Sestanovich: ’Putin Is Sending a Message to Sleazy Officials Across Russia That Harassing Business Is Okay.’

Stephen R. Sestanovich, a top Russian specialist, says the Putin government’s arrest of Russia’s wealthiest man, oil “oligarch” Mikhail Khodorkovsky, resulted from a confrontation between the pro-business and former-KGB elements in Putin’s inner circle. Khodorkovsky was arrested by Russian authorities on October 25 on charges of fraud and tax evasion, and the government on October 30 seized 44 percent of the shares of his company.

Sestanovich says the arrest could harm U.S.-Russian relations. Washington was counting on Khodorovsky’s cooperation in various energy-related activities, he says, and “Putin is supposed to be a buddy of [President Bush], but this isn’t the kind of buddy you want to have.”

Sestanovich, the Council’s George F. Kennan Senior Fellow for Russian and Eurasian Studies, served in the Clinton administration as ambassador-at-large and the secretary of state’s special adviser for the newly independent ex-Soviet states. He was interviewed by Bernard Gwertzman, consulting editor for cfr.org, on October 31, 2003.

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Can you explain the significance of the Russian government’s arrest of Mikhail Khodorkovsky, the chief executive of Yukos-Sibneft, Russia’s largest oil company?

It is extremely significant in three respects. First, it’s a sign that the ownership of Russia’s biggest and best-managed company really is up for grabs. Russian officials keep saying that they don’t intend any wholesale re-privatization, and they probably mean it. But it’s no longer possible to rule out that billions of dollars in assets— and maybe the whole company— will end up in government hands. At a minimum it may end up in hands other than Khodorkovsky’s.

His arrest was important in a second way. It suggests we may see a major shift in the balance of power between the two groups that have been the pillars of President Vladimir Putin’s rule during his first term, the so-called oligarchs— the big businessmen who made vast fortunes in the 1990s— and the KGB and police figures who have under Putin become increasingly numerous at top levels of the Russian bureaucracy.

And thirdly, it suggests that Putin’s second term in office may be quite different from the first. He is running for reelection in March, and many Russian analysts have argued that the current struggle will determine who gets what government jobs over the next four years. But maybe something more is at stake. Putin’s first term has been marked by stability. If in his second term he takes up big and controversial questions like whether the oligarchs are entitled to all they have, it’s not necessarily going to be a stable period.

Has there been a faction in the Kremlin that supports the oligarchs?

Their patron has generally been seen as Alexander Voloshin, who resigned on October 30 as chief of staff and head of the presidential administration, a position he had held not only during Putin’s entire tenure as president but also under former President Boris Yeltsin. Voloshin stayed on when Yeltsin stepped down at the end of 1999, and he was generally seen as a symbol of continuity between the two presidencies, as a protector of Yeltsin family interests, and— more importantly— as protector of the oligarchs as well. I might add that when Khodorkovsky was in Washington last July, he said that the KGB types around Putin wanted to use the confrontation with Yukos to force Voloshin out. They seem to have succeeded.

Let’s go back to the 1990s. It is unclear to Americans how these people became so rich. If President Theodore Roosevelt had arrested John D. Rockefeller, for example, would that have been analogous to the arrest of Khodorovsky?

One distinction that people generally make between the Russian oligarchs and the American so-called robber barons is that most oligarchs didn’t actually build anything. They did not create oil companies, or railroads, or steel mills. They merely ripped them off from the state. In the 1990s, large assets were transferred from old Soviet ministries and enterprises to private hands, often for negligible sums. The process actually started in the 1980s under former President Mikhail Gorbachev, when state-owned enterprises were told they had to become profitable and were told they could improve their balance sheets by selling off their assets. A lot of things were sold in corrupt insider deals that featured cut-rate prices, kickbacks, the works.

How did Yukos get so much power?

Like many others, the young Khodorkovsky started making money in just the way I’ve described, and he pursued the formula in successive phases as a banker and then as an oilman. But along the way, he did something different, too. He actually built Yukos into a successful company that increased output, introduced new management and technology, and attracted the admiration and envy of Western companies as well. This was no small achievement. In the 1990s many experts believed Russian oil production was headed permanently downward. No longer. The power and wealth of Russian oilmen— and Khodorkovsky first and foremost among them— has to do not simply with high oil prices, but with the way they’ve turned their companies around.

By arresting him and trying to crack down on his leadership, is Putin’s government running a risk of unhinging the economy?

No, but Putin’s introducing a major new element of uncertainty, even fear. He is taking down Russia’s most successful businessman, the person who exemplifies the ability to make an old industry work at international levels of performance. Yukos will still pump oil and so will other oil companies. But the growth of the Russian economy depends on investment decisions that— whether the money is Russian or Western— are now going to get a second look. Businessmen in other sectors, whether banking or supermarkets, have to ask themselves whether they’re going to own their companies a year or two from now if they get cross-wise with Putin, or with people who work for Putin, or for that matter with local officials who’d like a share of their profits. Putin is sending a message to sleazy officials across Russia that harassing business is okay. He may not mean to send that message, but there’s no doubt that’s how many people will read what is happening.

When you and I talked at the end of September, you pointed out that Putin had told the oligarchs that “you can make money, as long as you don’t meddle in politics.” And that Khodorkovsky was meddling in politics and that’s what was likely to cause him trouble. If he had stayed out of politics, would he have been left alone?

Some people in Putin’s circle are probably shocked to find Khodorkovsky— like other oligarchs, I should note— making big political contributions to opposition parties. Discouraging them from doing so too aggressively is surely part of the Kremlin agenda. But there is another issue here as well. In Russia, occupying a government position has often been seen as an opportunity to acquire personal wealth— a lever for personal taxation, you might say. It happens in other countries too, of course, but the idea that a government official would use his power to extort money or to get wealthy people to pay him off is virtually part of the job description for many Russian bureaucrats. Putin’s entourage in the Kremlin is made up of a lot of people who didn’t get rich buying state assets in the 1990s, and they are playing catch-up. This motive gives a personal dimension to their broader desire to keep oligarchs out of politics!

Are you suggesting that the Yukos people did not share their wealth sufficiently with the people in the Kremlin?

You could say that. It’s happened before. Look at the way Vladimir Gusinsky, another oligarch who headed a company called Media-MOST, was treated. He made enemies in the Kremlin because he helped politicians and parties who opposed Putin and was forced to leave the country. But this wasn’t the end of the story. Russian government officials were also able to use the legal campaign against Gusinsky to acquire some of his property. Today they are richer for their success in cutting one of Putin’s opponents down to size.

So what were the motives in arresting Khodorkovsky? Greed?

As with Gusinsky, there were multiple motives in going after Khodorkovsky. I don’t doubt that some people simply want to get their hands on Yukos assets. Second, there is the aim of delegitimizing oligarchs as a class. Third, there are aims related to the election campaign— blocking the support that oligarchs give to opposition parties and showing that Putin is man of the people taking on so-called malefactors of great wealth. You know, Russian elections almost always involve a spike in factional struggle of this kind.

Is there any doubt that these oligarchs violated laws to get so rich?

You could build a legal case of some sort against virtually any of the leading Russian businessmen. Now, whether they are guilty of the specific things they are charged with is much harder to say, but a lot of Russians may not care. The logic is, they’ve got to be guilty of something.

Incidentally, Yukos spokesmen have, for some months now, been saying the prosecutors are clearly having trouble coming up with plausible charges. That’s why it’s taking so long, and why there are so many efforts to intimidate Khodorkovsky, his associates, and even his family. The investigator’s visit to the school that Khodorkovsky’s daughter attends was read that way by many people. It had a crude Soviet menace to it: “We can put our hands on your kids any time we want.”

What impact is this going to have with Putin’s relations with the Bush administration?

It has to make the administration uneasy, because they have staked a lot on both Putin and Khodorkosvky. Putin is supposed to be a buddy of the president, but this isn’t the kind of buddy you want to have. As for Khodorkovsky, he has been a hero and essential figure in one of the main areas of Russian-American cooperation in the past two years— and that’s the effort to make the two countries so-called strategic energy partners. Khodorkovsky and some of his fellow oligarchs proposed a privately owned and managed pipeline to increase Russian oil exports to the United States, and the administration has supported the effort enthusiastically. It’s a definite downer to have one of the leading figures of this project in jail.

And American companies were looking to buy into Yukos in a big way, right?

Yes, western oil companies have expressed a strong interest in purchasing big positions in Russian oil companies in general. BP led the way early this year, acquiring a 50 percent share in another Russian oil company. Recently Exxon-Mobil and Chevron-Texaco have talked about acquiring a stake in Yukos. It is hard to imagine discussions of that sort going forward now. No American oil executive wants to have to explain that the company’s stock is down because he sank too much money in a partnership with some Russian oilman that Putin slapped in jail.