Commentary: This Time, Putin May Really Tame the Oligarchs

By Paul Starobin

It's high time to bring the money back home--and spread it around. So Russian President Vladimir V. Putin is telling the country's Big-Business titans, commonly referred to as the oligarchs. In a June 19 speech to the Russian Chamber of Commerce in Moscow, Putin went public with past--mostly ignored--private suggestions to the tycoons that they start repatriating the vast sums of wealth they amassed in post-Soviet Russia and then spirited abroad. Some already are doing just that. On June 25, the government said it had a net inflow of funds in the second quarter, the first time in years. There will be no questions asked about the root source of the oligarchs' money, Putin said. There won't be any punitive taxation, either.

Yet another attempt to rein in the oligarchs. Haven't scandal-weary Russians heard this before? After all, Putin's predecessor, Boris N. Yeltsin, swore repeatedly he would tame Russia's new plundering class, all to no avail. But Russians, and the world, should pay attention. Putin is younger, smarter, and tougher than Yeltsin, and the ex-KGB colonel has been steadily strengthening the state apparatus he inherited from an enfeebled Yeltsin. Indeed, he has already driven into exile two oligarchs, Boris Berezovsky and Vladimir Gusinsky, who publicly criticized him on political matters. Now, by playing nice but acting tough, Putin may yet get a chunk of that money back into Russia. And he may well hem in the remaining oligarchs in the process. The contest between the Kremlin and the oligarchs is entering "the endgame," says analyst Christopher Weafer of Moscow brokerage Troika Dialog.

Putin must prevail against the oligarchs because Russia desperately needs their money back in the country. Since the mid-1990s, Russia's commanders of oil, metals, and other lucrative commodities industries have tucked some $160 billion into foreign accounts--and the rate of capital flight continues at $20 billion annually, according to Troika Dialog. The oligarchs gained control of Russia's prime oil and metals assets largely through auctions even they admit were rigged.

Cleverly, Putin is now suggesting a fresh start--a kind of amnesty. "The government should not badger everyone about where these funds came from, especially as it failed to create normal conditions for investing this money in the economy in the first place," he told the Chamber of Commerce. Pledging to improve the investment climate in Russia through fair, reasonable regulations, he says oligarchs no longer need to shelter their money abroad.

In part, Putin is playing to the crowds. In the runup to his bid for reelection in 2004, he can strengthen his standing with Russia's mostly poor electorate by targeting the resented moguls. "It's politics," says Victor F. Vekselberg, an oil and aluminum oligarch based in Moscow. But Putin's free-market-oriented advisers also subscribe to the capital repatriation campaign. And their concern is practical: The Russian economy needs investment, and what little money is being invested is too concentrated in the oligarch-controlled oil sector. Oil accounts for about 50% of the $22 billion projected industrial investment this year.

Putin's jawboning is intended to persuade the oligarchs to shift voluntarily from oil into manufacturing and high-tech sectors. If the government can reform Russia's battered banking system, then deposits by oligarchs can be recycled to a credit-deprived small-business sector.

The oligarchs are wary of Putin's promise to ask no questions. Bringing their money out of the shadows could expose their deals to light--an iffy proposition, amnesty or no. There are growing whispers that the titans may recruit a candidate to oppose Putin in 2004, one way to stop this contest with the Kremlin for good.

But politics is no longer the oligarchs' strong suit. The Kremlin has sharply curtailed the oligarchs' control of Russia's major television stations. Without TV, no national candidate can get very far. This is one game Putin can win.

And if the oligarchs don't heed the call of amnesty for repatriated capital, they can expect to see the other side of Putin in a second Kremlin term. That's when he'll tighten the screws on the barons. The likeliest possibility, says analyst Weafer, is a windfall oil profits tax linked to output. With the tax system as his best overall weapon, Putin could also ratchet up enforcement of existing tax laws, subjecting oligarchs to punishing investigations. One way or another, Putin is intent on addressing the great uncorrected injustice of Russia's flawed entry into capitalism. And smart oligarchs will heed his advice, because in this endgame, Putin holds the best position on the board.

Starobin covers Russian economics and politics from Moscow.

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