Trouble brews between the Kremlin and the oligarchs

Was it a just a painful personal warning, intended to dissuade Russia's richest man from pursuing his political ambitions? Or was it the opening shot in a Kremlin power struggle that could reshape the country's political landscape as it heads into election season?

Conflicting theories abound as to why Russian prosecutors pounced last week on Yukos, Russia's most profitable oil firm. Two of the company's chief executives were arrested and its CEO, multibillionaire Mikhail Khodorkovsky, was summoned for questioning about a decade-old privatization scandal.

Many experts agree that, whatever triggered it, the sudden storm ruptures a three-year-old peace pact between the Kremlin and the baker's dozen of super-wealthy oligarchs who control an estimated 70 percent of Russia's economic output.

"These prosecutions are a typical showcase, using prosecutors to carry out political tasks," says Sergei Kolmakov, vice-president of the independent Foundation for the Development of Parliamentarism in Moscow. "It's a pity, because three years of stabilization in this country have been shattered with a single blow."

A week ago, police arrested Platon Lebedev, a co-owner of Russia's $30 billion Yukos empire, and charged him with defrauding the state of $283 million in the 1994 privatization of Apatit, a large fertilizer producer.

The next day Yukos's security chief, Alexei Pichugin, was picked up and charged as an accomplice in a five-year-old unsolved murder case.

But prosecutors' real quarry appeared to be Yukos's ambitious and energetic chief, Mr. Khodorkovsky, who was grilled for two hours Friday about the Apatit affair.

Khodorkovsky's own explanation merely fanned the flames of speculation. "What we are seeing here is the beginning of a power struggle between various factions surrounding Vladimir Vladimirovich [Putin]," he told the independent Ekho Moskvy radio station. One of those jockeying factions, which he declined to identify, was trying to blackmail him into providing financial support by arresting his chief lieutenants, Khodorkovsky said.

"It's obvious to me, though I'm no professional political scientist, that Putin will get a second term," Khodorkovsky said. "The question is, who is going to form the second echelon of his team." He added: "We are not the subjects in this battle. We are the objects; here's a chair, here's a table, here's Yukos."

Stability is widely regarded as the key achievement by President Putin, who came to power in 2000 pledging to install a "dictatorship of law" in place of the economic anarchy, Kremlin cronyism and ubiquitous official corruption that reigned in the wild 1990s. In the relatively calm and predictable business environment supervised by Mr. Putin, Russia has seen about 5 percent annual economic growth and a markedly improved image among international investors.

Putin's message to Russia's oligarchs was stark: If they halted their trademark political meddling, authorities would refrain from scrutinizing the murky origins of their business empires.

"Putin made himself very clear," says Liliya Shevtsova, a senior expert with the Carnegie Center in Moscow. "The oligarchs may play their economic role, and even dabble in local politics if they want, but they must not get involved in the Kremlin game. If they break this rule, prosecutors will start to remember things that happened in the last decade."

Putin's first year was marked by tough clashes between the Kremlin and two oligarchs who refused to play by the new rules. Media baron Vladimir Gusinsky and oil, auto, and airline magnate Boris Berezovsky found themselves charged with criminal offenses dating back to the '90s and were gradually stripped of their property holdings and hounded into exile. Mr. Berezovsky, currently living in England but still very vocal on Russian politics, is fighting a Kremlin extradition warrant. In contrast to Berezovksy, Mr. Gusinsky keeps a low profile.

The first hint that trouble might be now brewing beneath the apparently placid surface of Kremlin-tycoon relations came last month when 23 political experts, calling themselves the Center for National Strategy (CNS), warned of a "creeping oligarchic coup." The experts alleged that a cabal of business kingpins was plotting to take control of parliament and rewrite Russia's Constitution to drastically curb presidential powers. Khodorkovsky was singled out as ringleader, accused of bankrolling both liberal and communist parties and scheming to become prime minister.

"I think that (CNS) paper was designed to present Yukos as a political threat," says Vyacheslav Nikonov, head of the independent Politika think tank, adding that many Kremlin or oligarchic factions, hoping to stir the pot, might have funded it. "Myths can take on a life of their own and become more powerful than reality."

The rumors of Khodorkovsky's political activism are not entirely mistaken, say experts. He is believed to have supported the Communist Party. Two Yukos executives are expected to be running for the Duma, or lower house of parliament, as Communist candidates, in December elections, which precede the presidential vote in March. The businessman has acknowledged funding the liberal Yabloko party.

"Khodorkovsky is the only tycoon who's helping Yabloko," says Ms. Shevtsova. "He's also aided independent media and given money to human rights groups. It's very depressing: he's the first [of the oligarchs] to start behaving in a different way, and he gets slapped down for it."

Just 40 years old, and named by Forbes magazine as Russia's richest man, with an estimated worth of $8 billion, Khodorkovsky acquired control of Yukos in a dubious 1995 privatization, paying just a fraction of its real worth. But unlike many of his fellow oligarchs, some experts say, he has tried to straighten out his firm's business practices. "Yukos is not only one of the largest and most prosperous Russian companies, it is also one of the most progressive in terms of transparency and investment plans," says Mr. Kolmakov. Khodorkovsky recently agreed to merge Yukos with another Russian oil major, Sibneft, owned by tycoon Roman Abramovich - a $45 billion deal that will create the world's fourth largest petroleum giant.

Most experts believe Khodorkovsky will heed the warning he's been handed, and stay out of politics. But some fear that harm has already been done to Russia's fragile economic stability.

"The signal this [prosecution of Yukos chiefs] sends will have a dire impact on all investors in this country," says Kolmakov. "If a big company like Yukos can get hit because of something that wasn't quite right in 1994, then no small or medium business is safe."