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10/05/2005 | Russia: Yukos Affair Hangs Heavy over Second World War Ceremonies in Russia

WMRC Staff

With the international spotlight on Russia today as it plays host today to a 60th anniversary commemoration of the end of the Second World War, government efforts to sweep the 'Yukos issue' under the carpet only serve to highlight the lasting resonance and impact of its campaign against Yukos and its former CEO, Mikhail Khodorkovsky.

 

Global Insight Perspective

Significance

While a late-blooming diplomatic spat over Russia's refusal to acknowledge the occupation of the Baltics at the end of the Second World War is casting a pall over the ceremonies in Moscow's Red Square today, the ongoing Yukos affair and its lasting effects will ensure that Russia does not completely succeed in its international image enhancement efforts today. 

Implications

The last-minute postponement of a verdict in the trial of Yukos' former chief executive officer Mikhail Khodorkovsky until next week - apparently to spare Russian president Vladimir Putin the embarrassment of answering uncomfortable questions at today's ceremonies - seems to have had the opposite effect, as the delay in announcing what seems almost certain to be a guilty verdict has reinforced the belief outside Russia that the whole case is overtly political in nature.

Outlook

Despite the Russian government's attempts to polish the country's image in front of world leaders, the Yukos affair will continue to stain Russia's reputation and colour foreign investors' perception of the country's political risk, irrespective of the Khodorkovsky verdict.

Image is Everything

With the Russian government putting on a lavish show for an assortment of international dignitaries today to commemorate the defeat of Nazi Germany 60 years ago, the presidential administration (the Kremlin) is looking back and mythologising a glorious Soviet past. However, this very focus on the Soviet Union's triumph over Nazi Germany has opened up a wedge between Russia and the Baltic states over the Soviet annexation of Estonia, Latvia, and Lithuania. The diplomatic feud over calls for Russia to apologise - and the Kremlin's refusal to do so - has cast something of a shadow over the ceremonies in Red Square. 

The Kremlin, of course, has spent the past few weeks trying to spruce up Moscow, the Russian capital, for the occasion, while sweeping under the carpet any 'problematic' issues that could potentially undermine today's events. Chief among these is the nagging Yukos affair, which the Kremlin seems eager to put behind it, all the while continuing to take actions that ensure that the issue won't die. The last-minute postponement of a verdict until 16 May in the trial of former Yukos chief executive officer (CEO) Mikhail Khodorkovsky - apparently to avoid putting Putin in an uncomfortable position during today's ceremonies of having to answer for the dismantling of Yukos - has reinforced the view of the Kremlin's role in directing the whole affair (see 'Related Articles' below).

Throughout the Yukos affair, the majority of Russians have held a very different view of the case than the international community. While polls show that Russians largely support the government's crackdown on Yukos as an overdue comeuppance for the oligarch class, foreigners - and particularly, foreign investors in Russia - have held firm in the belief that the series of back tax claims levied against Yukos and the criminal trial of key Yukos shareholders is a Kremlin-orchestrated move to punish Khodorkovsky, and Yukos, for his political activities. The verdict in the trial of Khodorkovsky and his associate, Platon Lebedev - which is now expected 16 May - is not likely to cause anyone to rethink their entrenched viewpoint.

Yukos Will Live On...

Sadly, as much as everyone would like to see the verdict bring an end to this whole sordid affair, there are numerous other 'loose ends' to tie up before President Putin and the government can truly draw a line under the Yukos affair. Yukos, of course, lives on - albeit just barely. The once-mighty company is already in its death throes, and Rosneft's lawsuits against it, as well as the government's seizure of Samaraneftegaz and Tomskneft, should finally bring an end to its misery later this year. However, the continued Kremlin infighting over the merger of Gazprom and Rosneft, complicated by the latter's controversial acquisition of Yuganskneftegaz, will ensure Yukos' lasting legacy. The Gazprom-Rosneft merger itself may now be scuttled.

Another arena where the name 'Yukos' will likely outlive the oil company is in the Russian investment climate. Try as they may, the Cabinet of Ministers' efforts to rebuild foreign investors' confidence in Russia is being systematically undermined by the actions of the bureaucracy, specifically the Federal Tax Service. For all of Putin's rhetoric about welcoming foreign investment with open arms, the aggressive actions of the tax authorities say otherwise. In their enthusiasm to conduct back tax investigations and redress the perceived past wrongs of the oil majors, the tax authorities have done far more harm than good. While back taxes levied against TNK-BP and Sibneft dispel the notion that Yukos was merely a 'one-off' affair (thereby seemingly disputing the widely held notion among foreign investors that Yukos was selectively prosecuted), the new tax bills have left companies operating in Russia's natural resources sector asking who's next.

Rather than proving that 'all are equal before the law' in facing punishment for their alleged tax transgressions, the recent spate of back tax bills has raised new concerns about the state of the investment climate. Perhaps most worrisome is the growing belief that Putin is no longer in full control of the government - assuming he was in the first place. Despite assertions by US Secretary of State Condoleezza Rice that Putin has 'too much power', the recent divergence between Putin's comments and the actions of the bureaucracy have left foreign investors on edge. 

Outlook and Implications

While the Kremlin looks to mythologise and glorify the Soviet past, a giant cloud hangs over Russia's present. The looming Khodorkovsky verdict next week will re-focus the world's attention on the Yukos affair, but regardless of the decision, the lasting effect of the trial and the campaign against the oil company will cast the Russian government in a bad light. 

Until recently, foreign investors, especially the oil companies, took Putin's word as his bond, and thus they were willing to look the other way during the Yukos affair. Now, however, as Kremlin bickering over the Rosneft-Gazprom merger has erupted and over-zealous tax authorities continue to pursue tax probes despite Putin's pledges to rein them in, foreign investors are becoming ever more wary of committing their money to an increasingly unstable and unpredictable market.

Luckily for Russia, the country is blessed with vast oil reserves and seemingly unlimited potential, meaning that international oil companies are - in the words of LUKoil CEO Vagit Alekperov - 'doomed' to invest in Russia. The problem for the Russian government and the Russian economy, however, is that they are doomed to suffer the consequences of the Yukos affair long after Yukos itself passes away. 

WMRC (Reino Unido)

 


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Center for the Study of the Presidency
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