Moving In For the Kill; The Yukos affair enters its final phase. Investors are rightly outraged. But they miss an important point.

Byline: Frank Brown

After months of circling, the Kremlin last week moved in for the kill. Russian courts laid claim to the sweetest and biggest piece of the embattled oil giant Yukos--a Siberian subsidiary that pumps 60 percent of the company's crude.

Grabbing an asset worth as much as $39 billion, to settle a $3.4 billion tax bill? World reaction was not pretty. Yukos stock dived, taking the whole Russian market with it. Oil futures spiked to more than $42 a barrel. International investors muttered darkly about "renationalization." At the weekend, the U.S. ambassador made a highly unusual gesture of solidarity, ostentatiously visiting Yukos's headquarters.

In terms of international business and global public relations, it was one of the worst weeks ever for Vladimir Putin. (Ironically, he had just directed Russia's ambassadors to do something to improve the country's slumping image abroad.) Yet the president himself did nothing. There were no soothing words. No denials of a personal vendetta against the jailed former CEO Mikhail Khodorkovsky. No expressions of confidence in Russia's legal system. Western embassies and investors were baffled, both by the president's silence and, even more, by the timing and scale of Yukos's dismemberment. Only weeks before, Putin said he had no wish to see the company destroyed. Yet some Moscow hands consider his motives to be perfectly clear, even justifiable. It's summed up in the old cliche: all politics is local, especially for the Kremlin.

To put it bluntly, Putin faces his biggest crisis since taking office in 2000--and it has nothing to do with Yukos. The Russian president may be no democrat. But it is hard to dispute that he is a reformer, determined to remake Russia as a modern, free-market economy. And just now the Kremlin is embarking on its most unpopular reform of all--stripping away the Soviet-era social benefits that most of Russia's 145 million citizens have long taken for granted. Pensioners and war veterans will no longer be entitled to free medicine and health care. Students will lose their free ride on trains and subways. Housing subsidies for heating, telephones and utilities will be axed.

The government proposes to offset the cuts with direct payments in cash, theoretically of equal value. Yet Russians are deeply skeptical, remembering the crises of the '90s when government wages and pensions went unpaid for months. Thousands have marched in scores of Russian cities in advance of a crucial Aug. 2 ...