Mikhail Khodorkovsky is a Russian businessman (or tycoon) who began amassing his fortune in the go-go days of the mid-1990s, when the Russian economy was a virtual free-for-all in the heady days of postcommunism. By some sources, he is the seventh or eighth richest man in the world, and quite likely the richest in Russia. Although involved in numerous business ventures and entities, he is presently best known to the media as the director and president of OAO Yukos, a private energy consortium in Russia.

Current Events

His name is presently (as of October 26, 2003) in the news due to his arrest this past weekend on his chartered business jet, refueling in Novosiibirsk, at the hands of FSB agents, and his transport to Moscow to face highly publicized charges of fraud and tax evasion. Markets reacted strongly to his incarceration, with prices on the RTS dropping at least 10% in the course of Monday's trading - a loss of over $14.5 billion (US) in capital. Shares of Yukos plunged sharply enough that the RTS initated a halt to trading for the first time in its short history - albeit one limited to Yukos' shares. Russian Federation President Vladimir Putin has resisted calls from business organizations and pundits to step in or clarify events, saying that the arrest and prosecution of Khodorkovsky lies in the proper bailiwick of the civil court system, and that the present 'hysteria' should cease since he will not be intervening.

Of course, this is Russia, which means things are never simple.

Note: The following explanation and half-assed analysis are the result of my own reading of the situation as well as conversations with those much smarter than I in these matters - notably Dr. David Woodruff, Professor of Political Economy at MIT, and various colleagues in the International Security and Russian studies fields. All thanks to them, and all errors are mine.

The Rule of Law

One of the problems facing Russia as it struggles with the ongoing transition to a market democracy from a command economy is the role of the civil law system in both the economy and society. The old tradition of power struggles at the top of the system have not gone away, merely changed their stripes; and in some ways, this arrest is the most visible recent move in a large chess game.

Khodorkovsky is a 'New Man' - his money was self-made, and his power and influence derive from his fortune and the contacts, influence and assets his money brings him. He is a fervant advocate of laissez-faire, probably naturally since his money was made on the fringes of economic anarchy. He may harbor ambitions to political power in Russia.

Arrayed against him is the siloviki, a faction of ex-Security officials in the Kremlin. They represent a 'conservative' force in the Putin government, pressing for a strong state in classic terms (impinging on individual rights, etc. etc.) in order to provide a secure state (sound familiar?) Allied with them, or perhaps under their control (I'm not clear) is the federal prosecutory (izzat a word?) The prosecutor's organization has been making noises about pursuing Khodorkovsky and various other members of the Yukos organization since mid-year. They may view him and his cronies as an affront to the authority and power of the state legal system, an argument the siloviki would appreciate. Putin's 'do-nothing' stance benefits this side, although it does not indicate his wholehearted support.

Update:
Foreign support for Khodorkovsky that at least purports to be based on the 'rule of law' argument is rising:

BRUSSELS, Oct 28 - Russia must apply the rule of law in the case of oil giant YUKOS if it wants close trade links with the European Union, EU External Relations Commissioner Chris Patten said on Tuesday.

Reuters

The Cut-throat Business Fight

Yukos is presently involved in a dispute with the State-controlled energy firm Rosneft over the ownership of a firm in Siberia - and the oil wells that firm controlled. The dispute is tangled - apparently, Rosneft purchased the firm earlier in the year through the purchase of its outstanding stock. However, Yukos claims that this purchase was improper and/or not completed, and that it (Yukos) purchased the stock instead. This is difficult to unpack for a couple of reasons - first of all, Yukos apparently controls the stock registry which determines ownership of the shares in question (Can you say Western-style conflict of interest? I knew you could) and recently instigated similar criminal charges against a manager of the purchased firm in order to induce confusion amongst its opponents. So, looked at from the point of view of a corporate battle, it's possible that Rosneft has acquired powerful allies and is merely escalating the same tactic used by Yukos - that of jailing the opposing firm's executive.

One point to consider is that Mr. Khodorkovsky and his colleagues had been actively pursuing the sale of Yukos to a foreign buyer, possibly American firms ChevronTexaco or Shell Oil. This action is now on hold, which may have been part of the motivation for the arrest - either to prevent control of Yukos (and its role in developing Eastern Siberian oil) from passing into the control of foreigners, or simply to deny Khodorkovsky and his fellows the capital gains they would accrue from the sale. He acquired Yukos for several hundred million dollars US in 1995 in what the Moscow Times called a 'rigged auction'; estimates recently put its worth at around $28 billion US. (opinion from Gateway to Russia, http://www.gateway2russia.com/st/art_108216.php)

Money Versus Cronies

This is probably the most basic picture. In this view, Khodorkovsky and his New Men (the St. Petersburg liberals?) represent the 'new' crony structure of Russia, and his arrest represents an attempt by the 'old guard' to assert their control and dominance in purely political terms over this rising faction. Khodorkovsky has recently been funding opposition political parties. It could either be an attempt to dictate terms to him through exchanging his freedom (or the dropping of charges) for some form of quid pro quo, or it might be an attempt to knock out some of his support structure by crashing the value of Yukos shares. They fell some 20% during Monday's trading before hitting the trading halt.

There is widespread belief that the arrest is, in fact, an attempt by factions in Russian government to curb the rise of a potential rival. Even the head of the Communist party, Gennday Zyuganov, who strongly opposes the privatization of state assets that made Khodorkovsky rich, as well as the current capitalist rise, acknowledges this:

Even Communist Party leader Gennady Zyuganov, an opponent of the post-Soviet privatizations that brought vast wealth to Khodorkovsky and other so-called "oligarchs," alleged political intentions behind the probe.

"When Khodorkovsky didn't engage in anything other than business he was an ally to the powers that be, but as soon as he declared his political intentions he became an opponent and the present-day leadership doesn't stand on ceremony with its opponents," Interfax quoted him as saying.

Houston Chronicle, http://www.chron.com/cs/CDA/ssistory.mpl/world/2179877

Elite Backlash

One problem that this event brings to the fore is the incredible gap between the rich and the poor in Russia. While younger and/or intellectual members of Russian society may deplore the impact this is having on the economic development of their nation, the average Russian may not agree. There are some great quotes available from the Moscow Times website, for example:

Business leaders are outraged, liberals appalled. But Zoya, a sturdy pensioner in her 70s, could not care less whether security services had the right to arrest Mikhail Khodorkovsky.

"I am a pensioner, so by default I can't be on Khodorkovsky's side. He is a thief," she said as she vigorously marched through the slush of central Moscow.

"Look, everyone in my neighborhood wants Khodorkovsky in jail, the bandit."

Among ordinary Russians, views on Khodorkovsky's arrest are polarized between the young and generally liberal, who see it as a step toward a police state, and the old and poor, who regard him and his kind as thieves.

Like millions of other pensioners, Zoya supports any action against the super-rich elite.

"I trust Putin. His eyes are so kind. He is a kind man, he understands us pensioners," she said

Charges Play Well Among the Old and Poor
Moscow Times website, http://www.moscowtimes.ru/stories/2003/10/28/015.html

So what does it mean?

We don't know yet. One thing seems clear, however - Khodorkovsky himself was determined to undergo arrest. He has had numerous opportunities to flee the country, which he has not taken; furthermore, he has apparently not availed himself of opportunities in the past to work out a negotiated settlement with the prosecutor's office (and, presumably, any other 'opponents' in this fight). Why? That's a good question. He may be (or may think he is) 'calling a bluff' and submitting to a trial because he believes that he can prove his arrest and incarceration run counter to the stated current law in Russia. There is some evidence he may be able to do this. For example, he was arrested by Special Forces of the FSB - once known as the KGB. There is no legal authority or precedent (that I am aware of, and my knowledge is woefully incomplete) for using the FSB in situations where there has not been a violent crime or at least a claim of a threat to national security. Ostensibly, Khodorkovsky was taken into custody as a result of his failing to appear before a court to respond to the charges against him. However, in such circumstances (it's not as strong as a subpoena) the accused can request postponement of appearance for a 'respectable reason' - and historical precedent indicates that being on a business trip (as he was, in Siberia) has been accepted in the past. As the Moscow Times notes, at the least there may be indications of selective enforcement of the law, if not malfeasance.

The only thing I'm certain of so far is that this situation is extremely complicated, and is going to get more so. It will be a fascinating play to watch, as long as I'm able to get decent information on what's going on. The Western press, for example, has no information whatsoever on Mr. Khodorkovsky's ongoing struggles with the government and/or those of Yukos and its maneuverings, focusing entirely on the subject of capital flight from Russia and the reactions of the markets, as well as on the effects the whole thing will have on President Putin and the stability of the present government.

A (sort of) Counter Argument

I say 'sort of' because I was trying not to come down as pro-Khodorkovsky...but rereading my work above some days later, I don't think I managed it. The 'other' side of the coin is a point of view best explained, in purple prose, by Matt Taibbi, formerly of the Buffalo Beast and the eXile (many thanks to kozmund for pointing it out to me!) at: http://www.nypress.com/16/45/news&columns/cage.cfm

This piece unequivocally points to Khodorkovsky as the most successful of a small group of 'made men,' in the sense that the U.S. Government and business elite 'made' them by arranging the massive transfers of then state-owned assets (such as Yukos, various mineral firms like Khodorkovsky's Menatep, and billions of dollars of other goodies) to this group of businessmen. The reasoning and motives were classically Machiavellian: by so doing, they created a small group of extremely powerful men whose power was measured in dollars, if exercised in many ways. Men who would, the reasoning went, therefore serve the West as a 'front line' of defense against any attempts later on to re-nationalize economic sectors by the Russian government. The state was given the 'club' of re-nationalization to hold over them in a most crude manner - a sort of 'mutual assured destruction' arrangement.

Khodorkovsky, Taibbi argues, is not only the most successful of these (he calls them criminals at his most polite) but also the first to start testing the limits of that arrangement by making noises about political ambition. From this point of view, Putin and the siloviki are merely acting to curb the enfant terrible's attempts at pushing past the 'limits' set on him in exchange for permission to carry out one of the most bald-faced thefts of national property in recent memory. Ironically, therefore, from this angle, Putin and company are in fact invoking the 'rule of law' in order to curb the oligarchs; it's not the other way around.

The story continues to increase in fascination for me.

At the time of my writing, Mikhail Khodorkovsky has spent just over a month in a Siberian labor camp, where he is reportedly sewing mittens. In the Soviet era, the labor camp was involved in the mining of uranium, and few returned from it alive. Things have, at least, changed in this respect.

Introduction

The Khodorkovsky story is incredibly complicated not just in terms of what actually happened, but in moral terms. He is still regarded in some quarters as a profiteer, someone who took advantage of the post-Soviet revolution for personal gain. However, the Russian state has unquestionably acted reprehensibly during his trial, which has turned him into a political martyr. As he was taken to prison, a poll found that 11% of Russians would vote for him as President.

Khodorkovsky was born in 1963, just nine years after the death of Stalin. His parents were chemical engineers who did moderately well out of the Communist system, and he grew up in a typically drab two-room apartment in Moscow. Deciding to follow in the footsteps of his parents, he too went to University to study chemical engineering, at which he did well. He was also a member of Komsomol, the Communist youth league - not unusual at the time. What was unusual was that the young Khodorkovsky became deputy head of League at his University.

When Mikhail Gorbachev launched perestroika and glasnost, the Komsomol was given special authority to engage in private enterprise. The idea was both to give youth a chance and to transform the youth organization, which was not considered capable of surviving in the new open environment. Khodorkovsky proved that he himself was highly capable.

With a half-dozen partners, he established the Youth Center for Scientific and Technical Development in 1986. It was a private cafe which specialized in importing technology for resale to Soviet industry, along with a eclectic selection of other products such as brandy. The outfit also carried out market research for companies, which would usually result in them suggesting the purchase of technology from the Center. He had soon built up one of the most successful export-import businesses in Russia, with real revenue of about USD$10 million a year.

Using the funds from the Center, Khodorkovsky set up Menatep, a bank and holding company. He used the deposits raised from the bank to finance his trading business, and he also began to handle state money. While this was entirely unavoidable for the wannabe enterpreneur in Russia at this time, it would eventually be Khodorkovsky's undoing.

Yukos

"In those days everyone in Russia was engaged in the primary accumulation of capital. Even when laws existed, they were not very rigorously followed. Therefore, if you conducted yourself too much in a Western manner, you were simply torn to pieces and forgotten."
~ Khodorkovsky

During the early Yeltsin years, Khodorkovsky continued running Menatep and became the CEO of Rosprom, which managed the transition of state-owned corporations into the market system. In 1995, he really hit it big. The Russian state put Menatep in charge of managing the sale of its majority stake in Yukos. Menatep then proceded to sell Yukos to itself, ruling out the higher bid of a competitor on procedural grounds. Menatep paid USD$350 million for the 78% stake in Yukos, yet only two years later the company was valued at USD$9 billion.

In 1998, the Russian currency collapsed and and Menatep went down with it. Yukos' future looked uncertain. The whole Russian economy was in trouble due to the weak currency and a complete lack of confidence from overseas that investing in Russia was safe. Crony capitalism was taking its toll.

Khodorkovsky hit upon a new way to restore overseas confidence in Russia, and in so doing became representative of a new breed of oligarch. He began to move away from the shady business practices of the past and touted transparency. He began to issue full accounts, pay his taxes, and issue large dividends to shareholders. He appointed an American Chief Financial Officer to oversee the transition. Although this may sound very pleasing to Western proponents of the free market and the rule of law, it represented something very different to the Russian state.

Putin's wrath

Khodorkovsky's sudden discovery of sound, moral business practice was matched by a new show of largesse towards liberal political parties and good causes in Russia. He established the Open Russia Foundation, Russia's first international corporate philanthropic foundation. Its goal, according to the Yukos website, was "to foster openness, understanding, and integration between the people of Russia and the rest of the world". Unfortunately, while Yukos' site has not been entirely purged of mentions of it, the Open Russia Foundation appears to be no more - its website now merely redirects to Yukos' main page.

Together with this philanthropic work, which went beyond the Foundation, Khodorkovsky began to fund political parties. He funelled money to numerous parties, including the Communists, seeking to encourage an open political process rather than a particular point of view. Putin was naturally alarmed by Russia's richest man becoming politically involved, especially as he appeared to be making a drastic move away from cronyism.

It wasn't just his activities in the political sphere which were a problem. The more transparent and open a business is, the less chance there is for corruption. The gangster state could not profit from Yukos under Khodorkovsky's new regime. What was even more alarming was that this valuable and important industry was now in the hands of a man who declared himself in opposition to the gangster state itself. This wasn't just worrying to officials in the Russian government, but also to anyone who saw the oil industry as vital to national security. Keeping it in bed with the state had been the entire point of the privatization process - now Khodorkovsky was breaking the rules of the game. This could conceivably appear not just threatening to the Russian state, but also as a profound display of ungratitude.

Arrest and trial

As the world entered 2003, Khodorkovsky continued to irk the Russian President. An interview with Forbes magazine in 2002 indicates that he perhaps did not appreciate that he was playing with fire. Having just purchased his first house - a modest villa in a posh suburb of Moscow which is remarkably unostentatious for Russia's richest man - he said "I simply feel more comfortable in Russia these days". This feeling of comfort gave him licence to agitate against Putin in the run-up to the 2004 election, to advocate closer ties with the United States, and to support the war against Saddam Hussein.

Then, in October 2003, his chartered jet was raided by the Federal Security Service (FSB). Several dozen agents of the security services, armed with assault rifles, surrounded the plane and stormed it. Khodorkovsky was flown to Russia and detained pending his trial.

Khodorkovsky is charged with fraud and tax evasion. The exact details of the charges were byzantine and changed frequently throughout the trial. Basically, anything that could be used to defame him was applied. Retroactive laws were passed and invoked against him. Property belonging to him, his Foundation, and his lawyers was frequently raided in a search for new material to use against him. An orphanage he had endowed, which housed children orphaned in conflict zones within Russia, was raided by heavily-armed FSB agents.

Some of the charges were, to my mind, doubtlessly true. The chaotic nature of the privatization process in Russia meant that laws were rarely followed, as it was in no-one's interest to follow them. The state and the oligarchs engaged in an orgy of corruption and venality. To state that this was 'theft of national property' is misleading - it was merely the transfer from the old elite to a new. The public never had a look in under Communism, and they never really had one afterwards. Khodorkovsky's crime was to dissent from this way of doing things.

Members of the Russian government and the state as a whole had acted just as Khodorkovsky did, and in many cases in worse ways. However, they had the legitimacy and the power of the state to wield against him when they chose to destroy him. The state could not only deploy a dirty tricks campaign, but it could simultaneously cloak itself in the aura of respectability which comes from being the elected government. Tactics which Khodorkovsky was himself criminally charged with, such as the setting up of front companies, were actually used to bring him down.

As punishment, the state set out cynically to destroy him utterly. Stupendous charges were brought. When he refused to fold, his parents were accused of murder. No dirty trick was spared. As well as setting out to send Khodorkovsky down for a long time and hence remove him from the political arena, the state also needed a way of gaining back control of Yukos. It was here they were at their most cynical.

Redistribution of wealth

The state couldn't just renationalize Yukos by snapping its fingers, because this would have been too blatant and too horrible a precedent. However, their methods amounted to little less. Crime, once detected, has little refuge but in audacity.

To get the ball rolling, Yukos was accused of having a huge unsettled tax bill. Yukos was accused of having a tax bill which actually exceded its revenues for the period 2000 - 3. Obviously, it was unable to pay. The management offered the government a huge payment which it thought couldn't be rejected, but it was becoming clear the state was after more than just a tax payment.

As Yukos could not pay its bill, it had to declare itself bankrupt. Meanwhile, the government had frozen 44% of the company's shares, including those owned by Khodorkovsky. It then seized control of Yuganskneftegaz, the main operations unit of Yukos. The company was now to be auctioned off to the highest bidder.

I think you can probably see where this is going. On December 19, 2004, the company was sold to Baikalfinansgroup, an obscure corporation which upon closer analysis turned out to have been established two days earlier. Its registered office was a vodka bar in the Russian city of Tver. The corporation managed to get a 76.79% share in Yuganskneftegaz for USD$9.3 billion. It was able to finance this purchase partly via loans from state-run banks, although the source of most of its finance is far from transparent.

The only other bidder present at the auction was Gazprom, Russia's largest company. Gazprom is effectively controlled by the Russian government, and it failed to even enter a bid in the auction. It might as well have done, because two days later, Baikalfinansgroup announced it was selling its controlling stake in Yukos to state-run oil company Rosneft. The redistribution was complete.

Conclusion

Quite where a good Western liberal should stand on this whole story is not entirely clear. Clearly, the rule of law has not been followed. The trial of Khodorkovsky was essentially a show trial, and the methods remarkably Stalinist. However, there will always be those willing to argue that the real criminals here are the tycoons that took advantage of the privatization process. Revenge, in this version, has been some time coming.

Yet I find it hard to agree with such an analysis. In the early post-Soviet years, Russia was chaotic and rules were made to be broken. Khodorkovsky subsequently proved himself to be made of the right stuff when he turned away from cronyism and gangsterism and embraced humane values. Real life isn't like stories, where there are clear good and bad guys. Our choice is almost always between different shades of grey. In a story about a gangster-like, repressive state that destroys a man who had made even a belated conversion to liberalism, it seems clear to me which side we should be on.

Sources

"Profile: Mikhail Khodorkovsky", http://news.bbc.co.uk/2/hi/business/3213505.stm
"Mikhail Khodorkovsky: Official Trial Website", http://www.khodorkovskytrial.com/
"The Oligarch Who Came in from the Cold", http://www.forbes.com/forbes/2002/0318/110_print.html
"Open Russia Foundation launched in US", http://www.yukos.com/exclusive/exclusive.asp?id=6107
"Khodorkovsky forced to knit mittens - lawyer", http://en.rian.ru/russia/20051202/42297398.html
Wikipedia - Yukos, Mikhail Khodorkovsky, Baikalfinansgroup
Episode two of a BBC2 documentary entitled "Russian Godfathers"

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