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This article was originally published on May 31, 2011.
Instead of defending his innocence at the final day of his trial on nebulous charges in 2010, Mikhail Khodorkovsky, once Russia’s richest man and now imprisoned in a Siberian labor camp near a radioactive mine, read to the court a political manifesto that lambasted the stagnation and corruption into which contemporary Russia has sunk. “The obvious conclusion a thinking person can make is chilling in its stark simplicity,” he intoned in the tiny courtroom packed with reporters and the pensioners who’d come to show their support. “The siloviki bureaucracy can do anything,” he said, referring to the powerful faction in the Russian government whose roots are in the security forces. “A person who collides with ‘the system’ has no rights whatsoever.” He added: “I am ashamed for my country.” It was a moving speech that laid out, powerfully and clearly, everything that is wrong with Russia today; it made even my sober male Russian friends tear up.
When the judge handed down the guilty verdict just before the New Year, hundreds protested outside the courtroom. German Chancellor Angela Merkel condemned the ruling, as did Secretary of State Hillary Clinton. The White House issued a statement condemning “abuse of the legal system for improper ends.”
The case still hasn’t receded from Russian headlines. The press secretary of the court that heard Khodorkovsky’s case revealed to an opposition newspaper that the judge in the case didn’t write the verdict and that he was pressured from the outside. (She has since been made to take a lie detector test—she passed—and been forced out of her job.) Fifty-five “official” celebrities have signed a controversial open letter praising the verdict in the case, and 45 others signed one opposing it. When U.S. Vice President Joseph Biden gave a major policy address at Moscow State University in March, he cited Khodorkovsky’s case as a blight on Russia’s already troubled record. “Get your system right,” he said. Foreign investors regularly cite the Khodorkovsky case as a metaphor of the risks of doing business in Russia: If you run afoul of the Kremlin, you can have it all taken away in a heartbeat, even if you are the richest, most powerful man in Russia.
When Khodorkovsky was arrested, many, especially in the Jewish press, saw it as an attack against a Jewish businessman, and thus as a reinforcement of pernicious old stereotypes in a country famous for its institutionalized anti-Semitism. After the fall of the Soviet Union, there were attempts to rile up the Russian public by harping on the image of the rapacious Jewish businessman, of which there were several. Surprisingly, the attempts fell flat, perhaps because Russians were at the time too preoccupied with mere survival. The Jewish oligarchs had all come of age in the Soviet Union where, unlike their Orthodox Christian countrymen, few Jews hung on to their religion. Khodorkovsky, whose father is Jewish, was no exception. His political ambitions, and his risky battle with Putin, made it even less likely that he would openly identify himself as a Jew, even as his cause was adopted by the American Jewish and Israeli press.
Khordokovsky’s former deputy at Yukos Oil, Leonid Nevzlin, who fled to Israel (which has no extradition agreement with Russia) ahead of a similar battery of charges, including murder, told the reporter Gal Beckerman that he and his former boss and friend had made opposite and deliberate choices in the face of state persecution. “I always felt that I am first of all Jewish and then a Russian citizen,” Nevzlin said. “For Khodorkovsky, it was the opposite. And the Yukos case made us face this specific question. What choice would we each make? Where would we like to live? And each of us made his own choice. I totally respect Khodorkovsky’s choice, though it doesn’t match mine.”
Khodorkovsky’s choice was Russia, a choice that landed him in some of the country’s most notorious prisons. It has also meant taking on a vaguely Christian-tinged role, a just man laid low by Caesar’s hand. In the nearly eight years since a team of commandos stormed his private plane at what appeared to be the behest of then-President Vladimir Putin, Khodorkovsky—every minority shareholder’s worst nightmare—has reinvented himself as Russia’s preeminent martyr. After his initial conviction, in 2005, for tax evasion, Khodorkovsky began to write liberal political screeds from his crowded prison cell. He wrote op-eds for Western publications, like the New York Times, and maintained a correspondence with Lyudmila Ulitskaya, one of Russia’s most famous contemporary novelists. He has PR teams in Moscow, London, Paris, Washington, and New York. During Khodorkovsky’s second, and even more politicized, trial, his cadre of lawyers is always available; every journalist in Moscow has their mobile numbers. Recently, his main PR team in London hired Washington-based Randy Scheunemann, Sen. John McCain’s foreign policy adviser during his last presidential campaign. (Scheunemann also did a stint with Sarah Palin.)
But no amount of PR could have made Khodorkovsky into such a sympathetic figure without the Kremlin’s unintentional help. Putin’s relentless pursuit of Khodorkovsky, his apparently insatiable desire to see the man remain in prison, his flashes of seemingly genuine anger whenever Khodorkovsky’s name is mentioned, the fact that Khodorkovsky was convicted in his second trial for something that directly contradicts the conviction in the first, the fact that, even before the 14-year sentence was handed down in December, rumors started to circulate about a third set of charges—all of this has shown Khodorkovsky as a victim of the Kremlin’s selective, pettily vindictive justice. There was nothing, after all, that he did that the other oligarchs—many of them still flourishing—didn’t do. “My personal opinion is that Khodorkovsky, without any doubt, was a horrible transgressor of the rights of minority shareholders, and was fraudulent and avoided taxes, but that’s not why he’s in jail,” says Alexey Navalny, a young blogger who has made his name as an activist minority shareholder in state companies. “He’s not in jail for this. My demand isn’t so much to free Khodorkovsky but to jail everyone else.”
Older generations of liberal Russians, who saw their friends jailed for their views in Soviet times, have a sort of knee-jerk empathy for Khodorkovsky: If the state has put him in prison, then he is a dissident. Indeed, last Tuesday, immediately following the Moscow City Court’s rejection of Khodorkovsky’s latest appeal, Amnesty International declared him a prisoner of conscience. This is a strange development for a man with a soft, high-pitched voice who avoided the limelight in favor of the quiet search for loopholes and deals. “He’s not a dissident, he’s a victim of bad decisions, including his own,” Alexi Golubovitch, who served in various high-ranking positions in the oligarch’s companies, Yukos and Menatep, over 15 years, told me over lunch in his office in the historical center of Moscow. He left the company in 2001—it had become “too Soviet” in its mentality, he says.
“Khodorkovsky needs to be freed because his jailing is unjust, not because he’s a real dissident,” says Golubovich. “A dissident is selfless.” And selfless Khodorkovsky is not. There are still untold millions at stake, and a case pending at the European Court of Human Rights, in which Khodorkovsky seeks damages from the Russian state to the tune of $98 billion, the largest in the court’s history.
The Western investors who denounce the case against Khodorkovsky as politically biased were once his bitter enemies, trampled underfoot as he built up the biggest fortune in post-Soviet Russia. “He was uniquely ruthless, uniquely scheming,” says David E. Hoffman, whose book The Oligarchs provides the definitive account of the period. At the turn of the millennium, Khordorkovsky and his fellow oligarchs were seen not as entrepreneurs moving Russia forward, but as a danger to its future development. These oligarchs “threaten Russia’s transition to democracy and free markets,” wrote Lee S. Wolosky, a former Clinton counter-terrorism official and a professor at Columbia, in a 2000 article in Foreign Affairs. He was not alone in his assessment.
Back then, Russia was in a precarious position. It was only nine years since the collapse of the Soviet Union had shoved Russia on the fast track to a free market; it was also by no means a sure bet that Russia wouldn’t slide into the authoritarianism—both political and economic—that began to grip the other former Soviet Republics.
When the Soviet Union collapsed, the choice was made early on, with the guidance of American scholars like Jeffrey Sachs, to toss Russia into capitalism head-first. The result was unregulated chaos not because people were breaking the rules but because no one knew what the new rules were. In many cases, they didn’t exist at all. Pyramid schemes flourished, inflation sky-rocketed, the savings of millions evaporated repeatedly. In the midst of this contagion of poverty, a few rich men appeared who grew rich by exploiting the fact that the disorder provided one giant loophole. A favorite scheme was trading on the rapid disintegration of the ruble. A small fortune could be made in an afternoon. Among the men who did this was Khodorkovsky, who quickly turned his Communist Party connections into a café, then into a business importing personal computers, which became what was effectively a lucrative laundering scheme that turned government credits into cash. This, in turn, helped him set up his own private bank, Menatep.
Khodorkovsky cashed in again when it came time to privatize more of the Soviet Union’s vast industrial properties, in 1995. That year, a banker named Vladimir Potanin devised a scheme by which the government could get desperately needed cash—needed for things like paying salaries—in exchange for pieces of the Soviet industrial empire. It was a simple but brilliant idea: The government would hand over shares of various industrial giants to private bankers, like Potanin or Khodorkovsky, and they in turn would lend the government the money it needed to keep operating. If the government defaulted on these loans, as was overwhelmingly likely to happen, the banks could then auction off the assets to get their money back. When the Kremlin defaulted on the loans, banks belonging to the Potanins and the Khodorkovskys were suddenly in possession of the crown jewels of the Soviet industrial empire: its vertically integrated oil and natural resource companies. (The Soviet Union was once the world’s biggest oil producer, a position Russia has only recently recaptured.)
The oligarchs then set up rigged auctions in which the banks’ own affiliates walked off with the assets for a song. Khodorkovsky’s Menatep maneuvered to lend the government money in exchange for the country’s largest, most efficient oil production companies. When the state defaulted, Menatep set up an auction and sold the companies to a shell company owned by—who else?—Khodorkovsky. He paid only $159 million for a 45 percent stake in the companies that eventually became Yukos. It was just $9 million over the asking price. Two years later, in 1997, the company was worth about $8 billion, rivaling some of the biggest Western oil companies.
To be fair, almost no one knew the values of these Soviet, state-owned companies at the time they were being auctioned. But even accounting for the work Khodorkovsky put in to modernize the company and bring in more efficient Western equipment, the valuation still seems artificially low.
The acquisition of Yukos was a highly dramatic and controversial affair, with Khodorkovsky flashing some of his trademark ruthlessness: Shortly after the auction, Khodorkovsky sent a legion of his most elite security officers to the oil towns to formally take over the production and the books. (All oligarchs in this period had small private armies made up of former Soviet security officers and spies.)
And that was only the beginning. After he established control, Khodorkovsky set up a mechanism designed to transfer Yukos profits overseas, using an instrument called transfer pricing. Here’s how it worked: Yukos was a parent company that owned several oil production centers in Siberia. It would force its subsidiaries to sell oil to it for an artificially low rate. In early 1999, this was set at $1.70 a barrel. Yukos would then turn around and sell that oil overseas for the prevailing market price, which was inevitably much higher—during that period, around $15. Using this method, Khodorkovsky managed to siphon off $800 million in 36 weeks. He channeled his wealth to a string of shell companies located in tax havens around the world.
Transfer pricing turned oil production into the quickest way to spirit capital out of Russia. (According to one estimate, up to $150 billion left Russia between 1992 and 2000.) The technique also helped companies like Yukos avoid taxes, which in the 1990s were needed more than ever to prop up a country that was falling into deep disrepair. Khodorkovsky was, in effect, bleeding the producing parts of Yukos dry and thereby impoverishing the one-industry towns surrounding the oil production centers. “By mid-1998, regional and local tax arrears in Nefteyugansk, where Yukos’ main production company (and little else) is located, exceeded $200 million,” Wolosky wrote. “According to Nefteyugansk’s mayor, these shortfalls brought the region to ‘the verge of disintegration.’ In addition, wage arrears and drastic pay cuts for oil workers led to a ‘socially explosive situation.’ ” This led to protests in the town, which were led by Vladimir Petukhov, the mayor of Nefteyugansk and a major opponent of Khodorkovsky’s tactics. Once, Petukhov and his supporters protested a meeting of the board of directors of the local Yukos affiliate, effectively barricading the attendees inside for four days. A month later, in June 1998, Petukhov was shot dead on his way to work.
It is by no means clear that Khodorkovsky or Yukos was responsible for Petukhov’s death, but the coincidence is certainly an unflattering one. This is especially true because such tactics were common in the building of commercial empires in the 1990s, and it stands to reason that Khodorkovsky, the richest and wiliest of them all, was not above using such means. Asked in a recent interview if there have been instances where oil money acquired during that decade “smelled of blood,” Khodorkovsky responded: “There have been. In fact, in most cases.” The complicating factor, of course, is that the trail—or the stench—rarely led directly to the oligarch; he would never deign to specifically order a murder. He would simply dictate the direction in which the company needed to move, and his subordinates—including his army of security foot soldiers—would obediently hack away.
“This question of the security service is a difficult one,” Golubovich, the former Menatep employee, told me when I asked him whether Khordorkovsky’s men committed murder. “They were capable of doing anything. I don’t know much about the case [of Petukhov’s murder] but these questions were generally decided in back corridors, on the margins of the law.”
In 2005, Khodorkosvky’s chief of security was charged in Petukhov’s murder, for which he is currently serving a life sentence in prison. Putin has frequently and publicly alleged that Khodorkovsky was behind the murder, alleging that a corporate chief of security would not take such actions on his own initiative. “There are corpses hanging on them,” he said of the Yukos management, at an international investors conference in October. There is little proof of this, though, and no murder charges have been brought against Khodorkovsky.
Khodorkosvky became a changed man long before commandos stormed his plane. The collapse of the Russian economy in August 1998 had hit the oligarch hard. “By 1999, people close to Khodorovsky were telling me that he had decided to change,” Hoffman recalls. Given Khodorkovsky’s reputation and business tactics, “I was deeply skeptical of this.” After a while, Hoffman began to believe the talk around Yukos. “The reason,” Hoffman says, “is because I realized that the only thing for Khodorkovsky to do was to find an exit strategy for his assets.”
Before the 1997 and 1998 market meltdowns in East Asia and Russia, the oligarch had been on a shopping spree, stocking up on loans from Western banks eager to get in on the Russian miracle. “Yukos made some very risky financial plays then, acquiring credits at very high interest,” says Golubovich. After the meltdown, Khodorkovsky went on a pity tour of the bank boardrooms, pleading that he was unable to repay the debts. When the banks relented, Khodorkovsky bought the debt from one of the loans on the sly so that the collateral—shares of Yukos—wouldn’t end up with anyone else. While not illegal, it was certainly shady.
At the same time, Khodorkovsky decided to take full control of Yukos by declaring war on the foreign investors who had bought Yukos shares in the privatization bonanza. Khodorkovsky’s chief target became Kenneth Dart, the wily heir to an American Styrofoam cup fortune. Dart owned around 13 percent of several of the production companies that made up the Yukos empire. In the spring of 1999, Khodorkovsky began releasing tens of millions of new shares in these companies in order to dilute Dart out of his ownership. Dart protested.
In one particularly brazen—and by most measures illegal—move, Khodorkovsky managed to brilliantly outmaneuver Dart. At issue was the creation of 135 million new shares of Tomskneft, one of Yukos’ production companies. There were only 45 million shares in existence at the time, so creating 135 million new shares would dilute Dart’s ownership from 13 to 4 percent. In June 1999, when Dart’s representatives and other minority shareholders arrived at the meeting in central Moscow where they would vote on the share issue, they were greeted with a sign. The meeting, it said, had been moved to a small town south of Moscow; it would start in two hours. As Hoffman recounts in The Oligarchs, the shareholders raced to the new location, which turned out to be an old building, mid-renovation. After scouring the building, they found a small room up an improvised stairway. Inside was a table, seven chairs, and two copies of the meeting’s agenda. When the shareholders asked the construction workers if anyone had been there, they replied that some meeting had just ended about 20 minutes ago.
What was the next step for such an ambitious man? The crash provides yet another hint. The 1997 financial meltdown slashed demand for oil in East Asia, which pushed oil prices to their lowest level in years; soon a barrel of oil would cost barely more than it cost to produce it. With such thin margins, Khodorkovsky realized, the only way to make really, really big money was to sell a chunk of Yukos to a foreign oil company. Such a sale would bring him far more money than pumping more oil, especially if prices remained so low. “But you can’t sell to a Western company if you have bad accounts, you can’t do that if you’re a thief,” explains Hoffman. “He had to clean up his act in order to sell part of the company.”
Khodorkovsky’s metamorphosis into the patron god of Russian corporate governance, in other words, came first and foremost by greed rather than by some sudden fondness for principles. This kind of evolution has happened before—it was common for many Western tycoons, as well. Whatever his motives, Khodorkovsky did clean up Yukos’ operations, legitimizing it enough to pursue talks of a sale to Chevron and ExxonMobil and, later, BP. According to Hoffman, Khodorkovsky paid dividends to shareholders for the first time, published accounts meeting international standards, and reinvested profits back in the oil business and towns. Oil prices rebounded suddenly in 1999 and 2000. So did the value of Yukos. Khodorkovksy and his partners revealed that they owned 69 percent of the company. The shares soared from $.20 each to $3.60 on the Russian stock market.
And this is where Khodorkovsky went wrong: He became too big, too rich, and he didn’t share with the new people in power, Putin and his siloviki. These ex-KGB and security service officers had been left behind in the free-for-all of the ’90s; many of them were now servants of the oligarchs who had outpaced them to the gold pile. Now that they were in power, they too wanted a slice. The working theory—that Khodorkovsky ran afoul of the Kremlin by meddling in politics—only works to some extent: Putin’s chief of staff had allegedly told him exactly how much money to donate to which political parties.
In recent years, a different story has emerged. According to the updated version of The Oligarchs, published at the end of 2003, Putin convened a business roundtable in the Kremlin on February 20 of that year. Khodorkovsky, then flying high, raised the issue of a shady deal that had just gone down. A tiny company, Severnaya Neft (“North Oil”), was sold to Rosneft, then still a tiny, state-owned oil company, at a wildly inflated price—up to five times its real value. Khodorkovsky wanted to know who was behind the deal. Putin soured instantly and asked Khodorkovsky where he had gotten his oil reserves. The implication was that a new crew was on the block, and it was best not to get in their way.
This would prove a turning point. Khodorkovsky never got to sell Yukos. Instead, he was arrested and his company driven to bankruptcy by bogus government tax bills. Rendered insolvent, the company was seized and auctioned off—again at bargain prices—to Rosneft. The head of Rosneft? Putin’s old friend, rumored to have been a fellow spook.
For a while it seemed that Putin had won, and, to a large extent, he has: Unless the Kremlin experiences a cosmic change of heart, Khodorkovsky will be in prison until 2016. But prison has merely proved to be another in a series of tactical challenges for Khodorkovsky, and from his cell he has managed to parry his torturer. By coupling his political writings with a high-octane PR operation, Khodorkovsky has managed to completely obscure the life he led before 2003. He is now a prisoner of conscience, a victim of a rapacious Kremlin, a martyr. Any naysayers who bring up his past as a robber baron are shouted down as Kremlin apologists. The fact that they often are and that Khodorkovsky’s arrest and internment are clearly motivated by politics only helps Khodorkovsky’s case.
But there’s a catch: The two men have cornered each other. Putin, who has carefully crafted the image of a tough man, a master of his house, was the only president who had the gumption to stand up to the oligarchs like Khodorkovsky who threatened to bankrupt Russia. He cannot, therefore, answer any calls for justice and clemency from the West. The longer he does this, though, the more Khodorkovsky seems to be the David to his Goliath, the more appealing he becomes to the underdog-loving West, the more they call for his release. And if he were released, what would he do? The only realm left to conquer is politics, and Putin cannot risk such a showdown in flat, open terrain.