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. Last Updated: 07/27/2016

Finding a Common Language With Putin

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During the recent campaign for the State Duma elections, President Vladimir Putin declared corruption a threat to national security that must be countered by imposing "law and order."

His proclamation, following Mikhail Khodorkovsky's arrest on fraud and tax evasion charges, has fueled intense speculation that officials loyal to the president singled out the Yukos chief due to his growing financial support of opposition parties in the Duma.

The stakes raised by the actions of the Prosecutor General's Office and other government agencies are high for Western governments, multilateral banks and foreign investors that have bet the country is headed toward democratic capitalism.

By leading Yukos to accept standards of corporate governance, Khodorkovsky had become "Exhibit A" for the case that the country should be included in Western institutions as a market economy.

In response to Khodorkovsky's prosecution, U.S. Senators John McCain and Joseph Lieberman introduced a bill on Capitol Hill to exclude Russia from the G-8 group of market democracies.

On Dec. 7, the pro-Putin United Russia, along with nationalist parties that promise to reclaim the country's wealth from billionaires such as Khodorkovsky, won a comfortable majority in the Duma.

Now that Putin has consolidated his power and Khodorkovsky sits in jail awaiting trial, how will the president use his mandate to promote "law and order" and social justice? And how should the West respond?

To attack corruption, the president must demonstrate that no one is above the law. Notwithstanding their recent commitment to corporate governance, Khodorkovsky and other business leaders continue to use patrons in the government to secure favorable decrees, licenses, tenders and tax treatment.

This practice has become so pervasive that Russia suffers from "state capture," a condition where it cannot operate as a law-based state, regulate markets fairly and allocate resources efficiently.

Putin, however, cannot ensure equality before the law if government officials have the discretion to engage in selective prosecutions.

Following Khodorkovsky's arrest, the Prosecutor General's Office froze public trading in certain shares of Yukos, which have now fallen in price by over 30 percent.

Yukos has been unable to merge with junior partner Sibneft on terms that would have created one of the largest oil companies in the world. The result of the investigation is that Yukos' property is being redistributed by prosecutorial fiat.

Putin has sought to assure Western stakeholders that Khodorkovsky will receive a fair and open trial. Many are inclined to give the president the benefit of the doubt.

After a recent meeting with Putin, International Monetary Fund chairman Horst K?hler stated that the prosecution of Khodorkovsky does not signify a reversal of economic and legal reform.

Such "happy talk" misconstrues the dilemma the West faces in Russia today. Though the Putin government has adopted new commercial laws and criminal procedures, it has not shaped institutions capable of executing, adjudicating or enforcing them. Without such institutions, neither property nor contract rights are enforceable.

In the 1990s, despite concerns that Yeltsin's government was privatizing state enterprises too quickly, the IMF, World Bank and foreign governments agreed to financially support the process.

This "Washington consensus" was based on the belief that an independent judiciary and other institutions would sprout naturally to protect the private wealth of a middle-class spawned by privatization.

Instead of a middle class, the rapid privatization empowered a class of "rent-seekers" -- those who profit by using their access to the power to control state assets.

Instead of a rule of law, rent-seekers created the "law of rules."

Under this system state institutions, including public prosecutors, courts and bailiffs, can be manipulated to reexamine or reverse the privatization of Yukos or any Russian company.

Under the law of rules, there are no free rides for foreign investors. Any business -- even one with clean hands -- may have its property seized, its profits squeezed, its people prosecuted as criminals.

For example, in the name of vaguely defined "state interests," officials in Russia's regions have engaged in "discretionary expropriation" of foreign businesses sanctioned by local courts.

The evidence is mounting that the Kremlin is seeking to engineer the construction of a market economy without a rule of law based on a strict separation of powers.

To hold the government accountable to protect private property, Western stakeholders must find common language with Putin over the precise role of institutions in building a law-based state.

Recently, Prime Minister Mikhail Kasyanov declared that the government would eventually seek to bring the Prosecutor General's Office under the control of the Ministry of Justice.

In the meantime, to restore confidence in the investment climate, the Kremlin must strictly define and curb the prosecutors' discretionary powers, and clarify how the courts can exercise independent judgment where the Prosecutor General's Office, or any other government agency, is representing state interests.

As a threat to national security, corruption should be a priority matter of mutual concern to Putin and his supporters in the West. Western stakeholders should closely monitor the results of the president's efforts to recapture the state from special interests.

For example, on Nov. 24, Putin created an Anti-Corruption Council to uncover conflicts of interest among government officials. To attack the institutional roots of corruption, however, Putin must also be convinced to empower independent courts and allow a free press.

As a sovereign nation, Russia has the right to establish its own rules of the game. Western stakeholders, however, have the right both to know the rules and to expect that they cannot be changed at will. Currently, rent-seekers can control both process and outcome.

Western parties are entitled to know whether the country intends to build a market governed not by men, but by institutions and laws.

Matthew Murray, president of management consultancy firm Sovereign Ventures, Inc., contributed this comment to The Moscow Times.