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.

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.


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.