What Is Mine Is Mine, What Is Yours Is Negotiable

The Kremlin-Yukos conflict, almost a month old now, has shaken the conventional wisdom many had come to accept about the Vladimir Putin presidency

In a nutshell, the standard interpretation before this happened was the following: Putin's 2000 agreement with the oligarchs called for strengthening the state without big business getting overly involved in politics. In turn, the state would not meddle too much in the affairs of the business empires - basically, in the Russian economy.

Of course, there are many nuances, but, essentially, the Yukos fracas has put this 'social contract,' as it were, into question. Eventually, most likely very soon, this conflict will be resolved, but the aftermath may be a strong indicator of how Russian politics and the country's economy will develop in the future.

There are plenty of conjectures floating around about why the Kremlin decided to take on Mikhail Khodorkovsky's company; almost all focussing on the personal political ambitions of some and/or greed of others against the backdrop of the upcoming State Duma and presidential elections. However, most people who have written on this subject have passed over what recent events may imply about Putin's strength as president and the nature and future of his reform project for Russia.

If the aim of the attack is to nationalize Yukos - with the company's shareholders being expropriated - this would mean that Putin has embarked on a truly new policy direction. While this is possible, it would seem almost incredible in light of his actions over the past three years. Nationalizing Yukoswould be a significant reversal in the area of property-rights protection and not fit in with what Putin has done as president thus far.

The issue of Putin's ability to control his subordinates needs greater attention. Is he too weak to stand firm against the plans of his former FSB-subordinates-turned-Kremlin-staffers? This may be true to some extent. However, if Putin allows his subordinates to dictate state policy in the sensitive area of "expropriation" of private property, then one must assume that Putin is just as amenable in other areas of policy making, including the state's attitude to direct foreign and portfolio investment into Russia. This interpretation also seems to be quite incredible. If it were true, then we should expect official, centrist policy to support nationalization and neglect of meaningful property rights, which it does not.

The issue of property rights is, however, of course at the center of the conflict. The real reason is this: Putin's 2000 social contract created the conditions for a temporary truce between the state and the oligarchs. It did not resolve the issue of 'who owns Russia.' The contract put systemic change in Russia on hold, and we are now experiencing the consequences of neglecting this very important issue.

One solution is to codify in law a statute of limitations regarding the revisitation of privatizations during the 1990s - some claim the sooner, the better. However, this writer supports such a course of action only with the proviso that a social fund be created for at least a decade that directs some of the super-profits generated by the few of the Yeltsin era to programs for the many that lost out as a result of the privatization process. Undoing the privatizations of the 1990s makes little sense at this point, especially if Russia's goal of doubling GDP in 10 years is to become a reality, but keeping those in mind who lost out during the transition away from Communism would contribute to Russia's struggling civil-society project.

It should not be expected that Putin address the issue before the elections - both State Duma and presidential. However, the outcome of the Yukosaffair may cause the Kremlin to reflect on how unstable laws concerning property rights may affect economic growth after the widely expected re-election of Putin in the spring - including the creation of a Russia that is foreign-investment friendly.

In many ways, the Yukosaffair may be a precursor of what to expect during Putin's second term. Putin has a very ambitious reform agenda, but he does not seem prepared to pay the price for his policy ambitions - giving up some political control by allowing strong private-sector involvement, whether in the person of Khodorkovsky or more generally. There is no clear way out of this impasse. The unfolding of the State Duma election campaign and its outcome will be the most important indicators of how Putin views this crucial trade-off and whether he is capable of striking the right balance.

This unfortunate state of affairs may have a silver lining, though. Both the oligarchs and the Kremlin are attempting to use the law in their favor. Law in Russia, especially in terms of property rights, is clearly flawed and not up to the hopes and expectations of either the state or moneyed interests. After l'Affair Yukosis settled, both sides will hopefully come to the conclusion that the present system of property rights works to no one's advantage in the longer run.

US President John F. Kennedy was asked what it was like engaging Soviet leader Nikita Khrushchev for the first time. He retorted that dealing with Khrushchev was akin to confronting a man who claimed, 'What is mine is mine, what is yours is negotiable.' The oligarchs and the Kremlin are going through the same drill in a post-Soviet and still-unstable new Russia.

One thing seems to be clear, though: The outcome of the Yukos affair will tell us a lot about how Russia's reform project will continue as well as how much influence Vladimir Putin really has over the endeavor.

Peter Lavelle

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Author`s name Peter Lavelle