THE ATTACK ON YUKOS
This distinction about status in the Soviet era, even if subtle, also helps explain the arrest of Mikhail Khodorkovsky. The attacks on Yukos and Mikhail Khodorkovsky highlight Putin’s determined effort to reign in these upstart oligarchs and at the same time renationalize and refashion their property into state companies and his vaunted national champions. By 2003, with the earlier arrests and firings, it should have been clear just what Putin was attempting to do. Yet Khodorkovsky, by his actions and his hubris, acted as if he were invulnerable. At the time, Forbes Magazine estimated that his net worth amounted to $15 billion, which made him the richest man in Russia. This may have warped his judgment and made him think he was indeed invulnerable.
Khodorkovksy’s rise to fortune and infamy began when he was a student at the Medeleev Chemical Technical Institute. Taking advantage of the new 1987 Gorbachev-era reform authorizing the creation of private businesses, Khodorokovsky, along with twelve classmates, opened a cooperative coffee house and discotheque, which they called Menatep (this stood for Intersectoral Center of Scientific Technical Progress). They soon expanded their activities to sell consumer goods such as computers and other products that were in short supply. Trading proved to be very profitable, and all the cash they had accumulated allowed them to open their own bank the following year. This was made possible in 1987 by another Gorbachev reform that authorized the formation of private banks, the first time since the Revolution. Eventually, they named the bank Menatep, the same as their cooperative.
As one of the first private commercial banks in Russia, Menatep was in a key position in 1992 to buy up the vouchers that President Boris Yeltsin decided to issue to every Russian. The vouchers, in turn, could be exchanged for shares of stock in the thousands of heretofore state-owned enterprises that were then being privatized. The intent was to make every Russian a stockholder, a true case of people’s capitalism. The hope was to involve each Russian in the privatization process and so give each one a stake in the new market system.
But as we saw, few Russians had any appreciation for the value of their vouchers. The voucher system, however, was made to order for economic sophisticates like Khodorkovsky and his banking associates who understood the potential of the vouchers. They quickly bought up as many as they could. In a few months, their vouchers enabled them to accumulate a large corporate empire.
Khodorkovsky’s biggest acquisition, however, came when he managed to gain control of the oil company Yukos. This was a by-product of the Loans for Shares scheme described in Chapter 3. To help the government pay its bills, Khodorkovsky’s Menatep, along with several other banks, offered to lend the government the money it needed. As collateral for its loan, Menatep agreed to take the government’s stock in Yukos, a petroleum company that had been spun out of Rosneft in November 1992. Incidentally, the name “Yukos” reflected the merger of the Production Association Yuganskneftegaz (Yu) with the refinery KuybyshevnefteOrgSintez (Kos).13 When the government could not pay back its loan, Menatep proceeded to auction off its collateral, as it was allowed to do. The assumption was that a fair auction would fetch a price high enough to provide the state with funds not only to repay the loan to Menatep but also to generate additional income for the government. What happened, of course, was that the December 8, 1995, auction was rigged. As with the other auctions, viable competitors were prevented from bidding so that the winner was, in fact, a “straw” put up by Menatep, which conducted the auction. This way, despite higher bids from Alfabank, Inkombank, and Russian Credit Bank, all of which Menatep had ruled out on a technicality, Khodorkovsky was able to pay only a bit more than $350 million, the required minimum price for control of 88 percent of Yukos stock. A few months later Yukos would have a market value of $3–5 billion.14
It was disturbing enough for the public to learn how these one-time state properties had been acquired by Khodorkovsky and a dozen or so other oligarchs at a fraction of their value, but to make matters worse, it happened at the same time the Russian economy was all but disintegrating. Between 1990 and 1998, as the country moved into shock therapy and simultaneously closed down much of the military-industrial complex, the GDP shrank by 40–50 percent. Not only were a few oligarchs taking out a gigantic piece of the economic pie for themselves but the pie itself had shrunk to barely half of what it had been before Yeltsin rose to power. That is why by 1998, more than one-third of the population found itself below the poverty line.
This was not the only controversial action taken by Khodorkovsky and his associates on their way to control of Yukos. Khodorkovsky and Menatep did not control all the stock in Yukos nor in the Yukos subsidiaries that produced the oil. Other investors had also purchased vouchers and exchanged them for shares, which they now owned. One of the most adventurous investors was a foreigner, Kenneth Dart, an American who was an heir to the Dart Cup business. He put in approximately $2 billion to purchase shares in Yuganskneftegaz and other subsidiaries of Yukos. Khodorkovsky wanted Dart out. Consequently, Khodorkovsky stripped Yuganskneftegaz of its value in the expectation that Dart would conclude he should sell out while there was still some value to his investment. To nudge him along, Khodorkovsky ordered that the petroleum produced by Yuganskneftegaz should be sold at below or close to cost to another subsidiary more closely controlled by Khodorkovsky. This second subsidiary would then sell the petroleum at the higher market price and thereby capture all the profit. This so-called transfer pricing is a common way to squeeze out minority shareholders (it is also a way of trying to reduce taxes for the first subsidiary) such as Dart, even if it means bringing a company like Yuganskneftegaz to the brink of bankruptcy. Subsequently, Dart initiated a series of lawsuits in an effort to recoup his investments. Despite some success, Dart estimates he lost over $1 billion.15
Something similar happened after Menatep closed its doors in the wake of the financial crisis of August 17, 1998. Those with deposits in Menatep as well as the foreign companies and banks that had provided loans to Menatep lost almost all their money. But while outsiders were left with little or nothing, Khodorkovsky, as we saw, transferred the bank’s assets that still had value to another, but independent, subsidy in St. Petersburg called Menatep St. Petersburg.
As troubling as such behavior is, it was the physical violence, including murder, allegedly carried out by several Yukos officials that was the most disturbing. That at least was what the judges decided in March 2005 when they found Alexei Pichugin, head of Yukos security, guilty of murder and sentenced him to twenty years in prison. (In August 2007 the sentence was extended to life in prison.) In addition, Leonid Nevzlin, one of Khodorkovsky’s closest associates who is now exiled in Israel, was also charged with being Pichugin’s accomplice in similar crimes.16 Given how dependent the judges in the Yukos case were on Putin, there is reason to question just how impartial the judges could be. Khodorkovsky’s lawyers, in fact, claim that one of the judges would excuse herself periodically to seek advice from the Kremlin about how to rule.