Global Policy Forum

The Dilemma of Russia's

July 13, 2000


Russian President Vladimir Putin's campaign to wrest control of the economy away from the oligarchs is moving along briskly, propelled by a series of corruption investigations. But this campaign is at least rhetorically rooted in the rule of law and as a result, the president's efforts may ultimately snare his own allies in the government. Soon, the Russian president will confront a choice: temper his campaign or be labeled a fraud.


With tax, corruption and embezzlement investigations against top Russian corporations proceeding at a blistering pace, President Vladimir Putin is making great strides in his efforts to rein in Russia's oligarchs. So far, the government has launched investigations or filed charges – ranging from fraud to tax evasion – against 13 major business leaders whose companies include Media-MOST, LUKoil and Gazprom.

However, as these investigations widen, they are beginning to take in some of Putin's own associates. The president may be dangerously close to compromising key political allies in his widening crackdown on the oligarchs. Putin's own prime minister, Mikhail Kasyanov, has been under scrutiny for alleged ties to organized crime. If Putin spares allies like Kasyanov, the president will lose political legitimacy and be branded an autocrat.

On July 12, investigators from the Russian Federal Tax Police Service (FSNP) announced the launch of a criminal case against auto giant AvtoVAZ. Vyacheslav Soltaganov, director of the tax police, told ITAR-Tass that the company, headquartered in the central Russian city of Togliatti, had concealed hundreds of millions of dollars from taxation by producing multiple vehicles with the same serial number – and then reporting the manufacture of a single automobile.

With this case, investigators can snare more than a company set on a bold scheme; they can also snare two of Russia's most powerful businessmen. One is Boris Berezovsky, director of LogoVAZ, AvtoVAZ's sales arm, and most recently a detractor of the president's. Berezovsky has been named in the most recent criminal charges. The second man, AvtoVAZ Director Vladimir Kadannikov, said that the company would appeal the decision and the charges would not impact a joint production deal to be signed with the American auto giant, General Motors.

The tax police have simultaneously opened criminal charges against Russian oil giant, LUKOil, and its director, Vagit Alekperov. Tax Minister Gennadiy Bukayev told Interfax that the company had concealed revenue in "especially large amounts." Ironically, the tax minister himself had praised the company in May, handing it an award for being a conscientious taxpayer. Bukayev told Interfax that the company had won the award based on its own tax reports. Evasion was only discovered in a subsequent investigation.

The sweep of the government's investigation is now expanding exponentially, snagging the largest names in Russian business. The Media-MOST empire, which owns banking, broadcasting, satellite communications and banking interests, has been raided repeatedly. Gazprom, the country's natural gas giant, and its director, Rem Vyakhirev, are under investigation for questionable loans to Media-MOST. The director of LUKOil, Vagit Alekperov, the country's largest oil concern has been charged with tax fraud.

After years of corruption and crony capitalism, Putin is attempting to regain control of the Russian economy by imposing the rule of law. Successful investigations will allow the government to recover assets that were pillaged while at the same time reassuring nervous foreign investors that there corruption won't be tolerated in the Russian economy.

But the success of the crackdown will generate its own logic – and a dilemma for the president. All the same allegations that are befalling Berezovsky, Alekperov and Gusinsky could be pinned on Putin's allies in the Duma. Kasyanov, for one, is under attack in the Duma for alleged ties to organized crime.

Putin will soon privately grapple to build a firewall between his allies and his foes. The web of oligarchs extends right to the door of the president. Putin must now decide whether to let his allies fall in the name of the law – or protect them and undermine his campaign and his own authority.


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