Kremlin's corporate seizure as a war of elites

Behind-the-scenes Kremlin intrigues are changing the face of Russia's ruling elite, as opposing factions parry and thrust to gain power.

In the latest, dramatic escalation in what is being seen as essentially a confrontation between the Kremlin and big business, Russian judicial authorities seized a large chunk of shares in oil giant Yukos yesterday.

The arrest last weekend of Yukos' head - Russia's richest man, the resulting chaos in Russia's markets, and the widely expected resignation of President Vladimir Putin's pro-business chief of staff have also exposed the longstanding tug-of-war that is finally coming to a head as key December and March elections near.

A group of Kremlin hawks loyal to Putin known as siloviki - many of them former KGB and security officials from St. Petersburg - has all but declared victory over its main rival, the influential "family" of superwealthy oligarchs close to former president Boris Yeltsin who engineered Putin's rise to power.

The recent developments have raised the prospect of more conservative rule in Russia that, some observers are warning, could lead to an effort to renationalize industry.

The impounding of shares in Yukos was the largest seizure of private assets since the collapse of the USSR and communism in 1991. Tne news sent shivers through the investment community.

"It's not a renationalization, but it's a changing of property," says Sergei Markov, a political analyst in Moscow with Kremlin ties. "They want to have managers and owners who will be more patriotic."

Until now, Putin has apparently kept the two conflicting Kremlin clans in check by playing one off the other. But the likely departure of Putin's chief of staff, Alexander Voloshin, is being seen as a symbol of the new power shift - and a warning to business. Voloshin - a main Kremlin advocate of big business - is a former Yeltsin aide known as the "Gray Cardinal" for his master-of-intrigue influence. He played a critical role in bringing Putin to power.

Dmitri Orlov, deputy head of Moscow's Center for Political Technologies, predicts that "the authoritarian nature of the current regime will increase ... and expansion of the siloviki will have negative consequences for the whole of civil society and the political future of the country.

"The problem is that, being aggressive as they are, and expanding quickly, this group has no positive program," says Mr. Orlov. "It's clear a change of elites is taking place at the top, but what is their message? Let it be a totalitarian program, but it should be clear. It can't just be power for power's sake."

Critics of the growing power of the siloviki faction, including many in Russia's print media, charge that the informal system of checks and balances that prevailed in the Kremlin until now is crumbling, as the St. Petersburg faction makes its play for more control over Russia's vast natural resources, which in turn means more political power.

"By next autumn the cards will be dealt a bit differently in this country as compared to today," a siloviki source was quoted as telling the newspaper Izvestiya.

Such confidence is setting off alarm bells for some, like analyst Mark Urnov, head of the Expertiza think tank, who told Nezavisimaya Gazeta that the "next step" will be an "all out attack" of the St. Petersburg group to ensure their freedom of movement "and power" to shape a Putin successor in 2008 elections.

"The group that is now trying to get to power is convinced that 'Law is my wish, my fist is the police,'" Mr. Urnov was quoted as saying. "For them business has to stay under tough official controls. Any change of elite [will] make the country pay the highest price."

After four months of uncertainty and prosecutor's inquiries, Mikhail Khodorkovsky, the head of Yukos, Russia's largest oil company, was arrested Saturday. After prosecutors froze shares in the oil giant yesterday, the Russian stock market went into its second nosedive in a week. The frozen shares represent 44 percent of the company's stock, Yukos financial officer Bruce Misamore told Dow Jones Newswires. The benchmark RTS Russian stock index closed down 8 percent after the announcement of the share freeze, and Yukos shares lost 14 percent.

As markets and investor confidence sagged, talks were put on hold with US oil majors ChevronTexaco and ExxonMobil, which were looking to sink billions into the recently merged YukosSibneft.

"This one clearly snuffs out any hope that Chevron or Exxon had entertained of cutting a deal with current management," says Peter Kemp, editor Petroleum Intelligence Weekly in London.

With a personal fortune now estimated by Forbes magazine at $8 billion, Khodorkovsky is one of a handful of Russians who became fabulously rich and influential in the Yeltsin era, during the rigged privatization sell-offs of Soviet assets in the 1990s. Despite an unwritten deal with Putin calling for oligarchs to stay out of politics, Mr. Khodorkovsky helped fund two opposition parties, and has hinted at presidential ambitions himself.

Prosecutors targeted another top shareholder in Yukos Wednesday. A statement from the general prosecutor's office said it wanted the election to the upper chamber of parliament, just days ago, of Vasily Shakhnovsky, who owns 4.5 per cent of Yukos, to be annulled and so end his immunity from charges of tax evasion.

To help calm the furor here among business leaders, and quell deepening concern over an imminent review of past privatizations, Putin promised Monday that there would be no chance of renationalization. Still, Russian markets dropped on Monday, rallied on Tuesday, and fell again on Wednesday.

Heightening uncertainty here, Interior Minister Boris Gryzlov warned that "all the natural resources that Russia possesses belong not to some corporation...but to the people of Russia."

Even if a corporation "took it upon itself to manage the resources," Mr. Gryzlov added Wednesday, "it does not mean that they can privatize our profits."

Getting a piece of those specific profits, or at least imposing far greater taxes on them - thereby redistributing Russia's wealth - appears to be one aim of the ascendant siloviki faction.

"I am not afraid of these people [just] because they are not democrats," says analyst Markov. "My concern is that, while they may have good ideas, they are not professional enough to do it, [which] can move them to use more authoritarian methods." Markov says that because Russian government institutions are "too weak" to extract appropriate tax revenues from big business, Western and Russian investors in major energy and other natural resources firms face a "real risk" that Russia will "finally" resort to renationalization.

Such an endgame plays to the popular view. Poll results of 1,500 Russians published in July, by the Russian Public Opinion and Market Research, found that 77 percent thought privatization results needed "revision." Fully 88 percent said authorities should prosecute the oligarchs.

President Putin has defended the arrest of Khodorkovsky on tax and fraud charges and characterized it as an effort to enforce the law equally on the rich. Gleb Pavlovsky, a former Kremlin insider credited with helping Putin gain power, has been sharply critical of the president's handling of the oil chief's arrest. But yesterday, he had softened his tone. "There is a political crisis, but it has a positive nature," he says. "The fact is, that old political form of bureaucratic liberalism [the Yeltsin-era 'family'] has exhausted itself," says Mr. Pavlovsky, who now heads the Foundation of Effective Politics. "[The crisis] can be solved within the framework of president Putin's program to build a democratic society."

Few yet cast a solution in those terms, though some analysts argue that the arrest was a necessary step to fight high-level corruption, and narrow Russia's vast wealth gap.

"It's clear that all these corrections are inevitable, and if Mr. Putin survives, he should undertake them," says Oleg Bogomolov, at the Institute of International Economics and Political Studies of the Russian Academy of Sciences. "There are some honest people among [the siloviki]," Mr. Bogomolov says, though he admits that "corrections" especially favor this Kremlin faction. "What is of great concern...is this gap between rich and poor, and we should secure a more just distribution of wealth."

The fate of Voloshin, widely seen as head of a pro-business faction and architect of Russia's so-called "managed democracy," is likely to determine the shape of future Kremlin politics. "[They] used authoritarian methods, but in a very calm, moderate way," says the Kremlin-connected Markov. "If this machine [of Voloshin's] will be dismantled, I don't know what the political mechanism of Putin will be anymore."

• Material from wire services was used in this report.