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Conditional Property Rights in Russia

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.

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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.