Oligarchic Capitalism in Putin's Russia: The Khodorkovsky Case

I "told Human Rights Watch that [Mikhail] Khodorkovsky is not Sakharov," stated David Hoffman, Foreign Editor, The Washington Post, at a 27 January 2004 seminar. "After that I told the Carnegie Endowment that [he] is neither Rockefeller nor Carnegie. The question of who Khodorkovsky is and what he has done is important for what it tells us about Russia today and Putin."

In response to one of his first stories on the oligarchs filed from Moscow, Hoffman was asked whether one of the oligarchs was a capitalist or a criminal. Hoffman replied, "what are capitalists in a land that has been hostile to the very idea for more than seven decades? And what are criminals in a state completely without the rule of law?" Post-Soviet Russia was such a place. While there was plenty of theft, Hoffman said, the oligarchs who emerged did more than hustle or steal, they built empires and tried to steal the very state.

Hoffman stated that the roots of Russian capitalism are in Gorbachev's perestroika reforms in the late 1980s, which were in part an attempt to legitimize self-interest to foster efficiency. Khodorkovsky seized on the idea of exploiting a loophole granted to Komsomol (Young Communist League) organizations that enabled them to convert purely administrative currency units (beznalichny rubles) into cash (nalichny rubles). The cash reserves he accumulated through this practice enabled him to take advantage of the collapse of the Soviet Union.

Russia's early economic reforms were crafted to reduce the state's role in the economy as quickly as possible and to create a class of capitalists who would support continued economic reform. Khodorkovsky, with his cash reserves from before the collapse, was among those early capitalists to benefit from the privatization of government functions and assets. His bank, Menatep, was among a limited few that were authorized to handle government funds for payment of salaries and contracts. Hoffman described how Menatep, along with other Russian banks, would hold on to government funds for months at a time in order to speculate on exchange rates and other investments, enriching the bank's owners at the expense of the designated recipients of the government funds.

During this period billions of dollars fled Russia to offshore tax havens, but Khodorkovsky took a risk by buying up privatization vouchers and acquiring Russian companies, Hoffman said. Khodorkovsky also acquired companies through "investment tenders," which were organized to sell off remaining state shares in enterprises in return for pledges to invest significant funds. Investment tenders were followed by an even more infamous "give-away" of Russian state assets to select business elites—the loans-for-shares program, which introduced the term "oligarch" to describe the handful of beneficiaries. Hoffman noted that in the loans-for-shares auctions, the auctioneers were often the same as the bidders—the auctions were rigged and the state knew it.

It was during this period, Hoffman stated, that Khodorkovsky acquired the Yukos oil company for about $300 million through a rigged auction. Khodorkovsky subsequently went on a campaign to raise investment funds abroad, borrowing hundreds of millions. When the 1998 financial crisis struck Russia, Khodorkovsky defaulted on some of his foreign debt and took his Yukos shares offshore to protect them from creditors.
With shares of Yukos trading at near zero, Khodorkovsky was faced with the choice of living off the oil exports of his company or launching a reform effort to increase the value of his personal holdings. He chose the latter. By reforming his company to adopt western accounting principles, respect minority shareholders, and pay dividends, he slowly rebuilt his reputation and as a result—with the help of high oil prices—drove up Yukos' share prices. In 2002, Yukos reached a market capitalization of $23 billion.

In 2003, Khodorkovsky seemed poised to take his company to even greater heights. He was wrapping up negotiations to merge with Sibneft, another large Russian oil company, and was seeking to sell a minority stake in Yukos to a Western firm for billions. However, Hoffman stated, he came into conflict with the Kremlin by supporting opposition parties, hinting at a desire to go into politics, and advocating private pipeline routes. In October, he was arrested on charges related to an investment tender of a fertilizer company in 1994, a case that had already been litigated and for which Khodorkovsky paid a fine of $15 million, according to Hoffman.

Hoffman argued that Khodorkovsky's arrest halted the evolutionary process of self-reform in Russian business, and that "the real danger of where we are today is that it could be aborted altogether." "What is really happening here," Hoffman continued, "is that Vladimir Putin is trying to extinguish competition, and competition is the oxygen for democracy and capitalism." Hoffman stressed that is important for the West to continue to engage Russia during this period of difficulty, but "we have to speak the truth to Putin about our values."