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Security Watch: November 5, 2003


5 November 2003, Volume 4, Number 44
YUKOS CASE
JAILED OLIGARCH STEPS DOWN AS YUKOS HEAD... Mikhail Khodorkovskii, the billionaire CEO of oil giant Yukos who has been imprisoned since 25 October on suspicion of fraud and tax evasion, announced on 3 November that he has resigned from his Yukos post and is leaving the company, Russian and international media reported. In a statement published on the Yukos website (http://www.yukos.ru), Khodorkovskii said he is quitting in order to save the company from "the direct attacks against me and my partners." He added that he hopes Yukos's new management will manage to realize his goal of integrating the merged YukosSibneft into the global economy. He said that he plans to concentrate on his philanthropic activities as chairman of the board of Open Russia, a Yukos-created NGO with the stated aims of developing civil society and promoting democratic values among young Russians. Although Khodorkovskii's announcement appeared less than an hour before the Russian Stock Exchange closed, the market reacted immediately and favorably to the news, with Yukos shares rising by 4 percent and the RTS index by 6 percent before the closing bell, Ekho Moskvy and other Russian media reported on 4 November.

...AS PUTIN SAYS PROSECUTORS HANDLING YUKOS CASE PROPERLY. Speaking to Italian journalists on the day before his 4 November departure for a Russia-EU summit in Rome, President Vladimir Putin said that the Prosecutor-General's Office is acting properly in its investigation of oil giant Yukos and is not abusing its power, ITAR-TASS and RIA-Novosti reported on 4 November. He said prosecutors are only responding to suspicions of crimes and that one of the defendants in the Yukos case has admitted that he owes tax arrears. "The law should be observed by everyone all the time, not only when you are caught," Putin said. Just as Foreign Minister Igor Ivanov did earlier this week (see "RFE/RL Newsline," 3 November 2003), Putin cited the recent investigations into major U.S. corporations, including energy trader Enron. He said that it would be improper of him to express a specific opinion on the Yukos case because doing so could influence the courts. "Only a court can determine whether the people being investigated in the Yukos case are guilty or not," Putin said.

PUTIN'S NEW CHIEF OF STAFF SPEAKS OUT ON YUKOS... In his first interview since being appointed presidential administration head on 30 October, Dmitrii Medvedev said on 2 November that he has doubts about the Prosecutor-General's Office's freezing of $12 billion in Yukos shares (see "RFE/RL Newsline," 31 October 2003), RTR reported. "The legal effectiveness of such measures is not obvious," Medvedev said. "Our colleagues should...consider the economic consequences of the measures they take. This is a dangerous thing." Medvedev, who is a lawyer, warned against the "administrative zeal" of law-enforcement organs, noting that President Putin has emphasized the importance of strict compliance with the law. Medvedev said that all citizens should be held accountable before the law, but that the laws should not be applied selectively. He noted that there are cases currently pending not only against prominent executives, but against allegedly corrupt law-enforcement officers as well.

...AS DOES PRIME MINISTER. Prime Minister Mikhail Kasyanov said on 31 October that he would refrain from commenting on the Yukos case, but added that he is "deeply concerned" by the freezing of the assets of a publicly traded company, RTR reported. Such moves are "a new phenomenon," and it is impossible to predict their consequences, Kasyanov said. On 27 October, President Putin asked government officials to refrain from commenting on the Yukos investigation (see "RFE/RL Newsline," 27 October 2003).

MEDIA PONDERS THE EFFECTS OF THE MOVE... Russian media on 4 November was full of speculation that following Khodorkovskii's resignation, Yukos will invite foreign citizens to join its management team in order to make it more difficult for prosecutors to continue investigating the company. "Kommersant-Daily" wrote on 4 November that Khodorkovskii made his decision after receiving information that the Kremlin intends to install external management at Yukos. "Izvestiya" on 4 November noted that although Khodorkovskii stepped down as the company's CEO, he retains his Yukos shares and other levers of influence and remains the company's principal owner. The paper reasoned that the decision will not affect the status of the investigation because the Kremlin cannot risk the perception that the Yukos investigation is not -- as President Putin said -- a matter of law but a case of political persecution.

...AND HEAD OF UPPER CHAMBER WEIGHS IN. Federation Council Chairman Sergei Mironov, who is in the United States, told strana.ru on 3 November that Khodorkovskii's move is "a tactical maneuver, the goal of which is not completely clear." "In Khodorkovskii's case, there are [accusations of] concrete violations of the Criminal Code that should be brought by prosecutors in an open trial," Mironov said. "Either the prosecution will prove them or it will bear the responsibility [for not doing so]."

EXPERT SEES THE END OF A POLITICAL ERA... Strategic Studies Center Director Andrei Piontkovskii said that the Yukos investigation and Voloshin's resignation will end the long internal struggle within the executive branch and move Russia into a new political era, Ekho Moskvy reported on 29 October. He noted that President Putin was brought to power in 1999 by a combination of the so-called "Family" of the era of President Boris Yeltsin who were seeking to prevent former Prime Minister Yevgenii Primakov and his allies from coming to power, the so-called liberals who viewed Putin as the Russian equivalent of Chile's General Augusto Pinochet -- someone who will use an iron hand to bring about market reforms -- and the "siloviki," who were primarily interested in restoring the former dominant role of the country's security organs. The relative equilibrium among these three groups can be called "Putin's first republic," Piontkovskii said. The breakdown of that equilibrium and the apparent ascendancy of the "siloviki" will usher in a new, "second republic" with its attendant political consequences.

...AS WEBSITE ENUMERATES THE CONSEQUENCES. The exit of chief of staff Voloshin and the appointment of a St. Petersburg team to head President Putin's administration will have several important political consequences, strana.ru predicted on 31 October. First, it will consolidate the formerly divided presidential administration into a single team of Putin loyalists. This could make the administration more open than it was under Voloshin. Second, it could herald a purge of people linked with Voloshin from throughout the executive branch. Third, it could signal the decline of political parties linked with the policies of former President Yeltsin, including the Union of Rightist Forces (SPS) and Yabloko. This could deepen the current crisis of reformist ideology and lead to the exodus from the country of capital and of oligarchs who have been backing these parties. Fourth, Voloshin's departure could signal the transition to a more ambitious political course by the Kremlin, one characterized by increased administrative control and a further strengthening of the role of the "siloviki," the website concluded.

REPUTED IDEOLOGUE OF ANTI-OLIGARCH CAMPAIGN SAYS YUKOS CASE MARKS END OF YELTSIN ERA... National Strategy Council Director Stanislav Belkovskii told RosBalt on 28 October that he believes that by siding with law enforcement officials in the Yukos dispute, President Putin has brought the era of former President Boris Yeltsin to an end. The National Strategy Council in May published a report warning of a possible "oligarchic coup" in Russia (see "RFE/RL Newsline," 27 May 2003) that many analysts viewed as the opening volley in a new anti-oligarch campaign. In July, however, Belkovskii denied any connection between his report and the Yukos cases (see "RFE/RL Newsline," 30 July 2003). Belkovskii called upon Putin to follow this new policy to the end and to rid his administration of holdovers from the Yeltsin era.

...AND SAYS THAT WEST, RUSSIA WILL BACK PUTIN IN DISPUTE. Commenting on Yukos head Mikhail Khodorkovskii's 25 October arrest in the same RosBalt interview on 28 October, Belkovskii said Khodorkovskii made a grave miscalculation if he believed that the West would support him against President Putin. The West, he said, values stability in Russia above all else, and therefore will support Putin. He added that Khodorkovskii cannot count on much support within Russia either, since oligarchic capital has not legitimized itself at home. "People do not understand where all this wealth comes from, how the oligarchs got it, and why it should have such a major impact on Russian politics," he said.

LEADING DEPUTIES CRITICIZE OLIGARCHIC SYSTEM... Appearing together on ORT on 1 November, Motherland-National Patriotic Union head and State Duma Deputy Sergei Glazev and Yabloko leader and Duma Deputy Grigorii Yavlinskii agreed that the Yukos cases stem from Russia's oligarchic system that emerged in the 1990s and the perverse relations that system entails between business and the state. Glazev said that those who called upon President Putin to intervene following the 25 October arrest of Yukos head Khodorkovskii were, in fact, calling for the continuation of a system characterized by corruption and a cynical attitude toward the rule of law. He said that now only a court can establish Khodorkovskii's guilt or innocence and that, in general, major privatization deals should be subjected to the scrutiny of the courts. Otherwise, he added, the legitimacy of property rights will always remain in doubt, and there could be endless arbitration. Yavlinskii said that he opposes Khodorkovskii's arrest because he is not accused of any violent crimes and therefore should be allowed to remain at liberty through the investigation phase. He added that the problem of the botched 1990s privatizations cannot be resolved through repression, but only through radical systemic reforms.

...WHILE YABLOKO OFFERS ITS FIX. During the same 1 November ORT program, Yavlinskii said that he does not agree with Glazev that the courts are able to resolve privatization disputes because the courts are also part of the entire system of corrupt crony capitalism. This system, Yavlinskii said, is characterized by a lack of civilian control over the law enforcement organs and a business community that has effectively melded into the state bureaucracy, the Duma, and the mass media. The first step toward breaking this system is adopting a package of legislation that Yabloko intends to introduce in the Duma soon, Yavlinskii said. This package includes a law that would declare all privatization deals valid unless they involved violent crimes such as murder. Privatized companies would also be required to pay all tax arrears, after which the matter of privatization would be closed forever. The second part of the Yabloko package includes legislation on removing "aggressive" big business from the country's political life, including boosting transparency in lobbying; anticorruption measures to insulate the presidential administration, the government, and the legislature from bribery; and new laws on political parties and public television. Finally, the package will also contain a strict new antimonopoly law designed to prevent "hungry" new oligarchs from seeking to take away property from the current oligarchs.

POLITICAL ECONOMY
GOVERNMENT INSIDER SAYS YUKOS AFFAIR WILL HARM ECONOMY... Mikhail Delyagin, director of the Institute of Globalization and, until recently, economic adviser to Prime Minister Mikhail Kasyanov, told reporters in Moscow on 28 October that he believes Western investors will steer clear of the Russian economy as a result of the Yukos investigations, RosBalt reported. "The reaction of international and Russian business to the arrest of Mikhail Khodorkovskii indicates that they view the efforts against Yukos not as a step to bring order but as a shift away from 'managed democracy' -- which is acceptable for business circles -- toward uncontrolled lawlessness," Delyagin said. The new climate could lead to the cancellation of some major economic projects, including the proposed Angarsk-Datsin oil pipeline, which has been heavily lobbied by Yukos. He added, though, that the Russian business community will not attempt to exert pressure on the Putin administration, as the Kremlin has already shown what can happen to those who dare to do so. "The state can no longer curtail the appetite of the state security bureaucracy, which, according to the Prosecutor-General's Office's own statistics, has opened 3,000 privatization-related cases this year," Delyagin said. "During his 2000 presidential campaign, Putin promised a 'dictatorship of law,' but now he seems to be demonstrating something that looks more like a dictatorship of mediocrity."

...ANTI-OLIGARCH CAMPAIGNER PREDICTS YUKOS'S FUTURE. In the same RosBalt interview, Belkovskii said that the arrests of some senior Yukos managers will not have a major impact on the company's capitalization over the long term. He commented that it is not the actions of the authorities that could harm Yukos, but rather the public-relations campaign launched by Khodorkovskii's supporters. Belkovskii also speculated that President Putin would like to delay as long as possible the sale of a Yukos stake to a Western company, although he said Putin would eventually approve such a deal, including possibly the sale abroad of a majority stake in the company. Yukos has reportedly been in talks recently with U.S. oil majors ExxonMobil and ChevronTexaco. Belkovskii said the question of which of these companies could get the stake remains open, but the Kremlin believes ChevronTexaco has closer ties with the current Republican U.S. administration, while ExxonMobil is more closely associated with the Democratic Party, and a final decision will be based on this understanding. He concluded that there is no danger that Yukos will be nationalized or broken up.

PROSECUTORS FREEZE YUKOS SHARES... The Prosecutor-General's Office on 30 October announced it has frozen a 44 percent block of Yukos shares, Reuters reported. Prosecutors said they took the step in order to prevent Yukos head Mikhail Khodorkovskii, who was arrested on 25 October on suspicion of embezzlement and tax evasion, from selling his assets. Yukos lawyer Andrei Tarasov said the court order to freeze the stake could be followed by an order for its confiscation, according to RIA-Novosti. However, Prosecutor-General's Office spokeswoman Nataliya Vishnyakova said the shares "have only been sequestered. They have not been confiscated," according to ITAR-TASS. "They remain in the accounts of the Trast Bank," she continued, "and only the shares of those people against whom criminal proceedings have been launched were seized."

...AND MARKETS REACT. The RTS stock-market index tumbled 8.14 percent on 30 October in reaction to news that prosecutors had frozen a 44 percent stake in oil giant Yukos, newsru.com and other Russian media reported. Yukos shares fell by 18 percent. Renaissance Capital Chairman Aleksandr Shokhin, who held several key economics posts under President Yeltsin, told gazeta.ru on 30 October that the market's condition is approaching "collapse." However, former Finance Minister Fedorov, who served as Russia's IMF representative in 1991-93, said there are no conditions in Russia today that could lead to a financial catastrophe or default comparable to what happened in August 1998. By the middle of the trading day on 31 October, the stock market seemed to have absorbed the shock and stabilized. The prices of most blue-chip stocks, including Yukos, rose by 4-7 percent, RTR reported.

PRESIDENT TRIES TO CALM JITTERY INVESTORS. President Putin on 30 October met behind closed doors in the Kremlin with a group of leading Russian and foreign investment bankers just hours after the Prosecutor-General's Office announced the freezing of a 44 percent stake in oil giant Yukos, newsru.com and other Russian media reported. Putin said that his administration is paying special attention to attracting foreign investment by guaranteeing investors' rights. He stressed that Russian law protects minority shareholders through the arbitration-court system. He said the country continues to make the transition to international-standard accounting and that progress is being made in the areas of corporate transparency and the accountability of financial-market players. Renaissance Capital President Igor Sagiryan said the meeting with Putin clarified the situation with regard to Yukos. He added that Putin promised to consider reducing the profit tax on securities investments. Representatives of Goldman Sachs, Morgan Stanley, Citigroup, Templeton Asset Management, Deutsche Bank, and UBS, as well as representatives of leading Russian financial groups, attended the meeting.

PROSECUTORS RELEASE SMALL YUKOS BLOCK. In an apparent attempt to reduce the tension around the Yukos matter, the Prosecutor-General's Office on 31 October announced that it has released a 4.5 percent block of Yukos shares that had earlier been frozen, Russian and Western media reported. A spokesperson said it had been determined that there are no criminal charges pending against the owner of those shares. The spokesman also noted that although the owners of the shares that remain frozen cannot sell or transfer them, they retain voting and dividend rights.

NEW YUKOS MANAGEMENT VOWS TO MAINTAIN COURSE... Embattled oil giant Yukos announced in Moscow on 4 November that U.S. national Simon Kukes will take over as chief executive to replace jailed oligarch Mikhail Khodorkovskii, "Izvestiya" and other Russian media reported. The announcement came as the company raised the curtain on a new management team in an effort to distance itself from criminal investigations of shareholders, including Khodorkovskii, and related obstacles that have arisen in recent days and led to a plunge in Yukos's share price. As a Russian-raised U.S. citizen, Kukes is less vulnerable to Russian prosecutors, the "Financial Times" noted on 3 November. A trained petrochemical engineer, Kukes led the Tyumen Oil Company through its merger with British Petroleum, the paper added. Kukes is one of three Americans named to the Yukos board on 4 November. Kukes pledged to "keep everything the way it is. We will continue merging with Sibneft, and we will keep our obligations to shareholders," according to the "Financial Times." "Izvestiya" reported on 4 November that Khodorkovskii and his associates continue to control a majority stake in the company and determine its strategy.

...AS YUKOS SHAREHOLDER ACQUIRES ISRAELI PASSPORT. Leonid Nevzlin, until earlier this year the second person in the Yukos hierarchy and who is still a major Yukos shareholder, was granted Israeli citizenship on 3 November, according to newsru.com. He retains his Russian citizenship and is currently in Israel.

FOREIGN POLICY
FOREIGN MINISTER LASHES OUT AT U.S. 'DOUBLE STANDARD.' Igor Ivanov on 1 November reacted angrily to a 2 November statement by U.S. State Department spokesman Richard Boucher in which he said the Yukos situation "raised serious questions about the rule of law in Russia, and we've noted that it sparks concerns among domestic and international investors about respect for ownership rights in Russia," RTR reported. Boucher's statement was posted on the State Department's website (http://www.state.gov). Ivanov said Boucher's remarks are an example of interference in the functioning of the legal system of a foreign country and another manifestation of U.S. double standards. In recent years in the United States, there have been a number of high-profile bankruptcies and some company CEOs have been arrested, but the State Department did not express any concern over these cases, Ivanov said. "Washington likes to teach others," he said

PUTIN ARRIVES FOR THREE-DAY ITALIAN VISIT. President Putin arrived in Rome on 4 November and met the same evening for unofficial talks with Italian Prime Minister Silvio Berlusconi, whose country currently holds the rotating EU Presidency, Russian media reported. Putin aide Sergei Prikhodko called the visit "the key event in the Russian-Italian relationship this year," according to ITAR-TASS. Prikhodko described Italy as a country that "has a firm status among Russia's main political and economic partners." Putin is in Italy for a two-day visit that includes a high-profile Russia-EU summit, but he is also expected to meet on several occasions with Berlusconi and Italian President Carlo Ciampi and will have an audience with Pope John Paul II. Putin told journalists before departing for Italy that he believes "the unification of the Christian world" should be promoted, including closer relations between the Russian Orthodox Church and the Vatican. Putin said he views greater convergence of the "Christian world" as another aspect of Russia's integration into Europe and the international community. The Russian Orthodox Church has objected to Putin's support of a visit by the pontiff (see "RFE/RL Newsline," 20 May 2003).

SHARON IN MOSCOW TO DISCUSS MIDDLE-EAST PEACE PLAN... President Putin on 3 November met in the Kremlin with Israeli Prime Minister Ariel Sharon, who is in Moscow for three days of talks on bilateral relations and international issues, Russian and Western media reported. Sharon is expected to discuss Russia's call for the UN to adopt the so-called road-map Middle East peace plan as an official document in order to break the current stalemate in the region. Israel, backed by the United States, has said it considers such a move premature until the Palestinian leadership changes. Sharon is expected to ask Russian officials to reconsider their support for Palestinian President Authority President Yasser Arafat, whom Israel considers an obstacle to a settlement.

...AND OTHER MIDDLE-EAST ISSUES. Sharon is also expected to discuss Moscow's continued assistance to Iran's nuclear-power program and Russian-Syrian military cooperation, gazeta.ru reported on 3 November. Sharon will meet in Moscow on 4-5 November with Prime Minister Mikhail Kasyanov, Foreign Minister Ivanov, Defense Minister Sergei Ivanov, and other senior officials. At a joint press conference with Sharon on 3 November, Putin said Russia cares about Russian Jews who have emigrated to Israel, and he discussed plans to open Holocaust museums in Moscow and St. Petersburg. In response, Sharon called Putin "a real friend of Israel" and invited him to visit after, as Sharon said, Putin is "re-elected to a second term as president."

RUSSIAN, CZECH PRESIDENTS DISCUSS BILATERAL TIES. President Putin on 1 November met near Moscow with Czech President Vaclav Klaus for talks on bilateral relations, Russian media reported. Putin said that Russia is making progress in improving relations with the European Union and with many Central European countries, but added that Russia-Czech relations have lagged behind. Klaus, who speaks fluent Russian, said that he is ready to do everything in his power to correct this situation. He said that he regrets that because of his country's expected entry into the European Union next year it has had to introduce visas for Russian citizens. However, he expressed the hope that as an EU member the Czech Republic will become even more attractive to Russian businesses.

TRENDS AND IDEAS
KREMLIN INSIDER LEAVES PUTIN'S TEAM. Kremlin-connected political consultant and public-opinion analyst Gleb Pavlovskii, who is president of the Fund for Effective Politics, told Ekho Moskvy on 31 October that he has left President Putin's team together with former presidential chief of staff Aleksandr Voloshin. "I left my position as adviser the moment [Voloshin] left," Pavlovskii said. He said that within the Kremlin there has been a shift toward the so-called "siloviki," and this could be dangerous. In 1993, Pavlovskii said, the government was tilted toward intellectuals, with several writers and artists working within the government. This, however, came to an end with the October 1993 confrontation between President Boris Yeltsin and the Supreme Soviet. Now, he said, the administration is tilted toward the "siloviki," and Putin himself is a "silovik."

RUSSIAN POLITICIAN WANTS TO IMMORTALIZE THE BACKSIDE OF LIBERTY. Federation Council Speaker Sergei Mironov told journalists during a visit to the United States that the view of the Statue of Liberty from Battery Park in Manhattan prompted him to think about responsibility as the reverse side of liberty, nns.ru reported on 4 November. He said a Statue of Responsibility should be erected somewhere, perhaps as part of the projected Federal Assembly complex in Moscow. Mironov said he shared the idea with Russian-born artist Ernest Neizvestnyi: "I don't know what it would look like, but I trust Neizvestnyi, whose creative imagination is well known."

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