Mikhail Khodorkovsky
– Stitch Up
You do not mess with Vladimir Putin. As Russian president, Putin conducted military offensives, is accused of crushing the opposition and charged with curbing the country’s free press. Trained by the KGB, Russia’s fearsome former secret service, he has reached the Sixth Dan level in his favourite sport, judo, and has been photographed in recent times variously hunting (with a large weapon), fishing and horse riding (bare chested) and generally looking macho. Most world leaders, if they attempted such things, would be laughing stocks. Picture French leader Nicolas Sarkozy fishing bare-chested.
In Putin’s case, the images make the man, and have helped boost his popularity among large portions of the still impoverished Russian population. They point to previous Soviet leaders and say Putin is the best they have had. Putin also has the sort of steely glare that says ‘don’t mess with me’. And most people do not – or dare not. But occasionally, people have dared to take on Putin, and how they must now wish they had kept schtum.
One such man is Mikhail Borisovich Khodorkovsky. The former head of Yukos, once one of the largest oil producers in the world, he now languishes in a Siberian prison, convicted in 2005 of fraud and sentenced to nine years. In 2008 he was denied parole by Judge Igor Faliliyev, at the Ingodinsky regional court in Chita, Siberia, in part because Khodorkovsky ‘refused to attend jail sewing classes’. Even steely-eyed Putin must have smiled momentarily at that one. Welcome to the enigma that is Russia.
Khodorkovsky was born on 26 June 1963, in Moscow. His parents, Boris and Marina, worked as chemical engineers. Khodorkovsky studied chemical engineering, and graduated in 1986 from Moscow’s Mendeleev Institute of Chemical Technologies. His dream was to become the manager of a Soviet factory.
It was Khodorkovsky’s involvement with the Komsomol, the Communist party’s youth organization within the Institute, that really set the direction of his life. Rising to become its deputy chief, he forged friendships and allegiances that would later become critical.
He certainly understood how to get ahead in this theoretically egalitarian environment, and he shares this ability with his fellow entrepreneurs. He knew the best route to success, and in the beginning it was more about privileges and favours than making money. It makes sense that at the fall of communism, the people who knew how to get on in one environment could quickly turn their hands to another, the business of enterprise.
The Komsomol was unusual in that it allowed members to set up enterprises and keep the profits. This fact, along with the economic and political reforms being introduced by Mikhail Gorbachev, offered opportunities to a few bright and ambitious Russians. And Khodorkovsky was ambitious. Together with some business partners, he started a private cafe, reportedly sold bottles of brandy, and in a world that until then had been starved of widespread access to computer technology, he started buying and selling imported PCs. Business boomed. In two years he was said to have accumulated more than US$1 million. Khodorkovsky, who lists his favourite pastimes as ‘listening to Abba records, watching action movies, reading science fiction and pumping iron’, was fast becoming something that would have been utterly unthinkable in Russia only a few years previously: a successful entrepreneur.
As the social, political and economic changes in Russia gathered pace, communism fell, Boris Yeltsin came to power, and fleet-footed business people took full advantage. Khodorkovsky and friends used their wealth, as many other people were doing, to set up a bank. Thousands sprang up overnight. Khodorkovsky and his colleagues established Bank Menatep, a privately held banking and financial business, and through Khodorkovsky’s friends in high places, it managed to secure lucrative government contracts.
This is yet another example of Khodorkovsky mixing the nitro and glycerine of communist contacts to create capitalistic endeavour. And for a while, it was a success.
The banks that prospered had licences to work in hard currency. Businesses needed dollars to import goods, and banks charged high rates for hard currency. Bank Menatep was authorized to handle the funds of the Ministry of Finance, the State Taxation Service, the Moscow city government and the Russian arms export monopoly. Khodorkovsky, who was also starting to operate internationally, as well as increasingly through off-shore banking affiliates, was getting ever wealthier. But his life was about to change. Back in November 1992, the Russian oil firm Yukos was founded by presidential decree to bring together several state-owned producers. The name Yukos comes from the main producing entities, Siberian oil producer Yuganskneftegaz and Volga refining company KuibyshevnefteOrgSintez. The big time beckoned for Khodorkovsky when Boris Yeltsin started selling off state assets like Yukos in an effort to kick-start the Russian economy.
In December 1995, Bank Menatep was put in charge of processing the bids in the Yukos auction. To no one’s surprise, and despite higher bids from rivals (which were rejected for ‘technical’ reasons), a company run by Bank Menatep and Khodorkovsky won the auction. It is not entirely clear exactly what percentage of the business Khodorkovsky managed to secure (around 78 per cent), nor is it agreed exactly what he paid. Estimates range from US$300 million to US$350 million, with the bank taking on something like US$2 billion in debt. Whatever it was, it was soon looking like the deal of the century. The deal implied a value for the whole company of US$450 million, but when the shares began trading less than two years later, Yukos’s market capitalization was US$9 billion. By 2002, it was nearer to US$15 billion.
While in retrospect these deals appear like daylight robbery, the Russian economy in the mid-1990s was in a precarious state. The investment climate today remains relatively risky, and in the few years after the fall of communism it was extremely dubious. There was little political vision, Russia had an unpredictable president, business law was in its infancy and uncertainty was everywhere. It meant that raising money to invest into Russia, even into oil companies, was virtually impossible – and that had an impact on the prices of assets (not to mention the additional issues with favouritism, cronyism and nepotism). Luckily Khodorkovsky was part of the in-crowd.
Even so, from importing computers to controlling Russia’s second-largest oil producer, in no time at all, was some achievement for the Muscovite. It put the workaholic Khodorkovsky in an altogether different league, and brought him enormous wealth, great power and considerable influence. It also brought great dangers. In early 1998, Yukos signed an agreement with another major producer, Sibneft, to merge production operations. Sibneft had been acquired for US$100 million in 1996 by Roman Abramovich (who now owns Chelsea Football Club) and Boris Berezovsky (who is now a fugitive from Russian justice). The deal never came off, but the real trouble was just around the corner. In August 1998, Russia defaulted on US$40 billion of its domestic debt and devalued the rouble. The sudden economic meltdown wreaked havoc for financial institutions such as Bank Menatep, leaving it, like Russia itself, close to bankruptcy.
In fact Bank Menatep-Moscow went under, but Khodorkovsky managed to transfer its good accounts to a sister bank called Menatep-St Petersburg. The organization still faced serious problems, not least the angry creditors who were owed US$266 million, secured against Yukos stock. Chief among those were Daiwa Bank and West Merchant Bank, a subsidiary of Westdeutsche Landesbank. Other Western banks also felt the strain. Barclays fell victim to the tune of £250 million, while Credit Suisse First Boston lost the best part of US$1 billion. In Russia, banks literally closed their doors while ordinary citizens queued around the block and fought desperately to save their money. To this day, Russians prefer to keep what money they have under the mattress.
The banks wanted their money back, and refused to listen to Khodorkovsky’s three-year repayment plan. In the end, the banks dumped their Yukos shares on the market, getting a fraction of their investment. While some thought this action hasty, it came to light that Yukos was planning to make a share offering that would have seriously diluted the banks’ 29 per cent stake. Ultimately, Khodorkovsky and his partners bought back most of the stake themselves.
The Muscovite had a ruthless streak. With its creditors gone, Yukos went from strength to strength. By 2001 it had become the fastest-growing oil company in Russia, and in 2003 it was announced that merger talks were back on with Sibneft. It was even becoming fully legitimate in the eyes of international competitors by its increasingly transparent dealings, culminating in a listing on the New York Stock Exchange. Part of the push to becoming legitimate was down to recruitment policies that encouraged the best and brightest from business schools around the world to work in Russia. There were also steps to lure back expat Russians to the Motherland. Khodorkovsky played a role in this effort, and was said to be personally behind the drive to make Yukos the best-managed oil company in Russia. All this meant that Khodorkovsky’s personal stock, despite his bland appearance and slight stutter, was rising ever higher. And that meant a collision course with new Russian President Vladimir Putin. Putin had made it abundantly clear to this new breed of oligarchs: do business or do politics, but whatever you do, do not do both.
Khodorkovsky, though, did not listen to the clear distinction thrown down by Putin. He used his power and influence at Yukos in lobbying successfully against a new bill to increase oil taxes, in direct contravention of Putin’s wishes. It did not help that international player Khodorkovsky was starting to flirt with America. Following the 11 September 2001 attacks in New York, Russian oil gained an instant allure as an alternative to Middle East supplies. It was reported that under the auspices of the Carlyle Group, a Washington-based private equity fund, Khodorkovsky had ‘discreet meetings’ with George Bush Sr and vice-president Dick Cheney. Khodorkovsky also started talking about selling off part of Yukos to ExxonMobil, a move that would effectively have allowed Americans to control Russia’s natural resources. This too was regarded as politically unacceptable in Russia. He also acquired the rights to publish the prestigious Moskovskiye Novosti newspaper, hiring a new, anti-Putin editor.
Things came to a head. The first Kremlin broadside came in July 2003 when Khodorkovsky’s business partner Platon Lebedev, also a major shareholder in Yukos, was arrested and accused of having illegally acquired shares in Apatit, a fertilizer company, in 1994. Khodorkovsky was questioned and released two days later. Two weeks later, as the investigation into the Apatit deal widened dramatically, the Russian tax authorities announced that they were planning to audit Yukos’s books. The firm’s offices were raided and records taken away. Then things got really personal. Khodorkovsky’s chartered plane landed at a Novosibirsk airport for refuelling on 25 October 2003, while en route to Irkutsk. At 5 am local time, according to a Yukos statement, it was surrounded by several vehicles with their headlights on. Around 20 black-uniformed agents stormed into the first-class compartment where Khodorkovsky and his entourage of aides and bodyguards were sitting. Brandishing weapons, they apparently shouted, ‘FSB! Put your weapons on the ground, don’t move or we’ll shoot!’ Nobody moved.
Khodorkovsky was then flown to Moscow to face various counts of fraud and tax evasion. On 30 October 2003, the Russian authorities froze the 44 per cent stake in Yukos owned by Menatep Bank, and soon after Khodorkovsky resigned as chief executive. But then the fun really started.
In December 2003, Yukos was hit with a US$3.5 billion tax bill for the year 2000. In July the following year it got another bill, this time for US$3.4 billion. Just for good measure, in November 2004 Russian authorities clobbered the firm with a whopping US$10 billion tax bill for alleged unpaid taxes in 2002. In the meantime, on 16 June 2004 Khodorkovsky’s Moscow trial began. Prosecutors argued that Khodorkovsky and Lebedev had run an ‘organized criminal group’. Khodorkovsky said the charges were ‘absurd’.
As the criminal case rumbled on, the prospects for Yukos were looking just as bleak. The firm tried to file for bankruptcy in the United States in an attempt to derail efforts by Russian authorities to sell off the best bits of the business. It did not work. Yuganskneftegaz was eventually sold to the little-known firm Baikalfinansgroup for US$9.35 billion. Then the state-owned oil firm Rosneft bought Baikal, therefore acquiring Yuganskneftegas, and the business was effectively renationalized.
The final verdict on Khodorkovsky was set for 16 May 2005, but it took Judge Irina Kolesnikova an unbelievable 12 days to read it out in full in court. ‘Do you understand your sentence?’ she asked, finally. ‘Yes,’ replied Mikhail Khodorkovsky, ‘and I also understand that this is a monument to Russian injustice.’ Both Lebedev and Khodorkovsky were sentenced to nine years behind bars, almost the maximum penalty possible under Russian law. As if to hammer home the message, Khodorkovsky was dispatched to a Soviet-era prison in the town of Krasnokamensk, in the eastern Siberian province of Chita, near Russia’s Chinese border.
It is a very long way indeed from Zhukovka, the elite, gated suburb an hour west of Moscow that Khodorkovsky calls home, although at both he was guarded by men with guns. Inmates at YaG-14/10 can expect to earn 23 roubles a day for prison labour, work that entails sewing protective clothing for the prison system and the police. The average daily temperature in January hovers between –18°C and –33°C. Apparently the average age of the male prisoners is 24, significantly younger than Khodorkovsky, and the most common conviction is for theft.
It is out of sight for the former head of Yukos, but not out of mind. Khodorkovsky continues to plead innocence, and through his supporters and his ‘Khodorkovsky & Lebedev Communications Center’, he continues to be an irritant to the Russian leadership. On 7 July 2009, he even managed to get an opinion piece published in the Moscow Times on ‘the prospects for democracy and judicial reform in Russia’. It has to be said that his musings are falling on deaf ears – as of July 2009 Khodorkovsky was up on fresh charges of embezzlement and money laundering, which could lead to a new sentence of up to 27 years.
Opinion in Russia is divided on Khodorkovsky. To many ordinary Russians, the oligarchs are despicable. Khodorkovsky himself admitted to being ‘a robber baron’, and many poverty-stricken Russians blame their ongoing plight on the likes of the former Yukos head. On the other side of the argument, Putin is blamed by some for carrying out a political vendetta and holding back change in the country.
As with all things in Russia, it is not black and white. Until the main parties publish their warts-and-all autobiographies (which is never), we are unlikely to find out what really happened. ‘Putin wants the oligarchs to behave themselves by paying their taxes, to stop stealing assets and behave like normal business people,’ says one observer.
As for the languishing Khodorkovsky, it has been an incredible rise and fall, the most dramatic possible. In a long and wide-ranging interview given from prison to the Russian Esquire magazine (an interview, incidentally, that resulted in a spell in solitary confinement), it is clear that Khodorkovsky has had plenty of time to think about his predicament. He says at one point:
God, doom, fate, destiny, nearly everybody believes in something that’s higher than us. And indeed it would be strange not to believe, living in a huge unknown world, not really even knowing ourselves; to consider that everything around us – is the product of a random confluence of circumstances… If there is no God, and all of our life is but an instant on the way from dust to dust, then what’s the point of everything? What’s the point of our dreams, our aspirations, our sufferings? What’s the point of knowing? What’s the point of loving? When it comes right down to it, what’s the point of living?
Away from the philosophy, Khodorkovsky seemed to think himself untouchable. There is a fine line between self-belief and delusion, and keeping on the right side of that line is what all great entrepreneurs manage to do. The successful ones convince themselves – and others – that they are better, smarter, more cunning, more visionary or more astute than the people who surround them. It is a vital attribute to have, but it also puts them on a collision cause with self-destruction. Without a brake on that self-belief – or a rational mind to balance the bravado – entrepreneurs like Khodorkovsky are doomed.
That said, it is unlikely that the Khodorkovsky story is over. Until then, it is back to the sewing classes.
SOURCES
BBC, 16 June 2004
BBC, 27 July 2004
BBC, 31 May 2005
BBC, 1 June 2005
BBC, 20 October 2005
Chicago Tribune, 31 May 2005
Daily Telegraph, 3 March 2009
Esquire (Russian edition), 10 October 2008 (see www.esquire.com)
Financial Times, 10 May 2007
Financial Times, 15 May 2008
Forbes, 18 March 2002
Forbes, 1 August 2008
Fortune, 20 September 2004
Kommersant, 22 February 2007
Moscow Times, 7 July 2009
Sunday Times, 13 June 2004
The Times, 21 July 2006
The Times, 17 November 2008
The Times, 4 March 2009
The Times, 27 April 2005
www.slate.com, 29 October 2003
www.zabinfo.ruwww.fundinguniverse.com
Also: www.businessweek.com, www.russiatoday.com, www.bloomberg.com, BBC, ITAR-TASS, Associated Press, AFP, Reuters