburg background, and critical media and political parties were marginalised.

As Russia’s wealth increased, so did its confidence and Putin’s popularity. Russia finally broke the back of rebel resistance in Chechnya and won a brief war with Georgia last August and assumed de facto control over two of that country’s rebel regions, Abkhazia and South Ossetia. But last summer’s triumph is now a distant memory, and the Putin doctrine that inspired it is showing deep cracks as the economic crisis takes hold of the world’s largest country. More than six million Russians are now unemployed, the rouble has lost a third of its value in the past six months, wage arrears are growing, inflation is rising and industrial production is tumbling. Russia is entering recession for the first time since Putin took power in 1999, and the outlook is only getting worse.

Anti-government protests have occurred in cities from Moscow to Vladivostok on the Pacific coast, where riot police clashed with thousands of demonstrators chanting anti-Putin slogans.

Such a spectacle was almost inconceivable a year ago, when Putin passed presidential power to Medvedev and became prime minister, creating a peculiar power-sharing arrangement that has been dubbed a “tandemocracy”. In a Russian political world governed by patronage, however, Putin is still seen as the nation’s real leader: Medvedev and most other top officials owe their positions to Putin, and he controls the country’s purse strings.

Putin spent a decade sidelining potential rivals, promoting anonymous “yes men” and enjoying the adoration that came with a decade of rising national pride, prosperity and hope. Now, his pre-eminent place in Russian politics could leave him exposed to the brickbats of an increasingly angry people, especially if major enterprises or big banks go bust.

Polls suggest that, for now, Putin’s popularity remains largely intact, and the dominance of state-controlled media ensures that most Russians never see or hear concerted criticism of his policies.

But whispers of discontent are on the rise and, as never before, Putin’s position is being questioned by commentators in certain newspapers and on radio and the internet. There are also signs of renewed life from Russia’s beleaguered liberal opposition groups.

They question the wisdom – and legality – of the government’s decision to spend some €145 billion on trying to prop up the rouble, and on using billions more from a state pension fund to help Russia’s richest men pay their debts to foreign banks and escape insolvency.

WHEN PUTIN CAME to power, promising to submit Russia to a “dictatorship of the law”, the most obvious target for his wrath were the so-called oligarchs, billionaires who had acquired huge political and financial influence through the murky privatisation schemes of Yeltsin’s Russia.

But Putin’s courts only went after the oligarchs that opposed him: Boris Berezovsky, Vladimir Gusinsky and then Mikhail Khodorkovsky, the richest of them all, whose nascent political ambition and western contacts made him a potentially dangerous adversary for Putin. Tycoons who toed Putin’s line, did not stray into politics and put at least a little of their cash back into Russia, continued to thrive. Roman Abramovich enjoyed life as owner of Chelsea football club, and vied for the title of richest Russian with metals magnate Oleg Deripaska.

They are just two of dozens of major Russian businessmen who have taken a huge hit from the collapse of world raw materials prices and the Moscow stock market: last year, Forbes magazine listed 87 Russians as billionaires; this year, only 32 of them made the list, and together they lost more than $250 billion over the past 12 months.

Russian businessmen also owe about $500 billion (€365 billion) in foreign debt, with $130 billion (€95 billion) due this year. Many will succumb to the crunch unless the state – and namely Putin – bails them out.

Some analysts see the crisis as a chance for Putin to continue his drive to concentrate Russia’s finest industrial assets in the hands of state firms or the most loyal businessmen, by taking large stakes as collateral for emergency loans to their cash-strapped owners – potentially reversing the cut-price privatisations of the 1990s which created the oligarchs.

“On the surface, it looks like an ordinary swindle under which oligarchs close to the authorities raid the pension fund in order to maintain their wealth,” says opposition leader Boris Nemtsov. “But Putin is also strengthening his hand by taking control of the shares being offered up as collateral. The workers end up with nothing. The budget gets nothing. Production is not increased, and the economy is not modernised.”

But as fears mount about a protracted recession and the financial and political impact of using state cash to support tycoons, Putin has halted payments from a $50 billion (€36 billion) fund created to help the oligarchs, and has made clear that not every ailing enterprise can be saved. “Russia has reached a crossroads. Many of the oligarchs are basically bankrupt and will not get out of this mess by themselves,” one senior western banker told Reuters. “Should they be bailed out with public money intended for Russian pensioners? That is the next page which we are about to see. Many are facing extinction.”

AMONG THE WEALTHIEST men in Russia, therefore, the thirst for money is getting sharper, just as its availability is dwindling. This is increasing friction between the factions that vie constantly for influence with Putin and Medvedev, the ultimate arbiters of power and dispensers of cash. Under this mounting pressure, some perceive the first cracks in the united front presented by Putin and Medvedev.

The president has sacked several regional governors appointed by Putin, has called for more official honesty and public discussion about Russia’s economic problems, and blocked a draconian tightening of treason laws. Medvedev has also said how “easy” it is to govern at a time of high energy prices – as Putin did – and challenged officials to manage the budget better during the crisis.

Opposition figures such as Nemtsov are already calling on Medvedev to sack Putin and introduce a new wave of liberalising “perestroika”. That, for now, seems deeply unlikely. But, should a group of oligarchs become sufficiently dissatisfied with, or afraid of, Putin’s management of the crisis, then Medvedev would be the obvious figure around which they would rally.

It is amid such talk that Khodorkovsky was brought to Moscow for a new trial. And in a country where signs and symbols can reveal deep political shifts, the timing of his reappearance is seen as vital, and two interpretations prevail: either Medvedev and Putin are reminding the restive oligarchs of what could happen to them if they step out of line; or the Putin-controlled security services are besmirching what remains of Medvedev’s liberal reputation by staging the second Khodorkovsky “show trial” during his Kremlin watch, rather than Putin’s.

Either way, the sight of Khodorkovsky back in the courtroom cage is likely to focus the minds of Russia’s most powerful men. And for the oligarchs, mourning the collective loss of hundreds of billions of dollars, his fate serves as a stark reminder of the real stakes for which they are playing.