‘This wasn’t Mother Teresa versus Mike Tyson. These were two big tough guys at it with each other and one of them won. Putin won, Khodorkovsky lost, but it was a fair fight. He certainly didn’t deserve the pity of some type of political prisoner because all the things he did basically disallow him from claiming that’
- BILL BROWDER, Hermitage Capital Management1
WHEN BRITISH SECURITY consultants arrived at the Moscow headquarters of the Yukos oil company in late summer of 2003, they were shocked by its size, opulence, and almost military atmosphere. The ‘office’ turned out to be an imposing Victorian castle with huge bronze letters declaring its presence. It was surrounded by a tall, wrought-iron fence with sharp spikes and barbed wire and armed security guards patrolled the grounds.
As the consultants walked through the endless labyrinth of doors, rooms, and bunkers, it was as if they had entered the command and control HQ of a private army. After a bewildering number of corridors, they finally entered the private office of Leonid Nevzlin, Director of Corporate and Political Affairs at Yukos and a close confidant of its majority shareholder, Mikhail Khodorkovsky. There was a Zen-like atmosphere about the room: it was furnished with a single, plain white table, a plain rug and was minimally decorated.
Eventually, the thin, wiry, intense Nevzlin walked in wearing a designer suit with a black silk shirt. He was in a pensive, impatient mood. A month earlier the Prosecutor-General had announced the start of an investigation into Yukos. Within days the police had embarked on a series of heavy-handed raids on Yukos’s offices. Then, on 2 July 2003, Platon Lebedev, Khodorkovsky’s right-hand man and a major shareholder in Yukos, was arrested and hauled away in handcuffs. Over the next week arrest warrants were issued against a number of other executives.
Nevzlin was nervous that other senior executives would suffer the same fate as Lebedev. The British consultants had been called in to give advice on the security and protection of these key staff. Their immediate priority was a little-known 32-year-old executive named Ranil Burganov, a Director of a Yukos exploration company. Indeed, the Russian authorities had already accused Burganov of fraud relating to the Eastern Oil Company, a Yukos subsidiary, which consisted of stakes in six oil companies. The Russian police had earlier searched his house, interviewed his wife, and seized some of his assets. Within days he had been moved out of the country to Malta.
From that point, Yukos’s management moved rapidly. Around twelve other executives also fled Russia. Several went to Malta, some to Cyprus. This was merely an interim move. There was concern that these countries might comply with a Russian extradition request. London, in contrast, was considered a safe haven and a new plan was hatched to smuggle the Yukos employees from their Mediterranean hideaways into safe houses in the UK.
As the first individuals to be moved were hiding in Malta, the first phase of the clandestine operation was code-named Operation Maltesa 1. It was a challenging assignment. The problem was how to ferry the Yukos exiles into the UK and prevent them from being stopped at Heathrow. To solve this problem, they were provided with tourist visas and travelled by ferry and yacht, the reason for this being that immigration and customs officials usually only check the vessel, not the individuals on board.
Burganov was moved by yacht across the Mediterranean via safe houses in the South of France. He was then driven from Bordeaux to the north coast of France, placed on a ferry at Le Havre, and landed at Folkestone in Kent. As soon as he arrived, a dark cloak was placed over his head and he was driven to a flat near Oxford Circus. It was a sparse apartment rented from a service company, so the tenant could not be identified. He was placed under tight security with twenty-four-hour protection. Two bodyguards were with him at all times. Protected in this way for nearly a year, the former Yukos executive was not allowed to leave the flat unless it was vital. Although he was a man of simple tastes, he hated the flat and his new life drove him crazy. For relief from the daily grind he was allowed a computer and a set of video games.
It was hardly the life of luxury he had been promised by his superiors. Although he felt like a prisoner, he cooperated because he had little choice. When he did leave the flat, he was always accompanied by his two bodyguards, who would back off when he went into a shop. At one point he was given tickets to see his favourite football team, Tottenham Hotspur.
Even when his wife and daughter flew to London to visit him, there was an elaborate counter-surveillance operation to prevent his detection by Russian intelligence officers.
Although his wife and daughter received visas for the visit from British authorities, there was still a fear that, if they were followed, Burganov would be located, kidnapped, and returned to Russia. On their arrival at Heathrow his wife and daughter were picked up by taxi, dropped off at one location, collected by a different taxi and taken to another, an underground station. After a brief tube journey, they went in yet another cab to a restaurant where they were reunited with Burganov.
That protection ended in January 2005. Burganov had applied for political asylum and been handed over to a specialist immigration lawyer who secured his UK residency. The Russian authorities requested his extradition for fraud offences but it was too late. Foreign citizens granted asylum in the UK are usually automatically protected from extradition requests. At his extradition hearing the request was discharged by the judge because he had already been granted asylum.
As soon as his status was secure, Burganov moved into a much more comfortable flat in St James’s Square and settled into a new life. The property had been bought by a British Virgin Islands-based company called Vengrada Estates, which has offices in Geneva and Mayfair. Burganov’s finances were secure and held in an offshore company called Lutton Invest and Finance, also registered in the British Virgin Islands, and set up by wealth management company the Trident Trust. The following year he moved into a new apartment in Bayswater, bought for £520,000 and registered in his own name.
The next smuggling case was more challenging. Known as Operation Maltesa 2, this involved using the same procedure to move Natalia Chernysheva, a senior Yukos executive and adviser to Khodorkovsky. She had been accused by the Russian authorities of embezzlement in relation to the privatization of a state-owned chemical company. A prime target for the prosecutors, she also needed to be moved quickly.
Indiscreet and outspoken, Chernysheva was more difficult to manage during the risky journey in the late summer of 2003. She was also a habitual name-dropper, which irritated her security handlers.
When Chernysheva arrived in London, she was taken to the Grosvenor House Hotel on Park Lane. When asked if she wanted security, she refused. ‘I know the right lawyer,’ she snapped and walked off into the Mayfair night. Her bodyguards were mightily relieved. ‘She argued about everything,’ said one of the security consultants. But going it alone was a high risk for Chernysheva. A year later, in September 2004, the Russian authorities issued an arrest warrant and requested her extradition. But she could indeed afford the best lawyers - Edward Fitzgerald, QC, and solicitors Corker Binning - and in March 2005 the presiding judge rejected the extradition request - on the grounds that it was politically motivated - and the former Yukos executive was a free woman. She continues to live in London.
A number of other Yukos executives also entered the UK from their secret base in southern Cyprus. Known as Operation Olive Grove, this was a safer and easier route and had been used by one of Khodorkovsky’s associates who settled in a safe house in London, just off Piccadilly.
The costs of Operations Maltesa 1 and 2 and Olive Grove were paid from a Yukos offshore account in the Isle of Man by bank transfer. Hundreds of thousands of dollars in cash from the transfer were stashed in safety deposit boxes in Knights-bridge and Mayfair. These were then used to disperse the fees and expenses. As for their predecessors in the 1990s, paying in cash was routine for the new arrivals, as commonplace as having a bodyguard, but it was a practice that would become more difficult after 2 June 2008. On that day Metropolitan Police Specialist Crime officers raided a Mayfair safety deposit centre on Park Street, the culmination of a two-year undercover anti-money-laundering operation. They found vast quantities of cash and sensitive documents belonging to at least one former Yukos executive and a prominent Georgian businessman - as well as handguns, fake passports, and cocaine.
Unlike Boris Berezovsky, the oil billionaire Mikhail Khodorkovsky was strategic, modest living, and methodical. Highly focused and intense, he often appeared oblivious to his immediate surroundings. A classic boffin-type intellectual, he once arrived for a business meeting wearing only shoes, socks, trousers, and jacket, having forgotten his shirt and tie. None of this, however, should disguise his single-minded, ruthless streak - he was known to install CCTV cameras to spy on his own staff. Like Berezovsky, Khodorkovsky was merciless in his pursuit of wealth and power. One journalist who interviewed him in Davos in 2003 remembers ‘rarely meeting anyone with such hard and unforgiving eyes’.2
As Russia faced bankruptcy in the late 1990s, Khodorkovsky became obsessed with protecting the value of his multi-billion-pound fortune. Like some of his fellow oligarchs, he had obtained lucrative state assets cheaply, but in the volatile atmosphere of the time his windfall wealth was far from secure. Knowing that the authorities might one day claw back the nation’s wealth by reversing the privatizations or imposing retrospective taxation, the tycoon had already taken contingency measures.
As his business empire expanded in the 1990s, Khodorkovsky, like most tycoons, developed an aversion to paying tax. Fortunately, there was a neat solution that would enable him to both protect his assets and avoid paying tax: he could move his assets offshore and into hard currencies. With advice from Western European financial experts, they developed a complex network of offshore companies and accounts.
However, parts of Khodorkovsky’s business empire may, it seems, have had quite a cosy relationship with certain elements of the Russian state. This was confirmed in testimony to the US Senate Banking and Financial Services Committee in 1999, which described a ‘KGB money-laundering operation with stolen funds that were passed through Khodorkovsky’s Menatep Bank as a KGB-controlled front firm’.3 In effect, the committee was told the bank was being used by Kremlin insiders and top KGB officials as their paymaster. The reward for the oligarch was a large pot of gold, which one source described as ‘a platinum parachute’.
Bank Menatep - registered in a PO box in Gibraltar - was at the centre of all Khodorkovsky’s business operations. It was through Menatep in 1996 that he acquired his biggest prize of all, Yukos oil, in the ‘loans for shares’ auctions.4 The potential flow of money from the oil business was huge and required an even more complex set of arrangements.
As Khodorkovsky’s empire escalated and his offshore base expanded, friends suggested that he might need specialist legal advice. The lawyer he turned to was Stephen Curtis.
In the summer of 1997 Khodorkovsky arrived at Luton Airport in his private jet. Surrounded by three bodyguards and amid intense secrecy and security, he was driven to Curtis’s offices at 94 Park Lane. Soon Curtis had signed up his first oligarch client and set about masterminding the restructuring of Yukos and its offshore network.
Excited by the challenge, Curtis’s first task was a major one: the creation and setting up of Group Menatep, which was incorporated on 5 September 1997. Menatep became the vehicle of ownership for the oligarch’s legal control of Yukos, but its primary purpose was to protect Khodorkovsky’s assets from being frozen and seized by the Russian authorities. This could only be done by setting up an elaborate offshore network.
Also registered in a PO box in an anonymous suite in Gibraltar, Group Menatep Ltd’s (GML) original share capital was just five million shares, despite controlling assets worth billions of dollars. These were held equally between Stephen Curtis and a senior accountant based in Cyprus. All but one of these five million shares were then transferred to a trust called the Palmus Foundation and offshore companies in Liechtenstein, Cyprus, and Gibraltar. The one remaining share was retained by Curtis.
However, GML was ultimately controlled by Khodorkovsky. His majority shareholding was administered by a special offshore trust of which he was the sole beneficiary. This was set up by Curtis, who was given voting rights in the event of Khodorkovsky’s arrest or death.
In effect, Curtis had become the custodian and protector of Yukos’s and Menatep’s assets. He was not the beneficial owner of the shares, but he held them in trust. He was the firewall that investigators later hit when they tried, mostly unsuccessfully, to penetrate the bewildering maze of interlocking companies and trusts that had been established.
Khodorkosvky both trusted and liked the sociable Curtis, who was honest and did not steal from him. The oligarch also liked the way the Mayfair lawyer kept most of the sensitive details in his head and the paper trail to a minimum. Although this helped maintain secrecy, it was also a reflection of Curtis’s computer illiteracy and chaotic filing system (he preferred to dictate his letters and attendance notes verbally). Like an absent-minded professor, Curtis often carried about him scraps of paper with scribbled notes of information relating to hundreds of millions of pounds. And on the rare occasions when he could not recall data, he would telephone his staff at 3.00 a.m. for the answers.
Sometimes minutes were kept. Indeed, the scale of the operation was revealed in the minutes of a meeting in June 1999 at Curtis’s offices. These showed complex and impenetrable financial networks that stretched across the globe. Hundreds of millions of dollars of Russian oil profits from Yukos were spirited away via offshore accounts in Gibraltar, the Cayman Islands, and the Isle of Man.5 However, exactly how much will never be known.
The network that handled the oil flow was code-named Jurby Lake, named after a stretch of water in the Isle of Man. Some of the revenue from Yukos oil exports flowed through Jurby Lake into a range of companies in Switzerland, Liberia, and the Republic of Ireland. It was these companies that accumulated vast sums in profits. Although they all had legally separate entities, they shared a common office in Geneva.
Placing money offshore in this way proved a huge financial bonanza, helping to save Khodorkovsky’s fortune when the rouble collapsed in 1998. As the crisis turned into near catastrophe, Menatep found itself, at least publicly, in deep trouble. Consultants and staff went unpaid, and the bank blocked withdrawals and deposits and refused to pay its creditors. The Central Bank withdrew its licence and its giant name in letters was quietly removed from its façade at its Moscow headquarters while depositors queued up in their hundreds, largely in vain, outside the grand marbled building. Menatep might have appeared to have crashed but most of its assets, including Yukos, had already been safely deposited abroad in hard currency largely through the offshore networks set up by Curtis.6
The shuffling away by Khodorkovsky of these assets to offshore subsidiaries and bank accounts was not just a mass tax avoidance device. During the second half of the 1990s, Western investors sensed the potential profits to be made and poured money into Russia. Many were so keen to get involved in the newly privatized companies that the normal process of due diligence was often carried out only superficially. By hiding the assets in this way, some minority shareholders in Yukos claimed that this structure was used to hide profits and hence avoid making their dividend payments.
One of the minority investors was Bill Browder, who set up Hermitage Capital Management, once the largest private foreign investor in Russia. From 1997 to 1999, the share price of Yukos crashed precipitously from a high of $6 to a low of 8¢. Although the fall was mainly down to the economic crisis rocking Russia at the time, this was not the only reason. ‘While some of the drop in the share price - from $6 to about $1.25 - was down to the market, the rest from $1.25 to 8¢ was as a result of the asset stripping plan,’ said Browder.7
Browder was just one of several Western casualties. Among Menatep’s creditors were the German Bank West LB, Japan’s Daiwa Bank, and South Africa’s Standard Investment. Between them they had lent Menatep, with deeply unfortunate timing, a total of $236 million just a few months before the crash in 1998. As collateral, the lenders were pledged shares in Yukos - the equivalent of 30 per cent of the company. The shares would be reclaimed by Menatep when the loan was repaid. On paper the deal looked pretty robust.
When, following the crisis, they inquired about the state of their loan, the overseas banks were given a remarkable runaround. Repeated requests for information were met with contradictory answers. At one point a truckload of Menatep documents being shipped out of Moscow ended up in the Volga River. Moreover, to hide the true state of the bank’s finances, Khodorkovsky embarked on a series of new financial manoeuvres, effectively playing a game of hide and seek with both the bank’s and Yukos’s assets.
On one occasion shares were sold on Khodorkovsky’s behalf in two of Yukos’s main petroleum-producing units to a group of offshore subsidiaries. Menatep claimed that it did not know who owned these companies, but it emerged that one of the subsidiaries was owned by close advisers of Khodorkovsky. Yukos’s minority investors claimed that profits were being siphoned off into anonymous offshore accounts and at least one shareholder hired private detectives to find out what had happened.
The effect of the share offloading was that Menatep’s assets were further diluted. As a result, the overseas banks owned 30 per cent of a company that was little more than an empty shell.
While Khodorkovsky and Curtis set up elaborate offshore arrangements, they had not reckoned on the emergence of whistleblowers. One was Elena Collongues-Popova, a Russian living in Paris who managed another network of offshore accounts for Menatep from 1996.
Collongues-Popova, once married to a KGB colonel, became involved in Menatep following a party for elite Russian businessmen in St Tropez in 1995. She claimed that she was eventually managing twenty to thirty companies, registered in her name - in Switzerland, Luxembourg, the British Virgin Islands, the Seychelles, Panama, and the Bahamas - involving transfers of some £150 million a year. Some of the transactions allegedly passed through major London-based British and American banks.
Working in what one observer described as the ‘seedy back streets of global finance’ also offered a bonus: a glamorous lifestyle. ‘I could have bought an English football club,’ joked Collongues-Popova. ‘It was like the soap opera Dallas. It meant executive jet flights all the time - to the Caribbean, to the Seychelles, and to the Isle of Man. It was a life of luxury hotels, top restaurants, and endless supplies of cash to bribe the right people. I cannot remember how many pearl necklaces - at £80,000 apiece - I bought to win over the wives of our go-betweens.’8
Like the methods used by spy rings and terrorist cells, the complex network of companies linked to Menatep and Yukos was run by different people, each deliberately kept at arm’s length from each other to preserve secrecy. ‘It was like a big building block in which there were many apartments, everybody had his own key and was doing his own business with his own premises,’ admitted Collongues-Popova.9 The network only emerged during an investigation by the French tax authorities, which had uncovered large amounts of cash moving in and out of Collongues-Popova’s bank accounts.
During the investigation into Yukos, she was asked to go to Moscow to testify but refused because she feared for her safety. In an attempt to clear her name, in August 2003 she sent the Russian prosecutors boxes of documents including corporate papers, trading reports, and bank statements dating from 1996 to 2000.
While some of the billions that flew out of Russia and into foreign bank accounts were the result of tax avoidance, a great deal also disappeared through wire transfers, phony import-export documents, oil shipments, and other devices.10 It mostly came from what should have been highly profitable companies providing the backbone of the Russian economy. There is even evidence of the looting of international loans from the IMF made to help prop up the rouble.11
Despite his growing business empire, Khodorkovsky also sought political influence to protect his interests after Putin came to power. ‘It makes me weep when Boris Berezovsky talks about this group of people having 100 per cent political influence,’ Khordorkovsky said in 2000. ‘If we had just 10 per cent of the political influence that Berezovsky claims, we would never have allowed the government to impose the unbearable tax burden on business that it has.’12 His own influence at the Kremlin was in decline. He had been extremely influential at the Ministry of Fuel and Energy under the Yeltsin regime but, as Putin’s star rose, so Khodorkovsky’s declined.
Unwilling to be cowed by Putin and his new tougher line on the oligarchs, Khodorkovsky turned to a new tactic. He now realized that for Yukos to become a global energy power and attract foreign investors he needed to clean up his commercial reputation. To his credit, he did not attempt to deny a chequered business past. ‘We started out as robber barons, but you have got to understand that rules were hazy in those early days and we changed ourselves as we became familiar with what was expected of us,’ he said in December 2001. ‘I don’t think I actually violated the law but it took me some time to realize that above and beyond the law there were also ethical laws.’13
Realizing the deep-seated damage to his reputation from a run of exposures and the potential risk from the Russian investigators, Khodorkovsky set out to reinvent himself as a responsible businessman and to rebrand Yukos as a law-abiding company. In May 1999 the oligarch paid a whirlwind visit to Washington, DC, and New York. He toured the New York Stock Exchange, met newspaper editors, and attempted to defend his business methods.
By the end of 2000, the Yukos boss was well into his international charm offensive. He realized that transparency and efficiency were now in his own financial self-interest. He was, as The Economist put it, ‘The first of the Yeltsin-era tycoons to see that there was even more money to be made by going straight’.14 He ended some of the more controversial aspects of the offshore scams, brought some income back onshore, used profits to reinvest, and even started to pay taxes. Suddenly, he was a model of corporate transparency, released financial records, paid dividends, and even repaid, at least in part, some depositors who had lost their money when Menatep collapsed in the 1998 financial crash. To meet his new goal - to create ‘something huge’, a Western-style quoted company listed on the London or New York Stock Exchange - he knew he would have to play by their rules.
Accordingly, he set up company towns like Nefteyugansk, where even the Christmas lights on Lenin Street were in the shape of the Yukos corporate symbol - a green and yellow triangle. In a desolate town where temperatures reach -40 degrees C in mid-December, Yukos supplied everything, from new computers to fresh water. The company provided a hospital, welfare, and even a police force. Based on the Japanese business model, drugs or drinking were forbidden and there were early morning exercise sessions.
In July 2001 Khodorkovsky sat in his nineteenth-century-mansion HQ in Moscow under a sign with a slogan that read, ‘Honesty, Openness, Responsibility’ and told the New York Times of his conversion to business transparency. Having once denied that he owned any shares in Yukos or Menatep, he now confessed details of his controlling stock and published accounts to international guidelines. Khodorkovsky hired American and French executives from Western oil companies and banks and appointed prominent politicians as non-executive directors. ‘He was trying to protect his rear,’ according to one British academic who knew him well. The change of heart was rewarded by investors. In the years after 2000 Yukos’s share price soared, boosting the value of the company and Khodorkovsky’s personal fortune, although the rising demand for world energy was the major factor.
To help improve his image abroad, Khodorkovsky hired Western PR experts and contributed generously to conservative think-tanks linked with the Bush administration. He turned to APCO Worldwide, the savvy American lobbying company and a subsidiary of the global giant Grey Advertising. The lobbying company was paid an upfront fee of $4 million, a monthly retainer of $25,000 for website design and maintenance, and an annual fee of $90,000.
It was APCO that advised him to create the Open Russia Foundation, modelled on George Soros’s Open Society Foundation. It was launched with much fanfare in London’s Somerset House on the evening of 10 December 2001. Khodorkovsky flew in from Russia and told guests at the launch, ‘I am launching the Foundation in London to highlight the international nature of the Foundation’s aims and to create an infrastructure from which the next generation of Russia’s leaders will emerge. Yukos oil already supports various educational programmes in Russia and I view this as the next step towards encouraging further cooperation between our country and the West.’15
In the same week Khodorkovsky held court at the Dorchester Hotel, a venue long associated with controversial foreign tycoons and royal families. Even in the grandeur of the Dorchester tearoom, there was little that was flashy or ostentatious about Khodorkovsky or his presentation. The diffident executive was escorted by a press officer and interpreter, but there was not a bodyguard in sight. When asked whether he was uncomfortable about being so rich in a country where poverty was widespread, he answered, ‘A wealthy person is not very comfortable in Russia.’16
Describing itself as the ‘first Russian international corporate philanthropic foundation’, the Open Russia Foundation was launched in the US in September 2002 in the elegant hall of the Library of Congress in Washington, DC. The launch was attended by America’s political and business elite and addressed by James Wolfensohn, President of the World Bank. Many of those present no doubt smelt new and lucrative networking opportunities. With APCO’s help, the foundation recruited powerful figures as trustees, notably Henry Kissinger, Dr Mikhail Piotrovsky, Director of the St Petersburg’s fabled State Hermitage Museum, and Lord (Jacob) Rothschild.
The multi-millionaire scion of the banking dynasty, Lord Rothschild is a close friend of Prince Charles and one of the best-connected bankers in the world. Khodorkovsky first met him in the 1990s when he was invited to a party at his country home at Waddesdon Manor, Buckinghamshire. Unsure about navigating his way through Western corporate governance waters, Lord Rothschild became a confidant of Khor-dorkovsky’s and allowed his offices in St James’s to be used as the London address of the Open Russia Foundation. He was so trusted that he was assigned the voting rights behind Khodorkovsky’s Yukos shares in 2003. That meant that the veteran banker could vote at board meetings and AGMs as a surrogate for the oligarch in his absence.
Henry Kissinger was also an admirer and even travelled to Moscow to support a joint project with the foundation to promote ‘Russian democracy’. But not everyone was so enthusiastic. Former Senator Bill Bradley of New Jersey was invited but declined. Although the foundation funded projects inside and outside Russia, including exhibitions of Russian art at Somerset House and a programme to bring together young British, American, and Russian leaders, it always had a modest $15 million budget. According to the American journalist Lucy Komisar, ‘Open Russia Foundation’s grants seemed aimed more at cultivating powerful friends than promoting democracy. A book of photographs of Russia by Lord Snowdon was commissioned. The Foundation also gave $100,000 to the National Book Festival, a favourite charity of Laura Bush, the wife of President George Bush.’17
Khodorkovsky also pumped money into the powerful investment fund Carlyle Group, run by Frank Carlucci, a former deputy director of the CIA and US Defense Secretary under Ronald Reagan. These moves all helped to secure the oligarch goodwill among powerful US political figures. Hoping to win over public opinion, in 2001 he invited a handful of prominent journalists on what became an infamous champagne-fuelled junket around Russia by private jet. The trip, organized by Prince Michael of Kent, became known among Moscow correspondents as the ‘plane of shame’.
The Open Russia Foundation also donated $1 million to the Open World academic exchange programme, championed by the Librarian of Congress and Russian scholar James H. Billington. In September 2002 Billington organized a dinner at the Library of Congress at which he described Khodorkovsky as a ‘visionary’. Later, in the grand setting of the Members Room of the Thomas Jefferson Building, Khodorkovsky and Lord Rothschild mingled with congressmen, State Department officials, businessmen, and Russia experts. The rebranding and relaunch of the oligarch had been an ‘enormous success’, according to Lord Rothschild.
In Britain Khodorkovsky’s foundation also paid for Somerset House to retrieve paintings once owned by Sir Robert Walpole, Britain’s first Prime Minister, which had been sold off to Catherine the Great by Walpole’s eccentric and flamboyant grandson. In 1779, 204 of the finest paintings in the Walpole Collection were shipped to the State Hermitage Museum in St Petersburg. Khodorkovsky’s money funded the return of thirty-four of the paintings back to London. Entitled ‘Passion, Painting and Politics’, the exhibition was displayed in ‘The Khodorkovsky Room’.18
To win influence, the oligarch indirectly donated to the Foreign Policy Centre (FPC), which has close links with the Labour government, and whose patron was Tony Blair. Such politically connected think-tanks are, according to the FPC’s former Communications Director Rob Blackhurst, beholden to their corporate sponsors. ‘The FPC has accepted more than £100,000 from an unnamed Russian oligarch to establish a programme on Russian democracy,’ Blackhurst stated in January 2005. ‘The money does not come directly. It is channelled through London PR companies presided over by a retinue of former New Labour special advisors. The PR people want to shift public sympathy away from Vladimir Putin and they are no doubt delighted that the project has led to a paper criticizing Downing Street’s closeness to the Russian President.’19
Like most oligarchs, Khodorkovsky was enamoured of the House of Lords and cultivated influential peers. In late 2000 he was invited to lunch at the Lords by Baroness Smith, the Labour peer and widow of former Labour Party leader John Smith. The Baroness was a consultant to BP, which was then starting to invest in Russia, and the country fascinated her. As part of his cultivation of the New Labour establishment, Khodorkovsky donated to the John Smith Memorial Fund, which was why he was invited. As Khordorkovsky does not speak English, he was seated next to Lord Skidelsky, distinguished academic and biographer of John Maynard Keynes and a fluent Russian speaker. The peer asked the oil baron what he thought of Putin. ‘He is a perfect representation of [mainstream] Russian opinion,’ he replied dismissively, alluding to the fact that the President understood the basic instincts of Russian people. Khodorkovsky’s generosity to the Fund was further rewarded when he was invited to 11 Downing Street and thanked personally by the then Chancellor of the Exchequer, Gordon Brown.
Khodorkovsky also hired Lord Owen, one of the founders of the Social Democratic Party. Lord Owen had already been involved in Russian business as a Director and figurehead for Middlesex Steel, owned by the oligarch Alisher Usmanov, since 1995. The former Labour Foreign Secretary was retained as a paid consultant to Yukos.
Khodorkovsky also retained the lobbying company Public Policy Partnership, owned by Lord Gillford. Known as Paddy, he is the only son and heir of John Meade, the 7th Earl of Clanwilliam. Educated at Eton and Sandhurst, Gillford is a former Coldstream Guardsman and became head of the public affairs (i.e. lobbying) unit of Hanson Plc, Lord Hanson’s construction conglomerate. He has all the attributes of an aristocrat: monogrammed signet rings, tailored pinstriped suits, and a cut-glass accent straight out of P. G. Wodehouse.
A consummate political networker, Paddy Gillford joined the notorious lobbying company of Ian Greer Associates, which he left in 1993 to form his own consultancy, Westminster Policy Partnership, later renamed the Public Policy Partnership. One of his clients was Vladimir Potanin’s investment vehicle Interros in London. With his aristocratic bearing, Gillford, one of the more unorthodox political lobbyists networking in Westminster on behalf of Russian clients, was precisely the type of spin doctor that appealed to Khodorkovsky. As well as Yukos, Gillford’s clients included Russian Axis Ltd and several foreign regimes and he was close enough to Prince Michael of Kent to host lavish receptions for oil and gas companies at Kensington Palace.
The Russians fell in love with the titled lobbyist. And Lord Gillford loved to play up to his aristocratic image, inviting his Russian clients to his Scottish estate every year for a spot of hunting, shooting, and fishing.
To cement his cultivation of the British establishment, Khodorkovsky set up the Khodorkovsky Foundation. Registered as a UK company on 8 December 2003, it received $500 million from Group Menatep Ltd, roughly twenty-five times the amount given to Open Russia. Its objectives were ‘to advance education in the Russian Federation through the provision of scholarships to students and the making of donations to educational establishments’.
The Khodorkovsky Foundation was a philanthropic and academic organization. Its initial board members were: Alistair Tulloch, a Mayfair lawyer who represented several Yukos companies and entities; Charles Young, Bursar of Magdalen College, Oxford; and Anthony Smith, the former President of Magdalen College. Boris Saltykov, the former Russian Deputy Prime Minister, joined the board on 11 March 2004. For its first year, the foundation was a commercial operation and not registered as a UK charity until 19 November 2004, a year after Khodorkovsky was arrested. And it did not make any donations until 2005, when it provided over £400,000 to St Antony’s College, Oxford, over four years and £500,000 to the Oxford Russia Fund, which provides scholarships. The latter was another charity set up with the same trustees as the Khodorkovsky Foundation.
Although the oil tycoon invested heavily in the West to improve his corporate image, he was taking no chances back home. He may have enjoyed relaxed security in London but in Moscow his security manifested itself in something more resembling a small private army and was dominated by specially trained former Special Forces operatives. A normal convoy consisted of four cars - bomb- as well as bullet-proof, and all with blacked-out windows - and a motorbike, and bodyguards armed with French machine guns and side pistols. Run on military lines, security was staffed by Russian officers and soldiers left unemployed after the collapse of communism. Highly-trained and in prime physical condition, they were mostly in their thirties and bored, with little money. They were not difficult to recruit.
Gradually, Khodorkovsky picked up where Berezovsky left off. Now Russia’s richest man, and increasingly arrogant, he believed that he no longer needed protection or to pay political godfathers for a ‘krisha’ (Russian for roof). By 2003, Khodorkovsky was expressing vociferous criticism of the Kremlin and was becoming more than just a pestilential nuisance to Putin. The tension between the two culminated in one of the regular meetings at the Kremlin between the President and businessmen. This particular one occurred in February 2003.
Usually, such meetings were mundane affairs, but this one crackled like a log fire, with Khodorkovsky accusing Russia’s bureaucrats of corruption. Ignoring the advice of his colleagues, he singled out a murky deal involving the purchase of the Northern Oil Company by the state-owned Rosneft a few days earlier. His own company had been outbid by Rosneft, which paid $622.6 million - three times what Yukos considered a reasonable price. Frustrated at losing out, Khodorkovsky complained that Rosneft executives had paid an inflated price and received kickbacks from the state in return. He demanded that Rosneft be investigated. ‘Your bureaucracy is made up of bribe-takers and thieves,’ he told the President.
Bristling with irritation, especially given Khodorkovsky’s own track record, Putin icily reminded him of how he himself had made billions through manipulated government auctions and tax evasion. ‘Rosneft is a state company and needs to increase its insufficient reserves,’ he said. The President then stared at Khodorkovsky with such hostility that he turned pale. ‘And a few companies like Yukos, for example, have good reserves. The question is, how did they get them?’ he added sharply. ‘So I am returning your puck.’20
The meeting was the catalyst for the impending showdown between Russia’s richest man and its most powerful. Khodorkovsky had consistently ignored Putin’s stark warning not to meddle in politics. He funded opposition parties hostile to Putin, publicly criticized the government, and hinted at his own presidential ambitions. He even acted like a sovereign power, negotiating with the Chinese government directly to build a pipeline through Siberia to China.
Despite his outward self-confidence, Khodorkovsky knew he was taking risks. In early 2003 he made secret contingency plans to avoid arrest. His business partner Leonid Nevzlin devised a plan whereby oligarchs would live on a ship that sailed around the world in international waters. A Cyprus security company was commissioned and it bought a mini-QE2 cruise liner for the operation. The 100-cabin ship was dismantled, refitted, and refurbished and its cabins reduced to twelve luxury suites. Named Constellation, the plan was for the ship to fly an international flag, in the manner of Liberia, and remain in international waters, thereby avoiding extradition and international arrest warrants. While Khodorkovsky was on board, other oligarchs would be flown in by helicopter and plenty of food and drink would be provided.
Plans for military, anti-radar, and security systems were agreed and commissioned. The basic idea was for Khodorkovsky and the other oligarchs to move from port to port, a sort of floating anti-Putin vessel. This may have helped to explain Khodorkovsky’s continuing bravado. He may have thought that he would be immune from extradition but, in fact, he was legally misinformed - no territorial waters are immune from extradition.
Meanwhile, Putin, urged on by the leaders of the newly empowered FSB, was running out of patience. On 2 July 2003, the same day the value of Yukos reached £16 billion, Platon Lebedev, Khodorkovsky’s business partner, was arrested. Warrants were also issued for other executives, notably Yukos’s Security Chief, Alexei Pichugin, who was later found guilty of murder and given a life sentence. It was this move that triggered the rapid flight of Yukos executives to the UK via Malta and Cyprus.
Two days later Khodorkovsky attended Spaso House, the official residence of the US Ambassador in Moscow, to celebrate American Independence Day. He briefed the Ambassador on the situation and the implications of Lebedev’s arrest, then he flew to Washington, DC, for meetings with Democratic Congressman Tom Lantos and Energy Secretary Spencer Abraham. During his trip, he began negotiations to sell a substantial stake of Yukos to ExxonMobil, the US oil giant. These discussions further infuriated Putin, who was not consulted.
Khodorkovsky could have stayed in exile and the Kremlin privately gave him three opportunities to leave Russia while the investigation was underway. Putin even sent messages via intermediaries that he would not pursue the oligarch if he stayed away from Russia. But Khodorkovsky thought he was untouchable, that his wealth would protect him. ‘With money, you can ultimately buy anything’, he once said.21
But even the steely Khodorkovsky was now beginning to show uncharacteristic signs of nerves. Later in July, after Lebedev’s arrest, the self-confessed former robber baron gave a lecture to the Moscow School of Political Studies, which he had helped to finance. During the session, he was asked about the pressures on Yukos. ‘I would rather rot in a Russian jail than make compromises with these criminals,’ he replied bluntly. ‘It is my right as a citizen to use my money to organize political opposition.’ One of those present, Lord Skidelsky, recalls, ‘He was clearly having no part of the Putin deal. I gained the impression he had developed a martyr complex. He was courting danger. He was certainly tense - he was chain-smoking and I had never seen him smoke before.’
Three months later, on 25 October 2003, Khodorkovsky arrived in his private jet at Novosibirsk Airport in central Siberia to refuel. It was the day the Yukos owner had been summoned to appear before the prosecutors for questioning. Once it had taxied to a halt, two carloads of masked FSB officials, armed with sub-machine guns, stormed the plane. The country’s richest man had reached the end of his journey to untold wealth.
The dramatic arrest of Khodorkovsky was designed to send a chilling message: the state was more powerful than the oligarchs. The former KGB officers had been let off the leash and were now exacting their revenge. As Vladimir Kolesnikov, the Deputy Public Prosecutor explained, ‘Let those who are not yet jailed think hard about what they are doing.’22 One former KGB official close to the Kremlin, who headed a state-owned oil company, revelled in the arrest, ‘Three days in Buttrke prison and they will understand who is the master of the forest.’23
Khodorkovsky was charged with grand theft, fraud, forgery, and corporate and personal tax evasion. The charges related primarily to his acquisition of the Apatit chemical company (in the ‘loans for shares’ auction in 1994). Soon after Khodorkovsky’s arrest, Aleksandr Voloshin, who was seen as the oligarch’s patron within the Kremlin, resigned as Putin’s Chief of Staff.
The move against Khodorkovsky caused a panic among investors and a short-lived run on the Russian stock market. It also sent a shudder down the spines of the other oligarchs. Few had expected Putin to take such drastic action, and the talk was of ‘who’s next’.
As for Russia’s business elite, they might have won more friends if they had reinvested more of their wealth in Russia and, as Putin demanded, paid for social welfare projects. Asked in prison what he had done wrong in the 1990s, Khodorkovsky replied, ‘My biggest mistake was that I established a company and invested in industrial plants - but it would have been necessary to build up the country and create social institutions. This was the general problem of the liberal reforms. Business forgot about the people, their interests, their problems and opinions.’
Most oligarchs, for their own self-interest, had by 2003 started to reinvest in their own industries. Aware of the dangers of alienating an entire population, some funded social projects, though initially at largely tokenistic levels. Some were buying back the lost national heritage. To avoid being the next target, none of the oligarchs except Berezovsky (in London) stood up for Khodorkovsky.
Up to this point Roman Abramovich - a canny political operator - had played his cards much more carefully than either Berezovsky or Khodorkovsky. Understanding that Putin’s ultimatum to the oligarchs was deadly serious, he steered clear of politics and complied with Putin’s wishes. He willingly agreed to stand for the governorship of Russia’s remote and impoverished Siberian province of Chukotka, an area where living standards could not have been in greater contrast to Abramovich’s own lifestyle. He also quickly responded to the Kremlin’s overtures to make large-scale investments in social projects. As a result, he continued to climb up the world’s rich list, just as Berezovsky slipped down it.
But despite being on his best behaviour, even Abramovich was not immune from growing Kremlin pressure. Shortly after the arrest of Khodorkovsky, Evgeny Shvidler, then Chief Executive of Sibneft, was summoned to the Interior Ministry to face questions about whether Sibneft was paying enough tax. The wider message was clear: the days of tax loopholes were over.
Within seven weeks, the Audit Chamber announced it was reviewing all privatizations of the past decade, including the ‘loans for share’ auctions. One Audit Chamber report stated that Sibneft had been sold off in a ‘fake auction’ with the winner chosen in a ‘premeditated agreement’. Fellow oligarch Vladimir Potanin smugly remarked, ‘Everything is not going well for Abramovich. It is not turning out the way he wants.’24 Nearly two years later Abramovich sold Sibneft to Gazprom for $13 billion, another in the steady round of state renationalizations.
Following the arrest of the company’s principal owner, the state soon moved to crush Yukos. First its assets were frozen. Then, in December 2004, the government announced that the bulk of Yukos was to be auctioned off. Only two companies were allowed to bid and the winner was a mysterious company called Baikal - later found to be registered to a twenty-four-hour grocery store in the provincial town of Tver, 150 miles north of Moscow.
On the day of the auction, to which Yukos’s lawyers were refused access, Baikal bought the company for a fraction of its real value. Two days later the government announced that Baikal, clearly set up to act as a front for the state, would sell the main production arm of Yukos to Rosneft, the giant state combine. If Rosneft had made a direct bid for the company, it might have been the subject of international lawsuits for recovery of Yukos’s foreign-owned assets. Even in a country accustomed to rigged auctions and double dealing, the seizing back of a company the state had earlier given away was still a remarkable charade. Khodorkovsky and his fellow shareholders were left with one oil refinery and a handful of petrol stations. The oligarch’s global ambitions were over.
After the auction, the once powerful oligarch’s attorney, Robert Amsterdam, declared, ‘Well, we will have to eat more reasonably now. We have a much smaller company. The share value of Yukos when we first met Khodorkovsky was $16. Now, I think, it’s under a dime. They [the Russian government] behaved like gangsters. This is a dirty war carried out by a corrupt system.’
This enforced renationalization of a company was just as controversial as the privatization a decade earlier. Until the arrest of Khodorkovsky, foreign investors had been nervously moving into Russia. Now, at least for a while, capital flight accelerated. ‘Putin paid a high price for going for Yukos - it was a big setback internationally for Russia,’ said Lord Skidelsky.
Back at 94 Park Lane, the dual incarceration of first Lebedev and then Khodorkovsky had dramatic implications for Stephen Curtis. By the time of Khodorkovsky’s arrest, the lawyer had already moved from being a moderately successful Mayfair solicitor to a multi-millionaire and an international businessman.
The sudden wealth, however, was accompanied by intense pressures. While Curtis retained his generous spirit and honesty, he was no longer the easy-going personality he had once been. Now he behaved more like a typical oligarch himself - quick-tempered and impatient. He started tipping doormen £20 every time he walked into a hotel, and entertaining lavishly at Chinawhite - an increasingly popular haunt for rich Russians and celebrities - where he was given a special VIP room. During one epic night at Stringfellows with some Russian clients, he went through £20,000 in cash - for the best table, vintage champagne, dinner, lap dancers in private rooms, and tips. For the Russian businessmen, such hospitality was a sign that they were being accepted by London and Curtis was providing it all - legal services, advice on property and schools, and, in some cases, nocturnal entertainment.
Nothing was too good for his new Russian clients. He hired executive boxes at Manchester United for Berezovsky, Abramovich, and Yukos executives. It was at one of these matches - the Champions League tie match between Manchester United and Real Madrid on 22 April 2003 - that Abramovich decided to buy a major English football club. Curtis himself never attended but it was all part of the service. Typically, Berezovsky was the most demanding and often asked for tickets for sought-after theatre and sporting events that were long sold out. Curtis would use all his contacts and occasionally spend £5,000 on tickets. He was both exasperated and amused when Berezovsky paid up but then failed to attend. ‘Perhaps he was testing me,’ he told a colleague.
As the big Russian money poured in, Curtis’s hourly rate for his legal services rocketed while his colleagues still worked on the flat rate. In November 2002 he became a tax exile in Gibraltar, operating separately from Curtis & Co. and took the Russian clients with him. He set up a new company, the New World Value Fund Ltd, an investment fund whose clients included Berezovsky and Patarkatsishvili. He moved into the Penthouse Suite at the Elliott Hotel in Gibraltar at a cost of £5,000 per month. He became the sole director of Group Menatep Ltd, and was now managing Khodorkovsky’s global business empire - all from his hotel suite in Gibraltar.
Based in Gibraltar, Curtis was forced to decline dinner invitations because - as a tax exile - he could only spend ninety days of the year in the UK. He only came into the Park Lane office once a month and staff were told that their former boss was preparing to transfer ownership of the firm and instructed that no correspondence was to leave the firm bearing his name. They were told that whenever anyone called for Curtis, they should say he was ‘out of the country’ but could be contacted on his mobile phone. Everything else was done on the telephone from his Gibraltar hotel suite. Computer-illiterate, Curtis lived on the phone: his mobile phone bills ran to between £15,000 and £30,000 a month. He would call Russia and Israel and talk for an hour or dictate letters to his secretary in London.
Curtis’s finances also started to bear comparison with those of his wealthy clients. At first his assets were held in his wife’s name but he later arranged a network of offshore companies and trusts, just as he had for his oligarch clients. Fees from Khodorkovsky’s Group Menatep Ltd were paid into a Gibraltar-based company, Corfe Holdings Ltd, which was 100 per cent owned by Curtis. His fees from Berezovsky and Patarkatsishvili were also paid into this company.
In the month of Khodorkovsky’s arrest, October 2003, Curtis received fees of $6.49 million from the New World Value Fund and $33.9 million from Group Menatep Ltd for overseeing a $20 billion corporation. These funds were, in turn, channelled into other companies that held Curtis’s personal property. His helicopter - bought for £1.5 million from the Hon. Charles Pearson, brother of Lord Cowdray, and, through his family trust, a shareholder of the Financial Times - was owned through a British Virgin Islands company, Island Spice Overseas Ltd. And his home of Pennsylvania Castle, formerly held in his wife’s name, was transferred to a new company called Fezan Ltd. Other assets were held by various companies in the British Virgin Islands and Gibraltar. He even planned the acquisition of a UK bank. In 2003 he bought himself a villa in Ibiza and divided his time between there, Guernsey, and Gibraltar, where he now applied for a passport.
Everything changed when Khodorkovsky was arrested. ‘The shit has hit the fan,’ he told his colleagues. During his occasional visits to the London office, the atmosphere was cooler. Curtis was now a much more serious man. ‘I cannot go back to Russia now. I will be arrested immediately,‘ he said. Gone was the friendly banter of old. Now conversations were all about business and he became impatient and demanding. ’This has to be done. That has to be done,’ he snapped.
The pressure mounted further when, in early December 2003, Curtis agreed to replace Platon Lebedev as chairman of Menatep. His job was to protect Khodorkovsky and the Yukos assets along with the company’s deepest secrets. Matters intensified yet more when the Russian government claimed, as part of its ongoing investigations, that the Yukos restructuring was illegal. Curtis’s response was that it may have been Byzantine, opaque, complicated, secretive, and offshore but it was perfectly legal. ‘I worked closely with Stephen,’ said one banker, ‘and he was scrupulous about not doing anything illegal. It may not have been transparent and good for corporate governance and minority investors, but it was not criminal.’
Fearing that he was a target for prosecution and investigation, Curtis increased his physical security. He could not resign because he was a shareholder and a trustee of the shares, but he could protect himself and his family. Security had always been tight. Now it was paramount.
Curtis already ‘owned’ a private security company, ISC Global. In order to disguise his and Khodorkovsky’s connection, the company was 100 per cent owned by Kilmarsh Ltd, a Gibraltar-based company, which, in turn, was owned by another Gibraltar-based company, Zampa Holdings Ltd. Both were owned by Curtis, but only as a nominee on behalf of Khodorkovsky. The original plan was for ISC to service all of Curtis’s clients, but it ended up working mainly for the two oligarchs. Berezovsky paid ISC an estimated £2 million a year in fees - mainly for physical security for his family - but gradually Yukos became the most prominent client. In effect, ISC Global became the intelligence and security arm of Yukos and Menatep. The main contact at Yukos was Leonid Nevzlin.
Nigel Brown was head of ISC Global. A former police officer, the calm, quietly spoken Brown had a reputation for honesty and professionalism. He was joined by Keith Hunter, talkative, hyperactive, smart, and extrovert, the very opposite of his more considered and strategic partner. Hunter was also a gambler who owned racehorses and bet on his own horses. Always the centre of attention, he was popular and he enjoyed entertaining his Russian clients when they were in London. Business meetings often took place in expensive and exclusive restaurants rather than at their sober offices in Cavendish Square, Mayfair.
Secrecy was Brown’s motto. ‘The best security is not to know what was happening,’ he said. The secrecy encouraged a strange atmosphere in the office. Brown was insistent on strict confidentiality because of the sensitive business of their two Russian clients. Operatives rarely knew what the others were doing. Reports were often deleted from the computer. Documents were written in code and then shredded after distribution to the client. It appeared as if Russian paranoia had been caught by their British minders.
Curtis relied on ISC Global heavily for his own security. The lawyer not only switched pay-as-you-go mobile phones on a regular basis, but the Park Lane office was swept for bugs every day. And for good reason. Despite his infrequent visits to London, he was under surveillance by business intelligence agencies working for commercial competitors to Yukos. In just one day in 2003 there were 7,000 attempts to hack into the computers at Curtis & Co.
Bugging of meeting rooms was also a concern. ‘The problem with any listening device is the battery,’ said one top professional. ‘The power is the key to any successful bug. That is why you should always look for the device inside your television set. Whenever we had meetings, Stephen would always turn on the radio or turn on a CD with opera with a soprano voice, because that is the nearest thing you get to white noise and that made it very difficult for eavesdroppers to pick up their conversations.’
Much of the security work was put in the hands of Israelis. ISC liked using Israelis - superb surveillance and counterespionage technicians who used the most sophisticated devices - and it helped that both Brown and Berezovsky were Jewish. ISC bought an Israeli company just to obtain their contacts. They also hired a German former Mossad officer to conduct polygraph tests of employees, and likely suspects as well, after information leaked from ISC or Curtis’s office.
The Mayfair lawyer believed that he was an assassination target. He even moved his desk away from the window on the first floor overlooking Park Lane because he was convinced that someone would shoot him in the back of the head. Curtis spent £40,000 on counter-surveillance equipment and special bugs were placed in cars. He used mobile phones to record meetings with clients because mobiles have long memories and could be left open on the meeting-room table. But despite the elaborate security, the lawyer would sometimes resort to more primitive methods to avoid being bugged: he would buy a mobile phone, use it for a couple of conversations, and then throw it away.
On one occasion ISC discovered that a hostile intelligence firm had informants that enabled them to obtain Curtis’s telephone, bank, and credit card details. About six months before he died, a printout of Curtis’s calls was obtained by that security firm. ISC responded by buying him new unregistered pay-as-you go mobile phones, which made it impossible to identify the numbers.
Mostly, Curtis revelled in the intrigue, but when the Russian authorities started to investigate Yukos from early 2003, he too began to feel the pressure. As well as investigations by the Russian state, many companies were suing Yukos and Curtis was the custodian of its secrets. One of the litigants was Kenneth Dart, who had invested heavily in Yukos subsidiaries - and lost equally heavily - and who was now leading a class action lawsuit against the company on behalf of minority shareholders. In 2003 Dart hired a private security firm in the US to investigate Curtis - the firm’s first move was to approach UK business intelligence agencies. One such company that it initially approached was ISC itself - unaware that it was owned by Curtis. They offered ISC $1 million to unravel the restructuring of Yukos and the ultimate beneficiaries.
The US security firm then turned to private investigators, tasking their operatives and Russian journalists to track Curtis’s movements, as well as those of his staff. Vast fees were offered for revelations about the secret, complex ownership structure. But the private detectives were clumsy and were soon spotted in rented cars. ‘We knew we were being followed,’ said one employee. ‘At first we thought it was a laugh and so we bought Stephen a wig, hat, beard, and glasses for his birthday, but then it became more sinister. We actually caught one of them and he turned out to be a reporter from the Moscow Times. Another followed a secretary back to her house.’ On the surface Curtis was unfazed and, on one of his London visits, he walked over to the watchers to tell them where he was going. On another occasion he even offered them a cup of tea. But, despite the humour, he confided to friends that he was concerned.
When Khodorkovsky was arrested and Curtis became chairman of the holding company, Menatep, he himself became a target of the Russian investigators. Business was now being done in even greater secrecy and in an atmosphere of heightened paranoia. In early 2004 a memo was sent to all staff at Curtis & Co: ‘We have had a major security problem with the office.’ It reminded staff not to open the front door to anyone they didn’t know and to ‘shred all unused documents every night [including drafts, old note pads and Post-it notes]’. Such was the secrecy and discretion required that one Curtis & Co. lawyer flew to Russia in the middle of the night and arrived in an obscure location, remote even by Russian standards. He walked straight through immigration at Tolmachevo Airport, drove to a remote forest in Siberia, delivered a document, waited for it to be signed, and then returned to the UK.
As a further indication of his apparent desire to show that his operations had been above board, Curtis also established contact with law enforcement agencies in Gibraltar and London. In early 2004 he met an official in the Gibraltar Criminal Intelligence Agency and gave him copies of Menatep documents. He also liaised with Matthew Porter, a Foreign Office civil servant responsible for international financial services, and Alan Kalbfell, a City of London police officer then assigned to the Foreign Office, to pass on information about the oligarchs. (When approached by the authors, all three declined to comment about their dealings with Curtis.)
Meanwhile, Khodorkovsky remained in jail in Krasnokamensk, Siberia, anxiously awaiting trial. To some extent his earlier charm offensive had paid off. On his arrest in October 2003, the reaction in the West was mostly one of outrage. The move was widely seen as a further sign of Putin’s autocratic tendencies while Khodorkovsky was portrayed as another victim of Russian injustice. Newspapers warned of a return to Soviet-style despotism.
While waiting for the trial, Khodorkovsky’s lawyers tried a new tactic - that of turning the man seen as a robber baron into a political martyr. From jail, he took to issuing letters renouncing the way he had made money and attacking what he called ‘the tyranny of wealth’. ‘I stopped worrying about material goods a long time ago,’ he wrote. He claimed that he had never paid himself more than enough to lead an ordinary life and that he simply ploughed most of his great fortune back into his company. It is true that, compared with his fellow oligarchs, he led a relatively unflamboyant life, holidaying with his family in Finland, living in a comparatively modest house, and managing without expensive yachts or a football club. He told a Russian interviewer early in 2003 that you had to be born wealthy to get much pleasure from hobbies such as indulging in fine wine.
In March 2004, a year before he was sentenced, he wrote, ‘We have made many mistakes because of our stupidity, ambitions, and lack of understanding. Forgive us if you can and allow us to redeem ourselves.’ Russia’s leading opposition newspaper, Novaya Gazeta, supported Khodorkovsky with a mass poster campaign and found itself deluged with support. As a result, the crushing of Yukos turned into almost as much a trial of Putin as it did of the oligarch.
At the trial his attorney Robert Amsterdam condemned the proceedings,‘This is not a trial. It is a show; a show to legitimize what is one of the largest thefts in recent history. My client will be found guilty. It is a show trial.’ In May 2005 - eighteen months after the arrest - the panel of judges, sitting without a jury, finally announced a guilty verdict. The judgement ran to 1,000 pages. Khodorkovsky and his partner Platon Lebedev were both sentenced to nine years in jail. In a final, ironic twist Khodorkovsky was sent to YaG-14/10, a Soviet-era prison camp in eastern Siberia, a region once the source of his great wealth. He soon acquired a new skill: sewing police uniforms for a few roubles a day.
Although Putin’s tactics almost turned Khodorkovsky into a national hero, most oligarchs remained hate figures for ordinary Russians. As a member of the Moscow Chamber of Commerce put it at the time, ‘Any mention of the word “oligarch” had the average Russian reaching for a gun.’25 In a 2003 poll 88 per cent of Russians believed that all large fortunes were amassed in an illegal way, 77 per cent said that privatization results should be partially or fully reconsidered, while 57 per cent believed that the government should launch criminal investigations against the wealthy. In a 2004 poll only 18 per cent of Russians opposed wholesale renationalization of the country’s resources. Interviewed by the Independent, Vladimir Potanin recognized that the oligarchs ‘had to learn not to be loved by fellow-Russians. People live in difficult conditions. I should not blame them for their lack of love for me.’26
Despite his lawyer’s vehement protestations, Khodorkovsky always knew he was at risk of losing his empire to the state. Only a couple of years after he had acquired Yukos in the rigged auction, he declared, ‘I don’t own anything. I rent it.’27 Some Western investors were also unconvinced about Khodorkovsky’s corporate makeover and PR tactics. ‘Khodorkovsky was doing an enormous amount of asset stripping,’ said Bill Browder in 2006. ‘He had pretended he was reformed, but in fact was trying to do the same kinds of dirty tricks politically that he was doing in business.’28
The indignant reaction in the West had less to do with a sudden concern for international human rights and more to do with the perceived new threat to Western economic interests. The West had turned a blind eye to the mass sell-offs of the 1990s because they were seen as the route to cheap oil and gas and opened up the door to foreign investment. British and American banks, PR companies, accountancy firms, and investment fund managers marched into Russia like an invading army intent on grabbing some of the spoils for themselves. In London the City’s investment banks and fund managers could hardly believe their luck as much of Russia’s secreted wealth flooded into Britain.
The reaction to Khodorkovsky’s incarceration reflected at least in part the fear that the party was over. As Professor Michael Hudson, an independent Wall Street financial economist, put it, ‘The hypocrisy of American pretence to help Russia create an honest and fair market economy was laid bare late in 2003, when Putin’s government finally began to roll back the most crooked privatizations by moving against the largest tax evaders and embezzlers. The US response was a series of hand-wringing complaints that “private enterprise” was being threatened by a renewed statism. It was as if…Mikhail Khodorkovsky was an heroic entrepreneur, not an insider dealer and kleptocrat.’29
Khodorkovsky ended up behind bars for one simple reason: he challenged Putin politically. The message being sent out was that making large amounts of money in Russia would be sanctioned if it was accompanied by political conformity. That is where Khodorkovsky went wrong. Putin was furious that the recalcitrant oligarch mobilized support in the Duma to vote down a bill set to raise taxes on the oil industry. Khodorkovsky considered such lobbying, so common in the United States and the UK, integral to a modern democracy. ‘I really don’t see the difference, politically, between Yukos and General Motors,’ he said shortly after Putin’s election as President. ‘Both have about 2 per cent of [their country’s] GDP. Both lobby in parliament for their interests. Both propagandise in the press.’30
Khodorkovsky also supported human rights groups and bought the weekly newspaper Moskovsky Novosti, appointing an outspoken Kremlin critic as its editor. He paid $100 million to the opposition parties, the Union of Right Forces and its sister party, Yabloko. He even hinted that he would run for President in the 2008 election. If he had succeeded, it would have been highly risky for those then in power. He knew much about where the nation’s wealth had gone, and who among the state and KGB apparatchiks had benefited. ‘If such a man decides to go into politics, he is a danger,’ said one Menatep insider.31 He was not merely an irritant; he was a potentially dangerous one. His arrest was an effective way of silencing him.
Most significantly, at the time of Khodorkovsky’s arrest, Yukos was in the process of merging with Abramovich’s Sibneft, a deal that would have created the world’s fourth-biggest oil company after ExxonMobil, BP and Shell and worth some £22 billion. Khodorkovsky’s plan was then to sell off part of the merged giant to one of the two giant US oil majors, ExxonMobil itself or Chevron Texaco. Within the Kremlin, relinquishing even partial control of Russia’s major natural resource conglomerate to a foreign power - and not just any foreign power - would have been viewed as tantamount to treason. Khodorkovsky was well known for his pro-American views. Asked by BusinessWeek if Putin was aware of them, he replied, ‘He knows where I stand. It’s not a secret…I am well known in Russia for my pro-Americanism.’32
Putin knew that once the oligarchs started selling off their stakes to foreign interests, there was little he could have done to prevent money from leaving Russia. ‘Selling off part of Russia’s strategic assets without consulting Putin was a big no-no,’ said a Yukos executive. ‘Nobody really knows, but there are lots of people who believe that was the real reason the Kremlin went after Khodorkovsky.’33
The man working on the new merger was Yuri Golubev, a senior Yukos executive and one of Khodorkovsky’s most trusted lieutenants. In January 2007 Golubev, one of the Yukos executives later sought by the Russian prosecutors, was found dead in his London apartment. His death was treated as ‘non-suspi-cious’ by the British police. He was recorded as having died of a heart attack.
Khodorkovsky was also planning another move, one seen by the Kremlin as even more arrogant. Only about 18 per cent of Yukos stock traded publicly; the rest was held by insiders. While the tax evasion investigation was proceeding, Yukos’s board of directors declared an extraordinary $2 billion dividend distribution, an increase of 400 per cent on the previous year. ‘Rather than use this money to modernize the industry, they appeared to be planning to strip the assets before letting it go,’ according to Michael Hudson. ‘There was no market justification for the huge dividend.’
The action against Khodorkovsky may have been an example of ‘selective justice’, according to Paul Klebnikov, later editor of Forbes Russia, but he added, ‘This is still better than no justice at all…The Khodorkovsky arrest does not signify the triumph of the rule of law. The brutal way in which the detention was handled shows how far Russia has to go before it develops a civilized law-enforcement system…But I think we’ll look back on this event and conclude that it actually strengthened the foundations of Russian property rights.’34
‘This wasn’t Mother Teresa versus Mike Tyson’ was how Bill Browder of Hermitage Capital Management described the epic battle. ‘These were two big tough guys at it with each other and one of them won. Putin won, Khodorkovsky lost, but it was a fair fight. He certainly didn’t deserve the pity of some type of political prisoner because all the things he did basically disallow him from claiming that. For anyone who knew the past…he made a lot of people’s lives very difficult when he was sitting on top of the heap.’35 Even those in his own circle knew that he was playing a dangerous game. As one Yukos executive said, ‘It was clear to me that we were signing our own death warrants.’36
In Moscow’s political circles they like to talk of the ‘curse of Yukos’ when referring to the remarkable personal fallout from the Yukos case. One of those who may have been a victim is Stephen Curtis. If Khodorkovsky and Lebedev had not been arrested in 2003, Curtis would probably have continued as their secret back-room lawyer. The arrests changed all that, moving Curtis from the hidden world of offshore banking into the heart of one of Russia’s biggest business and political dramas.
Many people have been touched by the Yukos curse: three are in jail, several linked to the company have died - some in suspicious circumstances - and others have simply disappeared. Most senior Yukos executives were forced to flee Russia. At least twenty ended up in exile, most of them in London. In May 2003 the second in command at Yukos, Leonid Nevzlin, fled to Cyprus, where many of the Yukos- and Menatep-owned offshore companies were registered. The following month Nevzlin summoned Nigel Brown, his head of security, for an urgent meeting. Nevzlin was extremely nervous and convinced that the FSB were planning to assassinate him. He tasked Brown with organizing his move to Israel.
Within days Brown flew to Israel to make the arrangements. But Nevzlin remained paranoid about being kidnapped or shot while in Cyprus. Never one for cigarettes, he became a chain-smoker almost overnight. In the event, the operation went relatively smoothly and, in October 2003, the Yukos executive arrived in Israel on a tourist visa. Within two weeks he had been granted citizenship. Some Israeli opposition MPs were sceptical about the speed with which this was expedited. ‘Suddenly, overnight, he [Nevzlin] became a dedicated Zionist and he got citizenship in a speedy manner,’ said one MP. Another MP, Colette Avital, asked internal affairs and immigration ministers whether Nevzlin used influence and his friendship with Israeli government officials to secure his citizenship so quickly. In response to the controversy, the spokesperson for the then Prime Minister Ariel Sharon said, ‘He got citizenship because he has no criminal record. As a Jew, his citizenship is automatic.’37
Nevzlin settled into a comfortable, if not overtly luxurious. lifestyle in Israel. He moved into a walled compound in Herzliya Pituach, an exclusive coastal neighbourhood north of Tel Aviv that was also home to ambassadors and business tycoons. His split-level villa featured a manicured garden with lemon, grapefruit, and olive trees and a small crescent-shaped swimming pool. It had marble floors, a wrought-iron spiral staircase, and a downstairs lounge dominated in his first two years in exile by ‘Free Khodorkovsky’ posters. After 2006 they became less prominent.
A tall, thin man with an angular face, Nevzlin lived frugally, eschewing drugs and vodka. He drank green tea. He had a number of girlfriends. His office was simple, stark, and minimalist. In business meetings he rarely seemed to notice what other people were saying. Instead, he would send text messages, speak on his mobile phone, or read books of Russian poetry. He often seemed to have about three things on his mind at the same time, which made him difficult to understand when he spoke. ‘He just talked in riddles the whole time I was there,’ said one Israeli visitor to his office.
Shortly before Curtis’s death, Leonid Nevzlin fell out with ISC over his security arrangements. Brown had arranged a large, modern, private jet to carry Nevzlin from Tel Aviv to London, but, when advised at the last minute that the chartered plane was actually an old aircraft and would need to stop to refuel en route, Nevzlin became furious. ‘I trusted you!’ he shouted at Brown. But Nevzlin, believing that he was being set up to be kidnapped, returned to his Tel Aviv apartment, refusing to speak to Brown again. Curtis was forced to act as intermediary. Neither Curtis & Co. nor ISC survived Curtis’s death. Brown retained his Israeli clients and set up a new company, GSS Global, while Hunter set up Risc Management and continued to work for Berezovsky.
While some prominent former Yukos personnel hid in Israel because they knew that they would not be extradited, most settled in London. As well as Ranil Burganov and Natalia Chernysheva, ten other former executives have been granted asylum in the UK; the most prominent of whom is Alexander Temerko, a former Director, Vice-President, and Head of Government Relations at Yukos. Despite his high-profile role as a company spokesperson, he is a highly skilled engineer and technician, and was another Yukos executive targeted by Russian state prosecutors. In early 2004 Temerko’s Swiss bank accounts were frozen by Swiss authorities at the request of the Russians. Then, soon after being questioned by state investigators in Moscow in October 2004, he fled to London.
On his arrival Temerko gravitated to the ‘oligarch belt’. He first rented a flat just off Belgrave Square and then moved into a modern luxury apartment in a mansion block in Palace Gate, overlooking the south-west corner of Hyde Park. Highly intelligent and technically gifted, he is also demanding and impatient. Every day the former Yukos executive was driven by his chauffeur from his Kensington apartment to his office at New Broad Street House in the City. But, increasingly exasperated by the traffic jams, he asked an associate if he could buy ‘blue lights’ for his Mercedes - the flashing blue lights used by VIPs and oligarchs in Moscow. Placed on top of their cars, these enabled Moscow’s financial and political elite to burst through grinding traffic ahead of other vehicles as if they were emergency ambulances. His aide had to explain that such privileges were not afforded executives in London.
Temerko had access to several million pounds to invest. In 2007 he set up his own private UK-based ‘investment research and consultancy’, BST Link, of which he is the sole shareholder. He set his sights on SLP Engineering, based in Lowestoft, Suffolk, which provides consultancy services in oil and gas extraction technology. After successful ventures in Mexico and Iran, SLP developed a presence in Russia and the Caspian Sea region. Given Temerko’s track record at Yukos, he was a natural choice to join the board. But the Russian also had plans to manage the company and invested hundreds of thousands of pounds in SLP. He was then dismayed to learn that his shares were non-voting ones and so he was forced to pour more money into the company to secure management control. It was a clear illustration of the different corporate cultures in Russia and the UK.
Nothwithstanding his technical background, Temerko has also been politically active on behalf of Yukos and against the Putin regime. He hired Bell Pottinger on a substantial retainer and through them wrote articles for the Guardian, Daily Mail, and Wall Street Journal.
With Temerko keen to cultivate and to ingratiate himself with the British establishment, Lord Bell introduced his client to a number of peers in the House of Lords. This kept Temerko happy for a while but the relationships were tense and never developed beyond an ad hoc basis. On the evening of 11 December 2006 he hosted a private drinks party at Kensington Palace, organized by Inna Vainstock, daughter of the president of Transneft, a state-owned business running oil pipelines in Russia. The party took place under the auspices of Prince Michael of Kent, and was attended by a mixture of art historians and Russian businessmen. No expense was spared and the reception was followed by dinner at Mark’s Club, the exclusive Mayfair dining club, where a four-course dinner including fois gras and lobster was specially prepared by a French chef.
While Temerko is not regarded by the Kremlin as public enemy number one, he remains on the wanted list of those to be extradited. On 25 October 2005 he appeared at Bow Street Magistrates Court before Senior District Judge and London’s Chief Magistrate Timothy Workman. At the hearing Temerko was represented by the top criminal solicitor Ian Burton and the experienced QC Julian Knowles from Matrix Chambers. During the proceedings, Professor Bill Bowering, a specialist in Russian law, testified that the extradition request was politically motivated. After giving the first part of his testimony, Professor Bowering flew to Moscow but was held at the airport for six hours. After intense questioning, he was refused admission to Russia and deported back to London.
On 23 December 2005 Chief Magistrate Workman dismissed the extradition application. In his ruling he said that he was ‘satisfied that the request for Mr Temerko’s extradition is in fact made for the purpose of prosecuting and punishing him for his political opinions’. Although the possibility of an appeal by the Russian government was mooted, this did not materialize.
Timothy Workman has heard and dismissed all the extradition applications for the former Yukos officials who moved to London. In January 2004, just as Yukos personnel were fleeing to the UK, an 83-year-old widower named Robert Workman was shot dead at the front door of his home in the Hertfordshire village of Furneux Pelham. The police described the killer as a ‘professional hitman’. The victim, a retired army officer, may have been another victim of the Yukos curse: a Russian website later claimed that the murder was a case of mistaken identity and that the real target was, in fact, Chief Magistrate Timothy Workman.
The murder has not been solved and the case remains open as a ‘cold case’. Hertfordshire police said that they investigated the claims made on the Russian website but could find nothing to substantiate them. A police spokesperson said that the incident was like an episode of Midsomer Murders.