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Vladimir Putin’s evil empire

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Russia’s role in the war on terrorism will be at the top of the agenda when U.S. President George W. Bush meets with Russian President Vladimir Putin later this week. Bush wants Russian troops in Iraq, help with North Korea, and cooperation with derailing Iran’s nuclear aspirations. In return, he’ll illustrate the harsh reality behind U.S. rhetoric about promoting democracy by largely ignoring the ways in which Putin has been undermining its foundations in Russia.

InsertArt(2023089)PUTIN, A FORMER head of Russia’s intelligence agency, has done a lot right since he became president in early 2000, taking Russia off the list of countries that can’t seem to get their act together. Unlike Boris Yeltsin, his predecessor, Putin doesn’t change prime ministers as often as he changes his socks, resulting in a relatively tranquil political environment. Although economic disparities remain enormous, and a small group of oligarchs dominates the economy, Russia is in the midst of its fifth consecutive year of economic growth, inflation is under control, and the ruble — once the currency equivalent of a late-night-show punch line — is strong. Perhaps more important, Putin has made Russia’s progress toward a market economy almost irreversible, in part through a string of impressive economic reforms, like implementing a flat tax, and a range of other important changes to the country’s economic infrastructure, such as land, pension, judicial, and labor reforms.


InsertArt(2023090)Putin’s dark side — the one that Bush will pretend to not see — is his budding authoritarianism and his ever-closer association with the siloviki, a powerful group of former KGB and law enforcement officials. Putin has severely limited freedom of expression: Reporters Without Borders ranks Russia 121st out of 139 countries in its worldwide press freedom index, and a few months ago Russia’s last independent national TV network was replaced with a state-sponsored sports channel in a final blow to national private television. Putin has made meddling in the electoral process an art and destroyed any attempt to balance power between branches of government. The brutal war in the breakaway territory of Chechnya regularly features astonishing infringements of basic human rights.

But as the head scientist in two ongoing large-scale democracy-building experiments in Afghanistan and Iraq, the United States can’t afford to look away as Russia retreats from democracy. Putin’s ongoing attack on Yukos Oil Company, Russia’s largest company and soon to be the world’s fourth-largest oil producer, is a vivid illustration of what the Bush government is choosing to ignore.

Back in early July, the top associate of Mikhail Khodorkovsky, the CEO and principal shareholder of Yukos, was thrown in jail and charged with fraud relating to the 1994 privatization of a fertilizer company. Soon thereafter, Yukos and some of its employees were hit with charges of bribery, murder, and corruption, and Khodorkovsky himself was pulled in for questioning. But the charges were just a front. Khodorkovsky’s real crime was his violation of an informal deal whereby Putin agreed to turn a blind eye to the questionable manner in which Russia’s oligarchs acquired their assets as long as the businessmen kept their noses out of politics.


Rewind to the mid-1990s, when a bevy of well-connected political insiders acquired Mother Russia’s assets for kopeks on the ruble in a series of rigged privatization auctions. Khodorkovsky acquired Yukos — which at the time controlled close to 2 percent of the Earth’s total known oil reserves — for the piddling sum of $309 million. Over the next several years, Khodorkovsky and his fellow oligarchs parlayed their booty into real money: Ten of them now have a total net worth of more than $1 billion; Khodorkovsky tops the list at $8 billion.

Khodorkovsky’s fatal flaw was his craving for power and respect that mere lucre cannot buy. Earlier this year, he began to fund a range of parties for the December Duma elections (Russia’s lower house of parliament) with an eye toward building a faction that might, for example, oppose the government’s desires to, say, raise taxes on oil producers. Khodorkovsky also courted foreign business and political leaders, casting himself as the leader of a new generation of Western-focused Russians and making a point of cultivating contacts with members of the Bush government. He also didn’t contradict the (partly self-generated) rumor that he was planning a run at the presidency in 2008 upon the constitutionally mandated end of Putin’s last term.

But then the siloviki, Putin’s former KGB buddies, stepped in. With the tacit agreement of Putin (his denials of involvement in abetting the crackdown don’t hold much water), the siloviki orchestrated the charges against Khodorkovsky and his company to warn other would-be oligarchs-cum-politicians to stick to their knitting. Allowing Khodorkovsky to break the rules that Putin established would — in the control-obsessed minds of Putin and his cronies — lay the foundation for other rich businessmen to get into politics, threatening Putin’s position of supremacy. Khodorkovsky’s power play would also make it more difficult for Putin to play kingmaker upon the end of his second term.

In response, Khodorkovsky decried political persecution and pledged to continue funding Duma candidates. In early September he bought a newspaper and signed up as editor in chief a longtime critic of the Putin government. His fellow oligarchs, wary of being targeted next, offered to pay more taxes-and offered no support to Khodorkovsky.

In the meantime, the scandal has faded from the headlines, replaced by rumors of the imminent purchase of a minority stake in Yukos by a Western oil company. (One of the likely objectives of a recent visit to Russia by former U.S. President George H.W. Bush was to assess Putin’s receptiveness to such a transaction, as he may not want Khodorkovsky to have the political cover that an international minority investor would bring.) Putin, meanwhile, has studiously avoided addressing the substance of the Yukos crisis.


Khodorkovsky is no stranger to stamping on others’ toes to get what he wants. But the Yukos dispute is more than a case of the Russian president disciplining a rowdy businessman. In a perfect political system, Mikhail Khodorkovsky would be able to play a role — in line with established and uniformly enforced rules and regulations — in influencing Russia’s political path. Russia’s evolving democracy is far from perfect, but Putin has abandoned even the pretense of striving for such a system. By closing its eyes to this, the United States is undermining the pretense that cultivating democracy is a foundation of its foreign policy. Ignoring the blatantly undemocratic governments of Pakistan and Saudi Arabia is one thing, but giving Russia — which isn’t as important an ally in the battle against terror — a pass as well carries the stench of flagrant hypocrisy.

On another front, as Putin chips away at Russia’s still-nascent democratic underpinnings, he’s threatening the economic reforms that comprise his government’s key achievements. The economic subtext of the Yukos affair is whether the privatization process through which Russia’s oligarchs acquired their wealth is subject to ex post facto modification. At this point, a wholesale re-evaluation of privatization appears unlikely. But reopening the wound of privatization has raised uncomfortable questions about the future of property rights and, much more broadly, the rule of law in Russia.

Several years ago, when referring to a policy effort, former Russian Prime Minister Viktor Chernomyrdin dryly remarked, “We wanted it to be better, but it turned out the same as ever.” The danger is that the same may hold true for Russia’s democratic underpinnings, with the United States as a silent partner.

Kim Iskyan has spent the past eight years in the former Soviet Union as an investment banker, consultant, and journalist.