By Simon Pirani THE GUARDIAN, Sun, 4 Jun, 2000 published: "Menatep bought Yukos for what critics say was an absurdly low price. Khodorkovsky was robustly unapologetic. "As long as the tax regime is unjust, I will try to find a way round it."
“The bad boy of Russian business was at the Dorchester hotel in London last week for an image makeover. Multimillionaire Mikhail Khodorkovsky was in town to tell an Investing in Russia conference that his oil company, Yukos, has put its poor corporate governance record behind it, and will soon issue internationally-traded shares (level 1 ADRs).
Yukos, Russia's second-biggest oil producer returned to the Moscow stock market - which delisted it a year ago for regulatory offences - just in time for the visit.
It is not just Yukos's record, or the spectacular crash in 1998 of Khodorkovsky's bank, Menatep, that have made him controversial. It is the belief, held by most Russians, that he belongs to a tiny group of 'oligarchs' who made their vast fortunes at the country's expense and wield tremendous political influence .
Khodorkovsky said he only wished the belief about political influence was true. 'It makes me weep when Boris Berezovsky [the car-sales-to-oil-to-media magnate, perceived as the most powerful oligarch] talks about this group of people having 100 per cent political influence. If we had just 10 per cent of the political influence that Berezovsky claims, we would never have allowed the government to impose the unbearable tax burden on business that it has.'
Shortly before Vladimir Putin was elected, Berezovsky claimed the oligarchs controlled Russian politics and the new President could not change that. But Khodorkovsky insists that Berezovsky is an exception: a politician-turned-businessman. The other oligarchs - such as himself, Vladimir Potanin, media mogul Vladimir Gusinsky, and banking-to-metals tycoon Mikhail Fridman - have political influence that is 'more visible than that of Western businessmen, but, unfortunately, less effective'.
He added: 'I really don't see the difference, politically, between Yukos and General Motors. Both have about 2 per cent of [their country's] GDP. Both lobby in parliament for their interests. Both propagandise in the press.'
James Fenkner, strategist at Troika Dialog, Russia's largest investment bank, agrees that the other oligarchs are 'not as omnipotent as Berezovsky', but says Khodorkovsky's wishes have an interesting habit of turning into government action. Fenkner cites as an example the appointment last year of Viktor Kaliuzhny, a former Yukos employee, as Energy Minister, and his subsequent dismissal after Khodorkovsky expressed displeasure.
Khodorkovsky's main theme on his London visit - the need to reduce the tax burden on Russian business - coincides neatly with Putin's only clearly-stated economic policy. And the oil baron concurs with the former KGB spy in the Kremlin on the latter's moves to curtail the power of Russia's regional governors.
Thirty-six-year-old Khodorkovsky's indignation at claims he has undue political influence is matched by his anger at suggestions that his wealth was ill-gotten. 'If a young American built a $30 million company in the space of three years, he would be applauded. If a young Russian does it, people say he could not have done without the help of the Communist Party.'
Those three years of Khodorkovsky's early success were also the last three of the Soviet Union. He started in business in 1987, as a 23-year-old student at the Moscow Chemical Technology Institute and a member of the Communist youth organisation.
Khodorkovsky founded Menatep bank in 1989 and it grew rapidly, sprouting Rosprom, an investment company managing more than 100 industrial enterprises. By 1995, Menatep was well positioned to take advantage of the notorious loans-for-shares scheme, under which banks that lent money to the cash-strapped government got state assets at bargain prices in return.
International opinion held that state property was plundered. An International Monetary Fund analysis reckoned the oil assets went for less than one-tenth of their value. An analysis by two World Bank officials said favoured banks used state cash to fund bids, and concluded that 'any one of the major oil companies sold via a transparent, international tender would have yielded far more revenue than all the loans-for-shares auctions combined'.
Menatep bought Yukos for what critics say was an absurdly low price. Khodorkovsky said: 'Yes, the price was low - $400m - but I was taking on $3 billion of debt. In east Germany they sold such companies for $1.'
Under Khodorkovsky, Yukos pioneered the controversial transfer pricing system, under which his Moscow-based holding company buys oil from its production subsidiaries at fabulous discounts - currently $1.50 a barrel, a twentieth of the world price and a fifth of the domestic price - and resells it. This concentrates wealth in the holding company, weakens minority shareholders, and avoids tax.
Khodorkovsky was robustly unapologetic. ' As long as the tax regime is unjust, I will try to find a way round it.'
His worst problems stemmed from the Russian financial crash of 1998; Yukos kept up payments on $1bn of international loans but Menatep lost heavily on Russian treasury bonds and collapsed. Menatep defaulted on loans from three western banks - Daiwa, Standard and West Merchant - for which it had used Yukos stock as collateral.
The banks took a 31.9 per cent holding in Yukos, but then found that some of the company's assets had been transferred to offshore funds, presumed to be linked to Yukos management, on a repurchase agreement. At the same time, minority shareholdings in Yukos's production subsidiaries were being diluted.
Russia's securities regulator launched an investiga tion. Two of the three Western banks pulled out. Yukos's reputation was severely damaged.
'I sat down with representatives of the three banks and explained the situation,' said Khodorkovsky. 'I assured them that they would retain seats on the board. Unfortunately two of the three decided to sell their holdings.'
The banks that withdrew did so under the pressure of 'propaganda' by Kenneth Dart, the US investor who fought a legal battle over his rights as a shareholder in Yukos subsidiaries, Khodorkovsky believes. He pointed out: 'The company that I head, Yukos, takes its responsibilities. It has never failed to pay its debts and never diluted shareholders. At my own insistence, as a major shareholder, Yukos is committed to paying off all of Menatep's creditors.'
While Yukos's victories in the courts implied that it had not broken the law, 'it has cer tainly violated shareholders' rights,' Fenkner of Troika said. 'There is a credibility gap. Of all the corporate governance abuses in Russia in 1999 - and there were plenty -Yukos probably provided the best example.'
Fenkner acknowledges that the fabulous potential of Yukos's assets may convince Western institutions to give Khodorkovsky the benefit of the doubt. And Khodorkovsky is sure that once the tax burden on Yukos is reduced and its finances improve as a result, he will attract investors to fund expansion.
He could not have chosen a better place than London to relaunch himself. The authoritarian gravedigger of human rights in Chechnya, Vladimir Putin, used a visit to Tony Blair in April to make himself appear dignified and statesmanlike. Building trust in a shrewd and eloquent young oil baron should be a comparatively simple task.” - notes The Guardian in the article “Oligarch? No, I'm just an oil magnate...”
