No friend to jed clampett.

Putin's Oil Kleptomania

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Tuesday's house arrest of Vladimir Evtushenkov, one of Russia's richest men with an estimated $7 billion fortune, is part of an attempt to nationalize his oil business. It also shows how the Western strategy of isolating Russia in response to its external aggression is, perversely, benefiting President Vladimir Putin's close circle of friends: They feel they can grab anything within Russia without regard for their reputations.

When the Western world accepts an authoritarian regime and fawns over its achievements, as it does with China, success stories look like that of Alibaba's Jack Ma. Never mind that his company's gigantic IPO is only possible because the Chinese authorities have helped Ma grow his business and could ruin it anytime, as my colleague William Pesek rightly points out, everyone still wants a piece of the action. When a similarly dictatorial government falls out of favor with Western politicians -- by invading a neighboring country, say, or refusing to curb a nuclear program -- it's the dictator's friends who benefit the most. That was the case in Iran, hit with the most comprehensive sanctions seen to date. That is likely to be the case in Russia, too.

Evtushenkov rode into big business on the coattails of former Moscow mayor Yuri Luzhkov, a cheerful but ruthless politician whose wife became the city's biggest real estate developer during his tenure. Evtushenkov headed the city government's committee for science and technology, moved quickly to privatize Moscow's fixed telephone network and set up what is now one of Russia's three national mobile carriers, MTS. His business empire, called Sistema, grew rapidly. Evtushenkov expanded into electronics manufacturing and real estate, then took his companies public. Back then, Russia was a relatively tame dictatorship, so investors weren't worried about Evtushenkov's path to riches; Sistema's initial public offering in 2005, held in London, was the biggest for a Russian company at the time.

Then Evtushenkov moved into energy, buying Bashneft, a medium-sized oil producer, from the family of Murtaza Rakhimov, the long-time leader of the Ural Mountain region of Bashkiria.

How the company fell into the hands of Murtaza Rakhimov's son, Ural, is a murky tale that Russia's budgetary watchdog, the Accounting Chamber, has called "an unprecedented case of federal property theft." Evtushenkov, however, was not part of that: He just wanted to win the last available major asset in Russia's lucrative oil industry. He made his move in 2009, fully cognizant of the risks. "Games with the state are totally losing games, always," he told Forbes Russia in 2010. "The weakest state is always stronger than the strongest businessman."

In Russia, no one could argue with that after the 2003 arrest of Mikhail Khodorkovsky, then the country's richest man and biggest beneficiary of the oil giant Yukos. Other oligarchs took politically active Khodorkovsky's fate as a warning and toed the Kremlin line, checking in with Putin's team ahead of major deals. As a result, the billionaires have largely stayed safe; Putin has let them hold on to property, often amassed in unorthodox ways, and even provided state support during the 2008 financial crisis.

That truce is now off. Khodorkovsky, out after 10 years in prison and living in Switzerland, calls Evtushenkov's arrest for "money laundering" -- essentially for helping Ural Rakhimov unload stolen property -- the handiwork of Igor Sechin, Putin's close friend who runs the state oil behemoth, Rosneft. It was Rosneft that took over Yukos's assets after the company was bankrupted for back taxes. Sechin, Khodorkovsky said, "has not gotten any smarter in these 11 years but he may have gotten greedier."

Indeed, Rosneft has been interested for months in swallowing up Bashneft, and the attack on Evtushenkov is remarkably similar to the one on Khodorkovsky's business, according to Dmitri Gololobov, a former top Yukos lawyer who now practices law in London. He suggests that Evtushenkov now has the too-risky option of fighting on, or the more sensible one of handing Bashneft to Putin's people. "Khodorkovsky's risk cost his employees a total of 200 years of jail time," Gololobov wrote on Slon.ru. "I'd like to believe that Mr. Evtushenkov will be wiser."

Sistema and MTS shares have crashed since news of Evtushenkov's confinement to his mansion near Moscow with a monitor bracelet. The Kremlin doesn't care. "We allow that some insignificant show of emotion in the markets may take place," Putin's press secretary, Dmitri Peskov, told the Interfax news agency. "That, however, is no reason for law enforcement agencies not carrying out necessary investigations."

Sechin and Rosneft, sanctioned in the U.S. and in Europe, no longer have to wear sheep's clothing and pretend to play by civilized rules. Private Russian businesses, large and small, now face a bigger threat than before the new Cold War: Putin and his entourage, riding a patriotic wave, no longer need a smokescreen for the de-facto nationalization of Russia's economy so it can be run by their rent-seeking clique.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net