For those of you who weren’t scared away from last Sunday’s New York Times by the long feature on the Nashi, you may have also had the opportunity to read the interesting article on Norilsk Nickel by business reporter Andrew Kramer. The article merits comment, as these events that have recently transpired at the mining behemoth underscore with breathtaking clarity the central problems of rule of law and state intervention in the economy in Russia. The conditionality of property rights, with which we are all too familiar with in the Khodorkovsky case, is a much bigger problem than many people realize. The discretionary and highly political nature of Russia’s control economy is a cornerstone of Putin’s “new financial architecture,” and the lessons outlined in the Norilsk experience serve as a powerful reminder of how this Tsarist system of “property by permission” continues to deprive so many people of so many freedoms.
Norilsk produces one-fifth of the world’s nickel. Copyright 2007 The New York Times Company
NYT: The Kremlin Flexes, and a Tycoon Reels
Rather than expropriating assets outright, Mr. Putin’s government has exploited minor legal infractions at the target companies to force sales. Either government-controlled companies, or companies run by men seen as loyal to Mr. Putin’s Kremlin, are the beneficiaries. In 2003, for example, prosecutors went after Mikhail B. Khodorkovsky, chairman of Yukos Oil, then Russia’s largest private company, on accusations of tax evasion. Mr. Khodorkovsky was sent to a Siberian prison, and Yukos went bankrupt. The state company Rosneft later acquired most of Yukos’s assets. Last fall, it was environmental infractions in pipeline construction that forced Royal Dutch Shell and Japanese partners to sell a controlling stake in their $22 billion Sakhalin II oil and gas development to Gazprom, the state gas monopoly. Then, this June, BP’s local joint venture, TNK-BP, sold its share of a huge gas development after regulators threatened to revoke the license because the field was developed too slowly, which was a technical violation of the terms of TNK-BP’s license. Gazprom, again, was the beneficiary. Coincidentally, Mr. Prokhorov and Mr. Potanin own a minority stake in that same BP gas field. Their 26 percent stake was not touched, perhaps because of Mr. Potanin’s close ties to Mr. Putin. But in the case of Norilsk, Mr. Prokhorov’s arrest, analysts say, seems to have been a fortuitous accident that gave the Kremlin cover for exerting more control over this strategic metals company.
Subscribe by Email
4 Comments
The first line you quote:”Rather than expropriating assets outright, Mr. Putin’s government has exploited minor legal infractions at the target companies to force sales.”A legal infraction is a legal infraction. Suppose a country lets a company violate a contract and get away with it; it will see more and more contracts being violated and law and order would disintigrate to a point where corruption rules the day.Any free country must strive to make sure it is not being cheated or taken advantage of, especially by foreign entities who have shown a history of corruption and environmental misuse, with the best example being Shell’s actions in Nigeria.
Colleen, you are entirely correct that “Any free country must strive to make sure it is not being cheated or taken advantage of.”However, the concern is not that the state should forebear from prosecuting tax evasion and regulatory offenses, but rather, that any legal action taken by the state ought to be premised on a foundation of basic procedural principles so as to ensure that the defendant or accused receives a fair trial.In these cases (Yukos, Sakhalin II, TNK-BP) the state authorities have been able to exploit a biased and corrupt judicial system to their benefit.So not only are a large amount of judicial resources mis-allocated, those who are pretending to act in the public interest are in fact reaping a private benefit at the expense of the rule of law.The result is a kleptocracy masquerading behind a thin veneer of legality.
I agree that a legal infraction is a legal infraction, and that governments should have a role in curbing abuses by foreign investors. However it is the selective application of the law which is particularly problematic in Russia. For example, these regulatory technicalities seem to magically disappear after a Russian state-owned firm gets majority control of the project. Does anyone think that Gazprom’s handling of Sakhalin will be more environmentally friendly?Are we meant to believe that the siloviki getting rich off these energy thefts are acting in defense of the Russian people?That seems like quite a stretch of logic to me.
I think that the government of every country in the world should have absolute control over every single inch of its territory and belonging natural resources. Even more, if there’s some very rich owner of some mining facilities or some corporation in some country, that owner also belongs to that country altogether with all one’s property. I know that there are people who would like countries to cease to exist so that they could freely spread around the globe and gain as much wealth as possible together with power that comes with it. They would want, actually the whole world to become one country so that the government of that global country would reinforce equal rules all over the planet, rules which best fit their interests. If we now take into consideration such hypothetical global state, in the essence it would be the same thing as some particular country today which has its own government and rules…only that government would be just their service and global country would be their own property altogether with people, natural resources and everything else. I am, of course against that so I support governments that are above any owner, banker, industrialist or any other rich or powerfull person. So, I support Russian tsaristic approach to this matter.