The New Republic November 17, 2003 Robber Baron By Gideon Lichfield Gideon Lichfield is Moscow bureau chief for The Economist.
When journalists ask Mikhail Khodorkovsky to explain how he made $8 billion in the decade since the collapse of the Soviet Union, he usually admits that his methods bordered on the unethical--though not, he would insist, the illegal. But, he adds, he and his fellow Russian cutthroat capitalists are not so different from another group of industrialists in an emerging democracy: America's robber barons, men like John D. Rockefeller, Andrew Carnegie, or Leland Stanford, who laid the foundations of the world's biggest economy. In their day, Rockefeller and his peers were also considered ruthless and sleazy. Now, however, their names conjure up the universities, endowments, and respected corporations that have helped create America's strong legal system and envied business climate.
Since Khodorkovsky's politically motivated arrest this week by the Kremlin and his decision to step down from Yukos since then, some leading Russia-watchers have endorsed his self-conception. Bruce Jackson, president of the Project on Transitional Democracies, a leading organization focused on democratization in Eastern Europe, wrote in The Washington Post this week that Khodorkovsky's only crime was to be "a successful businessman who built the largest privately held company in Russia, ... converted his firm to Western business practices, ... [and] made the fatal mistake of expressing political opinions."
But Khodorkovsky isn't Rockefeller, and his corporation, Yukos, isn't Standard Oil. To be sure, Khodorkovsky wasn't arrested merely because the Russian government believes he committed tax evasion, embezzlement, and fraud. Vladimir Putin appears to be using the arrest to threaten politically connected oligarchs who refuse to submit to the Kremlin's authority. In fact, Russia experts warn that Putin, a former KGB functionary, is recreating an authoritarian state. But the fact that Khodorkovsky is being persecuted doesn't make him a benevolent reformer. The Yukos chief has made his money in a dubious way. Worse, he has meddled in politics in ways that potentially undermine Russia's fragile democratic institutions.
When Rockefeller died in 1937, according to The Wealthy 100, a book by Michael Klepper and Robert Gunther, he was worth $1.4 billion, around 1.5 percent of that year's U.S. GNP. Khodorkovsky's $8 billion--his worth before he was arrested and before the share price of Yukos went down the toilet this week--was around 2 percent of Russia's GDP this year. If Rockefeller's fortune were translated into today's dollars, he would be able to fund nearly one-tenth of the U.S. federal budget. Khodorkovsky, for his part, could have covered over one-eighth of his government's spending. Both, of course, were oilmen. At its height, Rockefeller's Standard Oil controlled three-quarters of the nation's oil industry. Khodorkovsky's Yukos, which is about to complete a merger with another oil firm, soon will produce just under one-third of Russia's oil, according to United Financial Group (UFG), a Moscow-based investment bank.
But, while Rockefeller built a fortune, Khodorkovsky grabbed one. Standard Oil began as a single refinery and grew with the country's nascent oil industry. Khodorkovsky and his pals, by contrast, bought a 78 percent stake in Yukos from the state in 1995. The auction was organized by Menatep, a bank linked to Khodorkovsky, which itself had grown out of a series of currency-exchange tricks possible only in the chaos of the Soviet Union's dying days. They had acquired a hugely valuable asset for next to nothing. Throughout the next few years, Khodorkovsky consolidated his grip on Yukos by technically and physically blocking shareholder access to meetings, diluting minority shareholders' stakes, and defaulting on loans.
And, while Rockefeller kept his money at home, thus boosting America's economic growth, Khodorkovsky has moved his wealth offshore. He and other Russian oligarchs have used a host of offshore companies, including the Gibraltar-based Menatep, to keep cash overseas. Though estimates vary greatly, at least $160 billion of Russian capital has fled the country since the end of the Soviet Union. Though this strategy may have made business sense to the oligarchs, in a developing country like Russia--with a weak banking system and where loans are rare--rich people's wealth is one of the only sources of investment. In fact, there were signs, before his arrest, that Khodorkovsky was planning to leave a good chunk of Yukos in foreign hands permanently: Yukos was reputed to be in talks with two foreign oil firms interested in buying stakes. "The final aim was to sell [Yukos] abroad," says Roland Nash of Renaissance Capital, another investment bank that specializes in Russia.
What's more, though Khodorkovsky gave endless interviews promoting democracy and free-market reform, his own interests came first. While nobody agrees on what exactly triggered the four-month-long series of Kremlin investigations that culminated in his arrest, many Moscow analysts think one of the key moments came in the early summer, when reforms to raise taxes on oil companies were going through parliament. The government had successfully increased its revenue up to then by lowering overall tax rates, which encouraged people to stop dodging taxes, and Yukos had paid its taxes up to this point. But, as UFG's Christopher Granville explains, the oil companies still utilized tax loopholes and offshore tax havens; ending these would boost state revenue, force the oil firms to repay some of the riches they had grabbed in the privatization, and strengthen the tax code. Yukos led the resistance to the tax reform. "The perception in the finance ministry as well as in the Kremlin is that Yukos lobbyists have been the main frustrators of government reforms on oil industry taxes," says Granville. In fact, Yukos planned to bolster its influence over future reforms by running several former and current Yukos employees in December's parliamentary elections.
In a young pseudo-democracy like Russia, such meddling threatens weak institutions. Most Russian opposition parties lack the grassroots base that opposition parties enjoy in developed nations. That makes them much more beholden to the corporate patrons who finance their campaigns, forestalling their potential development as independent, grassroots parties. Yukos's willingness to run candidates in parliamentary elections only strengthened this trend. In fact, some Russian officials have privately grumbled about Yukos "buying out the Duma," the Russian parliament.
And there is no sign that Khodorkovsky's political meddling stopped at oil. According to Eric Kraus of Sovlink, another investment house, Khodorkovsky may have already been indirectly controlling a good-sized stake in Gazprom, the state gas monopoly and the largest company in Russia. Influence over Gazprom--which is responsible for heating and (through the electricity company's power stations) lighting much of the country--would be a huge political as well as economic tool. A shareholder with a large stake in the company could exercise considerable control over the lives of ordinary Russians.
To top it all off, Khodorkovsky has talked of stepping down from Yukos in 2008, which happens to be the last year of Putin's final presidential term, and many around him talked of the oligarch running for a high position in the Russian government. In so doing, the upstart oilman would be taking a page from Silvio Berlusconi, who used his wealth to dominate politics, and, once in office, changed laws to help his corporate interests. True, Khodorkovsky would not be able to dominate the media the way Berlusconi has--the state has gained control of all the TV channels--but his money, his influence over the energy sector, and his inroads into the Duma could make him a powerful contender.
So Khodorkovsky is no Rockefeller. But, then, Russia is no United States. Khodorkovsky seized the opportunities the dissolution of the Soviet Union presented. Unfortunately for Russia, those opportunities--the result of chaos and the lack of transparent legal and political institutions--allowed tycoons to act more rapaciously than in the United States of a century ago. Worse, by keeping his money offshore and undermining political institutions, Khodorkovsky has done less than they did to improve the system he took advantage of.
Then again, so has Putin. While early twentieth-century America passed antitrust laws and broke the robber barons' monopolies by strengthening the regulatory system, Putin has done no such thing. Instead, he has dug up dirt on Khodorkovsky and pursued him, all the while ignoring other oligarchs who did not meddle in politics but whose business dealings may have been just as sleazy. In fact, Putin seems interested only in pushing Khodorkovsky out of the country, where he would no longer be a nuisance to the president. That may solve Putin's immediate problem, but it won't help Russia at all.
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