The Oligarchs (79 page)

James Fenkner, the Troika Dialog analyst I had met during the boom years, wrote a note to clients about Khodorkovsky's gambit entitled “How to Steal an Oil Company.” Fenkner told me he was stunned at Khodorkovsky's nerve. “It's incredibly brazen,” Fenkner said. “A couple of years ago, people said Russian managers will steal, but only a little and it will improve over time. What this case shows is that it is all or nothing. It's kind of shocking. The second-largest oil company in Russia is no longer held under Russia's jurisdiction.”

Perhaps no one in Moscow watched these developments with more foreboding than Dmitri Vasiliev, the chairman of the Russian Federal Securities Commission. The lively, diminutive Vasiliev, who was Anatoly Chubais's deputy during mass privatization, had argued that the greatest mistake in Russian capitalism was the failure to build institutions that would create rules and laws to regulate the market after the first wave of reforms. His own Securities Commission was an example—its enforcement powers were extremely weak. I often thought of Vasiliev as the referee at a soccer match, blowing his whistle and waving his arms around wildly as the big, muscular players ran roughshod over anything in their way and ignored him. Vasiliev was a small hero of Russian capitalism at a time when it needed a big hero. He believed in the rules and tried to make them stick, but he was overwhelmed by a system that operated on a level that was beyond the official rules.

Vasiliev chose his fights very carefully. He was especially fearful of the tycoons because they could strike back against him personally. Investigating the tycoons was risky and sometimes impossible. For example, a truck carrying 607 boxes of Menatep Bank documents mysteriously plunged into the Dubna River on May 24, 1999.
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That was how things were done in Russia, a state where the rule of law had yet to be established and enforcing the securities law was a distant dream. Vasiliev held a long talk with Chubais about the best way to investigate one of the oligarchs. For tactical reasons, Vasiliev liked to strike first and settle later. But it could be risky to take the oligarchs by surprise; they had legions of spies, guards, and guns. Chubais urged Vasiliev to be more cautious. Better to warn the sleeping bear before you poke him in the eye, Chubais suggested.

Vasiliev scored an important victory in 1998 in his first test case, forcing Vladimir Potanin and Boris Jordan to back down from a planned dilution of minority shareholders in the oil company Sidanco.
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At the time, Vasiliev raised concerns about a similar share dilution at Yukos, but he told me later that including Yukos was a tactic to show that he was not picking on Potanin alone. Vasiliev recalled that he got a written pledge in 1998 from Yukos that they would follow the rules. But in early 1999, after the ruble crash, investors' complaints, chiefly from Dart, continued to pile up about Yukos.

In the spring Khodorkovsky launched his brazen plan to hijack the entire oil company. Vasiliev announced in April that he would conduct a full-fledged investigation into whether Yukos had violated minority shareholder rights. It was a risk he had to take, but how? At first, he tried to get the minority shareholders to do the hard work—he loudly and publicly insisted they should go to the courts. Dart did so and was able to persuade six courts in offshore zones to temporarily block the share transfers. At the Securities Commission, Vasiliev had little real power and only one option: to decide whether to formally register, or approve, the millions of new shares that were being issued. The only legal grounds for rejecting the shares would be a determination that the offshore havens were in fact controlled by Khodorkovsky; then the issuance of the shares might be illegal. But penetrating the offshore havens was way beyond Vasiliev's ability. The commission had a small budget and could not send lawyers globe-trotting in search of the elusive Yukos shares.

In the next few weeks, Khodorkovsky sent a message to Vasiliev: Get out of my way! A vice president of the oil company warned him privately, in a personal meeting, that Yukos would do everything it could to block the Federal Securities Commission. Yukos was a big oil company backed up by a powerful oligarch, and the Securities Commission was a weak agency. Vasiliev took the threat seriously, recalling what Chubais had said about going on the attack against the tycoons.

Vasiliev had precious few weapons at his disposal. His feeling of helplessness was deepened by a problem within his own commission, unknown to all but a few people at the time. The Securities Commission had benefited from an $89 million loan by the World Bank to help Russia improve its capital markets. Vasiliev used some money from the project to pay for the commission's press office and computers
that allowed outsiders to read reports about its regulatory decisions on the Internet. The press office was run under a contract with Burson-Marsteller, a global public relations company. The key official at the public relations company was Mark D'Anastasio, managing director of the international development practice, who was based in Washington. D'Anastasio was a public relations man who specialized in building up a long-term image for his client. He told me that he had worked hard for several years to build a “squeaky-clean good guy” image abroad for Vasiliev. The goal of the World Bank program, which paid the bill for Burson-Marsteller's work, was to improve “transparency” and to provide more “complete and reliable” information about companies in the stock market.
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But Vasiliev discovered in 1999 that D'Anastasio and Burson-Marsteller were also, at the same time, representing Yukos and Khodorkovsky, whom the commission was investigating. With the World Bank money, the PR company was supposedly building “transparency,” but with Yukos they were actively defending an oligarch who was hiding shares of an oil company in offshore zones. Vasiliev concluded that it was a direct conflict of interest. But Vasiliev was afraid to fire Burson-Marsteller because he desperately needed the press office and the computer support—he had little to work with as it was. If he threw out Burson-Marsteller, he told me, he probably would lose the badly needed World Bank money. “They had me by the throat,” he recalled.

D'Anastasio acknowledged to me later that he was representing both sides. After Vasiliev protested privately to him, the public relations company wrote a letter promising there would be no contact between the two clients. But in fact, D'Anastasio continued to deal with both of them. According to both Vasiliev and D'Anastasio, the public relations man at one point even proposed to Vasiliev that he might be an interlocutor with Yukos, a peacemaker. Furious, Vasiliev wondered what kind of peace would that be. How could he represent the interests of the regulator and the regulated at the same time?

When I asked D'Anastasio about the conflict of interest a few years later, he said it might have been a problem had the hostility continued for a long time, but he did not think it would go on. Besides, the rules in Russia were not as clear as rules in a developed market economy, he said. D'Anastasio also had his own preferences: he admired Khodorkovsky, whom he called “a figure of historic proportions.” Khodorkovsky
complained frequently to D'Anastasio that Vasiliev was going too far. D'Anastasio agreed.
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My own view was that Burson-Marsteller was playing a direct role in weakening the very capital markets they were being paid to improve. What is amazing is that it didn't seem to bother them—they played by Russian rules. It is not hard to see why Vasiliev felt vulnerable. His friends were his enemies.

In late June, as a result of a complaint from the trade association of stockbrokers, all trading in Yukos and the oil extraction companies was halted on Russia's chief stock exchange, the Russian Trading System.
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This was a setback for Yukos, but Vasiliev admitted at a press conference on June 29 that his probe of Yukos was running into a brick wall. The securities commission lacked investigative powers—all it could do was ask for information. No one, not even the Russian government agencies, came forward with any answers or help for his investigation. The Fuel and Energy Ministry and the State Tax Service ignored his requests. Even so, Vasiliev insisted, “The investigation will not be stopped.” Then, on July 21, Vasiliev announced that he was turning the files over to the law enforcement authorities for a criminal investigation—the Interior Ministry, the Federal Tax Police, and the Federal Security Service. On the same day, Yukos fired back with an angry statement, accusing Vasiliev of taking sides with the “famous speculator” Kenneth Dart.
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More pressure followed. On August 18, the Yukos vice president who had warned Vasiliev earlier that Yukos would fight him took action against Vasiliev. He quietly filed a complaint against Vasiliev in the general prosecutor's office on the grounds of slander, based on the July 21 news conference. Under Russian law, slander was a criminal offense. I was appalled when I heard about this. I had been at the press conference, and it was clear that Vasiliev had not slandered Khodorkovsky or Yukos, since investigating the oil company was clearly part of his official responsibilities. But Vasiliev saw the criminal complaint for what it really was, a message. He would face interminable difficulties, interrogations, and who knows what else they could come up with. The prosecutor's office was notoriously on the take. It was common at the time for all different kinds of law enforcement bodies to take bribes to frame someone in a dispute. I knew a young man involved in a commercial dispute who was framed; the police had planted a bomb in his trunk and then arrested him. In the lawless state, anything was possible. Poke the bear between the eyes, and you took enormous risks.

Rather than fight, a frustrated and discouraged Vasiliev resigned from the commission on October 17. “The system here doesn't protect investors,” Vasiliev lamented. A few days before his departure, the Samaraneftegaz share dilution—the proposed issuance of 67 million new shares—came before the commission. Although the application was in order, Vasiliev said he voted against it on principle. “It was all legal, but from a moral point of view, I understood it was theft.” He was outnumbered. The commission voted its approval.
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Khodorkovsky had won. Eight weeks after Vasiliev quit, Dart settled with Khodorkovsky and sold his shares for an undisclosed sum. It is not known whether Dart suffered a loss or made a profit on his investment in Russian oil. But it is clear that Khodorkovsky achieved his main goal: getting control of his oil company and getting rid of the minority shareholder. The scorched earth plan had worked.

Khodorkovsky defeated the creditors too. The three banks that loaned money to Khodorkovsky did not have infinite patience, and Khodorkovsky outlasted them. West Merchant, which had suffered heavy losses in the Russian crash, had originally loaned Khodorkovsky's Menatep $135 million. According to one well-informed insider, Khodorkovsky went to Germany and told top officials of West LB, the parent bank, that he could not possibly pay back the Menatep debt because of the Russian economic crisis. Menatep Bank had collapsed in the crash. But one German bank official threw up his arms in exasperation, noting that Khodorkovsky's oil company, Yukos, was still going strong. What did he mean, he could not pay them back?

But Khodorkovsky put on a very persuasive show, and the Western banks lost their nerve in dealing with the wily Russian. “Khodorkovsky said he was hard-hit,” said the insider at the German bank. “He got sympathy and understanding, when he should have been hit with a hammer.” As a result, rather than press Khodorkovsky to pay back the money, the German bank sold off the assets for $67.5 million, or half what the bank had originally loaned Khodorkovsky. A similar thing happened to Daiwa, the Japanese bank which had been part of the deal. Daiwa sold out its share for $40 million. The lenders had given up and taken a loss. Next, Khodorkovsky quietly bought back his shares at bargain-basement prices. Of the approximately 30 percent of Yukos he had pledged for the original $236 million loan, he managed to buy back 23.7 percent after the lenders threw in the towel.
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It was a good deal: his reward for defaulting on the loan was
that Khodorkovsky got most of his shares back, and for less than half the cash he had originally borrowed.

Although Khodorkovsky told the German bank that he had been badly hurt by the crash, the condition of Yukos soon improved dramatically. Oil prices went back up, and Yukos amassed an estimated $2.8 billion in cash by the end of the year 2000. If the banks had been willing to wait a little longer, they might have recovered their $236 million loan. But the Western lenders proved to be weak-kneed. Khodorkovsky had tried to hijack the oil company out from under them.

For Khodorkovsky, hardball paid dividends.
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The shattered landscape of the Russian economy left no one who had participated in the events of recent years unscathed—not Anatoly Chubais and the young reformers, not Boris Berezovsky and the oligarchs, not the ailing Boris Yeltsin. They were all tarnished by the upheaval; the Russian people, resentful and bewildered, regarded them with suspicion. The economic crisis left a political vacuum in its wake. The question of “continuity of power,” as Berezovsky had put it, remained unresolved. There was no obvious successor to Yeltsin.

But Yuri Luzhkov was still on his feet. No one could blame the Moscow mayor for the nationwide flirtation with easy money and GKOs. Luzhkov's reputation was not damaged by the crash, although the shock wave hit the city hard, especially the new middle class.

While visiting London on September 30, Luzhkov hinted for the first time that he would run for president. Speaking to journalists at a press conference held at the Russian embassy, Luzhkov said he wanted to remain mayor for the time being. But, he added cautiously, “If I see that presidential hopefuls do not possess the necessary statesmanlike views to ensure Russia's stability and progress, I will join the race.” On hearing these words, I immediately realized that Luzhkov had made the decision to run. Perhaps he had concluded that the other contenders had been crippled by the crash. Behind the scenes, Vladimir Yevtushenkov, chief of the Systema conglomerate, the most influential businessman in city affairs, encouraged Luzhkov in his ambition. Yevtushenkov was a prime mover behind the creation of Center TV, the channel of the Luzhkov empire, which could become a key building block for a presidential campaign. Although Center TV suffered from a miserably dull programming schedule, it quickly
acquired some of the most modern broadcasting equipment and technology in the country and devoted generous hours of airtime to uncritical interviews of Luzhkov. Another sign of Luzhkov's ambition was the formation of a political movement, Otechestvo (Fatherland), with Luzhkov at the head. Political consultants were being lined up. Yevtushenkov told me he believed Luzhkov could succeed by campaigning on the slogan that he would transform Russia as he had changed Moscow. “I believed that he had a chance, an historic chance, and he had to take advantage of it,” Yevtushenkov said.