Putin's Kremlin Asserting More Control of Economy

Yukos Case Reflects Shift on Owning Assets, Notably in Energy

MOSCOW, July 8 -- The threatened breakup of Russia's largest oil company signals a broader shift away from the country's anything-goes, freewheeling market of the 1990s toward a new form of state capitalism as President Vladimir Putin's government asserts a greater role in the economy. A dozen years after Russia began divesting itself of old Soviet state assets, Putin's government appears to be bringing the era of mass privatization to a close.

For the first time since the fall of the Soviet Union, the government this year will buy substantially more assets than it will sell, part of a Kremlin attempt to reclaim more control, particularly over the strategic energy industry.

Putin disavows renationalization of private property, but his government's tax battle with Yukos Oil Co. represents only the most sensational example of the state's growing power. Officials began moving Wednesday to seize Yukos assets after the company of tycoon Mikhail Khodorkovsky -- in jail on charges of fraud and tax evasion -- failed to meet a court deadline to pay the first half of a $7 billion bill for back taxes. If the state follows through, it could assume ownership of Yukos refineries and wells or sell them off to favored firms.

"It's clear that the state is strengthening its control over the economy," said Vladimir Ryzhkov, an independent member of parliament and market reform advocate. "Business today is facing a lot of trouble. They're under attack from all sides. These are black days for Russian capitalism."

Putin appears to be creating a hybrid between the command economy of the Communist period and the free-market economy ushered in by his predecessor, Boris Yeltsin, according to analysts. Rather than further liberalizing the market, Putin has moved lately to impose his own rules and collect a greater share of industry's profits through taxation.

"It was inevitable that the reconstruction of the Russian state would require restructuring the results of privatization," said Stanislav Belkovsky, a political analyst with ties to a hard-line Kremlin faction and a leading promoter of reining in the tycoons who came to be known as oligarchs. "The Khodorkovsky case was crucial from this point of view."

The reassertion of state influence reflects a popular backlash against the often-rigged privatizations of the 1990s that made small numbers of people extremely wealthy. Vladimir Mau, an economist who helped develop market reforms then, said retrenchment was the normal reaction to revolution. "It's nothing which could not be found in the economic history of Western Europe," he said.

Aside from the Yukos case, the government has suspended plans to privatize parts of Unified Energy Systems, the state-owned electricity monopoly; repeatedly put off auctioning a controlling stake in Svyazinvest, a major state-owned telecommunications firm; and failed to follow through on promises to lift foreign ownership restrictions on Gazprom, the state-controlled natural gas monopoly.

In the biggest blow to a foreign company, the government in January annulled a 1993 tender allowing Exxon Mobil Corp. and its partners to develop the Sakhalin-3 project in the Pacific. It plans to re-auction the license for $1 billion or more.

A brewing banking crisis has provided another opening for the government to increase its role. Several banks have collapsed or restricted payments in recent weeks, most recently Guta Bank, which closed branches Tuesday. Depositors flocked to various banks to withdraw money, fearing a repeat of the 1998 financial crisis that cost many their life savings.

The government's response includes a plan for state-owned Vneshtorgbank to buy Guta Bank. "This may appear to be a reasonable solution in the circumstances, but it would also signal the first step in what could become a wider re-nationalization of the banking sector," Aton Capital, a brokerage house, said in a report Thursday.

Other than Yukos, the state's most significant plans for taking control of private property center on Gazprom, one of the country's largest companies and steward of the world's largest natural gas reserves. After selling off shares over the years, the state holds 37 percent of the company. Now the government plans to buy back just over 13 percent, worth about $5.3 billion, to retake a majority share.

Some analysts say Putin's Kremlin is planning to make Gazprom the nation's dominant energy company, akin to state-owned oil firms in the Middle East. Gazprom officials have talked about creating an oil subsidiary; the obvious place to pick up petroleum assets would be from Yukos, as one Gazprom executive recently suggested.

At the same time, the state has slowed the pace of privatization. In 2002, it sold $2.9 billion in assets; it has sold just $100 million so far in 2004 and has plans this year for just one major privatization, sale of its 7.6 percent share in Lukoil, the second-largest oil producer, for about $1.6 billion.