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Russia: Foreign Investors Look To Kremlin For Signal On Future Business Climate

  • Jeremy Bransten

Jailed Russian tycoon Mikhail Khodorkovskii's resignation yesterday as chief executive of oil giant Yukos sent shares rising on the Russian stock market. Many foreign investors are now hoping that the government will reverse its freeze of a large portion of Yukos stock, saying the resolution of the case has important implications for the general investment climate in Russia.

Prague, 4 November 2003 (RFE/RL) -- The arrest of Russian oil magnate Mikhail Khodorkovskii on tax fraud and other charges sent a shiver through the business community, both in Russia and abroad. The state prosecutor's freezing of some 40 percent of the shares in his company, Yukos, made the chill even worse. Khodorkovskii's announcement from prison yesterday that he is stepping down -- coupled with words from the Kremlin's new chief of staff indirectly criticizing the Yukos share freeze -- helped boost the company's stock.

But Western business leaders are now eyeing the Russian market with renewed caution, raising questions about the independence of Russia's judiciary and seeking answers on the future stability of their investments.

Russian President Vladimir Putin tried to reassure them today. Speaking in Moscow, in an interview with Italian journalists, Putin said there would be no mass review of recent privatizations.

"I am categorically an opponent of a review of the results of privatization, even if one considers them to be less than ideal, because I am deeply convinced that it would lead to serious negative consequences for the economy and, of course, would have repercussions in society. Therefore, there will be no deprivatization or review of privatization," Putin said.

Analysts say that for the moment, the Yukos case has not destroyed Western investors' bullish sentiment on Russia, but damage has been done and what ultimately happens to the company's frozen shares -- whether they are expropriated by the state or returned to their shareholders -- will be watched carefully as a signal for foreign capital.

Peter Westin, an analyst for Aton Capital Investment Group, a Moscow-based investment bank, says one of the reasons investors were spooked by Khodorkovskii's arrest and the share freeze is that Yukos -- despite its murky beginnings -- was seen as one of the few major Russian companies to match Western accounting standards.

"I think the problem here is that the Kremlin has gone after the company that is seen as the baby of investors. Yukos is the company that has been in the forefront of improved corporate governance, it's the most transparent company and everybody that has exposure to Russia -- more or less everybody -- has Yukos in their portfolio," Westin said.

Khodorkovskii's frequent allegations of corruption in Russia's symbiotic business-government sector and his funding of opposition parties ahead of elections leave few Western observers in doubt that the government's targeting of Yukos was at least partially politically motivated.

Khodorkovskii, they say, broke the agreement Putin reached with the business oligarchs when he assumed power, which essentially boiled down to: make money but stay out of Kremlin politics. If this is true, it raises fundamental questions about the independence of Russia's judiciary, as Nicholas Redman of the London-based Economist Intelligence Unit tells RFE/RL.

"Putin hasn't actually helped himself by saying, on the one hand, that this isn't going to go on any further, but on the other hand, saying that this is the judiciary acting and it's not political and they will have free rein. If the legal system really has free rein to go after who it wants to go after, then it's not credible for a politician to claim that this is just going to be an isolated assault," Redman said.

Paradoxically, says Redman, Western business leaders would almost prefer to find out that the Yukos affair is the result of a personal vendetta instigated by Putin as this might put their mind somewhat at ease over other investments.

"If this is Putin simply teaching a lesson to an over-mighty subject, that's in a way a lot more comforting for Western investors than the idea that there are people below the president who are actually pulling the strings and the president really isn't fully in control," Redman said.

Westin, at Aton Capital, notes that Yukos stock initially plummeted on news of the arrest of another major shareholder, Platon Lebedev, in July. But a month later, the stock price had recovered. Westin expects the pattern this time to be similar, with initial indications -- following yesterday's 13 percent share price rally -- that it may not even take that long.

But Westin also cautions that in the longer term, investors will watch to see what happens to Yukos's frozen shares as well as whether the Ministry of National Resources will go ahead with an investigation of the company's licensing agreements.

"These agreements are of course vital for oil extraction and they are worded in a way, and also according to Russian law, that makes them very complicated -- which means that it's very easy to find violations. And that would be the next negative aspect that could come out of this, and investors will look very carefully at what happens to these licenses," Westin said.

The stakes are large, with companies such as the U.S. ExxonMobil considering major investments in Russia. An anticipated deal by the company to acquire part of Yukos is now on hold as developments unfold.

On the other hand, oil companies, as Redman points out, have a long track record of doing business in less-than-perfect environments and are somewhat used to the risks. Whatever happens in Russia, he says, the country's oil and gas reserves are just too big to ignore.

"The big oil companies are very used to dealing with extremely volatile markets and they don't appear to be put off by them. Given the scale of Russia's reserves and the fact that there is a role for the private sector, which isn't there in a lot of other oil-producing countries in the world, I would guess that probably the oil companies will continue with their commitment," Redman said.

Russia's economic recovery, however, will depend on more than oil investment. Especially for other sectors of Russia's economy, analysts say, foreign partners may need reassurance that property and shareholder rights do not exist at the whim of the government -- or they may take their business elsewhere. As U.S. Treasury Secretary John Snow put it last month -- in remarks about Iraq, but applicable to all countries: "Capital is a coward; it won't go places where it feels threatened."
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