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. Last Updated: 07/27/2016

Kremlin Tempers Attack on Yukos

President Vladimir Putin's efforts to minimize the economic fallout from the Yukos affair unexpectedly breathed new life into a collapsing market Friday, and a stern warning to prosecutors Sunday via his new chief of staff suggested he was determined to contain the damage.

In his first public statement about the legal assault on Yukos since succeeding Alexander Voloshin as presidential chief of staff late Thursday, Dmitry Medvedev said prosecutors should think twice about the economic impact of their actions.

Specifically, Medvedev, who is also board chairman of state-owned gas giant Gazprom, questioned the legal effectiveness of the unprecedented move by prosecutors last week to freeze more than $12 billion in YukosSibneft shares, which resulted in one of the largest sell-offs since the 1998 crisis.

"The question arises: how effective legally was the freezing of Yukos shares?" Medvedev said in an interview shown on Rossia state television. "Our colleagues should ... consider the economic consequences of the measures they take. ... This is a dangerous thing."

Political analysts polled Sunday said Medvedev would only have made those remarks if Putin had approved them, and that they appeared to be an attempt not only to assuage the global investment community, but also to avoid a potentially damaging split with Prime Minister Mikhail Kasyanov.

Kasyanov, an ally of Voloshin, who tendered his resignation after the arrest at gunpoint of Yukos CEO Mikhail Khodorkovsky on Oct. 25, broke ranks with the Kremlin on Friday by warning that the freezing of 44 percent of Yukos was a "new phenomenon" with consequences that were impossible to predict.

"Putin understands that if Kasyanov steps down over this, then Kasyanov would turn into a huge political figure that big business could unite around," said independent political analyst Andrei Piontkovsky. "This is an important political development that shows Putin does not want to risk a direct confrontation with Kasyanov, that he is attempting to find a compromise."

Medvedev's remarks came as two leading British papers reported that Khodorkovsky had handed over voting rights to his shares in Yukos to an influential member of the Rothschild banking empire, Lord Jacob Rothschild.

Yury Kotler, spokesman for Menatep, the parent company of Yukos, denied the reports, which ran in the Sunday Times and the Sunday Telegraph. He said Leonid Nevzlin, a core Yukos shareholder now in exile in Israel, had become the sole beneficiary of the trust that holds most of Yukos' stock as soon as Khodorkovsky was jailed on charges of fraud and tax evasion.

Representatives of Lord Jacob Rothschild could not be reached for comment Sunday. He is a member of the board of Khodorkovsky's charity, the Open Russia Foundation.

Putin himself went on a charm offensive Thursday at a meeting in the Kremlin with executives of more than a dozen leading Western and Russian investment banks. The unprecedented powwow came less than an hour after prosecutors announced they had seized the Yukos shares as collateral for the $1 billion Khodorkovsky allegedly cost the state.

To some extent, Putin's insistence that the Yukos affair was an isolated event calmed the market and reassured investors. The benchmark RTS index jumped 1.9 percent on Friday, with Yukos, which rose 7.5 percent, at one point leading the way.

"Putin insisted this was not going to be a campaign against corporate Russia," said Charles Ryan, who attended the meeting as CEO of United Financial Group. "The fact that he did not see this spreading to other companies and that he underlined the difference between the culpability of individuals and of the corporate entity were all positive."

Ryan said Putin also conceded some of the prosecutors' actions in recent weeks had been "overzealous."

Seemingly in response to that remark, prosecutors Friday announced they had unfrozen 4.5 percent of the 44 percent stake arrested the day before. They said they did so because they discovered that the shares belonged to "individuals with no relation to the criminal cases currently being investigated."

Neither Menatep nor prosecutors would say who owns the unfrozen stake.

"There's a lot of uncertainty right now, but it was reassuring that Putin said the attack is going to be limited," Ryan said. "In the short term, there's going to be disquiet, but Putin is intent on making people follow the rules."

The legal assault on Yukos kicked into high gear in July with the arrest of Yukos co-founder and billionaire Platon Lebedev. In the weeks and months that followed, prosecutors turned up the heat with a series of raids on affiliated companies, culminating with the dramatic pre-dawn arrest of Khodorkovsky by a team of Federal Security Service agents while his plane was refueling on a Siberian runway.

Analysts from across the political spectrum have said the move comes in response to Khodorkovsky's attempts to encroach on Putin's political power base -- in clear breach of a tacit agreement Putin reached with the oligarchs shortly after he was elected president. If you want to keep your assets, he essentially told them, stay out of politics.

Putin, however, compared the attack on Yukos to probes launched in the United States against Enron and WorldCom, according to participants of the meeting.

"He assured us that [the case against Yukos] does not represent ... any change in the government's commitment to the market economy," The New York Times quoted Morgan Stanley global chairman Stephen Newhouse as saying after the meeting.

Putin also dangled other carrots to keep investors interested in Russia. Most importantly, he promised it would be a matter of "months, not years" before the "ring fence" that forbids foreigners from owning domestic Gazprom shares is lifted. Foreigners interested in investing in Gazprom currently must buy American depositary receipts, which cost about double what domestic shares cost. Minority Gazprom investors have lobbied long and hard to level the trading field, which will likely lead to a radical revaluation of the company.

Gazprom shares at home and abroad soared on the news.

Despite Putin's assurances, investors say the onslaught on Yukos has raised serious doubts about Russia's commitment to property rights.

"I don't understand the endgame," Ryan said. "I don't know how all this is going to play out."

Even though Putin insisted at the meeting that the aim of the stake freeze was to secure collateral for the fraud charges against Khodorkovsky, most investors and analysts seemed to think it was inevitable that Khodorkovsky would be forced to give up control of Yukos.

"Everything is leading toward Khodorkovsky being pressured into giving up his role as owner and manager of Yukos," said Lilia Shevtsova, a senior political analyst at the Carnegie Moscow Center. "The Kremlin is pushing for ownership change the same way it did with [former Sibur chief] Yakob Goldovsky and with [former NTV owner Vladimir] Gusinsky." Both of these former oligarchs were briefly jailed.

"President Putin could really believe that the campaign against Khodorkovsky does not mean a violation of property rights. He believes that he is the guarantor of property rights. But investors will see that every step to the right and left [of the Kremlin line] can be in violation of the shadow rules of the game ... and [they] will suffer," she said.

It's not the first time Putin has won over a Kremlin audience and ultimately acted in contradiction to what he told his listeners. In the spring of 2001, Putin met with leading journalists and editors of the independent NTV television station and told them that the Kremlin did not intend to crack down on the media.

Not long after that meeting, NTV was taken over by state-controlled Gazprom, and within two years no independent television stations with a national reach were left.

"His meeting with us was aimed at calming down journalists and at creating a good impression for the outside world," said one of the participants of the NTV meeting, who requested anonymity. "It was a PR exercise, that's all."

"Putin is a very charming person. He listens to everyone carefully and looks them straight in the eye," said Alexei Venediktov, editor of Ekho Moskvy radio, who is close to many former NTV journalists. "He always says the right things. But when you compare his words to what is happening in the country, it does not quite fit."

"Investors have to judge Putin by his actions, not his words," said Stephen O'Sullivan, co-head of research at UFG.

"They have to carefully watch the ongoing investigations into Yukos' license rights, and watch for signs that the attack is spreading to other oligarchs."

In a sign that the licenses Yukos holds to develop oil fields may be under threat, the Natural Resources Ministry on Friday handed the temporary license Yukos held to develop the vast Talakanskoye field in eastern Siberia to Surgutneftegaz.

Surgut now has the inside track in the tender for the permanent rights to the field, which is scheduled for the second quarter of 2004.

The company's shares rocketed 13 percent on the news.