The New York Times: The Capitalist in the Cage

”They did not know how to judge and could not agree what to consider evil and what good; they did not know whom to blame, whom to justify.”

— Dostoevsky, ”Crime and Punishment”

SINCE his incarceration eight months ago, Russia’s richest man, Mikhail B. Khodorkovsky, has made only fleeting public appearances — behind bars on a prison video screen, hustled from police vans amid a phalanx of security guards, or, as his trial began on Wednesday in a Moscow courtroom, seated inside a cage.

In these glimpses, Mr. Khodorkovsky looks pale, resolute and unemotional, much as he did in the years before the state police arrested him at gunpoint aboard his private jet in October, charging him with looting public assets and evading hundreds of millions of dollars in taxes.

Until shortly after his arrest, Mr. Khodorkovsky, 40, was the chief executive of Yukos Oil, which he had transformed into one of Russia’s biggest and most shrewdly operated companies. He had amassed a personal fortune of at least $15 billion. Along the way, he jousted politically with Russia’s president, Vladimir V. Putin; deftly courted American financiers, legislators and opinion makers; showered money on public relations firms; and played the role of freshly minted capitalist with singular aplomb.

And until his arrest, Mr. Khodorkovsky’s past as one of Russia’s wiliest and most hard-nosed tycoons seemed a rapidly fading memory. He began his career as a banker who built his fortune on a series of highly criticized privatizations of state-owned companies, like Yukos. Russia’s former president, Boris N. Yeltsin, and a senior deputy, Anatoly B. Chubais, spearheaded the privatizations during the 1990’s. The deals were plagued by inside maneuvering and fire-sale prices, giving rise to a group of powerful businessmen, including Mr. Khodorkovsky, who became known as oligarchs.

Perhaps inevitably, given the arc of his career, Mr. Khodorkovsky’s showcase trial — freighted with the possibility of a lengthy prison term and a Yukos bankruptcy — promises to offer one of the first public referendums on the state of Russia’s riches. Its outcome could help shape for years the nature of the country’s experiments in capitalism.

”This should be Russia’s O.J. trial and should be the most public and most important bit of jurisprudence in modern Russian history,” said Bernard Sucher, a Moscow investment banker, referring to the attention on the trial of O.J. Simpson in the United States. ”Most people want to look deeply at what happened here in the 1990’s, and this is a chance to come to terms with how the country ended up the way it did at the end of the Yeltsin years.”

Mr. Khodorkovsky and his lawyers have disputed the charges against him, saying they are an attempt to neutralize him as a political reformer. They argue that a main fraud charge was already settled last year and that the shifting ground rules that defined the privatization rush in the 1990’s contained few clear-cut guidelines for any businessman to follow. Even so, in an effort to accommodate a prosecution widely regarded as orchestrated by the Kremlin, Mr. Khodorkovsky at one point offered a rare mea culpa for some of his business practices.

”WE have made many stupid mistakes, because of our ambitions and because we failed to understand what is going on in the country and the entire complexity of its social and regional peculiarities,” Mr. Khodorkovsky wrote in a letter published by Russia’s Interfax news service in April. ”These are our mistakes and not an inevitable result of liberal democratic reforms. Forgive us if you can. Let us make up for it; we know how to do this.”

By the time his trial started on Wednesday, however, Mr. Khodorkovsky’s stance had hardened. Speaking on his own behalf from inside the defendant’s cage, he reverted to the dispassionate and steely certitude that had guided his ascent through the ranks of Russia’s scrappy business world.

”I am not a naïve person,” he told three judges and a single state prosecutor in a cramped courtroom. ”As for the accusations made against me, I can say that there are no real grounds for them. The charges represent the opinion of the general prosecutor’s office and contain no facts.”

The charges against Mr. Khodorkovsky and Yukos, like everything else in the trial, are of Brobdingnagian proportions. They fill 227 volumes, and Mr. Khodorkovsky, who has been denied bail, was given about three months to read them. Among their other charges, the Russian authorities accuse him and another Yukos executive, Platon Lebedev, of defrauding the government of $1 billion. After crawling along uneventfully for nine hours on Wednesday, legal proceedings were postponed for a week to allow one of Mr. Khodorkovsky’s lawyers to seek medical treatment.

Mr. Khodorkovsky’s presence dominates the proceedings, but Mr. Putin casts a very long shadow. In a separate court case, the Russian authorities contended that Yukos owed $3.4 billion in back taxes. For months, the company said it lacked the money to make the payment, setting the stage for a bankruptcy filing and focusing attention on Mr. Putin’s designs for one of the crown jewels of Russia’s booming oil industry.

”The government will do its utmost not to ruin Yukos,” Mr. Putin told journalists in Uzbekistan on Thursday, according to Itar-Tass, Russia’s state news agency. The next day, however, a Moscow court ordered the company to make the tax payment.

Yukos shares still soared on Thursday and Friday, suggesting that investors believe some sort of deal will be struck, possibly one in which the Russian government receives a stake in the company in exchange for settling the tax case.

Many of the early privatizations in the 1990’s involved banks ostensibly lending money to industrial companies in exchange for controlling stakes, a widely derided program known as loans for shares. If the Russian government continues to assert itself with Yukos, then loans for shares may morph into shares for taxes, giving the Russian government a new foothold in the economy.

MR. PUTIN dominates Russia’s political sphere in the same way that Mr. Khodorkovsky once dominated its business realm. In many ways, the two are mirror images of each other. They are highly educated, extremely disciplined students of power who quietly keep their own counsel. Both expertly navigated around Russia’s bureaucracies and then outflanked opponents by patiently thinking several moves ahead of everyone else.

But they differ in one crucial aspect: though fairly close in age, they are from very distinct generations. Mr. Putin, 51, is a former K.G.B. agent, a child of the last vestiges of the old Soviet system. He has an ingrained respect for the role of the state. Mr. Khodorkovsky, 11 years younger than Mr. Putin, is a child of the economic restructuring known as perestroika who took full and ruthless advantage of the outsized financial opportunities presented during the Yeltsin era. Mr. Khodorkovsky also came of age during years in which the strong-arm police tactics of the Soviet years began to abate, adding, perhaps, to a risky self-assuredness when his confrontation with Mr. Putin came to a head late last year.

Although the standoff between the men has been widely characterized as political, economic factors also forced Mr. Putin’s hand. Last year, Mr. Khodorkovsky tried to sell a large stake in Yukos to an American company, Exxon Mobil, without consulting the Kremlin — at a time when oil was becoming a pivotal geopolitical and economic resource prized by Mr. Putin. Mr. Khodorkovsky had also tried to shop an oil pipeline deal with China, a move at odds with Kremlin policy. A senior Yukos official conceded in an interview in Moscow late last year that the confrontation between the two potentates was grounded in sharply differing visions of how to steer Russia’s economic might.

For now, Mr. Putin’s vision is winning out. He has made an example of Mr. Khodorkovsky, cracking down on him with all the remorseless determination of an old Soviet hand and winning the support of average Russians dismayed by the country’s inequities.

And the models that Mr. Putin appears to favor are the managed economies of countries like Chile, China and Singapore, which blend market forces with a strong state role. Those economies were spared the free-market fluctuations that ravaged some developing nations beginning in the late 1990’s — like Russia and Argentina, which were privatized hastily, before viable regulatory and legal structures were put in place as checks on hit-and-run profiteers.

”Khodorkovsky’s personal fate in this is not the big picture,” said Stephen M. Kotkin, director of the Russian studies program at Princeton. ”The big picture is Russia’s oil and gas holdings.”

”Putin has bought into the notion that Russian power will derive from higher G.D.P., and that’s totally new for that part of the world,” Mr. Kotkin added. ”He’s given a wide berth to both the economic planners and the market reformers. He’s also given a wide berth to the state security apparatus.”

Government intelligence and security forces are so free to operate in Mr. Putin’s Russia that the country’s courts, some political analysts say, act as instruments of Kremlin policy rather than as counterbalances to state power.

”Some people try to make Khodorkovsky the next Andrei Sakharov and he’s not the next Andrei Sakharov — he did sinister things,” said Michael McFaul, an associate professor of political science at Stanford University. ”But you don’t need to make him the next Sakharov to argue that there is a problem when the state self-selects whom to prosecute.”

Mr. Kotkin likens current Kremlin politics to a rugby scrum, with market reformers, hard-line security advisers and members of Mr. Putin’s inner circle all wrestling for the upper hand in policy making. Mr. Kotkin suggests that if market reforms gain greater traction in Russia, then the rule of law, over time, will supersede the security apparatus — though he cautions that this is unlikely ”in Putin’s lifetime.”

Dire predictions about financial fallout from Mr. Khodorkovsky’s imprisonment last fall have not proved true so far. Foreign investors have not fled Russia in droves, as Mr. Khodorkovsky’s Western advocates initially envisaged, and the country’s economy is robust and thriving. The government is running a budget surplus, runaway inflation has been tamed, and the gross domestic product has risen at a brisk pace. From 1998, when the economy unraveled amid a financial collapse, to the end of 2003, Russian G.D.P. rose 38 percent, according to the World Bank — a stellar performance by any standard.

A recent J.P. Morgan Chase research report praised Mr. Putin’s oil policies as ”well conceived,” saying that the industry will be taxed ”more in line with international norms” while still receiving government support for expansion projects. The report notes that the Kremlin plans to use added tax revenue from the oil industry to lower other business taxes and to finance health, education and welfare programs in Russia, where one in five people are mired in poverty.

Russia’s stock market has been flagging of late amid fears of rising interest rates in the United States. And Russia’s banking system remains dangerously weak and racked by corruption. But financial analysts say that neither problem seems to presage broader upheavals in the economy.

Nor have Russia’s oligarchs disappeared, despite a belief among some political and financial analysts that Mr. Khodorkovsky’s arrest foreshadowed a widespread purge of the country’s industrial titans. A World Bank report published in April said that 23 Russian industrial concerns — all of them controlled by oligarchs — still accounted for about 36 percent of the country’s privately generated revenue and 38 percent of total private employment. The roster includes Oleg V. Deripaska, an aluminum magnate, and Viktor Vekselberg, an oil and metals tycoon.

True, some oligarchs have taken to the road. Roman A. Abramovich, who controls the oil giant Sibneft and once pursued a merger with Yukos, has been busy spreading his $12.5 billion fortune around Western Europe. He has relocated to Britain, bought one of England’s premier soccer teams, scooped up a Swiss castle and two yachts worth more than $115 million each, and has given every appearance of wanting to convert a big chunk of his cash into hard assets before the Kremlin lays its hands on it.

Like specters from the privatization follies and machinations of yore, other Russian businessmen have rushed into the gap created when Mr. Khodorkovsky was arrested.

In May, Boris A. Berezovsky, once the dean of the oligarchs but now in self-imposed exile in London, slapped ”Free Khodorkovsky” placards atop a fleet of Mercedes-Benz limousines that snaked like a rich man’s conga line through the streets of the British capital.

And Boris Jordan, an American-born financier who created some of the earliest and most widely disputed Russian privatization plans, this month offered his own solution to Yukos’s woes: he would secure a seat on the company’s board and lead negotiations with the government. Mr. Jordan’s maneuver was pooh-poohed by analysts who observed that a Kremlin insider, Viktor V. Gerashchenko, had the Yukos board firmly in rein as its new chairman.

”It’s not viable and Gerashchenko would never let that happen,” said Padma Desai, an economics professor at the Harriman Institute at Columbia University, who met recently with Russian government officials and businessmen in Moscow. ”I think about 25 percent of the company may go into government ownership and the government clearly doesn’t want to destroy Yukos.”

YUKOS officials say the company’s financial performance, buoyed by skyrocketing oil prices, has not waned since Mr. Khodorkovsky was arrested. Last month, Yukos reported that its oil output rose 9.3 percent in the first quarter, compared with the corresponding period of 2003.

”I don’t think there has been any material impact on the bottom line,” Bruce Misamore, Yukos’s chief financial officer, said of Mr. Khodorkovsky’s absence. He added that Mr. Khodorkovsky’s managerial talents were missed, but that Yukos had a ”very strong remaining management team.”

In January, Yukos reported net income of about $3.5 billion for the nine months ended Sept. 30, 2003, an increase of 71 percent from the period a year earlier. Since January, Yukos has not publicly posted earnings that conform with American accounting standards, prompting analysts in Moscow to question exactly how the company is deploying its ample resources — especially in light of its contention that its inability to make the $3.4 billion tax payment will force it into bankruptcy.

Yukos made dividend payments of about $2 billion to its investors last year, cash that went to major shareholders like Mr. Khodorkovsky. Yukos also recently paid a bank consortium an undisclosed portion of a $2.6 billion loan, about $1.6 billion of which was guaranteed by Group Menatep, an investment vehicle controlled by Mr. Khodorkovsky and other financiers.

Group Menatep owns about 44 percent of Yukos’s shares, and the loan repayment, which tapped into cash that otherwise might have gone toward the disputed tax payments, benefited Mr. Khodorkovsky and other Yukos insiders.

”In the event that cash flows could not be properly accounted for, questions could arise as to whether or not Menatep was seeking to strip as much cash as possible from Yukos, an asset which it justifiably believes itself to be in immediate danger of losing,” Eric Kraus, a financial analyst at Sovlink Securities, said in a June research report. ”If so, the complex web of trading companies which still reportedly handles Yukos’s oil sales would provide an ideal vehicle for diversion of cash flows.”

MR. MISAMORE disputed that any cash was being drained from Yukos, describing it as ”absolutely false” speculation. Although he declined to provide details of the loan repayments to Group Menatep, he said Yukos had about $1 billion in cash reserves. He said Yukos could meet the tax payment if the government allowed it to sell some assets. But if Mr. Putin stays true to his word that he does not wish to see Yukos bankrupt, then the Russian government may wind up with a large stake in Yukos.

James Fenkner, research director at Troika Dialog, a brokerage firm in Moscow, said that the Russian government controls only about 5 percent of the country’s oil concerns. By comparison, he said, oil assets in OPEC countries are completely state-owned, as are oil interests in Mexico.

Such a small government presence in the oil industry makes Russia the exception among emerging-market economies, he said.

”This all goes back to Anatoly Chubais and the need to privatize everything immediately,” Mr. Fenkner said. ”There was an incredible concentration of wealth in a very short period of time in a society that regards itself as egalitarian. The quick-and-dirty method of privatization has had its negative ramifications.”

For Mr. Khodorkovsky, who raked in riches faster than anyone else, that has meant trading his executive suite for a cage in court.

Source: The New York Times, The Capitalist in the Cage, June 20, 2004