Mikhail Khodorkovsky
Mikhail Khodorkovsky
Mikhail Khodorkovsky (born 26 June 1963)is a Russian businessman. As at 2003, Khordorkovsky was the wealthiest man in Russia, and the 26th wealthiest man in the world by reason of his holding in the Russian petroleum company, Yukos and is referred to as one of Russia's oligarchs.
Budding Entrepreneur in Soviet Union
Khodorkovsky grew up in a typical, tough Soviet environment in Moscow in a grim two room communal apartment. The young Khodorkovsky worked hard, received excellent grades and was deputy head of the Communist Youth League at his university, the Mendeleev Institute of Chemical Technology.
In 1986 while involved in the the Communist Youth League, Mikhail Gorbachev had commenced his programme of perestroika and glasnost. With partners from the Communist Youth League, and technically operating under its authority, he opened his first business, a private cafe. Successful, they also imported computers, other technology, brandy and a wide range of goods to sell at a profit.
He proved himself a capable entrepreneur building an import-export business with a turnover by 1988 of 80 million rubles a year or US$10 million.
Armed with cash from his business operations, Khodorkovsky and his partners bought a banking licence to create Bank Menatep in 1989. As one of Russia's first privately owned banks, Menatep expanded quickly, by using most of the deposits raised to finance Khodorkovsky's successful import-export operations.
Bank Menatap also got government business, awarded the right to manage funds allocated for the victims of the Chernobyl nuclear accident. By 1990, critics suggest the bank was active in facilitating the large-scale theft of Soviet Treasury funds that went on at the time prior to and following the collapse of the USSR in 1991.
A Fortune Built on Privatisation
Yeltsin's elevation to power in 1991 meant an acceleration of the market reforms under Gorbachev and created a dynamic business environment in Russia for entrepreneurs like Khodorkovsky.
His bank grew quickly, winning more and more valuable Government clients such as the Ministry of Finance, the State Taxation Service, the Moscow municipal government and the Russian arms export agency, all of whom deposited their funds with Menatep, which Khodorovsky mostly used to expand his burgeoning trading empire.
Bank Menatep, provided the foundation for Khodorkovsky's bidding for Yukos in 1995. Yukos says that approximately US$1.5 billion has been spent purchasing the assets that now make up Yukos, with a market capitalisation of US$31 billion.
In 1995 the Yeltsin Government decided to privatise sclerotic state industries, including the state owned oil company Yukos. They appointed Khodorkovsky's bank Menatep to conduct a public auction process.
A higher bid from a group of rivals was ruled out of the process by Menatep on a technicality. Menatep paid US$350 million for 78% of the company which inferred a value of $450 million. When the company was listed two years later, it was valued at $9 billion. That transaction - and dozens like it - has fed the envy and suspicion of many Russians, some of whom believe the oligarchs like Khodorkovsky have stolen their fortunes from the state.
Foreign Business Partners Complain
Khodorkovsky's early days in the oil business made him seem like the stereo-typical Russian robbber-baron. Amoco - later taken over by BP - was an early partner with Yukos in a highly prospective Siberian oil field. Amoco spent $300 million developing the oil field before being completely squeezed out by Khodorkovsky, using methods that would be unlawful in most of the developed world. That oil field now produces 90 million barrels per day.
When the Russian ruble collapsed in 1998, Bank Menatep collapsed with it as many of it had borrowed money in foreign currencies. It lost its banking licence. Three banks, the Standard Bank of South Africa, Japanese Daiwa Bank and German West LB Bank, had lent $266 million to Menatep secured by Yukos shares. Khodorkovsky offered oil instead. They refused and took possession of the shares. They dumped the shares very quickly, collecting less than half of their loan, prompted in a panic sale by Khodorkovsky's public threats of massively diluting their stake with new shares. While lawful in Russia at the time, it would not have been so in most of the developed world. Yukos also sold shares in its main production subsidiaries to offshore shelf companies believed to be linked to Khodorkovsky. Daiwa and West LB, suspecting they would end up with nothing if they persisted, sold out to Standard Bank in mid-1999, which in turn exited Yukos at the end of 2000.
The two deals gave Khodorovsky, Menatep and Yukos terrible notoriety in Western financial circles. Only in 2003 did it feel sufficiently confident to return to Western banks with loan proposals.
A New Era of Transparency
Khodorkovsky is considered one of the first of the oligarchs to realise that in order to build a global business, one needed foreign investment. In order to attract foreign investment, investors would be motivated by both greed and fear. Khodorkovsky's tough treatment of some of the West's largest and most powerful businesses created a large amount of fear in most investors. His fellow oligarchs had acted similarly, if not more outrageously at times. Coupled with the collapse in the ruble in 1998, very few investors, oil companies or banks were interested in doing business with Russia.
Khodorkovsky introduced unprecedented transparency at Yukos. Having once denied owning any shares in Menatep and Yukos, he confessed his controlling stake. Yukos revealed the identity of its shareholders for the first time, published accounts following international standards GAAP, and started paying taxes and issuing large dividends. Khodorkovsky hired many executives from large Western oil companies, placing them in senior roles and appointed respected non-executive directors to the board of directors of Yukos.
Bank Menatep - by this stage rebuilt around its St Petersburg subsidiary which remained solvent - even started lending money to non-Khodorkovsky businesses. The Bank now claims only 15% of its loans are advanced to Khodorkovsky group businesses.
As his foreign executives and consultants had predicted the effect of the new corporate governance principles was a soaring share price as foreign investors forgave past atrocities and bought into Yukos, which continues to be heavily discounted for sovereign risk.
When rival Alfa Bank was successful in attracting BP to invest billions in its oil subsidiary in 2003 many regarded this as a turning point in Western confidence in investing in Russia. President Putin and Prime Minister Blair both attended the signing ceremony, signalling the growing respectability of business in Russia.
Khodorkovsky's Political Ambitions
Khodorkovsky also became a philanthropist, whose efforts include the provision of internet-training centres for teachers, a forum for the discussion by journalists of reform and democracy, and the establishment of foundations which finance archaeological digs, cultural exchanges and summer camps for children. Khodorkovsky's critics saw this as political posturing, in light of his funding of several political parties ahead of the elections for the Duma (Parliament) to be held in late 2003
He is openly critical of what he refers to as 'managed democracy' within Russia. Careful normally not to criticise the elected leadership, he says the military and security services exercise too much authority. He told The Times:
“It is the Singapore model, it is a term that people understand in Russia these days. It means that theoretically you have a free press, but in practice there is self-censorship. Theoretically you have courts; in practice the courts adopt decisions dictated from above. Theoretically there are civil rights enshrined in the constitution; in practice you are not able to exercise some of these rights.”
Merger Creates Russia's Biggest Oil Company
In April 2003, Khodorkovsky announced that Yukos would merge with Sibneft, creating an oil company with reserves equal to those of Western petroleum multinationals. Khodorkovsky has been reported to be negotiating with ExxonMobil and ChevronTexaco about them taking a large stake in Yukos. Sibneft was created in 1995, at the suggestion of Boris Berezovsky, comprising some of the most valuable assets of a state owned oil company. In a controversial auction process, Berezovsky acquired 50% of the company at what most agree was a very low price.
When Berezovsky had a confrontation with Putin, and felt compelled to leave Russia for London (where he was granted asylum) he assigned his shares in Sibneft to Roman Abramovich. Abramovich subsequently agreed to the merger.
With 19.4 billion barrels of oil and gas, the merged entity owns the second-largest oil and gas reserves in the world after ExxonMobil. YukosSibneft will be the fourth largest in the world in terms of production, pumping 2.3 million barrels of crude a day.
The Kremlin Strikes Back
The arrest in early July 2003 of Platon Lebedev, a Khodorkovsky partner and second largest shareholder in Yukos, on suspicion of illegally acquiring a stake in a state-owned fertiliser firm in 1994, caused Yukov's shares to drop. The arrest was followed by investigations into taxation returns filed by Yukos, and a delay to the antitrust commission's approval for its merger with Sibneft. Speculation as to the motive behind the arrest, which was almost certainly ordered with the consent of Vladimir Putin, has been extensive and inconclusive, although it was almost certainly some form of warning by the Russian government to Khodorkovsky.
The warning was not heeded, as Khodorkovsky continued his involvement in the political process in the lead-up to the Presidential elections scheduled for 2004. Khodorkovsky has spoken out in favour of closer ties with the the United States, was in favour of the US toppling of Iraqi dictator Saddam Hussein and - seemingly strangely for an oil company boss - has advocated lower but stable oil prices as being good for Yukos and the world economy. He has cultivated close ties with Government and business figures in the US.
Khodorkovsky was himself arrested in late October 2003, charged with fraud and tax evasion. Khodorkovsky's supporters say the arrest is politically-motivated and will have a devastating effect on Russia's nascent financial markets.
The Effect of Khodorkovsky's Arrest
News of Khodorkovsky's arrest had a significant effect on the share price of Yukos. The Moscow stock market was closed for the first time ever for an hour in order to assure stable trading as prices collapsed. Russia's currency the ruble was also hit as some foreign investors questioned the stability of the Russian market. Media reaction in Moscow was almost universally negative in blanket coverage, some of the more enthusiastic pro-business press discussed the end of capitalism, while even the Government owned press criticised the 'absurd' method of Khodorkovsky's arrest.
The US State Department said the arrest was likely to be very damaging to foreign investment in Russia, as it appeared there were "selective" prosecutions occuring against Yukos officials but not against others.
What Khodorkovsky's Supporters Say
Khodorkovsky's supporters point to the Russian Prosecutor-General's summoning of the Khodorkovsky's lawyer on the lawyer's activities as evidence that Russian authorities are over-zealous, if not corrupt. President Putin denied that he had played an active role in the prosecution, saying that the prosecutors move showed that no one was above the law. Some also question the impartiality of the Basmanny Court and one of its judges who approved Khodorovsky's arrest, Andrei Rasnovsky who is a former employee of the Prosecutor-General's office. The Basmanny Court is in the same district as the investigative division of the Prosecutor-General's office, which is the official reason why it is generally the forum for hearing its cases. Some say it is the because many of the judges in that court are former employees of the Prosecutor's office and remain loyal to it. One of Yukos' lawyers say there is not even an attempt to conceal their bias, with judges seen in private discussions with prosecutors prior to hearings.
It is believed that President Putin's powerful chief of staff Alexander Voloshin, regarded as close to former President Yeltsin and to some of the oligarchs disagreed that Putin had no role in the prosecution and tendered his resignation in protest at Khodorovsky's arrest. The resignation of the pro-busines Chief of Staff augurs a new era of the domination of military and security services figures within the Kremlin say some.
What the Prosecutors Say
Prosecutors say they operate independently of the elected government. The Prosecutor-General Vladimir Ustinov was appointed by former President Yeltsin and is not seen as being particularly close to Putin who once tried to remove him. However, he is politically ambitious and prosecuting Russia's most prominent and successful oligarch is particularly helpful to his political career and intended candidacy for the Duma.
The formal charges against Khodorovsky read as follows
"In 1994, while chairman of the board of the Menatep commercial bank in Moscow, M. B. Khodorkovsky created an organized group of individuals with the intention of taking control of the shares in Russian companies during the privatisation process through deceit and in the process of committing this crime managed the activities of this company."
He is charged with acting illegally in the privatisation process of the former state owned mining and fertiliser company Apatit. It is alleged that the CEO of Bank Menatep and large shareholder in Yukos Platon Lebedev assisted Khodorovsky. Lebedev was arrested and charged in July 2003.
In addition, prosecutors are believed to be conducting extensive investigations into Yukos for offences that go beyond the financial and tax related charges currently filed. They say there are three cases of murder and one of attempted murder that they believe are linked to Yukos, if not Khodorkovsky.
One area of interest to the Prosecutor-General includes the 1998 assasination of the mayor of Nefteyugansk in the Tyumen region, Vladimir Petukhov. Nefteyugansk was the main centre of oil production within the Yukos empire. Suspicions arose in Nefteyugansk because Petukhov had publicly and frequently campaigned about Yukos' non-payment of local taxes.
Khodorkovsky For President?
One wholly unintended consequence of the Kremlin's aggressive move on Khodorovsky, some supporters say is that it might build his popularity. One political leader, Irina Khakamada, of the main right of centre party claimed that Khodorkovsky's imprisonment was making the once hated oil billionaire into a political hero. She asserted:
"The longer he sits in jail, the more of a political figure he will become. Russians love martyrs. They will forget that he is an oligarch."
Others pointed to his unpopularity and his religious background of Judaism as insurmountable obstacles to election in a country with a deep loathing of the oligarchs and a shameful record of anti-semitism.