#15 - JRL 7254
The Economist (UK)
July 19-25, 2003
Face value
The troubled face of Russian business
What Mikhail Khodorkovsky's troubles say about business in Russia
UNTIL two weeks ago it seemed that there were no limits to what Mikhail Khodorkovsky could do. In a couple of years, a man with one of the worst reputations in Russian business had transformed both himself and his oil company, Yukos, into standard-bearers of modernity and transparency. He was feted in western capitals, set an example that his fellow Russian magnates had grudgingly begun to follow, and became Russia's wealthiest man (and, according to Forbes, the 26th richest in the world). After announcing in April that Yukos would merge with Sibneft, creating an oil firm with reserves to rival those of the international majors, Mr Khodorkovsky seemed all-powerful.
Perhaps too powerful. The arrest two weeks ago of Platon Lebedev, one of Mr Khodorkovsky's closest associates, on suspicion of illegally acquiring a stake in a state-owned fertiliser firm in 1994, shook corporate Russia to its core. Nobody doubts that the arrest is political: in Russia, the order to nab a big fish invariably comes from on high. It was followed by investigations into tax returns filed by Yukos, and a delay to the antitrust commission's go-ahead for its merger with Sibneft. But why?
During the free-for-all infancy of Russian capitalism, Mr Khodorkovsky sailed as close to the wind as anybody. He managed to obtain credit vouchers that Soviet firms used in barter transactions, converted them into roubles, and then the roubles into hard currency. In 1989, aged 26, he started Bank Menatep, which helped organise the bidding for Yukos in 1995. In total, according to the firm, roughly $1.5 billion has been spent buying the assets that now make up Russia's biggest oil producer, with a market capitalisation--until Mr Lebedev's arrest--of $31 billion. His other skills included stock dilutions, loan defaults and holding shareholder meetings at short notice in inaccessible locations.
All that appeared to change in 2000, when Vladimir Putin, Russia's new president, struck a deal with the businessmen who had taken control of most of Russia's assets: their past misdeeds would be overlooked if they (a) kept their noses clean and (b) stayed out of politics. Two who tried to assert themselves, Vladimir Gusinsky and Boris Berezovsky, were forced into exile. Mr Khodorkovsky was the first to realise the further implications. Now the asset-grabbing was over, his firm needed to grow. Growth meant investment. Investment demanded stability and transparency, clear rules and minimal government meddling.
Yukos started to reveal its big shareholdings, publish accounts meeting international standards and pay taxes. Other firms noticed. Investment analysts began to distinguish between those who were or were not "doing a Yukos". Sibneft had to clean up its books before the merger. Meanwhile, Mr Khodorkovsky began to preach the merits of free markets, checks and balances, and civil society. He did the rounds in the West, wooing journalists, investors and power-brokers. His friends and promoters include Henry Kissinger, Lord Rothschild and Lord Owen. He fancies himself as Russia's George Soros: his philanthropy includes providing internet-training centres for teachers, a forum where journalists discuss reform and democracy, and foundations that pay for archaeological digs, cultural exchanges and summer camps for children (where youngsters solemnly debate civic values, much as Mr Khodorkovsky no doubt debated socialist ideals as a leader of the Young Communist League). All this helped Yukos's share price.
The first signs that he was pushing the limits came earlier this year. He got into a public row over the government's insistence on keeping its oil-pipeline monopoly. There were smaller clashes over corruption and Russia's stance on the war in Iraq. His open funding of two opposition political parties, and rumours that he was also giving money to the Communists--he said only associates of his did--made it look as if he was buying support in parliament. In May, the National Strategy Council, a think-tank, published a report hinting at an "oligarchic coup". Then Kompromat, a muck-raking magazine, published a special issue on Mr Khodorkovsky. Mr Lebedev's arrest was the last straw. Since then, Yukos's share price has fallen by 14%.
War and peace
But what are the limits that Mr Khodorkovsky pushed against? Conspiracy theories abound: that there is a power struggle between two groups in the government, one linked to the oligarchs and one made up of Mr Putin's associates, each aiming to control his succession in 2008; that there is general displeasure--Mr Putin's included, or maybe not--with Mr Khodorkovsky's politicking, or maybe just with his economic power; that he is being made an example pour encourager other oligarchs, who may be doing political financing of their own; that
people he outsmarted in the 1990s are out to get their own back; that his anti-corruption efforts have hurt some powerful officials; and so on.
What does all this say about the purported modernisation of Russian business life? The answer matters both to Russian businessmen and to foreign firms and investors, who have become more bullish on Russia than at any time since they were savaged after the country defaulted on its debts in 1998. Is Mr Khodorkovsky being punished for being the advocate of liberal values that he would like to paint himself as, or the aggressive capitalist he unarguably still is?
The most worrying hypothesis to some investors (though a happy one for many Russians) is that a general oligarch-hunt has begun. That seems unlikely; prosecutors are investigating Oleg Deripaska, an aluminium magnate, but that concerns a private dispute that began long ago. Yet, if nobody doubts that the business climate in Russia is better than it was, at least foreign investors should be on their guard again. The mood in Moscow, for now, is that the storm is likely to blow over. Mr Khodorkovsky has been taught a lesson, even if only he knows what it is.