Emerging Markets : Putin's Image Takes A Beating

Russia

The so-called Yukos affair continued to dominate headlines. The naming of Dresdner Kleinwort Wasserstein to value the oil company’s major production unit, prior to an anticipated sale to raise proceeds to pay off Yukos’s still-mounting tax bill, briefly reassured investors that a fair resolution to the dispute was still possible. But a snub by the Kremlin of foreign investors in Yukos seeking to meet with President Vladimir Putin to discuss Russia’s investment environment wasn’t encouraging. In early September the company said it might have to halt production following the freezing by a Moscow court of as much as $2.6 billion in funds entering the accounts of its production units.

Some analysts suggest that the Russian authorities will want to end the dispute with Yukos before the anticipated auction of a 7.6% state stake in LUKoil, the country’s second-largest oil company, in late September. The sale is likely to be the single largest privatization in Russian history.

Yukos is not the only tussle in which the government is enmeshed. A dispute in the Russian cabinet between finance minister Alexei Kudrin and economic development and trade minister German Gref, on the one hand, and prime minister Mikhal Frankov bubbled over into the public eye, with the reform wing of the Cabinet appearing to win out.

None of this is helping President Putin, whose popularity rating fell to a new low of 38% in August, down from 56% in February, as unpopular social reforms moved closer to implementation. A spate of terrorism believed to have been carried out by Chechen rebelsa Moscow subway bombing, the downing of two jetliners and the death of hundreds of schoolchildren, teachers and parents at the hands of terrorists in southern Russiaplunged Putin into the gravest crisis of his presidency and further dented his image as the provider of stability to Russia. Security and terrorism have moved to the top of the Kremlin’s agenda, with pressure mounting for movement toward a resolution to the Chechen conflict.

Aaron Chaze