Sat, Nov 15, 2003 - Page 9 News List

Russia poised to deteriorate with new war on the oligarchs

By By Yevgeny Yasin

Just as familiarity breeds contempt, success often spawns complacency. Sadly, that seems to be the case in Russia, where the government has chosen the first period of prolonged economic growth since communism's fall -- with the budget in surplus and capital flight seemingly reversed -- to re-open the oligarch wars of the 1990s.

Optimists beware: the arrest of Mikhail Khodorkovsky -- and the freezing of his shares in oil giant Yukos -- will have a profound long-term impact on Russia's economy and on relations between business and government. The Yukos imbroglio will not bring Russia's economy to a screeching halt, because no single company determines the country's fate. But long-term prospects are certain to deteriorate.

The problem is one of trust between the business community and the government, which in recent years had just begun to develop. To put it bluntly, violating that fledgling trust will break the back of Russia's economic upswing.

"Operation Clean Hands" -- what some are calling the investigations into Khodorkovsky and his associates -- will not increase tax revenue, but only spur growth in the informal economy, as businessmen try to conceal their affairs even more completely from the government. After all, once Russia's richest man can be stripped of his assets at any moment, ordinary Russian businessmen may be forgiven for concluding that operating in the open is risky.

The first signs of this realization will probably take the form of an increase in capital flight. Until the Yukos affair, capital flight was reversing. After a decade of hemorrhaging capital, the first half of this year saw data indicating that Russians who had taken their money out of the country were bringing it back to invest at home. If capital flight resumes, it will quickly snowball if President Vladimir Putin fails to convince people that the Yukos affair is an isolated case.

I believe that capital flight will increase substantially. Reduced business activity, with long-term investment projects being cancelled, seems just as certain. A lower rate of economic growth thus seems inevitable.

Nor am I alone. Independent Russian economic experts are unanimous in sharing this grim conclusion. Only people linked to the regime appear to differ.

If investment stalls, Putin will have no hope of doubling the size of the economy within a decade, as he has promised. My longstanding skepticism about this promise has now hardened into certainty: the Yukos affair will make it impossible to sustain the growth rate required to achieve this goal because the arrest of Khodorkovsky and the seizure of his assets has dealt a devastating blow to business confidence.

Indeed, times have changed dramatically since the cutthroat Russian capitalism of the 1990s -- supposedly a world in which entrepreneurs were indifferent, at best, to each other's problems. That caricature, if ever true, is certainly not true today -- the business community's negative reaction to the persecution of Khodorkovsky by the law enforcement agencies has been strong and nearly unanimous.

The growing calls of some state officials to deal with economic crime are viewed by the business community as both a mockery of the legal code and a veiled threat that the prosecutors want their cut of Russia's riches. The improved image of Russia's legal system is in tatters.

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