Tuesday, October 28, 2003

Troubling Developments in Russia

This is bad news, very bad news.

MOSCOW, Oct. 27 — Russia lurched toward a political and economic crisis on Monday as the country's stocks, bonds and currency plummeted after the weekend arrest of Russia's richest man, Mikhail B. Khodorkovsky.

President Vladimir V. Putin, speaking publicly about the arrest for the first time, called for an end to "hysteria and speculations," which reached a new fervor in the two days since masked agents seized Mr. Khodorkovsky, the chairman of Yukos Oil, aboard his corporate jet during a refueling stop in Siberia.

The remarks by Mr. Putin did little to calm fears about his policy or financial jitters during one of the most frenzied days on Russia's stock markets since the financial collapse in 1998. Leading market indexes plunged sharply, dragged down by Yukos, which quickly lost a fifth of its value before recovering slightly.

Mr. Putin has sought to portray the investigation as an isolated criminal matter in the hands of independent prosecutors.

But he faces parliamentary elections in December and a presidential election in March, and Russian newspapers as well as analysts and some prominent politicians depicted the arrest as a politically motivated assault on an outspoken opponent. There were unusually dark warnings of a return of Soviet-like power clutched in Mr. Putin's steely fist.

The pretence on Putin's part that this is some sort of independent judicial investigation is preposterous. Khodorkovsky is almost certainly a crook, but then again, so is pretty much every other public figure in Russian life. To single him out like this sends a clear message to investors: that Russia is a country where the rule of law simply doesn't hold, and in which one's life and property are safe only for as long as the powers that be feel like it. Far from being a mark of "hysteria", the turmoil in Russia's financial markets is perfectly rational, and I'd say that one would have to be a fool not to pull one's assets out of that country with the greatest possible haste. No, what would be irrational would to heed Putin's calls for calm.

UPDATE: The British Times also has something to say about Khodorkovsky's arrest.

FOR President Putin, this is a rare mistake, destructive of Russia’s potential prosperity and, possibly, of his own political future.

It was no surprise that the Russian stock market plunged more than 14 per cent on opening yesterday, after the arrest of Mikhail Khodorkovsky, the head of the oil giant Yukos and Russia’s richest man. That brought a juddering halt to the year’s threefold rise, which has made Russia the darling of the fashionable “emerging markets” branch of finance.

That fall is a sensible — and overdue — response to the questions that hang over Russia, symbolised by the arrest but not caused by it. Has Putin been hijacked by hardliners, his old KGB colleagues, whom he brought into government? Is the climate for investment chillier than it has seemed?

At this point, the answer to both looks like “yes”.

It is not that Khodorkovsky has a lot of fans, in high or low places. In fact, that was part of his problem. Within the Kremlin, he had aligned himself with neither the hawkish “St Petersburg” faction, which includes many former KGB men, nor the more liberal camp created under President Yeltsin.

For ordinary Russians, particularly older and poorer ones, he was dubbed a thief, another oligarch who made his wealth from fast, shady privatisations.

Yet in liberal, commercial, Western-orientated circles, he had come to stand for something different: the hope that the Russian Government was making good on its promises of economic reform and that Russia was now a place where you could invest safely.

Yesterday, liberals, businessmen and investors were appalled. They fear that the arrest shows that the Kremlin is prepared to bend the law to its own advantage.

[............]

Under Russian law, now that charges have been brought, nothing has to happen for 60 days — until a fortnight after the elections. But if this was Putin’s motive, it may prove counter-productive. Before the arrest, the opposition parties were not expected to have much impact; now they might, fuelled by anti-Kremlin outrage.

More seriously, the arrest — and the fall in the market itself — may check the appetite for investment. The rise of the market has been driven both by foreigners and by Russians’ repatriation of capital. The attractions were already looking overblown; the World Bank, in a shrewd analysis last month, said that the economy was vulnerable to a fall in the oil price.

Incited by Kremlin hawks, with their exaggerated fears of the threat posed by Khodorkovsky, Putin may have underestimated the impact on Russia’s image in the West and among investors. It may prove a move that truly shakes the pillars of his presidency.