Russia's embarrassment of riches

The arrest of Russian oil tycoon Mikhail Khodorkovsky shattered the image of stability that Russia has enjoyed on Vladimir Putin's watch and unleashed well-deserved outrage over the strong-arm tactics of Russian law enforcement. But the outrage obscures an even more serious problem for Russia: The country is impoverished, its population is shrinking, its infrastructure is crumbling, and its wealth is in the hands of a small group of mostly super-rich insider businessmen who benefited from privatization a decade ago. The fate of that wealth is the third rail of Russian politics, which not a single Russian politician can touch.

Protests against the Khodorovsky arrest spanned the spectrum of Russian politics - from Communist Party leader Gennady Zyuganov to Anatoly Chubais, the man who in the 1990s was in charge of privatizing the nation's industry and mineral resources and now serves as CEO of the electrical monopoly UES. But Mr. Chubais's complaint about the selective prosecution of Khodorkovsky is telling because it includes the admission that in the chaotic atmosphere of the 1990s nobody played by the rules.

This is precisely the point for the Russian public at large and for the country's business elite. The public cannot forgive the privatization, which it views as the looting of the nation's wealth. Therefore, the business elite cannot forget how tenuous its property rights are. The status quo is unacceptable for all, because the public feels that the wrongs of the 1990s should be righted, while the business elite wants its property rights secured.

The Russian Union of Industrialists and Entrepreneurs, the leading organization representing big business interests, has campaigned for a "new social contract" - greater social responsibility on the part of the business community in exchange for official state recognition of the results of privatization. Not a single Russian political party is willing to endorse the oligarchs' deal, even though many business groups are contributing heavily to parties in the run-up to the Dec. 7 Duma election. But how can it be otherwise if even the chief architect of privatization Anatoly Chubais admits that it was crooked?

The oligarchs' "new" deal would legitimize the giveaway of the nation's most prized industrial and natural resources to the few, who exploited their power and privilege without the slightest regard for the effect it would have on the well being of their compatriots. In the eyes of the Russian public, long accustomed to false promises of a better life, amnesty for the ill-gotten gains of privatization would legitimize an injustice of historic proportions.

Despite recent Russian economic growth, male life expectancy still hovers around 60, infant mortality is comparable to that of a third-world nation, quality medical care is available only to the rich, and the elderly survive on $50 per month or less. But according to this year's Fortune Magazine "40 under 40" list, Russia boasts seven of the world's richest men under 40. Mr. Khodorkovsky - currently the richest Russian - is not even on the list because he turned 40 this year. The combined fortune of these seven 30-somethings is nearly $18 billion. All of them are prodigies of the 1990s privatization.

The Russian state is virtually powerless to address the long list of ills, from crumbling infrastructure to the HIV-AIDS epidemic. The federal budget is about $75 billion. When compared with the needs of the impoverished country spread across 11 time zones, this paltry sum relegates the Russian government to irrelevance. That is not an acceptable situation either for the political leadership steeped in the statist tradition or for the Rus-sian public, long accustomed to a strong government with redistributive functions.

Some Russian analysts argue that the wrongs of privatization can be redressed through heavy taxation of windfall profits. Others claim that privatization in extractive industries was meant to transfer into private hands only the equipment, but not the mineral deposits themselves, and that those deposits belong to the state. Others propose a different - concessionary - approach to oil exploration, which would retain state ownership of the oil deposit versus the current method of licensing that effectively transfers ownership of oil deposits to the oil companies.

Clearly, much more is at stake here than the fate of Khodorkovsky or of his giant oil company, Yukos. His arrest has demonstrated how little can be taken for granted in today's Russia and how many fundamental issues remain unsettled.

This is an important conclusion for Russians seeking to define a new deal for the nation. It is an important conclusion for those considering investment opportunities in Russia. It is an important conclusion from the standpoint of global energy security, because Russia pumps more than 8 million barrels of oil daily - roughly the same as Saudi Arabia - into the world market. And it is an equally important conclusion for foreign governments looking for Russia to fully face its responsibilities in the international arena. As long as Russia's internal fundamentals are up for grabs, it will remain preoccupied with its domestic problems.

Eugene Rumer is a senior fellow at the Institute for National Strategic Studies at the National Defense University. The opinions expressed here are strictly his own.

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