Baron who beat the sheikhs

Baron who beat the sheikhs

The Guardian, December 15, 2001 published: “The chief executive of the oil group Yukos is one of a handful of oligarchs or robber barons, according to their critics, who have gained greatly in the transition from communism to capitalism”.

“Mikhail Khodorkovsky, the Russian oil tsar and driving force behind a recent stand-off with Opec members which has sent oil prices sliding, wanted to talk in the Promenade lounge of the Dorchester hotel in London. Where else? In the 1970s this temple of opulence was the meeting place for oil sheikhs eager to show off their new-found wealth.

Now Khodorkovsky is signalling Russia's power and confidence, in London this week to launch an Open Russia Foundation at Somerset House. The 10m charitable fund aims to build cooperation between Russia and the west; Lord Rothschild and Henry Kissinger have joined the board - just the kind of men Khodorkovsky is keen to be associated with.

The chief executive of the oil group Yukos is one of a handful of oligarchs or robber barons, according to their critics, who have gained greatly in the transition from communism to capitalism.

He has also benefited from a two-year run of sky-high crude prices, endangered until recently by Russia's refusal to play ball with Opec. Moscow has agreed to slice 150,000 barrels a day off its exports, but industry experts see it as a political manoeuvre to enable Opec to save face.

Domestic assets
Khodorkovsky says he remains opposed to cuts. Industry watchers say output drops in the first quarter because of the Siberian winter so Russia is not promising anything that would not happen anyway. Meanwhile, Opec remains undecided whether non-cartel members have done enough to justify its going ahead with curbs to its production and oil prices remain at $18 a barrel, a far cry from the $30 they reached earlier this year.

Even in the grandeur of the Dorchester tea room, there is little flashy or ostentatious about Mr Khodorkovsky in his sober dark suit and white shirt. Nor is there a bodyguard to be seen. The 38-year-old executive is escorted by a press officer and interpreter but his own solid build suggests he can look after himself.

Is he uncomfortable about being so affluent in a country where poverty is widespread? "A wealthy person is not very comfortable in Russia, although where I live in Moscow public attitudes are much more liberal than anywhere else in the country. In Europe also, the wealthy are not loved: the situation is different in the US. There people are not envious of the rich; they just want to become wealthy themselves."

He has a large house, but says lots of children to help fill it up. He lists his other domestic assets: a BMW saloon and his wife's four-wheel drive plus a family minivan.

The greater part of my money is in shares, mainly Russian companies, especially the ones I am involved with. I have some money in the bank and primarily, once again, it is in Russia.

Khodorkovsky boasts that he was the first Russian to obtain agreement from the local authorities to open a bank account abroad. "When I first asked they did not know how to respond," he laughs.

He was not always a capitalist. He began his career in 1987 after graduating from the Moscow Institute for Chemistry and Technology as deputy head of the Komsomol (Young Communist League) department of the capital's Frunze district.

He went on to become director of the centre for scientific and technical creative work of young people (NTTM), which was used to help found the first private commercial bank in the then Soviet Union.

By 1990 the Innovation bank, as it was called, had bought NTTM and changed its name to Menatep-invest. Khodorkovsky briefly served as a deputy Russian fuel and energy minister and by 1997 Menatep had captured an 85% stake in Yukos and 54% of Eastern Oil.

The exact way in which Khodorkovsky, the son of two factory workers, became so powerful and wealthy is unclear. He had some famous rows with foreign investors over corporate governance but has since become a favourite with many western finance houses.

He does not deny a chequered past. "We started out as robber barons, but you have got to understand that rules were hazy in those early days and we changed ourselves as we became familiar with what was expected of us."

Not the cleanest
"It is obvious now that if I was doing these things again I would do them differently. I don't think I actually violated the law but it took me some time to realise that above and beyond the law there were also ethical laws. This all might seem obvious now but in the 1990s it was not always so."

Mr Khodorkovsky said his hero, if he had one, would probably be John D Rockefeller, the founding father of Standard Oil and the American oil industry. "John D Rockefeller was not the cleanest of people, his son was a bit better and his grandson perfectly decent. It took 100 years to get from A to B and one Harvard University professor said I had got there in a few years. I possibly embrace John D, his son and grandson all wrapped up together."

Although he speaks in soft, measured tones, Khodorkovsky did not balk at pushing his government into defying Opec calls for Russia to introduce production cuts that might have hurt his oil interests. He is vehement that the Middle East cartels goal to push prices up to $25 per barrel is unrealistic and should be abandoned. "People want to see the world in black and white all the time. Opec has a target of keeping oil around $25-$28 per barrel and wants to manage that price with short-term reductions [in output]. It says: Are you with us or are you not with us?"

Actually the situation is completely different. Russia feels the volatility on the oil markets and recognises there is a need to reduce that volatility. But at the same time we don't want to hurt relations with our customers or lose market share.

Does Russia want more dialogue with non-Opec producers? Is it considering a rival cartel? "I believe Russia needs to reach agreement with all countries but its not an anti-Opec initiative. Countries such as Russia and Norway are in a similar situation and we discuss [oil price] problems with the European Union. These countries could speak with one voice but there is no need to create a permanent grouping. One should not try to control the market from one point and we could not anyway because the world resists such actions quite easily. You might push the price of oil down for a bit but then it would shoot back up again."

While Yukos and Russia concentrate on increasing oil production 500,000 extra barrels are scheduled for next year others have been worrying about the end of hydrocarbons.

Khodorkovsky is not much interested in solar or other forms of renewable energy that increasingly attract the attention of western firms. "Our society is not yet wealthy enough to start moving in that direction. We don't produce much carbon dioxide. We are not near our Kyoto [protocol target] level."

The estimated $3bn surpluses created over the past two years by Yukos, Russia's second-largest oil group, will be ploughed back into oil and gas developments. A small part has already been spent buying a 22% stake in Kvaerner.

Yukos's easy access to cash following its latest annual profits of $3.3bn has helped it fast-forward a deal to purchase two of Kvaerner's subsidiaries, both with sizeable operations in Britain.

The Yukos connection with Kvaerner came after the early 1990s when post-Soviet economic turmoil left Khodorkovsky limping behind the west. "Between 1992 and 1999 the Russian oil industry did not see any capital investment, so parts of it were lost. They were not up to speed, like a journalist who has not written an article for a long time. That is why we contacted [US oil services group) Schlumberger to help with new wells."

This year it did a similar deal with Kvaerner and says it took the equity holding in the Oslo-based group to cement its joint ventures with the company. Through buying the two Kvaerner subsidiaries it has about 400 staff in Britain, with offices in London, Aberdeen and Stockton-on-Tees. It wants to revive the famous engineering brand John Brown, which was borne by one of the companies before it was bought by Trafalgar House and then Kvaerner.

Could more Yukos investment money end up in Britain? There is a small unit here looking for worldwide upstream opportunities and Khodorkovsky said a trading arm would soon be established. As for forming an investment group similar to the one set up by Sibneft to ensure greater financial transparency, forget it.

The company had moved far from the dark days when it battled with US investors over corporate governance. "We now have 70 PricewaterhouseCoopers employees working at Yukos all the time and they are in charge of auditing. After we dealt with the problems of [US investor] Mr Dart in 1999 no one has been accusing us of not being transparent with investors."

There will be foreign expansion in the years to come but hostile takeovers are pretty much ruled out. For us the upstream focus will be on a small number of countries and we would naturally want to work with a partner. But the opportunities would have to be at least as attractive as Europe. Downstream we would concentrate on eastern and central Europe.

Khodorkovsky says he does not know how to relax. He is standing up to leave, not having got round to ordering a cup of tea. His view on what takes someone to the top of business? "You need to be a bit of a fanatic."

The CV

Born: June 26, 1963

Education: Moscow Institute for Chemistry and Technology; Moscow Plekhanov Institute of Economics

Career: Deputy head of the Komsomol department of Frunze district in Moscow (1987). Director of the centre for scientific and technical creative work for young people (NTTM) (1987-1989). Founded first private commercial bank in Soviet Union, Innovation bank for scientific and technical progress (1988). Innovation bought NTTM and bank changed name to Menatep (1990). Deputy fuel and energy minister (1993). Menatep bought 85% stake in Yukos and 54% stake in Eastern Oil (1997).

Family: Married with four children

Interests: Reading science fiction, particularly books by Arthur C Clarke” – notes The Guardian in the article “Baron who beat the sheikhs

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