The Yukos Saga’s Comeback Kids

Russian-Israeli magnate Leonid Nevzlin gives Haaretz his take on the freed Mikhail Khodorkovsky — and Vladimir Putin’s limping economy.

Dmitry Beliakov / Bloomberg News

It has been one of the darkest — and most complicated — affairs in Vladimir Putin’s Russia. It began with the president’s steps to take back assets for Mother Russia that had been handed out in a privatization wave — valuable assets sold for peanuts to a new generation of crony capitalists, the “oligarchs.”

In the 1990s, young billionaires flourished, creating a whole new culture of wealth and ostentation. A business dispute between the state and a company might seem a modest event, but the Yukos affair was a watershed for Russia that arguably led straight to the downing of Malaysia Airlines Flight 17 over Ukraine.

The reversal began suddenly. On October 25, 2003, Russian authorities arrested the richest man in Russia, Mikhail Khodorkovsky, owner of the now-defunct Yukos oil company. In a day this symbol of post-Soviet capitalism became a prisoner accused of fraud.  Khodorkovsky’s trial, which he and his business partner Platon Lebedev spent in a cage in the courtroom, was the opening shot in the renationalization and collapse of Yukos, Russia’s largest oil company.

Dozens of people affiliated with Yukos were arrested. Others fled. The charges ranged from tax evasion to fraud and even murder, which were countered by accusations of political persecution. World business, especially the global energy market, shuddered.

On July 28, 11 years after Yukos’ assets were frozen, a court in The Hague ruled that Russia must pay former Yukos shareholders more than $50 billion, about half the company’s value according to the shareholders. Three days later the European Court of Human Rights in Strasbourg awarded Yukos shareholders 1.9 billion euros in damages.

Russia is of course appealing both rulings, and pundits say stockholders will be lucky to get a fraction of the money. The normal course of action would be to freeze Russia’s assets overseas, but the road from there to money changing hands is long — if the road has an end at all.

Khodorkovsky, whom Putin released from prison after 10 years as a gesture ahead of the Sochi Olympics, can claim victory. From his residence in Switzerland he said he isn’t entitled to any of the compensation because he transferred his Yukos stake to Leonid Nevzlin — his former partner who fled Russia — to protect the company when it was sued by the government. Nevzlin, now an Israeli citizen, owns slightly more than 70 percent of GML, a holding company that had owned 60 percent of Yukos.

Nevzlin today is a philanthropist and owner of 20 percent of Haaretz Group, which publishes Haaretz and TheMarker. The Financial Times coined Nevzlin the big winner of the ruling in The Hague.

Mission: Bankrupt Yukos

Speaking with Haaretz by phone, Nevzlin said he did believe the money would be paid, based on former cases that Russia lost, and the sums then were smaller. Moscow would have difficulty paying $50 billion, Nevzlin said; it all depends on whether Putin sees himself as part of the West. If he doesn’t want to fight with the West, he’ll pay. Neither Putin nor Russia are predictable, Nevzlin added.

In the ruling, the court wrote that Yukos had been “the object of a series of politically motivated attacks by the Russian authorities that eventually led to its destruction.” The company’s expropriation and liquidation were described as a political campaign designed to neutralize Khodorkovsky, who in the preceding months had started to look like a rival to Putin.

Russia helped itself to Yukos’ assets and thereby to the assets of its shareholders. “The primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets,” the court wrote.

The court did not spare Yukos, which it said had played an aggressive game with its tax reporting and could have faced legitimate charges regarding certain “fraud-like” activity. But the government took advantage of that weakness to cause Yukos to collapse, take its assets and chase Khodorkovsky from the political arena, the court wrote.

Khodorkovsky knew he was in Putin’s sights but stayed in Russia. “He’s a proud Russian,” Nevzlin says. “He was thinking about his country and that he has as much a right as Putin to be a Russian citizen.”

Of course, Khodorkovsky was no idiot; he knew he’d be arrested but didn’t want to flee, Nevzlin says. Nor did he try negotiations as others did before him, effectively paying a ransom in the form of assets in exchange for  freedom. Putin knew Khodorkovsky would proudly stick it out, says Nevzlin.

Learning in the Komsomol

Khodorkovsky, whose retired engineer father is Jewish, is 51. He studied chemical engineering and at university served as deputy secretary of the local Komsomol – the Young Communist League. The Komsomol was allowed to convert scrip that was transferred between Soviet companies into cash. In his book “The Oligarchs,” David Hoffman says this was the start of Khodorkovsky’s business career.

During the 1980s Khodorkovsky, Nevzlin, Lebedev, Mikhail Brudno and Vladimir Dubov built a technological-scientific center to encourage entrepreneurship. Upon its success, the five expanded to importing and marketing computers, alcoholic beverages and other things.

With their profits, in the early 1990s they founded one of the first private banks in the new Russia, investment bank Menatep. Khodorkovsky’s ties in the Communist Party and wealth propelled him onto the political scene. In 1993 he was named deputy minister of fuel and energy.

According to Susan Glasser and Peter Baker, authors of “Kremlin Rising: Vladimir Putin’s Russia and the End of Revolution,” Khodorkovsky’s ties with Boris Yeltsin’s government gave him access to state assets when Russia began to sell them to pay off debts. In 1995 and 1996, Menatep bought up Yukos shares, spending $350 million.

The Wild East

During its privatization era, Russia came to be dubbed the Wild East as national assets, notably natural resources that would soar in value as globalization accelerated, were bought on the cheap by the new young cadre of entrepreneurs.

The period has come to be associated with dark deals, violence and corruption, and many of its biggest winners have themselves become victims. This includes Boris Berezovsky, who died last year, after a stunning defeat in court and the loss of almost all his assets. Another is Vladimir Gusinsky, a media baron (and former Maariv investor) who had to flee persecution in Russia.

In 1998, amid the Russian financial crisis, Lee Wolosky, a lawyer representing American investor Kenneth Dart, told Foreign Affairs and The New York Times that Khodorkovsky had behaved thuggishly in trying to elbow Dart out of the company. Wolosky accused Khodorkovsky of stripping assets from Yukos and even commissioning two murders.

Yet Yukos entered the 21st century as a company whose owners were trying to give it Western standards of transparency and integrity. By 2000 it was Russia’s most transparent firm, Thor Halvorssen, head of the Human Rights Foundation, told Business Insider. It imported Western managers, adopted Western accounting standards and turned its management culture westward.

Between 1995 and 2003, Yukos doubled its oil production by upgrading its technology. Khodorkovsky was crowned the richest man in Russia with a fortune estimated at $15 billion. He was credited with changing the Russian financial world at the expense of well-connected businessmen who were furious at his ties with foreign companies — and his intention to sell a chunk of Yukos to a Western firm.

Khodorkovsky’s ambitions didn’t end with business. He donated large sums to political parties, including to Putin’s United Russia. According to Glasser and Baker, Khodorkovsky aspired to introduce a parliamentary system to Russia, in which the prime minister would lead. The president would be ceremonial.

This intervention was clear in a meeting at the Kremlin in February 2003. Khodorkovsky complained about the sale of a small oil company to Rosneft, the government oil company. Putin went on alert. He grilled Khodorkovsky about Yukos and how it had attained its assets. The other oligarchs at the meeting went pale.

All knew that Khodorkovsky was financing the opposition and could be a worthy rival to Putin at some point or other. Igor Sechin, deputy prime minister at the time and a Putin associate who particularly loathed Khodorkovsky, wanted to nationalize Yukos. In time he would be appointed CEO of Rosneft, which would receive Yukos’ expropriated assets.

By that autumn, Khodorkovsky knew he was in Putin’s sights. His partner Lebedev had been arrested in July over the allegedly illegal acquisition of a government fertilizer company in 1994. Following his arrest, an investigation began into Yukos on suspicion of fraud and tax evasion.

On the morning of October 25, 2003,  Khodorkovsky boarded a private plane in Novosibirsk, intending to fly to Moscow. Armed, masked security agents surrounded him and led him in handcuffs onto another plane, which flew him to Moscow, to prison.

His arrest prompted a fall in the ruble and in Russian shares. Trading on the Moscow Stock Exchange was halted and Yukos’ assets were frozen.

Putin’s Egyptian gambit

In 2005, Khodorkovsky and Lebedev were found guilty of fraud and tax evasion. The prosecution charged that Yukos had stolen $1 billion from the state. That year, Khodorkovsky transferred his Menatep holdings to Nevzlin, who meanwhile had become an Israeli citizen. The verdict, 662 pages long, was read out over two weeks. Khodorkovsky was sentenced to nine years. A second trial began against the two in 2007. In 2011 they were convicted of money laundering and embezzlement.

Meanwhile, Amnesty declared Khodorkovsky a prisoner of conscience. There can “no longer be any doubt that their second trial was deeply flawed and politically motivated,” wrote Nicola Duckworth, Amnesty International’s director for Europe and Central Asia, in a press release in 2011.

The claim that Khodorkovsky was imprisoned in order to snatch Yukos won credibility in December 2004. Rosneft bought 100 percent of Baikalfinansgrup, which that week had won a tender to buy Yukos’ main division. The move was tantamount to nationalizing the Yuganskneftegaz division, which produced 11 percent of Russia’s oil. The deal made Rosneft one of the biggest oil companies in the country.

The mysterious Baikalfinansgrup acquired 76.8 percent of the shares in Yuganskneftegaz for 260.75 billion rubles ($9.3 billion). The sale was sealed in hours, flouting a temporary injunction from a U.S. bankruptcy court prohibiting the public auction.

Baikalfinansgrup was a front company for Gazprom, Russia’s biggest gas firm and a government company. Baikalfinansgrup made a bid and raised it, even though there were no counterbids. In 2007 Russia declared Yukos bankrupt.

A decade ago, the group of Menatep shareholders, GML, started legal proceedings against Russia in a Dutch-based court. Nevzlin says it took years to establish the jurisdiction, then the parties spent five more years in pretrial proceedings.

“The trial began in November 2012. Some of us were called as witnesses, including me and Dubov,” Nevzlin says. They were told a ruling would be made soon but it took a year and a half. GML’s legal fees reached the tens of millions of dollars, Nevzlin adds.

He also found himself charged with murder and white-collar crimes. Sitting on a Russian extradition request, the Israeli Supreme Court ruled that the evidence was insufficient. Human rights groups claimed political persecution.

In an interview in 2008, Nevzlin said he was in danger. Six years later he admits that as a father he was very frightened at the time — but if anything he feels himself a target now even more. It’s common knowledge that he’s the main beneficiary in GML.

On the other hand, he says he hopes he’s in the clear. Who could have guessed back in 2003 that war would break out in Ukraine and Putin would respond so belligerently. It’s frightening not only for him and his children, but for the entire Western world, Nevzlin says. Sechin, Khodorkovsky’s old rival, told Russian television after the verdict that Nevzlin would need to watch out.

Superpower dreams

In a 2010 survey, 63 percent of Russians said nationalizing Yukos had been in the interests of a small group of government and business insiders. While in prison, Khodorkovsky was attacked. Later his assailant said he had been tortured and forced to make the attack.

Former Yukos managers and shareholders have launched legal proceedings around the world to regain their assets; so far they’ve received $485 million. Income from assets that were sold, totaling $1.2 billion, will be divided among the shareholders.

Putin’s ambitions expanded over the years, says Nevzlin. First he seized businesses, not just Yukos. Then he decided to annex territories such as Crimea. The opposition and sanctions were feeble, so Putin helped himself; Nevzlin mentions Abkhazia, which was separated from Georgia after the Russian invasion.

Then came the Olympics, which brought in people from everywhere and granted legitimacy to an event just a few dozen kilometers from Georgia – for which Nevzlin blames the West, including Barack Obama and Angela Merkel. Putin figured he could get away with anything, Nevzlin says.

Putin is trying to position himself as a strong leader for a nation that could become a superpower again. But  Russia’s economy has been destroyed and people are being driven by Putin’s propaganda, Nezvlin adds.

Russia has become completely dependent on the price of gas and oil that it sells to Europe. Its army is in deplorable condition after being neglected for years. Putin is playing like he heads a superpower, but he’s making mistake after mistake, Nevzlin says.

The Russian-Israeli has no suggestions for healing the Russian economy. Russian industry isn’t high-tech, it isn’t a knowledge economy. It’s an outdated one based on the sale of raw materials. Putin’s projects will lose money for 15 years, Nevzlin says.

“Politically, Putin can play the game,” he says. But the Western world is led by America and Germany-led Europe — and Japan and Australia too.  Against this stands the East with its giant companies and cheap manpower.

These two worlds have ties and Nevzlin sees no place for Russia in that new world. He thinks speculation that Russia will ally with China is inane. Russia needs to invest in knowledge, post-industrial economics, electronics and programming to be part of the Western world.

It’s a country of smart people, physicists and mathematicians, with highly developed universities for science. They’re not using these resources, and it’s Russia’s loss, Nevzlin says — “that’s the big problem of Russia and Putin.”

Reuters
Eyal Toueg
AFP