Putin Versus Big Oil.(Vladimir Putin)

The writing is on the Kremlin wall: oil taxes are going up this year. All that remains to be seen is exactly who will pay and how much, and the answers are critical for an oil industry that makes up nearly half of Russia's GDP. They also will be the first concrete signs of where big business fits in Vladimir Putin's economic strategy during his second term, which now seems all but certain, come the March presidential election.

Putin has made it clear that for big business, all tax bills are due. Most famously, his government has jailed Russia's richest man, Mikhail Khodorkovsky of Yukos Oil, on fraud and tax-evasion charges. Other top Yukos shareholders are also either in jail or waiting out the storm in Israel and the United Kingdom. Prosecutors froze 40 percent of the company's shares in November and then slapped it with a $3.3 billion bill for back taxes. And late last year the legislature closed down loopholes that billionaires had openly exploited to cut the official corporate tax rate of 24 percent to an effective rate of 12 percent. At the end of December the government's Audit Chamber pledged to spend 2004 both searching for other alleged tax dodgers and coming up with a better way to tax Big Oil.

In outlining the next phase of his campaign to rein in the big-business oligarchs, Putin is talking about increasing total annual oil-export duties by nearly half, from $6.5 billion in 2003 to $9.5 billion in 2004. This time he is sure to win. Last June the Russian oil majors cowed a peculiar coalition of communist and free-market parliamentarians into defeating a similar tax increase. That vote, by some accounts, infuriated Putin and inspired his campaign against Yukos. Then last month Putin's United Russia party scored an overwhelming victory in parliamentary elections, partly at the expense of two pro-business parties. Putin can now count on a two-thirds majority for an economic agenda topped by higher oil taxes.

The oil industry believes it is being unfairly targeted. Like Yukos, many of Russia's new oil companies were born of questionable privatization deals in the 1990s, and were especially aggressive in using loopholes, including three legal tax havens in underpopulated provinces of Russia. Now those havens are closed, and oil barons including Khodorkovsky have been at the forefront of efforts to clean up Russian corporate governance. They insist their taxpaying and accounting practices are now closer to international standards than the Russian average. And they complain that they are effectively ...