Putin vs. the Jailed Tycoon: Defining Russia's New Rules

Putin vs. the Jailed Tycoon: Defining Russia's New Rules

By Timothy L. O'Brien and Erin E. Arvedlund, The New York Times, Jan. 2, 2004 published: ''It's very strange that someone with that kind of background starts preaching sainthood,'' said Boris G. Fyodorov, co-founder of a Moscow investment bank and a former deputy prime minister. ''First, you should sell your interests in business and then preach. You don't become a billionaire in three years just by being bright.''

"The collision between Russia's most powerful politician, President Vladimir V. Putin, and its richest businessman, Mikhail B. Khodorkovsky, had been brewing for months when Mr. Khodorkovsky took the step that more than any other landed him in prison -- trying to sell a major stake in his oil company, Yukos, to ExxonMobil.

As recounted by associates and analysts, Mr. Khodorkovsky failed to consult the Kremlin adequately about a deal that would cede substantial control over a strategic Russian resource to a foreign company, and an American one at that.

It was no small matter to the Kremlin. Russia's oil boom has enhanced Mr. Putin's standing, underpinning his program for economic stability. Moreover, Russian oil has given the Kremlin crucial diplomatic and economic leverage with an America eager to develop oil supplies outside the Middle East, leverage Mr. Putin is unwilling to cede.

Mr. Khodorkovsky's pursuit of an ExxonMobil deal, said a senior Russian official who requested anonymity, was a ''catalyzing event'' for the Kremlin.

The tycoon's trial, which the government is no hurry to begin, is likely to open a Pandora's box of issues from the 1990's, when the Kremlin, businessmen, organized crime and huge sums of money intersected in the race to privatize Russia's economy.

In February, Mr. Putin had summoned Mr. Khodorkovsky and other tycoons who made financial killings in the early post-Soviet years to a meeting, telling them he wanted to eliminate ''the very foundation of corruption,'' by establishing ''a civilized partnership between business and state.''

His message was clear: businessmen had to follow new rules, rules that included economic order and a respect for government power.

Mr. Khodorkovsky failed to heed that message and his arrest in October on murky fraud charges has set off an international debate about Russia's economic and political course. The case also has renewed questions about civil rights in a country led by a former K.G.B. official intent on redefining the government's relations with an elite class of business owners who are known as oligarchs.

Yukos has routinely represented the showdown in political terms, emphasizing Mr. Khodorkovsky's politicking as a threat to Kremlin hegemony. Yet many analysts say the conflict really revolves around economic control in a country still struggling for its post-Soviet identity.

''To the extent that the media debate focuses on politics, Yukos will be quite happy with that,'' said Stephen M. Kotkin, head of the Russian Studies Program at Princeton University. ''Because I think a lot of this is about money and the future economic direction of the country.''

Mr. Khodorkovsky's legal team has a different perspective, and trial date will hinge in part on how quickly they can digest 45,000 pages of evidence and criminal accusations that they vehemently dispute.

''Start with the proposition that it's a politically motivated prosecution,'' said John Pappalardo, an American lawyer representing Mr. Khodorkovsky. ''He's in jail because he had the temerity to challenge the existing Russian government.''

Mr. Khodorkovsky's ''sins are political, they are not economic,'' Mr. Pappalardo added.

A Rapid Rise

Mr. Khodorkovsky built his oil fortune on Kremlin connections, smarts and cold-blooded determination, beginning with his purchase of Yukos from the state in a controversial auction in 1995 -- all during a time when Mr. Putin toiled in relative obscurity as a nondescript government aide in St. Petersburg.

Mr. Khodorkovsky often ran roughshod over investors and competitors, but later spruced up Yukos's operations and books, endearing him to bankers and to foreign companies interested in Russian oil. Yukos extracted oil at a much headier pace than some competitors, exploiting a surge in global oil prices that turned Mr. Khodorkovsky into a billionaire in a few years.

He then began confronting Mr. Putin, newly installed as Russia's president, more directly and persistently. He spoke out on political matters and spent mightily on public relations efforts in the West to burnish his image as a reformer -- moves that drew the ire of Mr. Putin and others.

''It's very strange that someone with that kind of background starts preaching sainthood,'' said Boris G. Fyodorov, co-founder of a Moscow investment bank and a former deputy prime minister. ''First, you should sell your interests in business and then preach. You don't become a billionaire in three years just by being bright.''

Mr. Khodorkovsky pursued his oil interests single-mindedly. In April, he announced a merger agreement with Sibneft, another major Russian oil company, which would have made Yukos the largest company in Russia and an even more powerful force in Mr. Putin's universe.

At about that time, Russian intelligence and law enforcement agencies stepped up their investigations of Mr. Khodorkovsky's finances, but he did not retreat.

Unlike Mr. Putin, he aligned himself publicly with American policy goals in Iraq. He also independently pursued an agreement with the Chinese to build an oil pipeline to China, even though the Kremlin had vetoed a Chinese effort to buy a Russian energy concern last year.

In written responses to questions, Yukos initially contested that oil or the Chinese pipeline led to the clash.

''Mr. Khodorkovsky has never indicated that he thought the current situation had anything to do with oil policy issues,'' wrote Hugo Erikssen, a Yukos spokesman. ''Decisions on whether or not to build pipelines are taken by the government.''

Meanwhile, Yukos spread its financial support among a variety of political parties that promoted the company's business interests. The objective, said a recent report by a local brokerage firm, Sovlink Securities, was to increase Yukos's parliamentary influence and force Mr. Putin ''to negotiate with them on an equal-to-equal basis.''

Mr. Khodorkovsky also pursued the sale of his Yukos shares to ExxonMobil. Russia opened the door to foreign investment in February when, with full Kremlin assent, British Petroleum acquired 50 percent of a Russian oil concern, TNK. But political analysts say Mr. Putin had a more jaundiced view of international mergers when it came to Mr. Khodorkovsky.

Yukos declined to comment directly on the ExxonMobil talks. But Mr. Erikssen noted in an e-mail message that in ''Russia, any big deal (like the sale of a stake in an oil company to a foreign entity) is supposed to need political support and everybody works on that assumption.''

But Mr. Putin appears to have felt that there was little Kremlin involvement in the putative deal.

''We favor foreign capital involvement in Russia's economy,'' Mr. Putin told The New York Times in an interview on Oct. 4. ''As regards purchasing part of the Yukos company, again this is a corporate matter, but once again we are talking about a possible major deal here, and I think it would be the right thing to do to have preliminary consultations with the Russian government.''

Three weeks later, government security agents arrested Mr. Khodorkovsky and hauled him off to jail.

The Accusations

Mr. Khodorkovsky's financial maneuvers, not his political dealings, lie at the heart of the criminal accusations against him. Mr. Khodorkovsky's lawyers say they cannot address the financial accusations specifically, because the case appears to have broadened substantially and because the process is skewed against them. Instead, they have circulated an outline of the human rights and legal abuses they say have been directed at Mr. Khodorkovsky and two business associates.

An analysis of some of the accusations offers a window onto privatizations of the 1990's that enriched a few tycoons who were willing to exploit Soviet-era laws or maneuver in ill-defined areas. Mr. Fyodorov, the former deputy prime minister, said, ''99.9 percent of the business class in Russia never did anything as scandalous as what the oligarchs did.''

Russian prosecutors say that in 1994 Mr. Khodorkovsky fraudulently obtained Apatit, a government-owned company that was one of the world's leading producers of fertilizer. Only four bidders competed for a 20 percent stake in the company and all were fronts for Mr. Khodorkovsky, prosecutors say. The highest bidder made a $1 billion offer but then dropped out. The sale went to the lowest bidder, say prosecutors, with an offer of only $283 million in cash and investments.

Prosecutors say Mr. Khodorkovsky sold Apatit products to his own offshore companies at low prices from 2000 to 2002. They later resold it at full price, escaping considerable Russian taxes -- a common practice in privatization's heyday known as transfer pricing. Prosecutors say the moves cut profits by roughly $200 million. But in a country with complex tax rates imposed by corrupt officials, evading taxes was a common practice.

Yet another accusation carries more weight with Moscow's business community. Prosecutors say Mr. Khodorkovsky and his colleagues simply decided not to pay the bulk of their $283 million purchase price once they got their hands on the Apatit stake and asserted control over the company.

''Maybe everybody did transfer pricing, but not everyone bought companies and didn't pay for them,'' said William Browder, a veteran money manager in Moscow. ''There's a whole order of magnitude between them.''

While some members of Mr. Khodorkovsky's camp acknowledge that the bid was never paid, they argue that the Apatit auction entailed bribes and perks for regional bureaucrats -- and that had Mr. Khodorkovsky paid the full sum, it would have been siphoned out of Apatit before he took control.

They also say the Russian authorities already reached an accord with Mr. Khodorkovsky and others last year on the Apatit sale, requiring one of Mr. Khodorkovsky's companies to pay about $15 million to settle earlier civil charges invalidating the sale.

Mr. Khodorkovsky and another Yukos executive are also accused of cheating the state out of $556 million in taxes from 1999 to 2000. But illegality may be difficult to demonstrate, since many regions in post-Soviet Russia offered robust tax breaks to attract investors. Companies put their headquarters in those zones to take advantage of the concessions.

''On behalf of Mr. Khodorkovsky, we look forward to an open trial and the opportunity that will afford to address these allegations,'' said Mr. Pappalardo, his lawyer.

Battle Lines Are Drawn

If convicted, Mr. Khodorkovsky faces up to 10 years in prison. He may lose his Yukos stake, setting a precedent for state seizure of property in the post-Soviet era. Meanwhile, the arrest of one of the boldest and most defiant oligarchs has cowed his peers into a newfound respect for Mr. Putin.

''Business, by definition, cannot be in opposition to the authorities,'' the metals tycoon Vladimir O. Potanin said.

''I am not worried that Putin himself will start attacking other oligarchs, but I am worried that either my competitors or some overzealous bureaucrat will start a provocation,'' Mr. Potanin said. ''Russia is like a dry forest on a hot day. One match and a gust of wind are enough to set it ablaze.''

Although Yukos officials repeatedly portrayed the battle between Mr. Khodorkovsky and Mr. Putin as revolving around political reform, a senior Yukos official recently reversed the company line and acknowledged that the primary reason for the dispute was economic.

For his part, Mr. Putin has promised there will be no return to the economic past or an unraveling of the privatization process. But some of his statements continue to rattle Moscow's business community.

''Yes, laws were complex and intricate, but it was quite possible to respect them,'' Mr. Putin said in a speech to businessmen on Dec. 23. ''Those who wanted to respect them did so. Those who were involved in deliberate fraud put themselves in more favorable conditions than those who played by the rules. The latter may not have earned so much money, but they now sleep well.''

Mr. Khodorkovsky's case is nominally supervised by the Russian prosecutor general's office. But it is commonly assumed in Moscow that the Federal Security Bureau, the successor to the Soviet Union's K.G.B, is overseeing the case. In an interview, Sergei Ignatchenko, an F.S.B. spokesman, said his agency had only assisted in the inquiry at the prosecutor general's request. The prosecutor general's office declined an interview request.

Mr. Putin's defenders say he is righting an unwieldy ship of state and a corrupt business class in the name of stability. ''Putin's aim is to build a prosperous, respected Russia on the basis of democratic institutions (albeit managed!), the rule of law, and a market economy,'' wrote Bernard Sucher, an executive with Alfa Bank, a local investment house, in a recent note to clients.

Others are more wary.

''What is order in the economy?'' asked Sergei Buntman, co-founder of Ekho Moskvy, a radio station. ''Perhaps they're quite sincere in the reforms, but perhaps they don't have a clear image of democracy.” – notes The New York Times in the article “Putin vs. the Jailed Tycoon: Defining Russia's New Rules

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