THE YUKOS AFFAIR

Rectifying the Past or Polluting the Future?

By David Schor

Government interference in the market is an old practice in Russia.

“In Russia, we have a bad tradition in this respect. Government intervention, not only in Soviet times, but in empire times, is a traditional Russian policy,” said Sergei Dubinin, former head of Russia’s Central Bank and the deputy CEO of Gazprom, in an interview with Columbia University Economics Professor Padma Desai.

In the wake of the Yukos affair--during which Yukos CEO Mikhail Khodorkovsky sat behind bars while his company’s largest production field was auctioned off to pay $27 billion in back taxes--it is once again Russian government intervention that has come under fire. And the fire is burning with one big question: what does the Yukos affair mean for Russia, and is Russian President Vladimir Putin placing his country’s economy on the fast track to a breakdown?

“A transition has been made to the interventionist trend. This model implies the state’s extremely incompetent interference in the economy,” said Andrei Illiaronov, former senior economic advisor to the Kremlin. “We used to see street hustlers do this kind of thing, now officials are doing it,” he said in reference to the auctioning off of Yukos’ largest production field, known as Yuganskchneft, or Yugansk. “[It’s] the swindle of the year.”

Add Illiaronov’s sentiments to the countless scathing criticisms from the international press about the way the seizure of Yugansk threatens property rights, democracy, the rule of law, and the path to market liberalization, and it appears to the world, or more precisely, to the Western community, that the Kremlin has run afoul. In the view of most analysts, the Russian government’s ‘acquisition’ of Yukos spells trouble, and spells out Putin’s desire to play marionettes with Russia’s natural resource industries. But such a reading of the Yukos affair may be overly simplistic, or perhaps even flat out wrong.

Nobel Laureate and Columbia University Professor of Economics Joseph Stiglitz sticks to another story, and it is one not widely told. To each condemnation of Putin’s actions in the press, Stiglitz seems to have a defense, and he presents the Yukos affair in a new and much more positive light. According to Stiglitz, Putin’s attack on Yukos is quite justifiable.

In his book, Globalization and Its Discontents, Stiglitz laments the illegitimate Yelstin-era privatizations of Russia’s state-run industries. During the 1990s, natural resource companies and other state-run conglomerates fell into the hands of Yeltsin’s close allies in a variety of illegitimate ways, including the infamous “loans for shares program” and what Stiglitz calls “sham auctions.” Because of the illegitimacy of the privatizations, the newfound oligarchs began to shuttle their rubles abroad in order to prevent the Russian government from repossessing the ill-begotten money in the future. Many of the oligarchs invested in the US stock market and other western investment vehicles, and according to Stiglitz, began to strip Russia of its prized assets.

With respect to the alleged politicization behind the government’s tax charges against Yukos, Stiglitz takes an uncommon stance: regardless of politics, enforcing tax laws is essential. “Any government, particularly one that has been starving of resource income, needs to enforce the tax law. And if you are going to get confidence in a tax collection system, you can’t let your wealthiest party abscond with billions of dollars without paying taxes,” he said.  

“One of the concerns has been that it has been selective,” said Stiglitz, “but the US does this all the time. You pick out certain targets in the hope that you get higher degrees of compliance among all other tax payers and with less need for strong arm enforcement. Hopefully that will be what will happen.” In this way, the jailing of Khodorkovsky calls into question the extent to which Khodorkovsky may have been a highly publicized way for law enforcement to say it means business, and this time, not funny business.

For Stiglitz, much of the justification behind the Yukos affair resides in the Putin Administration’s need to rectify the enormous mistakes made during the Yeltsin-era privatizations.

“You had an illegitimate privatization. If you then allow the guy to sell the assets to an American company like Exxon, Exxon pays full market value, and Khodorkovsky takes the money out of country. It becomes at that point virtually impossible to rectify the past mistakes,” he said. Indeed, Yukos reached that critical point in 2003 when the company discussed selling stakes of the firm to western companies like ExxonMobil and ChevronTexaco. “[Khodorkovsky] forced the issue by threatening the sale,” said Stiglitz.

The goal of rectifying the 1990s is not one that Putin supports without caution. It is clear that Putin does not wish to start an oligarch witch-hunt; Russia’s fragile economy cannot afford to send every Russian entrepreneur who was around during the 1990s running for the hills. Thus, with regard to the collecting of back taxes, Putin has now started looking more toward the future and less toward the past.

This March, Putin pledged his support toward a new bill that would shorten the statute of limitations over investigations into the Yeltsin-era privatizations. “This will help the business community look to the future with greater certainty, draw up promising development plans and make new investments, and I hope to reassure entrepreneurs on the security of property rights,” said Putin in a March television broadcast.

By burying the hatchet with regard to the rest of the Yeltsin-era privatizations, Putin will officially stamp Khodorkovsky as an example of what his administration will not tolerate, while allowing Russian businessmen to continue their dealings without remaining in a constant state of fear. Hopefully--now that Russian businessmen will constantly bear Khodorkovsky in mind--such dealings will occur in a more transparent manner. At least that’s the hope of both Putin and analysts such as Stiglitz. 

In the eyes of David Woodruff, a senior fellow at Harvard’s Davis Center for Russian and Eurasian studies, however, the conception of the Yukos affair as a way to repair past mistakes and fix the future is not so obvious. “I think it’s a repetition of the 1990s. If it turns out that now Yugansk will be paying much more taxes, and be much more transparent, I’d be very surprised. It’s just a transfer from one set of people to another set of people,” said Woodruff.

According to Woodruff, based on the process alone, it is dubious to think of the Yukos affair as repudiation. “[Yukos has] been assessed quite implausible tax debts, and those tax debts have been used to auction off the company at what was a very low price, which has not clearly even been paid. So to say that this is rectification of past abuses, is certainly very premature,” he said. According to Woodruff and to others who share his opinion, the notion that the Yukos affair can be construed as a force for good is hasty at best.

In its 2004 annual report on Russia, The European Bank for Reconstruction and Development (EBRD) claimed that the legal case against the Yukos affair has raised uncertainty about the sanctity of property rights in Russia. Stiglitz disagrees. “Ownership of stolen property, does not carry with it the same rights” as legitimately acquired property, he said.

“The fact that these natural assets were transferred in an illegitimate way to so many private parties means that there cannot be a social commitment to those property rights. To make property rights systems work, there has to be a view that those property rights are legitimate,” said Stiglitz. From this viewpoint, Khodorkovsky’s prominence in Russia, as it was founded upon the theft of prized Russian assets, is what truly undermines property rights. “You have to recreate a system of property redistribution that has confidence of legitimacy,” he said.

A good number of economic and political analysts disagree with Stiglitz and agree with the ERBD’s assertion that Putin is undermining crucial democratic fundamentals, such as the right to own property. “Mr. Putin may honestly believe he is right to restore state control...but his advisors are trying to tell him that by grabbing so much power and stifling so much debate, he is achieving an illusory stability that undermines Russia’s long-term development,” read a January editorial in the New York Times. Even the White House expressed its disapproval of the government’s acquisition of Yugansk in December 2004, and still others labeled the action a surefire indication of Putin’s authoritarian aspirations.

In Stiglitz’s view, however, Khodorkovsky is the real threat to democracy, not Putin. “The ability to have a viable democracy is certainly impaired when you have levels of inequality of the magnitude that have emerged in Russia,” said Stiglitz. “Khodorkovsky’s not a foreigner, but on the other hand, he’s not a good citizen. He’s not willing to risk his money--to put his money to work for the country,” he said. 

Sentiment in the western financial press has been that the Yukos affair will chill the foreign investment climate, but in Woodruff’s view, international capital flows are determined far more by the “push” theory than the “pull” theory. That is, foreign investment largely stems from rich countries with excess capital, rather than from the attractiveness of certain foreign investment opportunities.

According to Stiglitz, there are two interpretations of what Putin’s Kremlin is about. One interpretation is that Putin is trying recover from mistakes made by allowing “market players” to control the nation’s assets and reap the benefits of their control in the name of market reform. The other view is that one group reaped the spoils under Yeltsin, and another group wants the spoils now. “I’d like to believe the former, but I think we don’t really know, we don’t have enough evidence at this point to make a confident judgment. We know that it has done something to stop the kind of massive theft. What is clear [is that] Putin has not been as abusive as Yeltsin. So grading on the curve puts [Putin] in a very positive light.”

“The critical issue is the relationship of state and big business in a situation where legal enforcement is very weak. How can state authority create a balanced relationship?” asked Desai. It seems that this tension is what lies at the crux of the Yukos affair, but whether or not the Yukos affair will balance or destabilize that relationship has yet to be answered. Dubinin is not optimistic. “They tried to use the legal system to punish those involved, which can’t be a good development for the legal system in Russia,” he said. 

Something that lies at the heart of the debate about the meaning of the Yukos affair is the inability for analysts in developed countries to escape their own situations and supposed “western” ideals. It is somewhat disingenuous to juxtapose Russia’s current situation with mature capitalist economies, and call it legitimate critique. Russia is a country with its own unique history and problems. In addition, this type of criticism, to some extent, requires us to consider developed capitalist systems in an infallible light, which, considering America’s scandal-ridden corporate landscape, appears presumptuous, if not unfair.

It seems the Yukos affair is an event that must be digested in a variety of contexts. We should look at it both from the angle of rectifying past mistakes, and as potentially being just business as usual in Russia. But in the broader context, we should see it as another event in the long and murky history of the conflict between big business and the state in post-Soviet Russia. On all accounts, the straightening of the line between business and government lies at the heart of Russia’s progress--how that line is to be straightened, as Stiglitz’s unconventional views point out, is very much up for debate.