Economic Outlook: The politicising of business in Russia

The news of granting Israeli citizenship to Russian oligarch Leonid Nevzlin, a leading shareholder of embattled Russian oil giant Yukos, is another indication that the fight between the Russian government and the business elite is a power game rather than a fierce economic reform process with legal implications.

Nevzlin personally controls 3.5 per cent of YukosSibneft through his holding in the Menatep group, which owns a total of 44 per cent of the YukosSibneft stock. He is also believed to have replaced Yukos CEO, Mikhail Khodorkovsky, as the sole beneficiary of a trust owning 50 per cent of Menatep after Khodorkovsky's arrest two weeks ago, giving him an extra 22 per cent holding in YukosSibneft.

YukosSibneft resulted from a recent merger between Yukos and its smaller rival, Sibneft. Group Menatep is the investment vehicle through which Khodorkovsky and allies, including Nevzlin, control YukosSibneft.

Embezzlement

The attacks on Yukos began on July 2 when Platon Lebedev, an associate of Khodorkovsky, was arrested on charges of embezzlement. The probe was subsequently expanded, involving other senior Yukos shareholders and officials on charges ranging from fraud to attempted murder.

While these moves were widely perceived as being directed against Khodorkovsky, Russia's richest man with an estimated net worth of $8 billion, the Yukos CEO was left alone.

The legal attack on Yukos, Russia's largest oil company, reached a new level on October 25 when Khodorkovsky was seized at gunpoint by members of the Federal Security Service in Siberia on charges of fraud and evasion of personal and corporate taxation. Prosecutors then decided to seize control of a leading share stake of the company, belonging to Khodorkovsky and associates.

The Yukos CEO belongs to a class of influential entrepreneurs - the oligarchs - that built their empires in an environment where it was all but impossible to abide by the law and succeed commercially.

The legal code was peppered with inconsistencies and contradictions that made observance hugely difficult, while the corruption of state organs and the nature of the business environment made it impossible to succeed in the 1990s by staying within the law, which was widely recognised as imperfectly drafted and patchily observed and enforced.

Nor did the authorities stamp down on dubious practices. While the precise reasons behind the attack on Khodorkovsky are not certain, it is clear that from the Kremlin's perspective he overstepped the line.

The Yukos CEO openly funded political parties that will oppose the pro-presidential bloc in the forthcoming parliamentary elections and lobbied for a share of the state's gas production and oil and gas transport monopolies.

He also went on television to accuse Rosneft, state-owned oil rival, of corruptly acquiring exploration licences, criticised the government's foreign policy line over Iraq and voiced support for constitutional changes, as well as hinting that he had presidential ambitions.

Russian President Vlad-imir Putin quickly responded to his mineral resources minister who threatened to stop exploration and exploitation licences granted to Yukos by expressing his clear opposition to such a step.

The step, requested by persecutors asking the government to investigate the company's activities, could give an impression that the authorities are going to close down the private oil major. But the freeze of shares by persecutors has legal grounds. That's what Putin has to say in Rome, on the fringes of an EU-Russia meeting, to calm down the frenzy in business circles inside and outside Russia.

But refraining from a full assault on the company won't convince anybody that what's been going on between the government and "oligarchs" is purely business oriented and a fight for "economic correctness". Politics and power mingling is at the heart of the campaign, labelled as a government crackdown on profiteers from selling state assets in the 1990s.

Though the Yukos fight brought on Moscow criticism from Western capitals, influenced by their own business elite, it seems that businesses itself could correct this soon on pragmatic grounds. Among foreign investors, portfolio investors may well take fright but others will prove to be more robust.

Those in the oil sector are likely to pause for breath, as witnessed by the suspension of talks for ExxonMobil (US) to take a major (up to 40 per cent) stake in YukosSibneft. Once the dust has settled, however, the sale of Khodorkovsky's shares to a foreign player seems the most likely way for the oligarch to depart from the scene.

Putin may not be eager to hand over control of the oil sector wholesale to foreign interests, but there are few alternatives assuming that he is not prepared to allow another oligarch to take Khodorkovsky's place at the head of the soon-to-be-merged oil giant YukosSibneft.

A resolution of the uncertainty over YukosSibneft is likely to signal the resumption of foreign investment into Russia's oil sector. Russia remains one of the most promising territories for international oil companies outside of the Middle East, with regard to reserves, production and its attitude to private sector involvement. Energy companies are used to operating in difficult and risky environments.

Investment

In the rest of the Russian economy - especially investments in activities aimed at tapping the growing domestic market - there is unlikely to be much of an impact on prospective foreign direct investment (FDI), whether it is in the form of greenfield ventures or acquisitions.

Oil is a sector apart, politicised by the nature of the huge rents available, while domestic or foreign ownership in other parts of the economy is far less controversial. FDI into the broader economy will be spurred by the likelihood that Russia's domestic consumer market size is set to double in dollar terms over the next five years, as well as by opportunities for tariff-hopping investment.

The Kremlin is proving its point in having the upper hand on business elite eager for a power share, after they grabbed a large business share through officially corrupt privatisation. Though it is risking return of large amounts of money oligarchs flew offshore, power control is worth it and in the long-term this money can come back as FDI from London, Washington and even Tel Aviv.

Ahmed Mustafa is an Arab writer based in Qatar