Commentary: Can Putin Contain The Fallout?

Despite the Yukos crackdown, he's struggling to keep economic reform on track

The Oct. 25 arrest of Mikhail B. Khodorkovsky, Russia's richest businessman, on charges of fraud and tax evasion set off the biggest political crisis of Vladimir V. Putin's presidency. His chief of staff quit in protest. The stock market plunged. Russian liberals called him a dictator. Foreign investors quaked, worrying that a group of ex-KGB hardliners intent on renationalizing the Russian economy had seized control of the Kremlin.

But Putin, who takes great pride in the economic boom under his rule, has jumped into damage-control mode. His goal: to reassert his credentials as an economic reformer. He appointed a new chief of staff, Dmitry Medvedev, who is well liked by business. On the day the federal prosecutor froze Khodorkovsky's shares in oil company Yukos, Putin met with foreign investors to reassure them he had no intention of renationalizing property. He even dangled the prospect of allowing non-Russians to buy into Gazprom, Russia's huge natural gas monopoly, something they have long wanted. When the Natural Resources Minister said his Ministry might confiscate some licenses to oil fields held by Yukos, Putin slapped him down. And on Nov. 10, two officials in the same ministry were arrested for corruption, a sign that Putin is trying to divert the focus of the anti-corruption campaign away from business, toward corruption in the bureaucracy.

No question, Putin is still in charge. And he's beefing up the reformist element as a counterweight to the siloviki, or ex-KGB contingent. But reform is an ambiguous word. In Putin's Russia, economic reform seems to come at the expense of political reform. In the past four years, Putin pushed through market reforms, touching everything from taxes to land ownership. But he let his surrogates wrest control of two private TV networks from oligarchs who criticized Putin's policies on the air.

The rules for oligarchs are clear: Cross Putin and face exile or prison. That has worrying implications for political pluralism, of course. But many Russians, liberal reformers among them, are glad to see the back of oligarchs like Khodorkovsky. One leading reformer, Finance Minister Alexei Kudrin, has openly welcomed Khodorkovsky's arrest. Many investors and analysts are also inclined to blame Khodorkovsky, rather than Putin, for the affair. They see the oil mogul's downfall as the final blow to the oligarchic system that Putin inherited from Boris N. Yeltsin, whereby tycoons used their wealth to influence political decision-making. "Khodorkovsky was trying to turn the clock back to the old days," says Chris Weafer, chief strategist at Moscow's Alfa Bank.

Even the other oligarchs have been notably silent about Khodorkovsky since his arrest -- partly out of fear. But they are also said to be privately furious at Yukos' ex-boss for violating the deal they struck with Putin in 2000 to stay out of politics.

Some other business voices are more openly critical, despite their concerns over Khodorkovsky's arrest. Ivan Grachev, a member of Parliament and head of the pro-business party Development of Enterprise, slams Khodorkovsky's lobbying for lower taxes on oil companies, saying the change resulted in higher taxes for other businesses. "If it was necessary to sell out small and medium-sized business, [Khodorkovsky's representatives] did this without hesitation," he says.

Foreign investors, too, seem to be shrugging off the scandal. Since the arrest, Deutsche Bank (DB ) has bought a local investment bank, United Financial Group Inc., in a deal analysts say is worth $70 million, while General Motors Corp. (GM ) is pumping $60 million into a project to make GM cars at Russia's Avtovaz plant in Togliatti. Andrew Somers, president of the American Chamber of Commerce in Moscow, says several more U.S. companies are planning major investments.

With parliamentary elections coming in December and presidential elections next March, there are still plenty of opportunities for political intrigue. If anything, Khodorkovsky seems intent on transforming the criminal case against him into a trial of the Putin regime. But in his ability to be both reformer and authoritarian, Putin is proving a wily adversary.

By Jason Bush

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