The Oligarchs (86 page)

Khodorkovsky stirred quiet speculation that he might have a political future in mind for himself when he announced he would leave Yukos in 2007, a year before a presidential election. But his activities seemed natural for a rich and powerful tycoon and did not appear to be crossing the line Putin had drawn.

Then suddenly, something snapped in the Kremlin. The big screen of Khodorkovsky's dreams went dark.

The trouble began on February 20, 2003, when Khodorkovsky and other businessmen gathered in the Kremlin for one of their periodic formal meetings with Putin. When his turn came to speak, Khodorkovsky complained about the continuing scourge of corruption in government, and then he singled out a recent murky oil deal. A small company, Severnaya Neft, had been sold to a larger, state-owned oil company, Rosneft, for a wildly inflated price, hundreds of millions of dollars more than it was worth. What was going on? After Khodorkovsky mentioned this, Putin responded sharply, in a threatening tone. “Yukos has excess reserves,” he asked, “and how did it get them?”

Soon, Khodorkovsky was the target of a Kremlin campaign to intimidate him. A small, relatively unknown Moscow think tank published a report warning ominously of a “creeping oligarchic coup” in Russia in which the tycoons supposedly were planning to take over parliament and push around the Russian president. Next, a glossy magazine,
Kompromat.Ru
, which published
kompromat
, the mixture of fact and fiction that was often used in Russia for smear campaigns devoted an entire issue to Khodorkovsky. The Yukos team was no stranger to kompromat, but it looked at the article with a sense of foreboding. It was another warning.

Then, on July 2, 2003, one of Khodorkovsky's key lieutenants, Platon Lebedev, was arrested by the Russian authorities on charges of embezzlement in connection with the privatization of a fertilizer company in 1994. It was a flimsy charge, since the privatization had been litigated and settled in court the previous year. The arrest stunned Khodorkovsky. Lebedev was director of Group Menatep and one of the billionaire shareholders of Yukos.

The day of Lebedev's arrest, the market capitalization of Yukos had reached $31 billion.

The arrest was followed by more police raids on company buildings, and investigations were launched against other core partners of Khodorkovsky, who was personally interrogated. Agents from the Federal
Security Service showed up at his daughter's school and asked the principal for a list of all the students. The pattern was exactly the same as that used against Gusinsky earlier. Khodorkovsky was suddenly thrust on the defensive.

Khodorkovsky said the campaign against him was being directed by a group of security service men around Putin who wanted to drive him out of Russia. Their motivations were not clear. Khodorkovsky had tripped over something big when he raised the oil company deal during the February meeting with Putin. The security services retaliated. It was not hard to see that Khodorkovsky was one of the big winners of the age. Among the losers were the former KGB men who had been left behind by the collapse of the Soviet Union and the ensuing decade of turmoil. They had not managed to grab large corporate assets in the Yeltsin years, and they were envious of the oligarchs. With Putin in power, they saw a chance to enrich themselves. Putin told reporters he would not interfere with their investigations.

Khodorkovsky, the epitome of self-confidence for so many years, was unsettled. He told me that he would not give in to the security services. He vowed not to flee Russia. He pondered putting up a public fight but he knew it would be difficult. Khodorkovsky realized that Putin had certain core beliefs that were shaped in his years in the KGB. Putin looked with disdain on the brash tycoons. In an interview with the
New York Times
, Putin gave voice to this resentment. “We have a category of people who have become billionaires, as we say, overnight,” he said. “The state appointed them as billionaires. It simply gave out a huge amount of property, practically for free. They said it themselves. ‘I was appointed a billionaire.' Then…they got the impression that the gods themselves slept on their heads, that everything is permitted to them.”

Khodorkovsky celebrated his fortieth birthday in June 2003 at a time of deepening gloom. The Kremlin permitted the merger of Yukos and Sibneft, but at the same time intensified the campaign of intimidation aimed at Khodorkovsky and his partners.

Events took a dramatic turn on October 25, 2003. Khodorkovsky's private plane touched down in the Siberian city of Novosibirsk, where he was met by armed commandos. He was arrested, flown to Moscow and jailed on charges of fraud and tax evasion. “I'm not sorry about anything I've done,” Khodorkovsky said in a statement released by his lawyer, “Nor am I sorry about what's happened today.”

The attack on Khodorkovsky underscored yet again that the oligarchs and the system they had built remained a potent force in Putin's Russia. It was true that Putin set a different tone than Yeltsin. He talked about reestablishing the power of the state, and he prohibited the oligarchs from openly pulling strings in the Kremlin. Indeed, Putin showed little tolerance for political competition of any kind. He pushed for the creation of parties in the lower house of parliament that would rubber-stamp Kremlin decisions. He sought to limit the powers of the elected governors, weakened the upper house of parliament, and by mid-2003 had eliminated all of the independent national television networks remaining in Russia.

But oligarchic capitalism was entrenched. Two researchers in Moscow, Peter Boone and Denis Rodionov, prepared a study of Russia's sixty-four largest companies in August 2002—all firms in which the government no longer had a controlling stake. They found that 85 percent of the sales of these companies were controlled by just eight large financial-industrial groups.

The bigger companies thrived, but one consequence of the age of the oligarchs was that small and medium-size enterprises were stunted and did not expand. A huge obstacle for these firms was lack of access to capital. The banking system was still largely dysfunctional, a legacy of the 1990s. It was hard for entrepreneurs to get loans to start new businesses, while the oligarchs had plenty of capital and could easily finance their own needs.

As Khodorkovsky showed in these years, the nature of oligarchic capitalism was evolving. Khodorkovsky's transformation raised a very important question for Russia: Would the other oligarchs also eventually mend their ways? Would they become more like the American tycoons such as Carnegie and Rockefeller? And what were the forces of change that caused such an evolution?

One answer was that as the oligarchs gained more and more control over their companies, they became better stewards out of sheer self-interest. In the 1990s they fought bitter fights to gain majority ownership; now that it was all theirs, they were more inclined to treat the company nicely. The Boone and Rodionov study found that big tycoons stopped corporate abuse because now they were the uncontested owners. “The new property owners,” they wrote, “have now turned from promoting lawlessness and low transparency to supporting the rule of law and property rights.”

Another sign of change seen at Yukos and other companies was that once the oligarchs gained control, they began to focus on bringing in good managers, often from abroad. They found that better corporate behavior tended to drive up the market value of each company. This argument suggested that, over time, others would also see the riches that flowed from Khodorkovsky's example and they would follow it.

But the attack on Khodorkovsky also offered a stark reminder of the darker side of Russian capitalism. When Khodorkovsky opened up his books and ownership structure, few other major companies followed his example, and almost no one among the businessmen was willing to defend him in public. Khodorkovsky's transparency seemed to have backfired; others were frightened, and secure in the old ways of secrecy and coercion. Nasty corporate battles continued under Putin, much as they had under Yeltsin. New oligarchs, hungry for property, continued to use the same shady methods—coercion and subterfuge—that the Yeltsin generation had used. The economist Joel Hellman described this continuing battle for property as “permanent redistribution”: as long as a tycoon could get property cheaply by using force or bribery, and as long as the state remained weak and without the rule of law, there would continue to be unseemly contests for wealth and power.

Boris Berezovsky remained in self-imposed exile in London. He continued to attack Putin and sponsored a parliamentary party, Liberal Russia. The Russian authorities pressed new charges against Berezovsky, stemming from a business deal with Avtovaz in the 1990s, and sought to extradite him. Berezovsky denied the charges. In September 2003 he won political asylum from Britain and a London court threw out the extradition request.

Vladimir Gusinsky was unbowed. He sold his remaining shares in NTV to Gazprom for $50 million. He continued to show a flair for entrepreneurship and laid plans for new businesses. He controlled part of the Israeli newspaper
Maariv
and a Russian-language satellite television channel in New York, where he lived. He did not return to Russia. In August 2003 Gusinsky flew to Greece for a vacation on his yacht. The Greek authorities arrested him based on an old extradition request from the year 2000, issued by Russia. Gusinsky thought the request had lapsed. He was released on bail, and on October 14, 2003, a Greek appeals court threw out the Russian extradition request. Gusinsky was free again.

Alexander Smolensky did not reappear on the business scene in
Russia. He had established a small bank, but later he turned it over to his son and busied himself with a small jewelry boutique. Yuri Luzhkov was enthusiastically building bridges, office towers, and highways as mayor of Moscow, but he kept a low profile in national politics. Anatoly Chubais remained an important business and political figure as the head of the electricity monopoly. He had devoted years to trying to overhaul the mammoth company, and a major reform of the system was coming close to reality in 2003.

David E. Hoffman
Washington, D.C.
October 27, 2003

Mikhail Khodorkovsky
was sentenced on December 30, 2010, to serve in prison until 2017, following a second trial and conviction on charges of embezzlement. The proceedings were widely criticized as rigged by the Kremlin and politically motivated to punish Khodorkovsky.

 

Boris Berezovsky
received political asylum in Britain, where he remained an outspoken critic of Putin.

 

Vladimir Gusinsky
lived in the United States and built his media and entertainment businesses.

 

Yuri Luzhkov
was ousted as Moscow mayor by President Dmitri Medvedev on September 28, 2010. Medvedev said he had “lost confidence” in the longserving mayor. The move ended Luzhkov's nearly two-decade dominance over the city.

 

Anatoly Chubais
led the break-up and further privatization of the Russian electricity monopoly. In 2008, he was appointed chief executive of the Russian Corporation of Nanotechnologies, or Rusnano, to lead research and development in high technology.

 

Alexander Smolensky
slipped entirely from public view.

AUTHOR'S NOTE ON SOURCES

In the 1990s the new Russia was often obscure, impenetrable, and deceptive. Many of those who made the fortunes described in this book sought to keep their stories secret. Yet, compared with earlier periods in Russian history, my impression as a correspondent in Moscow from 1995 to 2001 was that Russia had become a relatively open place. The financial empires and tycoons were often at war with one another—and that was good for openness. The cacophony of voices was confusing but also revealing.

In order to assemble the portraits and chronicle the rise of the oligarchs, I relied on many different sources of information. The most important source was more than two hundred interviews I conducted with participants in these events. All six subjects—Boris Berezovsky, Anatoly Chubais, Vladimir Gusinsky, Mikhail Khodorkovsky, Yuri Luzhkov, and Alexander Smolensky—granted me interviews.

I also relied on a number of memoirs that offered valuable firstperson accounts of important events, verbatim transcripts of press conferences, several academic studies of the period by American and Russian scholars, and the rich literature about the collapse of the Soviet Union.

The documentary trail is sketchy on the successes and failures of the early banks and cooperatives mentioned here. For this period, I relied heavily on the personal recollections of the participants.

When Western investors began to scrutinize the factories and refineries being sold off during the privatization of state property in the 1990s, more information became available. Western brokerage firms published a large number of research reports on Russian businesses and industries. Also, as the Russians began to borrow on global capital markets and trade shares on Russia's own stock exchange, they were required to issue more detailed financial statements. I have pored over many of these documents. Some of the early reporting on the Russian oil and banking industries was especially useful. But all these sources required caution. The financial reports rarely acknowledged such abuses as asset stripping and transfer pricing, and research reports were sometimes little more than glossy advertisements from stock brokers trying to sell shares.

I also viewed many stories in the Russian press with caution. As a journalist, I admired the pioneering work of a few Russian colleagues. But all too often the press was a tool that the oligarchs used in their wars, and news reports had to be weighed in light of which financial group or tycoon was the underlying sponsor. I have relied, as much as possible, on published interviews in which the subject is quoted directly in question-and-answer format. In some cases, I have returned to the journalists or the subjects of the articles for a better explanation of who was doing what to whom.