In the predawn Siberian darkness last Saturday, security service agents stormed the jet of Russia's richest man. Mikhail Khodorkovsky, the chief executive and principal owner of Russia's largest oil company, Yukos, was arrested and charged with tax evasion, fraud, forgery and embezzlement.
Khodorkovsky now awaits his fate in a Moscow prison, but his arrest has already raised profound dilemmas for post-Soviet Russia.
It has exposed the complex and deep divisions within the elite and the public alike about the nature of state control over the economy, the role of big business in politics and the influence of personal wealth in what still is a poor society.
As regards the charges against Khodorkovsky: It is likely that in the 1990s he broke some laws. But in the chaotic Russian economy of the time, when the state was privatizing its assets on a grand scale, no large business in Russia was "clean" -- and the larger the company, the greater the chance it committed violations.
For example, full payment of corporate taxes amounted to well more than 100 percent of a business's profit. Tax evasion was the only strategy that allowed an entrepreneur to pay salaries and invest in his business.
Yet the choice of Yukos, among dozens of equally unsavory candidates, as the scapegoat for the misdeeds of the 1990s makes little sense. In the past five years, Yukos has traveled the furthest of any post-Soviet industrial giant from the mores and practices of the previous decade. In 1999, Yukos became the first major Russian oil company to release its quarterly results in accordance with international accounting standards. Independent directors are a majority on the company's board.
When Khodorkovsky took over the company in 1996, Yukos suffered from the same problems that were hobbling the rest of Russia's energy sector: with costs mounting and oil output declining, the company was on the brink of bankruptcy. Yet by last year, Yukos accounted for 18 percent of Russia's total oil production. Helped by higher oil prices, the company had enough cash to become the first Russian oil company to pay dividends to its nearly 60,000 shareholders.
This generosity has extended to the public as well. Yukos' and Khodorkovsky's personal donations are beyond parallel in post-Soviet history. Yukos gave $45 million to charity in 2002.
When the billionaire investor and speculator George Soros decided last year to end a decade of charitable giving in Russia, Yukos contributed $1.15 million to the Eurasia Foundation for the support of small-business and community development.
In March 2000, Yukos started a nationwide program called Pokoleniye.ru (or Generation.ru) to provide Internet access to high school teachers and students. Pokoleniye.ru equips centers where teachers can acquire Internet skills to pass on to their students. Their travel, room and board are paid by Yukos. By last spring, 56,600 Russian educators had completed the course.
This hard work has increased Yukos' profits and Khodorkovsky's enormous personal fortune. But it profits Russia as well. Alas, Yukos has been too fast for the slowly changing system. Born out of decaying Soviet socialism and with corrupt party functionaries as its midwives, Russian capitalism continues to be bound to the state by the myriad of "deals," outdated regulations and nefarious connections between businessmen and officials.
The idea persists: Private business must still and always remain in the government's good graces. After three-quarters of a century of limitless power, many in the largely Soviet-era senior bureaucracy are incapable of accepting an economic system in which property and wealth are not directly conferred, withdrawn or at least controlled by the state.
"If we don't like you, how can you be rich?" That is the message that the state bureaucracy intends to send with Khodorkovsky's arrest. Other oligarchs, as well as hundreds of thousands of owners of smaller businesses, must take heed.
Among other "transgressions," Yukos broke a cardinal rule of the bureaucratic game by openly contributing to the main opposition political parties to advance its interests and shape the laws. (The accepted practice would have been to ignore the laws and bribe those who write and enforce them.)
In a country where long-term planning -- economic, financial and political -- has been all but eliminated by 400 years of brutal authoritarianism and totalitarian ownership of the economy, Yukos dared plan for decades ahead without consulting state ministers and committee chairmen.
Thus the Yukos affair is not simply a law enforcement matter, as President Vladimir Putin has insisted. It is a major battle between two economic cultures: what Russian analysts have labeled "great-power statist" and the "liberal-oligarchic."
Although hardly perfect, in the last five years the liberal-oligarchic system nevertheless has proved more adaptable to change. It has fostered fiscal discipline, low inflation, lower corporate and income taxes, the extension of private property rights, a decline of bureaucratic interference, the continuing privatization of state assets, and improvements in corporate governance and transparency.
By contrast, the great power-statist culture seeks to increase the government's control over the economy and, inevitably, civil society. Added to this constituency in the last three years have been many retired and active secret service officers who under Putin came to occupy an unprecedented number of executive positions in government.
The statists need a decisive victory over not just a giant private conglomerate but a symbol of a more open, rapidly modernizing Russian capitalism. As the best known Russian company inside and outside the country, Yukos fits the bill.
No one knows how far they will take their campaign. They are likely to stop short of wholesale renationalization of firms. But new policies may include a "redistribution" of the privatized economy, with key industrial sectors and the most profitable large companies reverting to state control or being taken away from the current owners and given to more "loyal" entrepreneurs.
Conversely, the defeat of the statists may encourage the further emergence of the economy and civil society from under the state's shadow; a judiciary more willing to stand up to the Kremlin; the swift passage of structural reforms; and the establishment of a statute of limitations on charges arising from the privatizations of the 1990s. If passed, such a law will put an end to bureaucratic blackmail.
Finally confident in their property rights, entrepreneurs will be encouraged to spend less on bribing government officials and more on investments in their enterprises and charitable projects. New laws on lobbying, campaign finance and charitable contributions will permit Russian business to advance openly its interests in Russian politics.
Putin cannot long avoid making a choice between these two visions of Russia. It is unlikely he will be swayed by the surprisingly vigorous criticism of Khodorkovsky's arrest in the Russian press. But perhaps the resignation submitted in protest by his chief of staff, Alexander Voloshin, will give Putin pause.
As in any country, the interests of Russia's industrial leaders may not always and in every instance coincide with society's. But by winning the right to promote them, the oligarchs can help to advance the cause of Russian democracy.
Leon Aron, director of Russian studies at the American Enterprise Institute, is author of "Yeltsin: A Revolutionary Life." The piece appeared first in The New York Times.
Khodorkovsky now awaits his fate in a Moscow prison, but his arrest has already raised profound dilemmas for post-Soviet Russia.
It has exposed the complex and deep divisions within the elite and the public alike about the nature of state control over the economy, the role of big business in politics and the influence of personal wealth in what still is a poor society.
As regards the charges against Khodorkovsky: It is likely that in the 1990s he broke some laws. But in the chaotic Russian economy of the time, when the state was privatizing its assets on a grand scale, no large business in Russia was "clean" -- and the larger the company, the greater the chance it committed violations.
For example, full payment of corporate taxes amounted to well more than 100 percent of a business's profit. Tax evasion was the only strategy that allowed an entrepreneur to pay salaries and invest in his business.
Yet the choice of Yukos, among dozens of equally unsavory candidates, as the scapegoat for the misdeeds of the 1990s makes little sense. In the past five years, Yukos has traveled the furthest of any post-Soviet industrial giant from the mores and practices of the previous decade. In 1999, Yukos became the first major Russian oil company to release its quarterly results in accordance with international accounting standards. Independent directors are a majority on the company's board.
When Khodorkovsky took over the company in 1996, Yukos suffered from the same problems that were hobbling the rest of Russia's energy sector: with costs mounting and oil output declining, the company was on the brink of bankruptcy. Yet by last year, Yukos accounted for 18 percent of Russia's total oil production. Helped by higher oil prices, the company had enough cash to become the first Russian oil company to pay dividends to its nearly 60,000 shareholders.
This generosity has extended to the public as well. Yukos' and Khodorkovsky's personal donations are beyond parallel in post-Soviet history. Yukos gave $45 million to charity in 2002.
When the billionaire investor and speculator George Soros decided last year to end a decade of charitable giving in Russia, Yukos contributed $1.15 million to the Eurasia Foundation for the support of small-business and community development.
In March 2000, Yukos started a nationwide program called Pokoleniye.ru (or Generation.ru) to provide Internet access to high school teachers and students. Pokoleniye.ru equips centers where teachers can acquire Internet skills to pass on to their students. Their travel, room and board are paid by Yukos. By last spring, 56,600 Russian educators had completed the course.
This hard work has increased Yukos' profits and Khodorkovsky's enormous personal fortune. But it profits Russia as well. Alas, Yukos has been too fast for the slowly changing system. Born out of decaying Soviet socialism and with corrupt party functionaries as its midwives, Russian capitalism continues to be bound to the state by the myriad of "deals," outdated regulations and nefarious connections between businessmen and officials.
The idea persists: Private business must still and always remain in the government's good graces. After three-quarters of a century of limitless power, many in the largely Soviet-era senior bureaucracy are incapable of accepting an economic system in which property and wealth are not directly conferred, withdrawn or at least controlled by the state.
"If we don't like you, how can you be rich?" That is the message that the state bureaucracy intends to send with Khodorkovsky's arrest. Other oligarchs, as well as hundreds of thousands of owners of smaller businesses, must take heed.
Among other "transgressions," Yukos broke a cardinal rule of the bureaucratic game by openly contributing to the main opposition political parties to advance its interests and shape the laws. (The accepted practice would have been to ignore the laws and bribe those who write and enforce them.)
In a country where long-term planning -- economic, financial and political -- has been all but eliminated by 400 years of brutal authoritarianism and totalitarian ownership of the economy, Yukos dared plan for decades ahead without consulting state ministers and committee chairmen.
Thus the Yukos affair is not simply a law enforcement matter, as President Vladimir Putin has insisted. It is a major battle between two economic cultures: what Russian analysts have labeled "great-power statist" and the "liberal-oligarchic."
Although hardly perfect, in the last five years the liberal-oligarchic system nevertheless has proved more adaptable to change. It has fostered fiscal discipline, low inflation, lower corporate and income taxes, the extension of private property rights, a decline of bureaucratic interference, the continuing privatization of state assets, and improvements in corporate governance and transparency.
By contrast, the great power-statist culture seeks to increase the government's control over the economy and, inevitably, civil society. Added to this constituency in the last three years have been many retired and active secret service officers who under Putin came to occupy an unprecedented number of executive positions in government.
The statists need a decisive victory over not just a giant private conglomerate but a symbol of a more open, rapidly modernizing Russian capitalism. As the best known Russian company inside and outside the country, Yukos fits the bill.
No one knows how far they will take their campaign. They are likely to stop short of wholesale renationalization of firms. But new policies may include a "redistribution" of the privatized economy, with key industrial sectors and the most profitable large companies reverting to state control or being taken away from the current owners and given to more "loyal" entrepreneurs.
Conversely, the defeat of the statists may encourage the further emergence of the economy and civil society from under the state's shadow; a judiciary more willing to stand up to the Kremlin; the swift passage of structural reforms; and the establishment of a statute of limitations on charges arising from the privatizations of the 1990s. If passed, such a law will put an end to bureaucratic blackmail.
Finally confident in their property rights, entrepreneurs will be encouraged to spend less on bribing government officials and more on investments in their enterprises and charitable projects. New laws on lobbying, campaign finance and charitable contributions will permit Russian business to advance openly its interests in Russian politics.
Putin cannot long avoid making a choice between these two visions of Russia. It is unlikely he will be swayed by the surprisingly vigorous criticism of Khodorkovsky's arrest in the Russian press. But perhaps the resignation submitted in protest by his chief of staff, Alexander Voloshin, will give Putin pause.
As in any country, the interests of Russia's industrial leaders may not always and in every instance coincide with society's. But by winning the right to promote them, the oligarchs can help to advance the cause of Russian democracy.
Leon Aron, director of Russian studies at the American Enterprise Institute, is author of "Yeltsin: A Revolutionary Life." The piece appeared first in The New York Times.
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