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Moscow Times
December 2, 2004
Enron, Yukos and the Gatekeepers
By Sergei Guriev
Sergei Guriev is rector of the New Economic School in Moscow. He contributed this comment to The Moscow Times.

A defining feature of modern Russia's political and economic landscape -- the Yukos case -- has been interpreted very differently inside Russia and in the West. While no Russian has any doubt about the origin of the case, Western businessmen, politicians and pundits have a variety of explanations. Clearly, a rational Western mind cannot comprehend the idea that any government would intentionally destroy the most dynamic company and undermine the investment and business climate in a country that badly needs capital for financing its economic growth. Therefore, the foreigners have been trying to come up with a reasonable theory that would reach beyond political and personal feuds.

The prosecutors have always understood this longing and have tried to sell a few stories that would help the West rationalize the affair. Two stories seem to have been the most successful. Europeans have bought the "Berlusconi" story: Mikhail Khodorkovsky was on his way to buying political parties and media outlets to become Russia's new Silvio Berlusconi, capturing both political and economic power and subverting Russia's democracy. This story has been disseminated quietly since the Italian prime minister, even though quite unpopular in other EU countries, is still Russia's best friend in Europe.

In the United States, the Yukos case was marketed using a reference to Americans' own recent corporate troubles. Yukos was declared Russia's Enron and was therefore to be crushed as forcefully as America's energy giant was.

Certainly, this parallel shows genuine creativity within the prosecutors' ranks. However, not only has it required Americans to have no factual knowledge of the Yukos affair, it has also signaled Russian authorities' limited knowledge of what Enron actually did. If they were aware of the details of Enron's collapse, they would probably have preferred to stay away from such comparisons.

Indeed, Enron's breakdown, as well as most other recent corporate scandals in the United States, was due to the utmost failure of the so-called "gatekeepers" of American financial markets: auditors, rating agencies, investment banks, non-executive directors. Enron had the best auditor and worked with the most established investment banks; it was closely followed by top investment analysts; its board consisted of the most respected figures in the U.S. business world. Yet, all the gatekeepers failed completely in preventing earnings manipulation and disastrous investment decisions. It was not surprising that the response of the U.S. regulators and the public at large was directed both at Enron's management and its gatekeepers. Enron auditor Arthur Andersen is no more, the investment banks paid huge penalties, some investment analysts' careers were destroyed, and non-executive directors suffered serious losses to their reputations. Moreover, the regulatory reaction to the wave of corporate scandals -- the Sarbanes-Oxley Act -- has seriously strengthened the gatekeepers' incentives to protect outside investors' interests.

In the case of Yukos, the markets' gatekeepers worked very well, at least after 1999. The audits have not been questioned even by the prosecutors, and the 2003 market capitalization driven by analysts' optimistic reports was recently confirmed by the two independent valuations of the company's main production asset, Yuganskneftegaz. Moreover, the two investment banks that assessed the value of Yugansk arrived at very similar numbers, even though one was hired by the Russian government and the other one by the company itself.

It is indeed very hard to blame the Yukos collapse on a flawed gatekeeper -- that is, as long as we only look for one within the private sector. The real culprits were the gatekeepers within the government itself. The Tax Ministry had been happy with the company's tax compliance until 2003. The State Property Ministry had acknowledged in writing that there were no more problems with the privatization of Apatit, the central complaint in the Lebedev-Khodorkovsky criminal case. The Natural Resources Ministry had had no complaints on Yukos' performance under the licensing agreements.

In other words, Russian government agencies had been as positive about Yukos until 2003 as the gatekeepers in the United States had been about Enron up until its bankruptcy in 2001. The crucial difference is that at the end of the day the U.S. authorities have prosecuted the gatekeepers as harshly as they have Enron management, while in Russia the punishment has been perfectly selective: The managers are behind bars but not the bureaucrats. There cannot be any clearer proof that the Yukos-Enron parallel is just another smoke screen.

Yet, the Enron experience is still relevant for understanding the Yukos case. The amount of hypocrisy and often outright misrepresentation of factual information in the case has been so huge that it is very hard not to compare the Russian government itself to the flawed energy giant. One should not agree with the conventional wisdom that hypocrisy is harmless. Certainly, pretending that the Yukos case is an example of the rule of law cannot fool the Russians any longer. We all lived in the Soviet Union, and we all learned how to decipher official propaganda. However, the real lesson of Enron and, indeed, of the Soviet Union itself, is that it is impossible to run a bureaucratic system efficiently based on manipulated information. As Enron's deputy CEO once complained about Enron's aggressive accounting: "With [Enron CFO Andrew] Fastow, you could never tell whether [individual] deals were clean because they were too complicated." The government agencies have produced so many contradictory pieces of evidence that the government itself can no longer understand where the Yukos case is going, and is even less able to coordinate the agencies' moves.

As Enron was doomed to collapse under the burden of years of earnings manipulation, so are the government's attempts to maintain the interpretation of the Yukos affair as an isolated case that should not suppress Russia's investment and business climate.