Oil booms, but investors flee Russia

In what could signal a change of course, Mr. Putin met with business leaders last month to pledge that the seizure of Yukos would be the last episode of its kind. To bolster confidence, he offered to reduce the statute of limitations on prosecuting illicit privatization deals to three years from 10, a move that would effectively legitimize most property acquired during the 1990s. He also promised to rein in Russia's tax collectors, who've been the siloviki's main instrument. "It is well known that businessmen have a lot of well-grounded grievances against the tax authorities," Putin conceded.

But business leaders say there is less to Putin's olive branch than meets the eye, and they want to see more tangible evidence that the Kremlin's free-market wing is winning the war for control of economic policy. "We're in a downward spiral, and even such a signal emanating from the No. 1 man is not enough to restore confidence," says Igor Yurgins, an investment banker and vice president of the Russian Union of Industrialists and Entrepreneurs, the leading business-lobby group. "The harm was done. Also, the hunting dogs of law enforcement and tax collection are out. Once they've tasted blood, it's very hard to get them back on the leash."

The Kremlin's new outreach to private business does not extend to leniency for the top executives of Yukos, who are on trial for fraud, embezzlement, and tax evasion. The company's former security chief, Alexei Pichugin, who was charged with ordering a double contract killing, was handed a 20-year prison sentence on March 30. Prosecutors in the case of Yukos's founder Mikhail Khodorkovsky are demanding he be given the maximum sentence of 10 years hard labor. Monday, he made his final plea of innocence. "They have jailed me so I can't stop them looting Yukos," Mr. Khodorkovsky said in his closing statement. The judge is expected to announce the verdict on April 27.

"The Yukos prosecution is a pedagogical action, aimed at teaching Russian business who's the boss," says Mr. Mukhin. "The authorities know they have to destroy it to the very end, otherwise they'll look weak."

Underlying the looming crisis, critics argue, is the economy's long-term failure to generate a viable middle class - the bulwark of social stability in most developed countries - based on a rising tide of small and medium businesses. According to OPORA, a Russian business association, Russia has about 900,000 small companies - around the same number as a decade ago - which account for 12 percent of GDP. (In the US, small businesses account for about 50 percent of GDP.)

Even Putin, pointing to the gauntlet of bureaucratic abuse and punitive taxation small businesses in Russia must face, remarked late last monththat "anyone who registers a new firm should be awarded a medal for personal courage."

The Kremlin concern, experts say, is that rising poverty, social inequality, and public unrest - perhaps emulating the recent demonstrations of people-power by some of Russia's neighbors - could spark a crisis that the country's squabbling elites would be unable to manage. "After all those orange revolutions on the one hand, and steadily loss of government authority on the other, of course there's real apprehension in the Kremlin," says Yurgins.

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