Cleaning Up The Game

For Oleg Deripaska, life divides neatly into before and after, and the line that separates them is the rise to power of Russian President Vladimir Putin. Three years ago Deripaska was just another obscure businessman, slugging it out in Russia's lucrative and brutal aluminum industry. In the bleak Siberian towns where the metal is produced, contract killings were the order of the day. Most foreign investors were smart enough to keep their distance.

These days Deripaska, an early supporter of Putin's candidacy, controls no less than 70 percent of the Russian aluminum industry. But his net worth--rumored to be well over $1 billion--isn't the only thing that's changed about him in the Putin era. Most of his Siberian allies and enemies have been left by the wayside, and he's trying to wash away the taint of the past by adopting Western accounting standards and business practices (the kind they teach in books, not those exposed at companies like Enron and WorldCom). He's hired new managers from Australia and Canada--not to mention a Japanese sushi chef for the executive dining room. Deripaska is preparing his core company for a public offering, and he knows that success will depend on having the right reputation. "Let's call it 'learning by wrongdoing'," says Deripaska aide Konstantin Remchukov. "Russian businessmen now understand that a good reputation brings you money."

Life has changed for Russia's oligarchs. Under Putin, the country's business elite seem to be discovering the value of respectability and good manners. Part of the shift can be credited to the Russian president himself. Thanks in part to high oil prices and the devaluation of the ruble after the 1998 financial crisis, Putin has managed to ensure a climate of fiscal and macroeconomic stability that has allowed businessmen to invest and expand. Not surprisingly, they support his plans to liberalize the economy, which, if successful, could make them even richer than they already are. Perhaps most important, Putin has helped to enforce a ceasefire among the oligarchs that stands in sharp contrast to the endless turf wars of the 1990s. Now Russia's tycoons claim to have a vested interest in maintaining a civilized status quo. How deep that sentiment runs, though--or how long it lasts--is open to question.

For now, attention is being focused on the most striking turnarounds, like that of Mikhail Khodorkovsky, Russia's richest man. A few years ago he was portrayed in the press as a poster boy for everything that was wrong with the country's business elite (a characterization he denied vehemently). A onetime functionary in the Communist Party youth organization, he emerged from a dubious privatization auction in 1995 with control over one of Russia's biggest oil companies. He paid a mere $159 million for a 45 percent stake in the company, yukos--even though it has more reserves than U.S. competitor Chevron Texaco. When foreign shareholders tried to get in on the bonanza, Khodorkovsky drove them through an obstacle course of court cases and red tape that served only to reinforce outside investors' skepticism about post-Soviet markets.

Now Khodorkovsky can claim he's turned over a new leaf. Over the past three years he began laying out his financials for everyone to see. Instead of banking all of its profits offshore, as many companies did under former president Boris Yeltsin, yukos has plowed earnings into new production equipment. Investors have taken the bait: the company's market capitalization now stands at nearly $20 billion, and Khodorkovsky's personal fortune is valued at $7 billion.

The tycoon knows how to talk the new talk. "Society is calmer," he says when explaining why he has been able to be more open about his business. He is careful to underscore his charitable activities, which are vast, and is philosophical about the immediate post-Soviet years: "It was a revolutionary situation--and I was on the side of the rebels." This week, a yukos tanker full of crude oil will arrive in the United States to test the market, which Khodorkovsky portrays as an attempt to live up to the energy-cooperation agreement signed by Putin and U.S. President George W. Bush at their recent summit in Moscow. "The Russian oligarchs have started to see themselves as world players, and they're on their best behavior now in order to break into markets elsewhere," says Fiona Hill, a Russia expert at the Brookings Institute in Washington.

Yet skeptics remain. Part of the reason for the some of the tycoons' unusually good behavior, say analysts, is simply that there's not that much left to divide up. Most of Russia's biggest industrial assets are now in private hands, and their owners have an interest in establishing rules that will enable them to keep what they've got. The security of ownership is an explicit part of the bargain that Putin offered the oligarchs shortly after his rise to power: in return for not meddling in affairs of state through their media holdings or other political instruments, Putin promised to respect the results of privatization deals that had sold off the country's prime industrial assets at laughable prices. It was a take-it-or-leave-it deal. Two of the most powerful oligarchs, Boris Berezovsky and Vladimir Gusinsky, chose to take issue with Putin in public. Both now live in exile.

The oligarchs still enjoy plenty of access to the powers that be. Putin regularly seeks out the tycoons, who are now organized into a sort of glorified business club, for their input on how to revive the economy. Some of them are simply Yeltsin-era players who have undergone a makeover. Deripaska, for example, is widely considered a member of the "Family," a group of earlier-generation tycoons who cultivated relations with Yeltsin and his relatives. (Deripaska is married to the daughter of Yeltsin's former No. 1 aide, Valentin Yumashev--who himself married Yeltsin's daughter Tatyana not too long ago.) It was that sort of privileged connection, say skeptics, that helped Deripaska make his big push for control of the Russian aluminum industry two years ago. "Connections still matter," says Hill. "The people who run the giant companies and the government are all part of the same crowd."

At the same time, Russia is nowhere near having a stable rule of law. Putin has made legal and judicial reform a cornerstone of his next round of reforms. But for now, courts are still subject to pressure from corrupt companies and the government--and that means that even people with powerful friends might lose what they've got if someone more powerful comes along. (Ironically, that has led some of the oligarchs to support the push for reforms--particularly in bankruptcy law--in order to legitimize their hold over their current possessions.)

And Putin himself, not unlike Yeltsin, has his own, sometimes less-than-savory favorites. They're just more circumspect. Among his confidants are a group of powerful Kremlin aides, security officials and businessmen turned politicians--known as the "Ghosts" because of their aversion to publicity. One of them, banker and parliamentary deputy Sergei Pugachev, is currently under financial investigation relating to his properties on the Cote d'Azur. Pugachev claims that the allegations are part of a campaign to discredit him.

As his reforms get tougher and start to hurt vested interests, Putin cannot afford to alienate his closest allies. Pugachev's name has also cropped up in connection with a continuing battle over the Slavneft oil company--a tug of war that eerily resembles 1990s conflicts marked by suspect court decisions and takeovers of company offices by gun-wielding guards. For the first time during Putin's reign, the Slavneft fight has pitted the Family against the Ghosts; Pugachev is widely regarded as the latter group's "financier." When the French allegations surfaced two weeks ago, Pugachev was immediately granted an audience with Putin--a clear sign of the president's favor. That immediately triggered worried whispers among the Yeltsin-era tycoons. After all, even the most reformed among them know that some things in Russia haven't changed.