Competitive Intelligence

The Wild, Wild East: Russia’s Richest Man Arrested for Alleged Tax Evasion & Other Misdeeds

Arguably the leading figurehead of Russia’s recently stabilizing business community, oil tycoon Mikhail Khodorkovsky, was hauled into custody over the weekend, leading to a virtual crash in stock market investments and equity holdings there on Monday. Here’s an excerpt from the Washington Post article:

As investors rushed to sell Russian holdings, financial regulators tried to stem the tide by suspending trading, and President Vladimir Putin disavowed any plan for a broad revision of the 1990s privatization of state assets. But he defended Khodorkovsky's arrest and said there would be "no bargaining" with the imprisoned billionaire. "I proceed from the assumption that the court had good reasons to take this decision," Putin said at a televised cabinet meeting at midday during the worst of the sell-off. He depicted the Kremlin as removed from the arrest, a view that is widely disputed among Russians. Putin's reassurance that a more expansive campaign against business is not planned appeared to mollify some investors. The benchmark RTS index fell 14 percent by late afternoon before partially recovering to close down 10 percent.

Khodorkovsky, head of the newly merged YukosSibneft , now the world's fourth-largest private oil producer, was arrested on Saturday in Siberia by masked commandos who stormed his private plane. He was charged with tax evasion, fraud and embezzlement and sent to the overcrowded Matrosskaya Tishina prison in Moscow until Dec. 30. His spokesman has dismissed the charges as unfounded and politically motivated.

Khodorkovsky, 40, whose estimated $8 billion fortune makes him Russia's richest man, was transferred Monday to a more comfortable cell with a television and refrigerator in a detention center where the hard-liners who tried to overthrow the Soviet Union's last leader, Mikhail Gorbachev, in 1991 were kept. But Khodorkovsky's Russian attorney was not allowed to see him.

"This is a case that's about the trampling of the constitutional and procedural rights in Moscow throughout the course of the investigation against Mr. Khodorkovsky," Sanford Saunders, a U.S. attorney for Khodorkovsky, said by telephone after holding a news conference in Washington to denounce the arrest. "This appears to be politically motivated and a fight for the future of Russia."

Nonetheless, the case -- seen by many political and corporate figures as a Kremlin campaign to destroy a rival power who has contributed funds to opposition parties -- threatens to sideswipe Russia's racing economy, just as it has finally recovered from the 1998 crash. Capital flight has resumed in the months since the Yukos investigations became public this summer, and some analysts say they believe the arrest has sabotaged a potential multibillion-dollar partnership between YukosSibneft and the U.S. oil company ExxonMobil.

"Khodorkovsky's arrest has become a sign, a watershed which may have serious impact on the business climate in Russia," said Yevgeny Yasin, a former economics minister who now heads Moscow's Higher School of Economics. "Putin says we mustn't generalize, we mustn't be in hysterics, that nothing threatens big business. I would agree with him if I didn't see that the authorities are breaking the law themselves."

Brokers said Russia is entering a period of "market unease," as one put it, that could last through the December parliamentary elections and Putin's widely predicted reelection next March, upsetting the political stability that Putin had fostered.

"I'm having a hard time thinking of a good outcome," said Charles Ryan, chairman of United Financial Group, a Moscow brokerage.

"Forget the oil price," he said, referring to high world prices that have buoyed Russia's economy by increasing revenue from oil sales abroad. "The largest contributor to . . . growth in recent years has been stability and the confidence that has led to investment. So by trying to bring these guys to book, he could undermine the very stability that has been the underpinning of his success."

Other brokers put a more optimistic face on it, recalling that the market recovered strongly after initially dropping when Khodorkovsky's partner, Platon Lebedev, was arrested in July.

Christopher Weafer, chief strategist at Alfa Bank, a large Russian institution, said Putin's remarks Monday helped reassure jittery investors. "People were waiting for a very clear statement from Putin that this is not going to extend to other companies, that this is not the start of a campaign against oligarch-type companies. And they got that." Khodorkovsky and other top business leaders are known as oligarchs.

The oil sector took the biggest hit in the markets Monday, particularly Yukos and Sibneft, which still trade separately. Yukos fell 19 percent after markets opened, prompting the RTS to suspend trading of the company's shares for an hour. The MICEX suspended trading of all stocks for an hour after an early plunge. Yukos finished the day down 15 percent, and shares of Sibneft were 20 percent lower, wiping out a cumulative $8 billion of market value.

While Khodorkovsky waited in prison, another partner, Vasily Shakhnovsky, who was charged this month with tax evasion, sought legal refuge Monday by joining the Federation Council, the upper house of parliament. The appointment could give him some immunity from prosecution if confirmed. Shakhnovsky won the surprise appointment from legislators in the northern region of Evenkia, where the governor is a former Yukos vice president.

"It isn't absolute immunity, but it should give him political weight," said Nikolai Petrov, a political analyst at the Carnegie Moscow Center. "It's a way of showing they are attacking a politician rather than a Yukos official."

So it seems the relatively stable situation that had arisen recently in Russia's economy might be at risk. Let's hope that cooler heads will soon prevail.

- Arik

UPDATE: Thursday 30 October - the Kremlin froze 44 percent of Yukos' capital shares to prevent Khodorkovsky and his oligarch pals from cashing in on their investment - prompting another slide in the RTS today, as well as speculation about a frigid authoritarian trend taking over the Russian economy just as investors were beginning to warm up to the country's opportunities.