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.


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.


"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.


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.


"Profile: Mikhail Khodorkovsky",
"Mikhail Khodorkovsky: Official Trial Website",
"The Oligarch Who Came in from the Cold",
"Open Russia Foundation launched in US",
"Khodorkovsky forced to knit mittens - lawyer",
Wikipedia - Yukos, Mikhail Khodorkovsky, Baikalfinansgroup
Episode two of a BBC2 documentary entitled "Russian Godfathers"