Khodorkovsky and Putin share a common view on legalization of privatization deals
Two irreconcilable public figures, whose views on ways to develop Russia’s political and economic life in the late 1990s and at early 2000 were so different that one of them later ended up in confinement for his stance, have unexpectedly found a common ground on the necessity of legalizing the results of privatization of the Soviet state properties, which has gone down in the history of world economy as one of the most criminalized and corrupted ways of offloading government assets. The Russian privatization has long been labeled ‘the biggest daylight robbery of citizens by their own government in 20th century,’ a reality that later spawned such unsavory labels as ‘predatory grab-what-you-can privatization’ and other similarly negative epithets.
The two figures are Vladimir Putin, Russia’s current prime minister and one of obvious odds-on favorite candidates for the presidency, and his archrival opponent, Mikhail Khodorkovsky, the ex-owner of now bankrupted Yukos Oil Corp., who repeatedly headed the famous U.S. Forbes journal’s list of richest Russians in the early 2000s. The incompatible divergence in points of view of these ambitious gentlemen — Putin, then a newly elected president of postcrisis Russia, trying to keep the country intact and afloat after the wildness of the 1990s, and Khodorkovsky, the new rising flagman of post-communist Russian capitalism, bent on consolidating the lion's share of the country’s lucrative energy assets under his control — finally reached its climax in 2003.
The watershed clash between these two men occurred at on one of the meetings between the president and titans of the Russian capitalism in the Kremlin, where Khodorkovsky openly engaged in acute polemics with Putin over the latter’s policies in the business sector and the role of entrepreneurship in society. During the sharp altercations, “the oil baron” sharply and directly criticized Putin in the presence of all Russian business leaders and the whole country, as the meeting was broadcast live by the media. This dispute between nation’s ‘political leader’ and ‘potential economic leader’ ended terribly for the latter, as he was soon arrested after the incident, and thereafter repeatedly tried and then jailed for 14 years.
Since then, the opponents’ ways parted for good. For example, ‘the oil baron’ never pleaded guilty to the grave criminal charges brought against him, considering himself ‘a victim of political repression’ orchestrated by Putin. On the other hand, Putin never misses any opportunity to call the ‘dishonored’ oligarch “a criminal legally condemned by the Russian court of law for serious economic crimes that inflicted exceptionally huge financial damages to the state treasury.”
“The idea of reviewing the results of the privatization deals was first elevated into public limelight in 2005, when Khodorkovsky raised the issue in an article, ‘The Left Turn-2’ from his Moscow Matrosskaya Tishina prison.”
It is against this background that the almost complete convergence of these archenemies’ views on one of the most ‘divisive questions’ in the post-Soviet economy and within the frameworks of the Russian presidential election campaigns is, indeed, very surprising. Even more amazing is the fact that Putin, after almost seven years, has added his voice to the idea of legalization of the 1990s’ fraudulent privatization results, a proposal that is very unpopular among the Russian business titans, the chief beneficiaries of the questionable privatization deals.
The crux of Khodorkovsky’s proposal
It needs to be noted here that this idea of reviewing the results of the 1990s’ privatization, traditionally more popular among the communists, national patriots and some economists with socio-liberal views, such as Sergei Glazyev and Grigory Yavlinsky, was first elevated into public limelight in 2005, when Khodorkovsky raised the issue in his article, titled, ‘The Left Turn-2’ from Matrosskaya Tishina, the famous Moscow prison. In the publication, which was far too generously rich in ‘leftist revolutionary ideas’ for a notable flag bearer of the Russian oligarchic capitalism, the dishonored ‘oil baron’ offered, amongst other measures for improving the country’s investment climate, a scheme that would enable the oligarchs to ‘repent and atone for their financial or economic crimes’ during privatization.
According to Khodorkovsky, the social and economic injustices committed during privatization can be restored simply, without using any of the complicated formulas being offered by other experts or those that had already been used in other countries, notably the Great Britain (see below). In other words, the oligarch sees legalization of privatization deals as a pact, a form of ‘new social contract’ in the economy, which should be signed between the government, as the legal representative of the society, and the owners of the enterprises bought via privatization.
Complicated schemes, in the oligarch’s opinion, are meant to create a fertile maneuvering ground for people, who want to avoid the payment of lawful taxes. “This is why beneficiaries of privatization deals should simply return to the treasury the revenues generated by privatized companies in their first year of their ownership or management,” he noted. “Companies that plan to continue to operate in Russia should sign on to this pact, and in doing so, they should be guided by the indisputable principle that it is better for them to give a part of their companies today than to lose everything tomorrow,” he added, probably drawing from his own heartbreaking experience of losing control over Yukos, his ‘pet project,’ and later have to watch its state-controlled bankruptcy behind bars.
The key highlights of Putin’s proposal
Unlike the radical calls from leftist politicians, Putin, just like the ex-Yukos owner, favors the so-called ‘soft variant’ of revision of the results of the most odiously executed cases of privatization. Thus, addressing the members of Russian Union of Entrepreneurs and Industrialists, often referred to in the country as the ‘oligarchs’ labor union,’ Putin proposed closing the issue of ‘fraudulent privatization,’ and thus acknowledge the legal purity of the new ownership status of privatized assets after their proprietors pay a certain amount compensation, a sort of a special tax on these companies, to the government. “This could be either a single, one-time payment, or some other forms of compensation that have to be worked out. But I think, the society as a whole, and business leaders, in particular, should be interested in such arrangement.
According to Putin, this step will provide public legitimacy for the private property institution and restore public trust to businesses, otherwise Russia will not be able to develop modern market economy, and by extrapolation, create a healthy civil society. “We need to openly say that the unhealthy attitude towards businesses and the institution of private property in the society today has its roots not only in the Soviet past, but also in what occurred in the 1990s, when the essence of business was understood as a simple sharing of the state pie.”
However, it is necessary to note that neither Khodorkovsky, nor Putin is the pioneering author of these mechanisms for resolving the problems of distorted or quasi-legal acquisitions of state assets. Like other authors, these gentlemen simply suggested the use of time-tested global experiences in solving similar problems in world’s leading economies, notably, the Great Britain. For example, UK Prime Minister Tony Blair's newly elected Labor government in 1997 successfully used such strategy to rectify the ‘social and economic injustices’ done by the Conservatives’ government during ‘Thatcher’s privatizations’ that transferred the most profitable of British enterprises into private hands in the 1980s.
The essence of Labor government’s strategy was that it obliged the beneficiaries of Thatcher’s privatizations to pay a one-time fee, the size of which was defined by a special formula. Thus, to define ‘the real market cost’ of privatized assets, the government subtracted the average net profit for the first four years of company’s possession by the new proprietor from the company’s gross incomes, and then multiplied the resultant sum by a special P/E factor, defined as the ratio of company’s capitalization to its profit. This was set at 9.3 by a special law. Then the owner was required to pay a special tax at the rate of 23% on the difference between the company’s ‘real’ and ‘sale’ prices during privatization.
The British call this kind of taxation ‘a windfall tax,’ which, translated into Russian, means as “unexpected good luck tax” or “tax on unexpected happiness.” Such top UK corporations as British Telecom, British Energy, British Gas, Centrica and many others, which have successfully undergone the obligatory “tax clearance” procedure from the fallacies of Thatcher’s privatizations, can serve as an example for the Russian case, as the British Royal Treasury received over $8bln from this exercise.
Experts are not very optimistic over the idea
However, experts and titans of Russian capitalism, who had and still have a lot at stake in the Russian privatization or its results, are not exuding optimism over the successful realization of the call to review the result of privatization deals or over the possibility that the authors of this risky idea will be able to achieve a brilliant financial success similar to that of the British government in the 1980s. Indeed, a majority of Russian experts simply see such calls and similar statements today as a part of the presidential election rhetoric.
“Even more amazing is the fact that Putin has added his voice to the idea of legalization of the 1990s’ fraudulent privatization results, a proposal that is very unpopular among the Russian business titans.”
One of these personalities is Anatoly Chubais, the chairman of the Russian Nanotechnologies Corp., more famously known in the country and beyond as ‘the ideologist and father of fraudulent Russian privatization,’ has unequivocally noted that the calls by Putin, other politicians and economists to compensate the society for the unfairly executed privatization with the goal of legalizing the deals will simply not work in Russia. “It is impossible to legalize privatization by compensation from businesses. The compensation sums cannot improve Russian people’s attitude towards privatization, its participants, and above all, the present legal and ownership statuses of the privatized properties,” he added. “This is because no matter what amount money one takes away from the oligarchs, it will always turn out to be much less than they have earned on these assets.”
Mikhail Prokhorov, another candidate for the Russian presidency, unlike his opponent Putin, has called against supporting a populist theme of revision of the privatization deals as it is capable of undermining the current legal basis of modern Russian businesses. “Privatization in the 1990s was carried out according to the legislation that existed in Russia at that time. This is why the revision of its results can lead to the destruction of property ownership rights in the country and the legitimacy of all the enterprises that were acquired via privatization over 10 years ago.”
The proposed idea to take concrete measures to legalize privatization, whose results did not satisfy the majority of citizens in the country, is good. But people are mostly concerned that it could end up like all other good initiatives of the government, which, according to ex-Prime Minister Victor Chernomyrdin, always wants to do something better for its citizens, but, for one reason or the other, always woefully fail to reach the set targets.
Only time will show whose ideas or schemes on revision of the 1990s’ privatization deals will be more successful, but one can only hope that all the proposals under consideration will be thoroughly thought through from all sides, and the existing legal base of the legitimacy of contemporary Russian businesses will not be sacrificed at the altar of irresponsible populist calls and political expedience of public figures and statesmen vying for electable posts, as they try to please the electorate at any cost and by any means on the eve of the Russian presidential elections.
Tatyana Galushko took part in the translation of this text.
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