Khodorkovsky - the making of a myth

By bne IntelliNews September 6, 2010

Ben Aris in Moscow -

In October, the former owner of Yukos oil company Mikhail Khodorkovsky will start his last year in jail. The one-time oligarch and subsequent self-proclaimed victim of political violence has become a cause célèbre, held up as an example of everything that is bad about Russia today.

Khodorkovsky's arrest in his plane while it stood on the runway in Novosibirsk by Kalishnikov-toting Special Forces in October 2003 made headlines around the world. He was eventually sentenced to eight years in jail in May 2005 for fraud and tax evasion, a year of which he spent in a remote camp on the Chinese border in Russia's Far East. He has spent nearly six years in pre-trial detention, which has a harsher regime than if he was incarcerated as part of the regular prison population.

"By keeping Khodorkovsky in "pretrial" (which is blatantly illegal since April reforms eliminated such detention for allegations of business crimes), prosecutors can impose restrictions on access to legal counsel and family visits," Yukos representatives wrote in September on their Facebook page.

Not that anyone is expecting Khodorkovsky to be released soon. In February 2007, the Prosecutor General of Russia brought a fresh case against Khodorkovsky on more charges of embezzlement and money laundering that continues to the present day. Khodorkovsky faces another 15 years in prison if found guilty - the maximum allowed under law. Khodorkovsky and his partner Platon Lebedev have appeared repeatedly in court in a case that seems to be drifting towards a climax.

The trouble with this whole story is that even if the forces of law unfairly picked on Khodorkovsky, he is "guilty as charged" says Peter Clateman, a lawyer for Renaissance Capital in Moscow who has been following the case closely. To be fair most observers have criticised the first trial, but no one pretends that Khodorkovsky's trial had much to do with the letter of the law or was about "guilt" or "innocence." All the oligarchs were blatantly stealing everything they could in those days, so the issue isn't whether the law was use to lock up Khodorkovsky and expropriate his company, it's why all the other oligarchs weren't arrested and locked up too.

Khodorkovsky may be a victim, or better to say loser, of the political showdown with the Kremlin, but he is also certainly not the martyr the international press and leader writers in most of the international press make him out to be. Indeed, he started his corporate life as the very worst corporate governance abuser, which in Russia circa the mid-1990s is saying a lot. But since then, Khodorkovsky has been careful to manufacture an image by spending millions of dollars on the best law firms, lobbyists and PR that money can buy - with so much success that no one remembers the "old Khodorkovsky" when he had a moustache, wore shabby suits and big black, TV-frame glasses and would dilute your stake to zip the moment you invested into one of his companies.

Oil dilution

My first physical encounter with Yukos was at an extraordinary shareholders meeting called by its Yuganskneftegaz production subsidiary in March 1999.

It was a sunny day as I walked down to the Yukos clubhouse in the Lepekhinsky Perulok cul de sac, a short walk from Red Square, where the meeting was due to be held. A group of men in expensive suits were loitering on the pavement in front of the elegant building, smoking and talking on phones as we all waited to be ushered into the small office in the building opposite to register for the meeting.

I had interviewed Khodorkovsky several times in this building that once belonged to a Soviet labour union and sports a sweeping staircase, large club rooms and immaculate parquet floor. But on this day, the clubhouse was the setting for a showdown between Khodorkovsky and his biggest minority investor, Kenneth Dart, the American heir to a Styrofoam cup fortune who had bought some $100m worth of stakes in all three of Yukos' main production facilities.

John Papesh, who represented Dart and lived in Cyprus, was there waiting for me, looking tanned and nervous. Dart was afraid that the shareholder meeting was going to massively dilute his stake in the company and had arranged by power of attorney for me to attend the meeting as Dart's proxy. In theory, I could have voted on any motion in the meeting, but I had just come to watch.

Russia was just emerging from the financial crisis of 1998 when oil prices had dropped as low as $10. Despite running transfer pricing schemes for years and squirreling hundreds of millions of dollars away into offshore tax havens, even Khodorkovsky was strapped for cash. His bank Menatep had borrowed $266m from a pool of creditors that included Daiwa Bank, WestMerchant Bank (a subsidiary of Westdeutsche Landesbank) and Standard Bank of South Africa, secured against a 32% stake in Yukos. Khodorkovsky tried to persuade his creditors to a rescheduling over three years, but they called the loan in and took possession of the Yukos stake. However, after Khodorkovsky threatened to issue millions of shares and Yukos began to sell off its major assets to offshore shell companies, the creditors took fright and settled, taking a haircut in the process, according to "The Quality of Freedom", a book by Richard Sakwa, professor of Russian and European Politics at the University of Kent. "Yukos was selling prime assets to offshore companies (presumably linked to the Yukos management) and it appeared to be in danger of becoming little more than a shell company," he wrote.

There was a brief flash of hope in the summer of 1999 when the knight-errant of minority shareholders and chairman of the then-Federal Securities Commission, Dmitry Vasilyev, took up Dart's cause. However, when the FSC started to investigate, a truck carrying 607 boxes of company documents accidentally drove off a bridge and sunk to the bottom of the Dubna river in May 1999. Vasilyev went as far as suspending all trading in shares of Yukos' main subsidiaries - Samaraneftegaz, Tomskneft and Yuganskneftegaz - in June that year.

I entered the small office with Papesh and presented my documents to the girl who was processing the shareholder documents and adding their names to a register of shareholders in attendance. She took one look at my papers and gestured to the burly security office wearing blue fatigues in the corner. He marched over: "Out," was all he said, moving his hand onto the butt of submachine gun that was swinging at his hip.

Dart's lawyers were ready and rushed over. "Mr Aris has a legal right to attend this meeting under Russian law. All his paperwork is in order!" they said waving the papers around.

The security guard took hold of the butt of his gun and pointed it into my face and said again: "Out." So we left.

I joined the group of investors and journalists who had also been barred from the meeting. Apparently, Dart's shares had been seized by a court and frozen, so his proxies, including me, weren't allowed to vote at the meeting.

Together with David Hoffman from The Washington Post, we managed to corner Dmitry Gololobov, the Yukos lead lawyer (who it was recently reported was hired as a vice president at Rosneft, which now controls the main Yukos assets, but this apparently was a rumour and wrong), as he came out of the registration office. "This is an outrage. You have to let us in," Hoffman shouted, but Gololobov simply shrugged his shoulders, mumbled something about arrested shares and pushed past to follow the others into the club house.

Over the next few hours, the shareholders (that got in) voted to tripled the number of shares in Yukos, leaving Dart with an insignificant stake. To add insult to injury, the new shares were to be paid for with veksels, or promissory notes, that wouldn't mature for three years. And finally the shareholders decided it was in the best interests of the subsidiary to continue selling its oil to an "independent" oil trader for $1.50 a barrel, when the price of oil was already on its way to $30.

Papesh tried to keep his cool and said that in the long-term Dart's interests would be protected, but couldn't contain himself completely: "This brazen asset grab takes the violation of Russian law and international standards of corporate governance to a new low."


Pretty much the same story played out at the other Yukos subsidiaries - Samaraneftgaz and Tomskneftegaz: court orders, arrested shares, emergency shareholder meetings. Minority shareholders like Dart lost almost everything But ironically, these corporate governance abuses - amongst the worst of the time - paved the way for the most dramatic makeover Russia has ever seen.

Once Khodorkovsky had almost full control of all these production subsidiaries, all the assets that had been moved offshore were returned and the game at Yukos became all about investment and boosting production as fast as possible. The company was the fastest growing in Russia, with production soaring over by well over 10% a year until it was pumping 1.1m barrels per day, making Yukos one of the largest oil producers in the world.

Still, Khodorkovsky's name was mud for the rest of 1999. Dart took out a series of full-page ads complaining about Yukos in The Wall Street Journal, The New York Times and The Washington Post. Investors appealed to the US government, World Bank and other global institutions for assistance, all of whom condemned Yukos. After a survey of corporate governance practices in 25 emerging markets in November 2000 put Russia dead last, Yukos had a good claim on the title of "worst corporate governance abuser in the world."

"Prior to the crisis, the stocks of the three oil companies that Yukos controls - Yuganskneftegaz, Samaraneftegaz and Tomskneft - were a hot property," The New York Times wrote in an editorial in April 1999. "An investment of $3,000 at the end of 1996, divided equally among the three, would have grown to more than $11,000 by the following August. However, the same stake in the three companies fell 98% to a combined value of $150" by April 1999 following the financial crisis and corporate governance abuses. Companies that were earning $2bn a year in revenues in 1999 had a market capitalisation of only $22m after Yukos' share price fell from $6 in 1997 to $0.15 at the start of 1999. And it was precisely this that presented Khodorkovsky with his biggest opportunity.

Oligarchs are not businessmen, they are opportunists. They got so rich so fast because they saw - only a few months before everyone else - how the collapse of the Soviet Union could be turned to their advantage as long as they acted quickly and ruthlessly. According to bne sources, the actual idea for the makeover was not Khodorkovsky's; a group of bankers from Brunswick (which later sold out to UBS in 1997) went to see Khodorkovsky and explained that the most he could ever get out of Yukos was the $2bn annual revenue. But if he could turn his image round, then he could make far more from the share appreciation; at the start of 1999, Yukos' shares were trading at a price/earnings multiple of 1.3x, way below its Russian peers that were trading at multiples of 6.8x.

Khodorkovsky seized on the idea and threw himself into the task of cleaning out his own Aegean stable. It is a testament to the shortness of investors' memories that he was so spectacularly successful. Within three years, Yukos was the doyen of good corporate governance in Russia and Khodorkovsky was the 16th richest man in the world. Harvard Business School wrote a paper on the "Khodokovsky effect," which saw this good corporate governance spread to other Russian companies as the country's oligarchs looked on amazed.

The campaign was due to kick off in 2000, so in December 1999 Khodorkovsky bought off Yukos' most vocal critic, Dart, by paying him a reputed $120m-160m for his remaining shares, or roughly what Dart had invested in the first place. More importantly, Dart agreed to a gagging clause, so that even former employees like Papesh, who were so vocal in the 1990s, wouldn't comment for this report.

Yukos went public first by introducing quarterly international standard GAAP accounts - an unheard of level of transparency in Russia, let alone the oil sector. The company then hired a dozen independent directors including the UK's Lord Owen, who joined the board in 2002. At the same time, the operational staff came under a huge amount of pressure to deliver ever growing levels of production, which it managed to keep up for years. (There are even rumours Yukos started to pump water down into its deposits extraction in an effort to keep the oil flowing, even though this wrecks the chances of late-stage oil.)

Khodorkovsky made over his own image in an echo of Margaret Thatcher's transformation at the hands of Maurice Saatchi at the start of her rise to power. Khodorkovsky came up through the Soviet-era Komsomol (and Sakwa alleges that Khodorkovsky used the organisation's money to fund his entry into business) and still had a very Soviet look. But he dumped his shabby suits in favour of black roll necks, shaved off his moustache and swapped his thick TV-frame glasses for wire-rimmed specs. In fact, if he had lost a bit of weight, he would've been a dead ringer for Steve Jobs, CEO of Apple.

That was the visible stuff. In addition, Yukos spent $30m of its own money buying up its own shares - entirely legal in Russia - a trader told bne at the time. "That $30m was probably the best marketing investment any Russian company has ever made," said the trader, who watched some of the orders come over his desk, but didn't want to be named.

The stock price started 2000 at about $0.20, but by the autumn it had risen to $0.80, at which point the press took up the story. At first investors were buying Yukos simply because everyone else was and remained extremely sceptical of Khodorkovsky's motives. But as Khodorkovsky continued his relentless PR campaign, they began to buy more and more into the reformation of a bad boy story, and by 2003 Yukos had been dubbed a "tourist" stock, as any investor interested in rising equity prices bought Yukos before anything else because they "knew" they wouldn't get screwed over by the majority investors. The makeover had taken less than three years to complete and climb to a peak price of $15.92 on October 16, 2003, nine days before his arrest.

I interviewed Khodorkovsky many times over that period and just after he had been named the richest man in the world under 40, I asked him why anyone should believe that he had really changed. "I am all three generations of the Rothschild family in one," he told me in the same clubhouse that I had been barred from entering only three years earlier. "The first generation were robber-barons, the second generation built up the business and the third generation were Americana royalty."

Jail and politics

The transformation of Yukos from pariah to paragon left Khodorkovsky with a very useful skillset, which he has employed to good use since he was arrested.

While oligarchs cannot match the Kremlin for power, they have a huge advantage over the both the state and their foreign partners if they clash with either, as they can play both sides of the game. The two-year showdown with the state was like a game of poker, but the game of "Kremlin Hold 'Em" has some strange rules: the Kremlin holds virtually the whole deck and both sides know what's in the other's hand. The Kremlin leads with low cards like tax raids or inspections. Khodorkovsky has only one card, but he is allowed to play it as many times as he likes: embarrass the Kremlin in the international media for abusing the state's power. The Kremlin eventually starts playing face cards like canceling production licenses and arresting executives. In the final stages, the state plays its king and jails Khodorkovsky, who counters with his embarrassment trump card, which only gets more powerful the longer the Kremlin plays. However, the Kremlin has yet to draw its final card, its ace of spades: murder charges.

On June 26, 1998, Khodorkovsky was celebrating his 35th birthday with friends yet again at the Yukos clubhouse when some of his minions arrived and announced that Vladimir Petukhov, mayor of Nefteyugansk, had been gunned down and found in a ditch riddled with bullets. Petukhov had bitterly opposed Yukos' attempts to intrude into the administration of the region, which is home to the Yuganskneftegaz production facility.

Khodorkovsky was furious, according to a bne source that was at the party. Yukos' head of security, Alexei Pichugin, was eventually convicted of carrying out the killing, but Khodorkovsky has never been formally charged in connection with it. Khodorkovsky's lawyer Robert Amsterdam told bne in a 2008 interview that his team has thoroughly investigated the killing and collected deputations, including one from Petukhov's wife, exonerating Khodorkovsky from any involvement in the slaying.

These charges aside, Khodorkovsky's trump card is always winner in this game of poker, because both the Kremlin and the foreign investors are committed to claiming that they are restricted by the rule of law (sincerely in the case of the foreign investors, less so in the Kremlin's case).

The "Oligarch Hold 'Em" version of poker has slightly different rules from the Kremlin game. Oligarchs can appeal to the courts and draw the same card as Khodorkovsky, claiming they have been abused when they lose. But they can bribe, pressure and pervert the courts to their own ends with impunity, drawing as many cards as they like from under the table when it suits them. The trick is to make sure there is no evidence to prove they are cheating - and there never is. All Russia's oligarchs continue to play "Oligarch Hold 'Em" as a normal part of doing business routine.

And the problem is not just the venality of the judicial system, but also with the inadequacy of the laws. Following the collapse of the Soviet system, the newly minted democratic government found it had a body of law that was entirely unsuited to regulating a free market. For years, specific problems were fixed by adding a specific amendment to deal with the issue. But the upshot is that Russian law is so riddled with loopholes, it makes Swiss cheese look solid. Bad law is the price that young democracies pay for transition. And companies like Yukos are so rich and nimble that they can hire lawyers like Gololobov who can run circles around the Kremlin, using their own laws against it.

Khodorkovsky said the same to me when I interviewed him in 2002. He pointed out that western firms too spend millions on lawyers to allow them to operate as close to the edge of the law as possible. However, the difference is that US and UK law has had over 200 years to develop, while in Russia pretty much anything and everything can be justified in law.

Russian business daily Vedomosti wrote in a recent article: "What did the oligarchs want from their lawyers? We can say they demanded from the lawyer to identify the boundaries of the interpretation of the law. There is a law which is obvious enough for lawyers in 99% of the cases and can be explained to the manager by schemes, signs and a convincing 'moo' in five minutes; but there is also a space for manoeuvring... We must recognize that the situation is similar in the West, only the rules of 'stretching' the law are different and much narrower."

Oligarchs hire lawyers when they are feeling nice. Most of the time they simply buy officials and Yukos is not alone in this, but more active than most at its peak. "Yukos was particularly active in placing state officials on its pay role and... tried to buy executive officials wholesale to ensure that policy outcome was in its favour," concludes Sakwa in his book.

PR today

Even today, what's left of the Yukos oil company maintains a formidable PR and lobbying machine, spending millions of dollars a year to keep the Khodorkovsky cause alive.

And Yukos has been pushing at an open door. When relations with the US administration of George W. Bush began to decay as Russia became an economic power in the middle of the last decade, the international press were happy to demonise Vladimir Putin, while the inept Kremlin stumbled from one PR disaster to the next, culminating in the eight-day war with Georgia in August 2008.

Yukos has been able to rely on its dozens of independent directors as lobbyists around the world. In the UK, Yukos retained Lord Paddy Gilford as a consultant and his PR firm Gardant handles much of Yukos' European PR, with Claire Davidson as the point person. Lord Gilford is also extremely well connected and has actively campaigned for current PM David Cameron. J Dudley Fishburn, ex-executive editor of The Economist and one-time British Conservative MP, also helps with the UK PR effort. Dr Otto Graf Lambsdorff, a former leader of Germany's Free Democratic Party and economic minister between 1977 and 1984, handles Germany, according to bne sources. And Stuart Eizenstat, a former US Deputy Treasury Secretary and ambassador to the EU, is a key lobbyist in the US. However, Margery Kraus, who is the founder and CEO of US PR firm APCO Worldwide has a reported $200,000 retainer and is the most important US lobbyist.

In addition, the following lobbying and law firms have also been retained by Yukos: BKSH & Associates, which has done work in Nigeria and Iraq; the well connected law firm Greenberg Traurig, seventh biggest in the US; Covington & Burling, another top-20 US law firm that was used by US oil company Halliburton to lobby Washington on behalf of its controversial KBR Government Operations division in Iraq, as well as Philip Morris during its battle with the US government.

And then there is the tireless Robert Amsterdam, the Russian-born American lawyer who has been travelling the world meeting with politicians and journalists, unopposed as the Kremlin doesn't do overt PR, although it clearly benefits from its control of the media in Russia. I met him in a swanky hotel just off Berlin's Gendarmenmarkt in 2008, where he had flown in for a few days to lobby German MPs, who then were increasingly worried about the resurgence of Russia. "It must be the first time in Russian history that someone was arrested on a plane flying to Siberia," says Amsterdam, who comes across as a jolly but highly intelligent man, completely on top of a brief that's as much about politics as about the law. "He could have got out to the West if he wanted to, but chose to go to jail instead."


Is Khodorkovsky a successful businessman who was martyred to the vested interests in the Kremlin that were greedily eyeing his oil company? That is too simple an explanation. Is he an outrageous corporate governance abuser who changed his spots? That doesn't cover it either. Certainly he is an opportunist of genius and very focused on making money. Unlike his counterparts at Lukoil and Surgutneftegaz, he is definitely not an oilman.

Having interviewed Khodorkovsky many times during his rise to riches, I came to like him, as he was clearly a visionary. Ironically, the oil pipeline to Daqing in northwest China that was actually largely responsible for getting him jailed (rather than the nominal fraud charge) went on line at the start of September - built in the end by the same people in the Kremlin who had opposed it so vehemently when he wanted to build it.

But I never understood why he would choose to go to jail instead of cutting a deal with the Kremlin, which is always an option with the cautious and pragmatic Putin in charge. Indeed, most of the investors in Yukos who held on to their shares as they slid all the way back down from $15 to zero assumed he would negotiate a deal, as oligarchs put profits above principles. And no one has ever adequately explained to me why he would choose to spend what could be the rest of his life in jail. Clearly, he got some sort of religion along they way.

He introduced good corporate governance into Yukos because he was persuaded that he could make a stack of money if he pulled it off. Everything he did in his career was designed to make him money. It seems likely during the course of the transformation to doyen of corporate governance that he got religion in the sense he saw that to make his shareholders richer by doing all the "right" things instead of stealing their money, had the effect of making him richer - which is the basis on which capitalism is built. However, is it possible to believe that he went to jail for the betterment of the Russian people? This is unlikely. The best explanation I have heard is that he refused to do a deal with the Kremlin simply because he is pigheaded and bitter about his treatment, in the same way that Hermitage Capital manager Bill Browder and one time largest investor into Russia seems to be bitter about the Kremlin's effective destruction of his business.

Editors note: Since we published this article, The Khodorkovsky & Lebedev Communications Center highlighted several factual errors in the piece, which have since been corrected. You can read their criticisms here.

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.