by Tom Bower
Chevron’s interest in Yukos was deftly orchestrated by Khodorkovsky. Peter Robertson, Chevron’s vice chairman, was invited to a riotous fiftieth birthday party in Moscow on March 27, 2003. Yuri Golubev, Khodorkovsky’s partner, was seated next to Robertson in order to dangle the prospect of a merger. Robertson was visibly electrified. Chevron was in the doldrums, with fast-depleting oil reserves. Eager to catch up after Total and Exxon had done well in West Africa and the Middle East, Robertson and David O’Reilly, Chevron’s chairman, were desperately hunting for a buy. Two months later, Sam Laidlaw, a scrupulous, efficient English technocrat, formerly of Enterprise Oil, arrived in Moscow. Laidlaw had been recruited by O’Reilly to finalize Chevron’s merger with Texaco. He had saved $2 billion in synergies, and O’Reilly was hungry for more growth. In spring 2003, the invasion of Iraq was imminent, and O’Reilly shared the belief that the Middle East would finally be opened up to the oil majors. With teams searching for opportunities in Asia, Africa and Latin America, O’Reilly asked Laidlaw to secure assets in Russia. In his first meeting with Khodorkovsky, Laidlaw offered to buy 20 percent of Yukos, not with cash but with Chevron shares.
The Chevron team in Moscow felt well placed. With 12 years’ experience in Kazakhstan and a strong base in Moscow, Chevron’s managers spoke about their good relations with the Kremlin. Their confidence was ill-judged. Chevron’s alignment with the Kazakh government against Moscow offended Putin, who refused to meet O’Reilly. Frustrated by John Browne’s smooth diplomacy in using Tony Blair to engage Putin and finalize his deal, O’Reilly urged former US secretary of state George Shultz and Condoleezza Rice to advance Chevron’s case. But, like the diplomats at the American embassy and the Kremlinologists hired by Chevron, they were unable to offer insight or access to Sechin or Putin. “It’s too early to see Putin,” O’Reilly told Khodorkovsky, to conceal Chevron’s exclusion. “We’ve got to keep these negotiations confidential.” In essence, Chevron’s executives were offering Khodorkovsky shares for nearly the same valuation in a merged company as Raymond was proffering in cash.
The parallel negotiations by two compartmentalized Yukos teams were intended to be top secret, but Raymond had heard about Chevron’s involvement within a week. He appeared unconcerned. Exxon’s bid, he believed, would smother Chevron’s. On Khodorkovsky’s initiative, the two corporations were competing for different deals. Exxon was seeking a straight purchase, while Chevron wanted a merger. Khodorkovsky encouraged each to believe it was the favorite. In reality, the race was confused. Exxon’s bid of cash and shares was financially superior, but Yukos found negotiating with Exxon difficult. Tillerson, complained the Yukos negotiator, “self-importantly spent the day constantly repeating himself.” The Yukos team preferred dealing with Laidlaw, but in their lust for cash, personalities became irrelevant, especially as Raymond’s ambitions increased.
Nearly 50 Exxon experts had been ordered to abandon other negotiations and number-crunch the Yukos bid. After exhaustive due diligence, they reported Yukos’s value as $45 billion. In the wake of BP’s coup with TNK, Raymond changed the terms. There was talk of Yukos and Sibneft merging. If that was finalized, he wanted Exxon to immediately purchase 25 percent of the shares. Combined with its stake in Sakhalin 1, this would mean ExxonMobil would overtake BP and become the biggest Western investor in Russia. Once the minority stake in Yukos-Sibneft was consolidated, he wanted to gradually increase Exxon’s ownership to 75 percent of the giant.
Naturally, to cement the deal Raymond needed Putin’s approval. Exxon’s chairman always dealt with heads of state. He had always dismissed those decrying the competition in the 1990s among governments to make deals with the Russians. He did not sympathize with the critics of Clinton’s and Gore’s aggressive bid for Caspian oil, or overtly request protection under the “shield of government” from Washington to secure a level playing field. Nor was he particularly interested in persuading the Kremlin to adopt the rule of law. Although Exxon’s adherence to the sanctity of contracts was inviolable, Raymond saw no reason not to exploit laws to advance the company’s interests. Like John Browne, he paid scant attention to those fearful about the security of the West’s energy supplies. In his opinion there was no reason to approach Russia with particular sensitivity. The country was just another source for an uninterrupted flow of oil at reasonable prices. Ignoring Khodorkovsky’s relations with the Kremlin, Raymond abided by ExxonMobil’s usual practice of standing aside from internal politics and being guided by Daniel Yergin’s observation in Commanding Heights, his latest book, published in 1998, that the Big Four oil majors would dominate the world’s supplies, casting aside the powerless oil-producing countries. In June 2003 Raymond met Putin, and was reassured that the principle of Exxon’s investment was welcome. In the same month, President Bush met Putin at a summit in Saint Petersburg and declared his trust in Russia. Encouraged by Putin’s imminent return visit to Camp David to discuss energy cooperation, Rex Tillerson announced that Exxon would offer $11 billion for a 25 percent stake in Yukos, and would submit a new application to develop oil and gas in an area called Sakhalin 3.
By contrast, O’Reilly was tardy and entangled. Having initially bid for 20 percent of Yukos, he also threw caution to the wind as the prize became more attractive. “Their eyes are getting bigger and they want more,” reported Khodorkovsky’s negotiator. O’Reilly was warned, “Khodorkovsky’s valuation is greedy because he knows you need oil.” He acknowledged the high price, but like Raymond he was desperate to match John Browne’s deal. He suspected that Raymond and Tillerson had ordered their staff to whisper it around Moscow that “Exxon is much better known to the White House, and a deal with Exxon will improve Russia’s relations with America.” In his telephone conversations with Khodorkovsky, O’Reilly struggled to pose as Lee Raymond’s equal.
In early July 2003, Raymond returned to Moscow to participate in a business conference with Khodorkovsky. “Raymond thinks it’s all sewn up with Khodorkovsky,” ExxonMobil’s rival reported from Moscow to O’Reilly at Chevron’s headquarters in San Ramon, California. Exxon’s chairman had arrived in frenzied times. Khodorkovsky was due to formally announce Yukos’s merger with Sibneft, but days earlier, on July 2, Platon Lebedev, a major shareholder in Yukos, had been arrested on suspicion of fraud. Khodorkovsky recognized the warning shot, but chose to ignore it. Raymond followed suit, disregarding a local battle. Russia’s internal politics, he decided, were unimportant, and he and Tillerson continued to discuss with Yukos’s staff Exxon’s investment and arrangements for Khodorkovsky’s visit to America.
Raymond had good reason to be confident. Mikhail Kasyanov, the prime minister, had agreed that ExxonMobil would be allowed to buy a stake in Yukos, and Putin, he believed, was keen to do business. He had heard that James Mulva, the chief executive of ConocoPhillips, had recently met Putin to ask for his approval to purchase 20 percent of Lukoil for $7 billion. Mulva had also mentioned that ConocoPhillips was part of a consortium planning to develop production of 13 billion barrels of oil in Kashagan, and that the company intended to collaborate with Gazprom and extract natural gas from beneath the Barents Sea. Mulva had emerged from the meeting grinning, encouraging Raymond’s belief that Russia’s need for financial and technical support to extract the giant reserves in Shtokman, Kovytka and Sakhalin would favor Exxon. Commuting from his office in Irving, Texas, around the globe on his private jet with his wife and bodyguards, Raymond was too remote from Putin’s prejudices and anxieties to understand the confusion and anger within the Kremlin.
Putin and the siloviki resented Russia’s humiliation by Washington’s boast of victory in the Cold War. The Americans and Europeans spoke about friendly alliances with Russia, but both had reneged on their agreement with Gorbachev to limit their military expansion in return for Russia’s agreement to Germany’s reunification. The former communist states, even those bordering Russia, had joined the European Union and NATO, and, encouraged by Clinton and Bush, had treated Russia’s oil re
serves around the Caspian Sea as booty. The swagger of some visiting Western oil executives was intolerable. Restoring Russia’s prestige and power, Putin believed, depended upon hard bargaining over the country’s commitment to supply Europe with energy. Sechin, by then also the chairman of Rosneft, was calculating how to extract the maximum income from oil exports. Beyond the Kremlin, few realized that a big NOT FOR SALE sign was being erected across the country. A new fear had gripped the capital. The president and his entourage would not tolerate critics. Journalists, bankers and businessmen were being gunned down in broad daylight.
By then, unknown to Raymond, Khodorkovsky had been barred from speaking directly to Putin, and had to rely on intermediaries to find out what deal would be acceptable to the Kremlin. The breach had occurred following a televised encounter on February 19 between Putin and 20 Russian businessmen in the Kremlin. From the outset, Putin was annoyed that Khodorkovsky was wearing a turtleneck sweater, although he had worn a shirt and bow tie for a recent meeting with President Bush. The president’s irritation only grew during the program. Khodorkovsky complained about a license awarded to Rosneft, the government’s oil company, in northern Russia despite higher offers. “Your bureaucracy is made up of bribe-takers and thieves,” he brazenly told Putin. “That was corrupt.” Visibly angry, Putin replied sharply, “We might see how you got your money.”
The turmoil between the Kremlin and Khodorkovsky had not been reported to Dallas. Neither Tillerson nor Raymond made the connection with the news on July 26, five days after Khodorkovsky had accused Putin of orchestrating theft, tax evasion and murder, that a Moscow court had issued an arrest warrant for Leonid Nevzlin, a major Yukos shareholder living in Israel, on charges of murder (he would be found guilty, in absentia, of five killings). Tillerson was preoccupied by his suspicion that Chevron, to prevent itself being squeezed out, was leaking poison about Exxon to the Kremlin. Over the following weeks, while Tillerson continued to negotiate with Yuri Golubev, meeting once in Luton to “bullshit each other like there was no tomorrow about a supposed deal-breaker,” Khodorkovsky’s ambitions had become unacceptable to the Kremlin. Security officers, bankers and ministers close to Putin individually told Khodorkovsky and his close adviser to “stop causing more trouble,” especially after he bought a newspaper and radio station. Khodorkovsky understood the possible consequences. “The Exxon deal might not be doable,” he admitted to a senior aide. “But keep Exxon in the game to bargain with Chevron.” Khodorkovsky suspected that O’Reilly’s cashless offer to merge would be more acceptable to Putin. The oligarch might not be allowed to walk away with any money.
In early September, Putin’s suspicions about Khodorkovsky’s ambitions hardened, but neither Tillerson nor O’Reilly would have gleaned from Putin’s warm welcome to an oil conference in Saint Petersburg that their ambitions toward Yukos were jeopardized. Rather, the Exxon team had become concerned about Russian corruption. In conversations with Yukos executives, the corporation’s representatives explained their policy never to pay bribes. The Russians believed, however, that in certain circumstances there might be exceptions. In Africa and the Middle East, for example, oil companies had at times been required to pay local “consultants” for “services” to construct roads or buildings. The companies would have maintained that such payments were not bribes, but were merely a condition of doing business in those countries. Corruption in Russia was equally endemic, and in special circumstances a payment might be made to the single person who mattered — the person at the top. Payments further down the food chain, to ministers and bureaucrats not empowered to make decisions, were pointless. “You do one deal with the top and the rest would take care of itself,” was the memorable phrase uttered to a senior member of Khodorkovsky’s team.
Finalizing the deal with the “top” was Raymond’s intention when he met Putin at the Waldorf Astoria in New York on September 25. Unconcerned by any friction between the president and Khodorkovsky, Exxon’s chairman sought approval for purchasing Russia’s largest privately owned oil company. Ignoring Russia’s identity crisis and unaware of Khodorkovsky’s deception about his negotiations, Raymond plowed ahead for 30 minutes, dealing with Putin as he would any other Third World ruler. He did not anticipate the consequences of this conversation for Khodorkovsky, and for the West’s reliance on Russia as a secure supplier of energy. One week later he arrived in Moscow to finalize the deal. David O’Reilly was also in Moscow, convinced that he too was close to agreement with Khodorkovsky. Chevron’s outstanding issue was whether Khodorkovsky would own 42.6 percent or 37 percent of the merged company. O’Reilly believed they were heading toward a 60–40 split, with the new company having headquarters in both Moscow and San Ramon. Khodorkovsky wanted Exxon’s cash, but sensed that Chevron’s offer was more politically acceptable — although, cut off from Putin, he was unsure. Relying on Roman Abramovich and his two lieutenants, Eugene Tannenbaum and Eugene Shvidler, for news from the Kremlin, Khodorkovsky was warned that his profile was becoming too high. During those three weeks, in his cause to build a civil society, Khodorkovsky had openly challenged Putin for power. Putin’s warning that oligarchs could not buy political power was ignored. “Khodorkovsky,” Shvidler reported to a Yukos executive, “has screwed things up. He’s on a path of no return. Yukos is going down because Rosneft wants it.” Putin, encouraged by Igor Sechin, agreed that Yukos’s merger with Sibneft should not proceed. Instead, their assets should be diverted to Rosneft, which was controlled by Sechin.
As he sat on the podium of the World Economic Forum on October 3, Raymond must have been heartened that Yukos’s shares had risen in anticipation of his deal, and by the announcement that Yukos’s merger with Sibneft had been finalized. The only jarring note was Khodorkovsky’s agitation on the stage. He had received a telephone call from his wife informing him that police had surrounded his home and were searching a nearby school building, seizing equipment provided by Khodorkovsky. The oligarch left the hall just before Putin arrived. The president announced the Russian government’s intention to reduce its interference in business and encourage foreign investment. Those close to Raymond and Tillerson did not notice either man seeming alarmed by the contrast between Khodorkovsky’s plight and the president’s assurances. Nor did they comment about Khodorkovsky’s response to the Kremlin after the police raid. Describing the “intimidation” as “shameful to our country,” he said, “What we are seeing is the most repressive and aggressive part of the bureaucracy in its dying throes. We got over communism in 1996. Now the last sickness is the absolute power of the bureaucratic system.”
If Exxon ignored local Russian politics, the Europeans did not. On October 16 Pascal Lamy, the European commissioner for energy, arrived in Moscow. Gazprom supplied 40 percent of Germany’s homes with energy, and was seeking a greater share of the European market for natural gas. But its slogans “Gazprom is a reliable partner” and “What is good for a strong Gazprom is good for the world,” did not appeal to Europeans accustomed to Russian subservience. Lamy delivered a condescending ultimatum to ministers and officials about Russia’s threat to Europe’s energy market. Putin and his aides decided to draw the line.
Khodorkovsky’s arrest on October 25 surprised Europeans and Americans. On that Saturday evening, both Raymond and O’Reilly possessed “term sheets” from Yukos suggesting near agreement for their respective deals. With or without Khodorkovsky, Raymond still wanted his prize. Two weeks later, he suspected the worst. Officially, Yukos’s merger with Sibneft had been “suspended.” Raymond and Tillerson agreed that the Yukos deal was off, although many suggested that Khodorkovsky would be released within weeks. And then came the twist. Igor Shuvalov telephoned, summoning an Exxon representative to Old Square. “The president is concerned,” said Shuvalov, “that certain people in his entourage want to exploit the Yukos situation, and we would like you to continue negotiations with Khodorkovsky.” “The problem is that he’s in jail,” replied Exxon’s employee. “We will arra
nge it,” said Shuvalov, adding that Exxon should improve its position by co-opting a Russian partner. Raymond was reluctant to participate, but since Chevron, after receiving the same message, had recruited Gazprom, ExxonMobil signed Subneftigaz, a smaller Russian company, as a partner. Tillerson delivered Exxon’s tough conditions for any deal to German Gref at the Ministry of the Economy. Yukos, said Tillerson, should be given “a clean slate and there would be no tax increases.” Gref raised his eyes in disbelief. The negotiations were restarted through Anton Drel, Khodorkovsky’s Russian lawyer. Tillerson flew regularly from Texas to Moscow, Luton Airport north of London or Geneva to meet Golubev. He was searching for an angle: was Khodorkovsky a personal issue for Putin, and what part of Yukos was for sale? Since Chevron had departed the scene, clearly scared by the political turbulence, he suspected that with Yukos’s share price still high, the Kremlin might be persuaded to sell a stake. By December he accepted the inevitable truth.
In Dallas, assured that his conversation with Putin had not triggered Khodorkovsky’s arrest, Raymond offered an unruffled assessment of history. “People need to take a deep breath,” he said. Risk was always a factor in the oil business. “Back in the 1910s and 1920s,” he continued, “everyone went to Latin America and talked about risks. Indonesia was meant to be terribly politically risky. We went to Saudi Arabia and we went to Iran and got nationalized twice. We got thrown out of Libya. My point is that’s the nature of the business.” Taking the long view, the perils in Russia left him undisturbed. Exxon would never compromise by accepting lower returns on its investments. There would come a time when Russia, like all producer countries, would pay the price to attract Exxon and the other oil majors. “We bring capital, we bring technology and we bring people,” he said unemotionally. Concessions were unacceptable. In the short term, Raymond’s judgment was spotted by traders as a chance for serious profits.
