Home Political science The colder war
Putin realized early on that the key to Russia's rebirth was its vast wealth of natural resources. Oil, gas, uranium—the country had them all in abundance. All figured into his master plan. And because of their importance, energy companies could not be allowed to fall under the control of foreign investors, no matter what. Even domestic private owners would have to answer to the state or, more to the point, to Putin.
The oligarchs mattered to Putin not merely because of their wealth but because energy was precisely the industry in which they were most prominent. Mikhail Khodorkovsky was the richest and most powerful of them, with a fortune of $18 billion. In his struggle with the oligarchs, Putin's contest with Khodorkovsky was the decisive battle.
When it ended—with Khodorkovsky and others stripped of their wealth and imprisoned, exiled, or dead—there was no doubt that Putin would be the overlord of Russia's energy sector. And he would be thanked for what he did. As with Chechnya, attacking the oligarchs was a hit with the public, who resented both their great wealth and how they had gotten it. Seeing them humbled amped up Putin's popularity yet again.
The Khodorkovsky match was not the only front in Putin's war with the oligarchs. But it was the splashiest, and it best illustrates his methods.
Like Putin, Khodorkovsky had spent his childhood in a shabby communal apartment and, also like Putin, he had ambition to spare. After working as a leader in Komsomol, a communist youth organization, he opened the Youth Center for Scientific and Technological Development. Later he founded an import/export firm.
As he transitioned from communist to capitalist, Khodorkovsky came to believe that the new Russian economy should be centered on high-tech industries rather than on natural resources. That put him in conflict with Putin's notion that resources are the natural engine for Russia's economic progress.
Khodorkovsky became a prominent advocate for a free market. In 1993, he published the Russian capitalist manifesto, The Man with the Ruble. In it he wrote: "It is time to stop living according to Lenin! Our guiding light is Profit, acquired in a strictly legal way. Our Lord is His Majesty, Money, for it is only He who can lead us to wealth as the norm in life."
Khodorkovsky's compliance with the law was noticeably far from strict. But that was the norm at the time. Several of his early millionaire colleagues had gotten so closely involved with criminals that they eventually had to flee the country to save their lives and the lives of their families. Shootings in public view were common, as were kidnappings of women and children. It was all part of the cost of doing business. That Khodorkovsky's import/export company was known to violate dozens of laws surprised no one, and by comparison with many others he was a goody-goody.
It was entering the financial arena that put Khodorkovsky on track to join the billionaires' club. And it was through Bank Menatep that he positioned himself to become the richest man in the new Russia.
Bank Menatep, which Khodorkovsky established in 1989, made significant profits, reportedly enhanced by diverted state funds. The bank also operated a lucrative market for trading state privatization vouchers, which turned out to be more than just another profit center.
Though it seems crazy now, the voucher program must have made sense to Boris Yeltsin at the time. He initiated it in 1992 on a day when, perhaps, he was heavily into the vodka.
Yeltsin proposed that every man, woman, and child in Russia be issued a voucher that could be exchanged for shares in one of the state enterprises undergoing privatization. That way, Yeltsin was convinced, every citizen would gain a stake in the emerging capitalist economy. However, consistent with capitalist principles, everyone would be free to trade or sell his or her voucher if one chose to.
The voucher idea had been imported to Russia by consulting economists from the United States. It made good sense in a textbook kind of way. But it made no sense at all if the vouchers were going to be issued to people who didn't understand what the pieces of paper represented.
Over 140 million Russians participated in the grand voucher program, the great majority of them cash poor and lacking even a rudimentary comprehension of capital markets. Most chose to capture a little cash immediately by selling their vouchers.
That played right into the hands of anyone with a bit of investment sense—especially the oligarchs. They were ready and able to accommodate the millions of Russians who knew nothing about the vouchers except that they could be turned into instant cash. Buying on the very cheap, they gained control of formerly state-run companies, which concentrated an astronomical amount of wealth and power in the hands of a very few.
Khodorkovsky topped the list of those who made the people's ignorance his gain. Through Bank Menatep and a separate holding company, he took control of a string of companies for mere kopecks on the ruble. It wasn't quite theft, but it was a process in which informed consent played no role whatsoever.
In 1995, Group Menatep moved on Yukos, a major petroleum conglomerate. Yukos had been assembled by the Russian government in 1993 to roll up dozens of state-owned production, refining, and distribution assets, including one of the most productive oil fields in western Siberia. Like most other Russian companies struggling to adapt to a market economy, its performance had been dismal. Oil production rates were declining, employees were months behind in getting paid, and financial controls were haphazard.
Khodorkovsky set out to grab Yukos and fix it.
He captured Yukos in two bold moves and in so doing demonstrated that he was a wily businessman, someone to be reckoned with. Vladimir Putin—at the time still working for the mayor of St. Petersburg, but with his eye on higher office—took notice. Perhaps, given his dispassion in separating ends from means, he even admired how Khodorkovsky operated.
It happened this way: First, knowing that the Yeltsin administration was strapped for cash, Bank Menatep participated in the ill-fated "Loans for Shares" program. Under the arrangement, Yeltsin's government pledged shares in several of Russia's most profitable companies as collateral for loans from oligarch-controlled banks. The value of the collateral was several times more than the value of the loans secured. If the state defaulted—and its debilitated condition made that likely—the lending bank was supposed to auction off the shares. But the auctions that actually took place were rigged. Everything was carefully planned to exclude anyone who might outbid the lending bank.
In this instance, Bank Menatep lent the Kremlin $159 million under conditions that virtually ensured default. For collateral, the Kremlin pledged 45 percent of Yukos, which at that point was worth over $3 billion, or some 20 times the size of the loan. Then, when the government indeed defaulted, Khodorkovsky effectively swapped the IOU Bank Menatep was holding for nearly half of Yukos.
Days later, to gain full control, Menatep purchased another 33 percent of Yukos from Yeltsin's desperate government for just $150 million, or about 15 cents on the dollar.
Over the next several years, Khodorkovsky brought the company back to health. In 2002 Yukos became the first Russian oil company to pay dividends to its shareholders, and by 2003 it was accounting for
20 percent of all Russian oil production and 2 percent of the world's. It had become the country's second-largest taxpayer, covering 4 percent of the Russian federal budget.
This was quite a high standing for a company about to be smashed. Whether Putin could have succeeded in moving on Khodorkovsky in a different political and economic climate is difficult to judge. But he clearly made savvy use of the man's past.
During the postrevolutionary fallout of the 1990s, every large Russian business, including Bank Menatep, engaged in shady practices. Tax evasion, loose accounting, and bribery of government officials were flat-out necessities. In a transition to private enterprise rife with distortions and wrong turns, the roughest of the freshly minted capitalists modeled their enterprises after the powerful crime syndicates.
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