While both men deny any guilt, the circumstantial evidence is hard to disregard. The Russian procurator general claims that Pichugin and Nevzlin organized an assassination attempt in 2003 on Yevgeny Rybin, then the managing director of the E Petroleum Handesges oil company. Nevzlin was also accused of ordering Pichugin to murder Sergei Kolesov and Olga Kostina; the latter had been director of the public relations department of the Moscow Mayor’s office and for a time was an adviser to Khodorkovsky. Pichugin was also charged with the 2002 murder of Sergei and Olga Gorin, a businessman from Tambov and his wife, both of whom were rumored to be blackmailing Nevzlin and Valentina Korneyeva. Until her death, Korneyeva was the director of Feniks, a Russian commercial trading company.17
Those accusations involved not only Pichugin and Nevzlin but also Khodorkovsky. After Khodorkovsky’s Menatep and his investment group won control of Yukos in 1995–1996, Vladimir Petukhov, mayor of Nefteyugansk—the city where Yuganskneftegaz, Yukos’s chief producing unit, is headquartered—began to complain about the failure of the new management to pay its taxes.18 With weak oil prices, all the petroleum companies were under enormous financial pressure. For that matter, few companies were paying their workers on time. When they were paid it was often with goods in kind, not rubles. But as we saw in Chapter 3, when we noted Mayor Petukhov’s surprise that Khodorkovsky had never visited an oil field until he gained control of Yukos, the mayor was very outspoken. An oil man himself, Mayor Petukhov fought bitterly to pressure Yukos, by far the region’s chief taxpayer, to pay its taxes and other bills and to refrain from massive worker layoffs. In addition, he launched a campaign to embarrass Yukos over its effort to write off a 450 billion ruble debt to the city that had accumulated before Khodorkovsky took control. On June 16, 1998, Petukhov had the audacity, not to mention poor judgment, to write a public letter to Yeltsin as well as Prime Minister Kiriyenko that criticized Yukos for its failure to pay its share of taxes to the city. He also wrote to Duma leaders charging that Yukos was guilty of criminal acts for “concealing taxes in large quantities from 1996 to 1998.”19 To dramatize the city’s case, he organized a public protest outside Yuganskneftegaz’s headquarters during its annual stockholders’ meeting on May 27, 1998. A month later, he was shot. The prosecutors charged it was more than coincidence, and so the guilty sentence for Pichugin.
As the mayor’s experience suggests, Yukos officials did not take criticism lightly. A reporter for the Wall Street Journal in the Moscow bureau told me he had been warned that if he knew what was good for his health, he would stop writing negative articles about Yukos. I take such reports seriously; after having read a draft of what I planned to write about Yukos in my previous book, a senior official of Yukos agreed that I had every right to publish it, but if I did, I should expect to be sued for libel. Nonetheless, I went ahead and published it. So far there has been no such suit, probably because shortly after my book was published, Khodorkovsky was arrested and jailed. Understandably, since then, he probably has been distracted from such a frivolous pursuit as a libel suit against some hapless American professor (at least my wife hopes so).
Even though it may seem like piling on a man who is serving a long sentence in jail, there probably is a case for suggesting that Menatep and those associated with it had shady reputations. As early as 1994, the CIA issued a classified report warning that “the majority of Russian banks are controlled by the dreaded Mafia.” According to those who have seen the report, the only bank mentioned by name was Menatep.20
As sordid as all this was, Khodorkovsky and Yukos were not the only ones to have pushed the law to its limits and on occasion beyond. The struggle for control of the aluminum industry, for example, was even more violent. Nearly a dozen executives involved with aluminum finance and production encountered various forms of bodily harm. And as with Yukos, I was personally warned to avoid criticism of some of those more colorful executives in the aluminum industry. In another instance, one of the leading personalities in the aluminum business offered me a bribe. Of course, not all the oligarchs engaged in such tactics, but it was a tough time and those who were not prepared to cut a corner now and then quickly fell from power.
What makes Khodorkovsky unusual among the oligarchs is that having survived as the fittest, he suddenly decided in 1999 to embrace reform and transparency. This often happens once someone attains a hard-fought goal. “I have made it into the subdivision; now let’s raise the zoning requirements.” In other words, even if I acquired my property by questionable tactics, I have something of value (Yukos), and we need proper rules and regulations so no one can steal it from me.
By the time of his arrest, Khodorkovsky had become one of Russia’s most outspoken supporters of good corporate governance. Undoubtedly, the fact that by 1999 oil prices had risen from $10 and were on their way to $30 a barrel and beyond was a factor in his conversion. Khodorkovsky quickly realized that despite its shady past Yukos could become a much more valuable property if oil prices kept increasing. If Yukos looked as though it had become more transparent, it might become attractive to foreign investors.
Transparency, however, did not come easily. To begin with, it required a change of cultures, something the existing Russian management would probably have been incapable of doing by itself. Therefore, in a bold move for the time and culture, Khodorkovsky decided to bring in experienced Western managers. He appointed Bruce Misamore, formerly an executive for twenty-three years at Marathon Oil and PennzEnergy, as Yukos’s chief financial officer. Misamore’s task was to introduce international accounting standards and bring in Western accountants. This was not easy, but when I interviewed him, Misamore insisted that whenever he met resistance from others in Yukos, Khodorkovsky provided the necessary support. Similarly, Khodorkovsky hired Steven Theede, formerly an executive at ConocoPhillips, as his chief operating officer. Going even further, he decided to staff the board of directors with foreigners and appointed Sarah Carey, a Washington lawyer; Raj Kumar Gupta, a former vice president of Phillips; Bernard Loze of France; Jacques Kosciusko-Morizet, a former vice president of Credit Lyonnais; and Michel Soublin, the treasurer of the oil service company Schlumberger to his board. He also set up a philanthropic foundation with a blue ribbon international board, which provided grants to Russian and foreign groups, including the U.S. Library of Congress.
Khodorkovsky’s embrace of transparency, while far ahead of his peers’ behavior, was not beyond criticism. In 1999, for example, he suddenly relocated a stockholders’ meeting without bothering to notify stockholders who were not part of management. He was also accused of stripping assets from one of his subsidiaries, the Eastern Oil Company.21 Nonetheless by the year 2000 there were fewer such accusations, and Yukos seemed to be on its way to becoming the model of good governance in Russia. In recognition of these reforms, shares of its stock were listed on the London Stock Exchange.
Yukos also seemed to be setting high production standards.22 Output increased by as much as 12 percent a year. Some critics complained that this was a result of over-pumping, not new exploration. In any case, by 2004, Yukos was Russia’s largest producer and Khodorkovsky had become a major presence at international oil conferences. Yukos even sent oil tankers to Houston as a forerunner of what Khodorkovsky said was Yukos’s willingness to become a major supplier to the United States. As part of that effort, he, along with some of the other oil company oligarchs, called for the construction of an oil pipeline to Murmansk on the Barents Sea. This would provide larger deepwater tankers with easy access to Russian oil, which would make it profitable to ship petroleum to the United States. It was, however, a direct challenge to Transneft, a state-owned company that had monopoly ownership and control of all of Russia’s crude oil pipelines, including those used for crude oil exports.
Not only did Khodorkovsky decide to take on Transneft by threatening to end its monopoly in the European part of Russia but he also began a campaign to build a pipeline through Siberia to China. Yukos, on May 28, 2003, even
signed a twenty-year oil-delivery contract with China. This committed Yukos to deliver 20 million tons of oil annually by 2005 and 30 million tons a year by 2010.
What arrogance. Khodorkovsky and Yukos were acting as if they were sovereign powers. Here they were, making foreign policy with China, something Putin regarded as the state’s and his, not an oligarch’s, prerogative. Khodorkovsky also let it be known that he was on the verge of selling off a substantial portion of Yukos to either or both Chevron and Exxon-Mobil.23 In fact, a protocol of understanding agreeing to the sale was signed between Yukos and Exxon three weeks before Putin had Khodorkovsky arrested in October 2003.24 An employee of Exxon has acknowledged to me that the American company had completed its due diligence study and was prepared to become a Yukos partner, much as BP had just arranged that September with TNK.
Except for a detail or two, Exxon’s purchase of Yukos stock, possibly more than 50 percent of it, awaited only the signing of the contract. The CEO of Exxon, Lee Raymond, arranged to meet twice with Putin in September 2003 (once in New York and once in Moscow) to discuss the purchase. He left Putin’s office under the impression that the government would not object. Early in October 2003, Raymond spoke at a business conference in Moscow on a panel with Khodorkovsky the same morning that Yukos announced its planned merger with Sibneft, the oil company Berezovsky had turned over to Roman Abramovich. Raymond and Khodorkovsky both refused to confirm news reports that Exxon was about to buy at least 40 percent of Yukos, but nonetheless officers of Exxon reported they were close to a deal.25
That Khodorkovsky was also close to an agreement with Chevron is confirmed indirectly by Khodorkovsky’s lawyers who have filed a suit to subpoena Chevron to release its due diligence materials prepared before its intended purchase. These materials, the lawyers say, will show that Chevron had determined that Khodorkovsky had not stripped the company of its assets nor laundered money as the state contends. But this is also a fairly good indication that from Chevron’s point of view, such a sale was all but ready to be made.
But while all these negotiations were under way, there were also ominous signs. Shortly after his and Lee Raymond’s presentation at the Moscow conference, Khodorkovsky’s wife called him in panic to report that the police had just surrounded their house and were searching documents and computers in a nearby home and a boarding school funded by Yukos. The police claimed that Yukos had donated some of its old office computers to the school and that incriminating records could be found on the hard drives. Furious that his home and family had been subject to such intimidation, Khodorkovsky called a press conference. Apparently feeling invulnerable, he dared the police to go after him. “If the goal is to drive me from the country or put me in jail, they had better put me in jail.”26 A few days later, on October 25, 2003, they took him at his word.
From Putin’s point of view, Khodorkovsky was acting like a king, not a subject. In a subsequent interview reported by the Wall Street Journal, Putin expressed his pique that neither Exxon nor Yukos had consulted with him in advance about such a large transaction.27 What right, Putin implied, did Khodorkovsky have to turn over ownership and control of Russia’s most valuable resource to a foreign company, and an American one at that? Evidently, Putin did not consider his September 2003 meeting with Lee Raymond to be enough advance notice. Even without such an investment by Exxon-Mobil, companies partially or substantially owned by foreign companies or investors were already producing 26 percent of Russia’s oil.28 Given historic Russian xenophobia, that was too much. The failure to consult with Putin about such a matter was not the type of respect that Putin expected from his subjects.
Having become Russia’s richest man, Khodorkovsky apparently believed that he no longer needed to kowtow to political godfathers— that is, pay for a krisha or “roof,” as Russian businessmen had since the days of the czar. Nor did he take seriously Putin’s July 28, 2000, warning that if they knew what was good for them, the oligarchs would stay out of politics. In fact, Khodorkovsky seemed to think that he could create his own rival political power base. He and some of his Yukos executives became major financial supporters of several of the country’s opposition parties, including the pro-Western Yabloko Party. With the help of some financial inducements, he had lined up as many as 100 members of the Duma who would support whatever he wanted. That was one of the main reasons for the defeat of two government efforts to increase taxes and environmental restraints on the oil companies. After some financial contributions, even members of the Communist Party somehow agreed to set aside their ideology and rally to Yukos’s causes—causes somehow overlooked in the Communist Manifesto. There was even talk that Khodorkovsky had decided he would run for president in 2008 after Putin’s term came to an end.
As if he feared no one, Khodorkovsky began to challenge not only what the Russians call the “siloviki”—the law and order types in the government who had previously served in the KGB and in other higher security posts—but Putin himself. Khodorkovsky seemed oblivious to the fact that it was particularly hard for these loyal officials to accept such a reversal of roles. In the Soviet era, they ran the country and no one dared to challenge them. Now these KGB alumni and their siloviki counterparts from similar agencies found themselves having to stand by and suffer the antics of the likes of a Khodorkovsky and his highwaymen. Who did they think they were? As one insider told me, a Yukos official close to Khodorkovksy even warned a Kremlin staff member that he would be crushed if he were to dare move ahead with an effort to increase taxes.
The conflict between Khodorkovsky and the Putin government came to a head, however, when Khodorkovsky decided to criticize Sergei Bogdanchikov, the CEO of the state-owned Rosneft. On live TV in February 2003 Khodorkovsky had the effrontery to complain to Putin that Putin’s close friend Bogdanchikov had worked out a sweetheart deal at the country’s expense. According to Khodorkovsky, his rival Bogdanchikov overpaid $622.6 million for Northern Oil, a company controlled by Andrei Vavilov, an insider who was a senator in the Council of Federation and a former deputy finance minister. Khodorkovsky in effect implied that Bogdanchikov and Vavilov were in cahoots with each other and had used state funds to enrich themselves. Khodorkovsky charged that Bogdanchikov paid Vavilov double what the property was worth.29 According to Khodorkovsky, this was a corrupt kickback scheme. (Since his own background had not been so stellar, such an accusation had to be a little presumptuous coming from someone like Khodorkovsky.)
Pushing his luck even further, Khodorkovsky then told President Putin, “Your bureaucracy is made up of bribe-takers and thieves.”30 (Khodorkovsky had a point. Subsequently, Vavilov was charged in a Russian court of having committed fraud by selling shares in Northern Oil that he did not own.)31 Defending his buddies and Rosneft, Putin insisted to the contrary. Rosneft “is a state company and needs to increase its insufficient reserves,” and if anything, it is the nonstate private oil companies (Yukos) that have excessive reserves. “We still have to investigate” how they obtained them.32
There is good reason to believe the decision to destroy Yukos as a viable company may have been triggered by that incident. During the same month that Khodorkovsky attacked Bogdanchikov, an American working for an American investment bank in Moscow had an interview with Yury Shafranik, an insider who had been the minister of Industry and Energy from 1993 to 1996. At one point in the conversation, Shafranik became very angry because the American’s firm had been recommending Yukos as an investment to its clients. “It was a mistake to promote Yukos,” Shafranik warned, “because in a year’s time, Yukos would no longer be in existence.” Then revealing the anger that such former apparatchiks of the Soviet era have for these arriviste new owners of Russia’s oil and gas wealth, he added, “Before long, there will be some real oil specialists put in charge who will know what they are doing.”33
As Khodorkovsky became an ever more dominant and annoying presence, those around Putin came to regard Khodorkovsky as a major threat to their authority. In what is
alleged to be a wiretapped conversation, the same Sergei Bogdanchikov of state-owned Rosneft (and the one Khodorkovsky accused of taking kickbacks) is heard complaining that the Yukos leader had become too uppity. “Three days in Butyrke Prison and (the Yukos leaders) will understand who is the king of the forest.”34 In Bogdanchikov’s eyes, Khodorkovsky and his partners seemed to be acting as if they, not government officials, were running the country. Not only were they accusing Kremlin insiders of corruption and signing major petroleum delivery contracts with the Chinese government that had not been approved by the state, but they were also challenging the state’s monopoly control of the country’s petroleum pipeline. As if that were not enough, they were on the verge of selling some of the country’s most valuable assets, its oil fields, to an American company. Virtually all those around Putin regarded Khodorkovsky’s actions as an affront to the state’s authority and agreed that it was necessary to crush Khodorkovsky as soon as possible to abort such a sale.
The counteroffensive against Yukos began with the June 2003 arrest of its security chief, Boris Pichugin, on murder and attempted murder charges and continued with the arrest of Platon Lebedev, one of the top Yukos officials, the following month. Lebedev was accused of failing to invest as much as he promised in a fertilizer company Menatep took over from the government. That may have been a violation of a contractual agreement but it hardly warranted an eight-year jail sentence.35 Outwardly, at least, these arrests did not seem to bother Khodorkovsky. He continued to travel abroad, including a subsequent July 2003 visit to Sun Valley, Idaho, where he mixed with senior American government and business leaders, including Bill Gates, Warren Buffet, and New York Mayor Michael Bloomberg.36 The week earlier he met with Vice President Richard Cheney to discuss Exxon-Mobil’s pending offer to purchase major portions of Yukos stock. Yet despite the arrest of some of his close associates and increasing indications that he, too, might be arrested, Khodorkovsky invariably always returned to Russia. In fact, he did expect to be arrested, but he evidently assumed that he was powerful enough and his friends and lawyers influential enough to win his freedom. Khodorkovsky’s lawyers have reported that he was much more alert to what was happening than he let on. At an October 11, 2003, meeting with his lawyers, just two weeks before his arrest, Khodorkovsky discussed with them the steps to be taken should he be arrested.37
Petrostate:Putin, Power, and the New Russia Page 15
