A Top Advisor to Putin Calls Oil Takeover the 'Scam of the Year'

Illarionov sees the sale of Yukos' core unit to a state-owned company as a threat to the economy. His remarks reveal a rift among Kremlin aides.

By David Holley and Sergei L. Loiko

Los Angeles Times

December 29, 2004

MOSCOW — In an apparent sign of infighting among Kremlin aides, a top advisor to President Vladimir V. Putin on Tuesday harshly criticized the takeover of Yukos Oil Co.'s main production unit by a state-owned company and warned of far-reaching repercussions for Russia's economy.

"The sale of the main oil-producing asset of the best Russian oil company … and its purchase by Rosneft company, 100% owned by the state, has undoubtedly become the scam of the year," presidential economic advisor Andrei Illarionov told an annual end-of-year Moscow news conference, speaking days after Putin praised the deal and called it entirely legal.

"When the Yukos case began, everybody was asking which will be the rules of the game," Illarionov said. "Now it is clear that there are no rules of the game."

Even before the news conference, many observers saw Illarionov as being on his way out because of disagreements with other Kremlin figures, a perception that has now been reinforced.

Putin on Thursday bluntly described last week's controversial takeover of the private oil company's core asset by a state-owned firm as a step to redress injustices of Russia's post-Soviet shift from communism to capitalism. In doing so, he appeared to drop the pretense that authorities' pursuit of $27 billion in back taxes from Yukos was primarily a law enforcement matter.

Critics charge that the Kremlin wants to get control of Yukos' assets and punish its former chief executive and primary owner, Mikhail Khodorkovsky, a jailed political foe of Putin who is on trial for alleged tax fraud.

Khodorkovsky said in a letter from prison published Tuesday that the dismantling of Yukos was "the most senseless and destructive event in the entire reign of president Vladimir Putin." His letter was published in a leading Russian business newspaper, Vedomosti, and on his personal website.

"The destruction of Yukos demonstrates that bureaucrats who were set free from their leash are not guided by the real interests of the state," Khodorkovsky wrote. "They simply know that the state machine exists to serve their own interests."

Khodorkovsky predicted that "very soon there will remain only one opponent of this omnivorous bureaucracy: a fierce amorphous mob."

"It will take to the streets and ask: You promised us bread and circuses? Where are they?" he wrote. "It won't be possible to ironically wave a pack of administrative papers in the face of this mob. What will happen next will be 'uncontrollable democracy' with its countless troubles and sufferings. This is what we must actually fear."

Putin, defending the action against Yukos at Thursday's news conference, declared: "You all know very well how privatization took place here in the early 1990s and how, using various tricks and sometimes violating the laws that were in effect at the time, many market participants got hold of state property worth many billions. Today the state, using absolutely legal market mechanisms, is securing its interests. I consider this to be quite normal."

A U.S. Bankruptcy Court in Houston attempted to block the forced auction of Yukos' biggest asset, Yuganskneftegaz, which accounted for more than 60% of the company's production. Despite the U.S. court order, a previously unknown Russian financial group successfully bid for a 76.8% stake in Yuganskneftegaz and then was itself sold to the state-owned Rosneft oil company. That in effect nationalizes 11% of Russia's crude oil production, although the transactions have not been finalized.

The chairman of Rosneft's board is Igor Sechin, who also is deputy chief of the Putin administration. He is considered one of the Russian president's closest advisors and apparently won a battle with Illarionov over Yukos.

At his news conference Tuesday, Illarionov criticized the forced sale and the operation's pending takeover by Rosneft as an example of "extremely incompetent intervention in economic life by state officials."

Illarionov painted a picture of far-reaching damage to Russia's economy from the destruction of Yukos, which had been seen as one of the country's best-run companies. The result, he said, will be to channel investment flows to well-connected but inefficient firms rather than the best companies.

"Naturally, investors flee from the company which is being ruined," he said. "They are forced to move their assets to companies which have been described as 'Kremlin companies' by brokers, those companies which are close to the authorities…. Financial flows are rerouted from the most effective companies to the least effective ones. The overall efficiency of the national economy goes down and economic growth rates go down accordingly, as well as the pace of growth in living standards."

Steven Dashevsky, chief of research for the Aton Capital Group in Moscow, said it had become clear that others in the Kremlin were no longer listening to Illarionov.

"In this sense he is like a small dog barking at a herd of elephants," Dashevsky said. "He is still barking, but the elephants have done their job and moved on without paying attention. I think the only safe advice to the market will be not to listen to Illarionov because it is clear that his statements reflect a view that is not supported or even taken into account in the Kremlin."

Some observers suggested that Illarionov's criticism on this and other issues in recent months may have been permitted as part of an effort by the Kremlin to appear reasonably open and democratic even as key decisions are made behind closed doors.

"The Kremlin doesn't have a unanimity of views, and the mechanism of how the decisions are taken are totally unclear," said Yevgeny Gavrilenkov, chief economist of Troika Dialog Investment Group in Moscow.

"I share everybody's surprise that Illarionov, who not for the first time allows himself sharp criticism of government actions and of the policies approved by the president himself, has not been sacked yet," he said. "It may be explained only by one logical consideration: that the Kremlin keeps Illarionov and some other liberal advisors on its staff to preserve the democratic facade over its otherwise nontransparent and questionable decisions and policies."

Gavrilenkov said that Putin had "succeeded in building a vertical power model in which only very top officials close to the president are allowed to take part in the decision making."

"The democratic structures, which had been painstakingly assembled in the country since 1993 are being quickly dismantled now," he added.

Illarionov defended his outspokenness by claiming to serve the president and the nation with frank advice.

"I am an advisor to the president, not a presidential demolition expert," he said. "We are not living in a country … where a man takes an oath of allegiance to one man and serves only this man and nobody else. The position of a presidential advisor is a state position, and I am doing what I consider required, useful and necessary for my country. I am doing all I can to help, not to sabotage. To say publicly today that everything is splendid and that with current policy in all spheres we will be a success, in my opinion, is to undermine not only the president but the entire country."

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Holley reported from Kiev, Ukraine, and Loiko from Moscow.