Unlikely Martyr: Mikhail Khodorkovsky as Noble Dissident in Putin’s Russia
Newly released from prison, the Jewish tycoon was Russia’s wealthiest oligarch – and the Kremlin’s chief critic
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.
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