Exaggerated Fears of a Freeze in Russia?


By Jason Bush This year, Halloween seems to have come a day early. At least, that's how some investors around the world must have felt when, on Oct. 30, they stared in horror at their computer screens, trying to digest the terrifying words "Russian Government Seizes Control of Yukos." Coming just days after the arrest of Yukos' CEO, top Russian tycoon Mikhail Khodorkovsky, the news seemed to suggest that, sometimes, nightmares come true (see BW Online, 10/28/03, "A Fear Rises in Russia").

The reality though may not be quite as scary as the headlines imply. The Russian government has not, in fact, renationalized Russia's biggest oil company - not yet at least. What it has done is freeze a 44% stake, which it says belongs, directly or indirectly, to Khodorkovsky, currently sitting in prison charged with tax evasion and fraud.

Freezing the shares means Khodorkovsky can't sell them, but it doesn't affect either his dividends or his voting rights. Such freezes are common in tax-investigation cases around the world, designed to prevent the accused from spiriting away assets, experts say. "Whenever there's a tax investigation, that's the first thing [the authorities] do. It doesn't mean they confiscate the shares," says Paul Collison, an oil analyst at Brunswick UBS, an investment bank in Moscow.

CRONY PAYOFF? That didn't stop investors from panicking. The RTS index of Russian stocks went into free fall. Yukos shares fell 15% in an hour, although the RTC ended the day down 6%. It's not hard to see why. Since the start of the Yukos affair, President Vladimir Putin has insisted that the target of the campaign is not private property as such or Yukos as a company, but individual managers charged with crimes.

Most investors were ready to believe Putin. But the decision to freeze shares seemed to confirm the most frightening theories of the Yukos affair's origins. "This is an event of tectonic proportions - it's much broader than people hoped it would be," says Steve Dashevsky, oil analyst at Aton Capital, a Moscow investment bank. Adding to the atmosphere of tension, Russian media have reported that Alexander Voloshin, Putin's chief of staff and one of the few top Kremlin officials left from the Boris Yeltsin era, has resigned in protest over the Yukos case.

While Putin has insisted that no reversal of privatization is in the cards, some political observers fear that the Yukos affair signals the start of a general campaign to redistribute Russia's wealth - away from oligarchs like Khodorkovsky, towards a new oligarchy, consisting of Putin's cronies from the KGB and St. Petersburg, sore that they missed out on the first asset grab of the 1990s. It's easy to see how it might work: The shares are frozen and then, when Khodorkovsky is convicted as a swindler, confiscated. And then given to someone the Kremlin likes.

TAKING TO TV. A chilling scenario. But for the time being, only hypothetical. Foreign investors who met Putin on Thursday to discuss the crisis came away reassured that he had their interests at heart: "Putin was clearly making the distinction between the actions of individuals and Yukos the corporation. He regretted the short-term negative consequences for innocent stakeholders," says Charlie Ryan, chairman of investment bank United Financial Group.

And to clear up the confusion over freezing the shares, the Public Prosecutor's office made a statement on Thursday night, quoted in full on Russian TV: "The shares have only been frozen, no one has taken them away. We're not talking about any confiscation of Yukos shares," said spokeswoman Natalia Vishnyakova.

Couldn't the shares still be confiscated later? Perhaps - except that Khodorkovsky has not been accused of fraud involving the privatization of Yukos. He has been accused of fraudulent privatization of another company (a fertilizer company called Apetit) and tax evasion, allegedly costing the state just over $1 billion all told, according to prosecutors.

THE BIG QUESTION. Still, some investors worry that the existing charges against Khodorkovsky are just the start, and the investigations will soon spread to the privatization of Yukos itself. It's possible. Yet it's surely no coincidence that prosecutors have carefully refrained from probing the privatization of Yukos. That looks like a deliberate limitation exercise by Putin, designed to convince both Russian businesses and foreign investors that - as he has said time and again - no revision of privatization is on the cards.

That's why some investors remain unfazed by Thursday's panic. "The government hasn't changed its attitude toward private property. It's still going after individuals rather than companies," says William Browder, CEO of Hermitage Capital Management.

So maybe Halloween isn't early after all. Nevertheless, the latest surprise has only added to the sense of an escalating crisis, whose ultimate outcome seems harder and harder to predict. And if Khodorkovsky is convicted as a fraudster, it would certainly seem odd to let him stay on as owner of a stake, worth around $12 billion, in Russia's most valuable company.

How Putin plans to solve that problem is the $12 billion question no one seems able to answer. Bush is a correspondent for BusinessWeek in Moscow


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