By Catherine Belton
Staff Writer
PART ONE : Khodorkovsky's High Stakes Gamble
Several weeks before Mikhail Khodorkovsky was arrested at dawn by gun-toting special forces, the oil magnate was putting the finishing touches to a deal that would have earned him up to $6 billion and, potentially, vast political power.
Documents had already been drawn up for either Chevron or ExxonMobil to buy a blocking 25 percent plus one share in the combined YukosSibneft oil major, and all that remained was last-minute haggling over the price, according to a shareholder in Khodorkovsky's Menatep empire. Khodorkovsky valued the merged company at $48 billion. Chevron had signed off on $45 billion, he said.
"Chevron had agreed to this a month before his arrest," said the shareholder, a former business partner of more than 15 years who spoke on condition of anonymity because he said he feared attracting the attention of prosecutors. "But Khodorkovsky was still trading."
Neither Chevron nor ExxonMobil has commented on its negotiations with the Yukos CEO ahead of his arrest on Oct. 25, 2003.
There was another hindrance to the deal: the Kremlin. There, officials worried about the prospect of an ambitious, politically minded businessman with $6 billion in cash free to throw at any political or economic cause he saw fit, the former business partner, a senior U.S. administration official and analysts said.
Khodorkovsky, a chemistry graduate who worked his way up in business by trading computer parts and moving into banking and then to oil, had already started openly eyeing a piece of state-controlled Gazprom, the world's biggest gas company, and was lobbying for the construction of private pipelines, moves that would have broken into the state's closely guarded monopoly on its most strategic assets.
And, he was eyeing a post as prime minister, counting on support from the political parties he backed, the business partner and other observers have said. "I was witness to discussions about this," the Menatep shareholder said. "A prime minister with a strong personality could have immense influence on the country." Other Menatep shareholders, such as Mikhail Brudno, however, deny Khodorkovsky ever considered making such a move and say his political activities were aimed only at promoting democracy and civil society.
Whatever the real threat, the Kremlin responded to it with full force.
Today, Yukos has been partially taken over by the state. The Sibneft merger and any deal with Chevron or Exxon are long dead. Khodorkovsky and his business partner Platon Lebedev await a verdict on Monday in their fraud and tax evasion trial, and most of the remaining Menatep shareholders have fled to Israel, with warrants out for their arrest.
For a man from a family of engineers living in a communal apartment who had clawed his way up to become one of the country's most powerful men, the standoff with the Kremlin could be his wildest gamble yet. His refusal to back down has led to speculation that the oligarch, once reviled for his climb to wealth as the rest of the nation tumbled into poverty, could eventually emerge from his prison cell as a national hero and even a political leader, having suffered at the hands of the regime.
Ever since the soft-spoken chemistry graduate from the Mendeleyev Institute first made his way into business, he gambled for high stakes. Carving out a path to riches in the business operations that marked the collapse of the Soviet Union, the young Khodorkovsky stood out from the rest by his meticulous planning, willingness to take on major risks and uncompromising belief that he was always right, former partners said.
"He set about his work like a maniac. The business was his life. Nothing was left to chance, and he was constantly checking every detail. He has one single passion: building an empire. People like this are unstoppable, or stoppable only by a bullet," said Christian Michel, a founder of Valmet, a Geneva-based global trust business, which agreed in early 1989 to advise Khodorkovsky's group of young businessmen. Valmet later held the key to the Group Menatep fortune, holding shares via nominee ownership schemes and organizing the transfer of vast sums of money via its network.
"I think there could be a long-term strategy behind this," Michel said. "I wonder if Khodorkovsky is not going through a crossing of the desert, so that, eventually, he can look the Russian people in the face and say that he, too, has suffered.
"I think he will re-emerge transformed. I think it is a calculated gamble. I think he is driven by a consuming passion," he said.
The New Market
At the beginning of 1989, when Michel made his first trip to Moscow to meet Khodorkovsky, the group he met in a tattered room in the Ukraina Hotel was a determined change from the Soviet bureaucrats he was used to dealing with.
"In the early days, I was doing business with the apparatchiks. Many of them were dense: physically stout and intellectually stunted. They ran huge concerns where their sole responsibility was to keep churning out the product," Michel said. "They were often coarse and heavy drinkers. ... You could not have a lot of admiration for them. They had tedious jobs.
"But suddenly on the scene, these young people appear in jeans and say they are going to change the system. It's a shock," he said.
The new breed of hustlers he met had come from the fringes of Soviet society.
Khodorkovsky's part-Jewish background meant he could not count on fulfilling his childhood dream of becoming the director of a major Soviet plant. The system pushed ethnic minorities to the side. But in the early 1980s, opportunities slowly sprang up as a black market began to flourish under the watchful eye of the KGB. Soviet leader Yury Andropov, a former KGB chief, made a conscious decision to turn a blind eye to some black-market activities.
"As a good Soviet citizen, you would not want your daughter to marry a black marketeer. So the only people that went into it were the people who had no prospects in the normal Soviet system, the ones who had hit a glass ceiling and could go no further. These were the ethnic minorities: the Georgians, the Chechens, the Jews," Michel said. "The people that had money to start up were those who had begun by selling cabbages on the back street. They became the first bankers."
"But the stigma of their origin, although legitimate, stuck," he said.
As the Soviet economy began to kilter toward bankruptcy, opportunities arose for men like Khodorkovsky. In a desperate bid to restart the economy, Soviet leader Mikhail Gorbachev took steps to legalize part of this private business by signing off on a decree to allow the creation of "cooperatives."
As the leader of a Moscow Komsomol group, Khodorkovsky was chosen to head one of the earliest forms of private business, the so-called Centers for Scientific-Technical Creativity of Youth, or NTTMs. The centers were aimed at stimulating scientific research at the nation's institutes, which had been crimped by excessively controlled budgets. Under the new system, researchers were to make a cash percentage for the first time from the sale of their research.
As the 24-year-old Khodorkovsky explained the new system in a speech at a conference for programmers at the VDNKh exhibition center in 1987, the cash-starved researchers were dazzled, recalled Brudno, who was one of the programmers in the audience. "A really young person had come there and he was telling us of unimaginable things. But he was speaking with surety. So we decided to give it a try."
Brudno took along a colleague, Leonid Nevzlin, from Zarubezhgeologiya, the Soviet foreign trade group for geological and exploration services, for a meeting with Khodorkovsky. At first, he said, they were still unsure of him. But, as they worked, they formed a lasting team. So it was too for Vladimir Dubov, another future Menatep shareholder, who, after earning cash under one of Khodorkovsky's schemes at the Institute of High Temperatures, also became a lifelong partner.
Soon, the group was inseparable and the business was sprouting into new territories. With the help of a French-speaking partner, Yelena Legostayeva, and her French husband, Philippe Buratto, the group made its way into Western computer markets and began importing parts into Russia, a lucrative business for the time. "Khodorkovsky was always moving into unchartered territory," Brudno said. "He never stopped to rest on his laurels."
The group's cash pile was rapidly mounting. By 1988, they had enough for start-up capital for a bank. Initially named the Commercial Innovative Bank for Scientific and Technical Progress, in December of that year Menatep received one of the first licenses for private commercial banking and hard-currency operations issued by the Soviet government. Soon, Khodorkovsky and his team were being granted the right to manage government accounts.
How Khodorkovsky managed to get this role and how he was chosen to handle and make so much cash is still something of a mystery. From the NTTMs to computer imports to banking, all of these activities needed licenses and approval from at least some sections of a regime that was rapidly falling apart.
The Party and the KGB
Suspicions that Khodorkovsky was given the right to run the vast treasures of the Communist Party out of the country via his new bank have now become almost legend. Brudno said the bank never knowingly managed Party funds. "It can't be ruled out that some companies that belonged somehow to the Communist Party were clients, but we were not able to identify them as such," he said, speaking by telephone from Israel.
According to Anton Surikov, an independent security expert who has known Khodorkovsky for more than 10 years, the drive to create a new class of private businessmen was partly a KGB operation from the start.
"It was impossible to work in the black market without KGB connections and without protection from the KGB," he said. "Without them, no shadow business was possible.
"There was a conscious creation of a black market," he said. "The creation of the oligarchs was a revolution engineered by the KGB, but then they lost control."
Behind the birth of this new breed of businessmen was an ideological clash between the powerful Fifth Directorate of the KGB, headed by Filipp Bobkov, and the Communist Party, Surikov said. The Fifth Directorate was in charge of fighting so-called ideological diversions and national minorities and thus was deeply immersed in these countercultures, he said.
"The KGB began to engage in ideology, too. Suddenly, there were two competing ideological centers, when before the Communist Party held a monopoly on ideology. This unavoidably led to a battle for power," he said. "The Communist Party was heading into a dead end, and the people from the Fifth Directorate saw that a new impetus was needed. This was how perestroika was started."
Even though KGB officers working outside the country were in a better position to see how Western economies differed, it was those inside the country who "were leading the rebellion," he said. "It was the Fifth Directorate and the Sixth Directorate ... to some extent that were leading the way."
The Sixth Directorate was in charge of economic security, and the Soviet-era mafia and the black marketeers were under its watch.
"The KGB really did help them, and at a certain stage, those who helped them began to work for them," he said.
In Khodorkovsky's case, he said, the patrons were Bobkov and Alexei Kondaurov, who also served as a general in the Fifth Directorate. Kondaurov left the service immediately after the October 1993 revolt and began working for Menatep as head of its analytical division, in charge of relations with law enforcement structures.
Bobkov, meanwhile, went on to head the security division for Vladimir Gusinsky, Khodorkovsky's fellow 1990s-era oligarch. Bobkov was unavailable for an interview. Kondaurov said Khodorkovsky was never an agent of the KGB, though he conceded that his future boss had made his way by doing a lot of work for state officials as the Soviet Union was collapsing. "Leaders from all levels of power, from the party nomenklatura to the red directors, were looking for people who would help them deal with the new economic realities," Kondaurov said. "Khodorkovsky and his group were these new young wolves."
Khodorkovsky himself has been extremely circumspect about his early climb. In an interview several months before his arrest, he was anxious to brush over details of those days.
Even though Valmet's Michel said Khodorkovsky was clearly well connected from the start, by the end of his rise to wealth and power, he was totally independent.
"He is very much his own man," he said. "Even if 15 years ago, as has been said, he was using Komsomol money and KGB money, and I have absolutely no evidence of that, he was indisputably the boss."
(From The Moscow Times, 5.16.2005)
PART TWO : Banking Lessons for Future Oligarchs
It was 1997 and the heyday of Russia's boom transition to capitalism. Christian Michel and Christopher Samuelson could not help but quietly gasp as they climbed the girl-lined, sweeping staircase of one of Moscow's most lavish hotels, the Metropol.
In the hall below, where rich young Russians clinked glasses to celebrate the fifth anniversary of Rossiisky Kredit Bank, were many of the victors of the asset grab that marked the collapse of the Soviet Union.
With their global trust business, Valmet, acting as a key link to the outside world for at least three rapidly growing empires -- Mikhail Khodorkovsky's Group Menatep, Boris Berezovsky's Logovaz and Vitaly Malkin's Rossiisky Kredit Bank -- Samuelson and Michel had helped make most of them.
In those days, it looked like they had good reason to congratulate each other. They had given these upcoming business barons a crash course in the rudiments of Western banking practices. They had facilitated the transfer of cash made in lucrative export deals from an inflation-ravaged economy to safer havens in the West -- and helped point out prime oil assets along the way.
They had nurtured their young proteges' transformation from driven and ambitious, young, jean-wearing, black marketeers of the Soviet late 1980s into the slick flag bearers of Russia's new order mulling in the ornate Metropol. Together, these new Russian businessmen controlled a large chunk of GDP and wielded a growing political clout.
Today, the brand of capitalism Samuelson and Michel helped cultivate has been torn down. Just as he was about to cash in with the sale of part of his Yukos oil company to a Western major, the arch-capitalist they helped climb to power, Khodorkovsky, was arrested in October 2003 on charges of large-scale fraud and tax evasion. He and his partner Platon Lebedev, who was tried with him, await a court ruling this week, while most of the rest of the group have fled to Israel with warrants out for their arrest.
It has been a battle for empire as well as wealth, according to Samuelson, a well-connected financier. "[President Vladimir] Putin appears to be trying to rebuild the Russian empire. That's where the danger is because it will inevitably lead to clashes with the U.S.," Samuelson said during more than seven hours of interviews in the lounge bar of the well-appointed Goring Hotel, locked in a wedge of prime London real estate between Victoria Station and Buckingham Palace.
Under Putin, the Kremlin has turned the tide against these Yeltsin-era business barons toward increasing state dominance. Not content with tightening political control, he has also moved his top aides into key positions at state-owned energy companies and is bidding for the creation of a new state-controlled energy behemoth to boost the Russian government's influence over global oil supply. Instead of being snapped up by a Western group, Khodorkovsky's oil major has been partially swallowed by state-owned Rosneft.
In part, this clampdown on laissez faire capitalism is also a backlash against the tactics of little known, inside players like Samuelson and Michel. They had joined hands with upcoming oligarchs like Khodorkovsky to help build schemes to minimize taxes, which drained the federal budget and weakened the Kremlin to such an extent that eventually Khodorkovsky could seek to eclipse Putin's hold on power.
Their role was significant. "They taught us a great deal," Menatep shareholder Mikhail Brudno said by telephone from Tel-Aviv. "They taught us about the principles of organizing business: from both the financial and the business side. We didn't know anything. Until we met, we couldn't even imagine how these business processes were built."
In Michel's eyes, his teachings helped boost the Russian economy, freeing business from an overly powerful state.
It was also an initiation, of sorts.
Samuelson and Michel's Valmet Group was part of an extensive network that spread from Russia to the secretive financial system of Dubai, then on to Africa, London and the United States. Wrapped up in the network was not only Khodorkovsky's Menatep, but the founders of Rossiisky Kredit and Stephen Curtis, a former Dubai-based lawyer who via Samuelson became a consultant to Berezovsky and Khodorkovsky, setting up a legal framework for their offshore transactions. Michel sold off his stake in Valmet in 2000 and was followed a year later by Samuelson. The company's reputation was in tatters following a series of scandals in the late 1990s in which it was alleged to have been part of an extensive money-laundering network involving the Bank of New York and Menatep. Samuelson and Michel deny any wrongdoing.
Curtis, the man with the keys to much of this network, continued in his role. But a few months after he was appointed managing director of Menatep to replace the jailed Lebedev, he died in a helicopter crash. More than a year after the March 2004 accident, the inquest is yet to be held.
The Early Days
The young Khodorkovsky's linkup with Valmet back in the early days of 1989 was fortuitous. It marked the beginning of instruction in capitalist business practices, from standard banking procedures to offshore shell games and acquisitions, all an initiation that proved key in crafting the course of their business for much of the 1990s.
Khodorkovsky had already moved fast to seize new opportunities. He had leapt from importing computer parts from the West to founding one of the first private banks to be granted a license for commercial banking as the Soviet Union was collapsing. He needed immediately, however, a skilled Western counterpart.
After a seemingly random visit in late 1988 to their office in Paris by a Russian emigre living in France, Samuelson and Michel's contact with Menatep was made.
The emigre, who spoke French with a thick Russian accent, had arrived in their office unannounced with a strange proposal that Valmet finance a tour of the Moscow circus, Michel said. "I asked him, 'Is this a joke?'" he said. He asked, were we not a finance company. "I said, 'Yes, but we don't do this type of finance.' I started to tell him what we do."
A couple of months later, Michel said he got a call from Moscow. It was the emigre, whose name Michel said he did not want published. "He told me, 'There's a group of young people who have started a bank. They're looking for a foreign partner'"
Valmet, which stood for Valeur et Metaux or Assets and Metals, had been transformed with the help of Samuelson into a pioneering global trust business with branches in Gibraltar and the Isle of Man from a Swiss-based family business that managed the wealth of the South American mining dynasty Michel had married into.
With the help of British government connections, Valmet had already built up a wealthy clientele that included the ruling family of Dubai.
Samuelson and Michel were experts in the art of creating shell companies and moving money into tax havens. But for Khodorkovsky and his team, the first lessons they gave were in basic Western banking practices and even in basic personal finance.
"I taught them what a credit card was, and how to use a checkbook," Michel said. When they first came to Geneva to Valmet's offices, they stayed in Michel's apartment. "Initially their budget was so tight they could not afford even to stay in a hotel," he said.
"Khodorkovsky and Nevzlin came several times. Every trip they made they traded up. First, it was my Geneva flat, then it was a low-cost hotel and eventually it was a suite at the five-star Hotel des Bergues."
Then came the lessons in Western business practices, which began with banking and later expanded even to advice on future possibilities in the oil industry.
"I spent two weeks training the entire staff in Budapest ... running through in basic detail how a bank works," Michel said. "I taught them how to read a balance sheet, how to conduct an audit, how to put internal control mechanisms in place, and how to provide credit facilities. It was a crash course in banking 101.
"They were fast learners," he said.
Soon their clients, Bank Menatep and others, were moving on to more complicated transactions and testing the Western system to the limit. "These newly formed corporations had no idea of Western business practices and who the players were. One of the very first transactions ... was something completely crazy. It was not that it wasn't legitimate. It was just that you couldn't do that," Michel said.
"We told them that Arthur Andersen, who were my auditors, would not allow it, and we got a letter back from them saying 'Could you tell Mr. Arthur Andersen ...' ... They didn't have a clue."
Both Michel and Samuelson declined to say what the transaction involved or which of their Russian clients it involved. They declined to elaborate on any of the transactions they were conducting for their Russian clients at a time when the Soviet Union was heading for bankruptcy as it rapidly hemorrhaged cash.
While the Soviet Union teetered toward collapse and its hegemony over a vast swathe of territory from East Germany to Turkmenistan began to fracture, Bank Menatep was growing fast.
By the time Boris Yeltsin took the stand during the 1991 coup that was to make him the country's leader, Khodorkovsky was building close ties with the future regime. As Yeltsin stood on a tank and rallied the crowds in front of the White House, Khodorkovsky, by then an adviser to the Russian government, was inside with Yeltsin's press secretary, who was steeling himself for a storm and standing guard with a gun, Khodorkovsky said in an interview with the U.S. television network PBS.
Shortly after Yeltsin moved into the Kremlin, Khodorkovsky worked a brief stint in the Oil and Gas Ministry. Future allies such as Konstantin Kagalovsky, who became a Menatep vice president, also received posts from Yeltsin, while Menatep corporate lawyers worked for Alexander Mamut, a Kremlin financier, and for Yeltsin's son-in-law Leonid Dyachenko.
The bank was growing rapidly not just because it courted ties in high places, but also because it was embarking on an image campaign of its own. Menatep advertised for shareholders on television while making sure to cultivate an image of wealth. The bank opened up a representative office in Paris on the fashionable Rue de la Paix. Tucked alongside Cartier shops, the two-room rep office made an immediate impression.
"All the Russians that came through Paris went to visit their office and left favorably impressed," Michel said. "This was part of [Leonid] Nevzlin's brilliant PR strategy. He reasoned that if you outwardly appear successful then this will be rapidly backed up by genuine success."
They had been joined in late 1989 by Lebedev, the only card-carrying member of the Communist Party to enter the group and former head of planning and economics at Zarubezhgeologiya. They formed a formidable team.
"Lebedev was the organizational genius. He liked things to run like a well oiled machine," Michel said. Nevzlin, meanwhile, was the artist, he said, in charge of government communications. "Nevzlin was all charm and smiles. He would embrace you and bring you into the fold. The team was impressive in that they all complemented each other perfectly."
They also rarely let one another out of their sight.
Nevzlin, Lebedev, Khodorkovsky, Vladimir Dubov and Brudno all lived together throughout. "Over the years, they migrated like one nomadic clan through a series of compounds. One of the early ones was a group of apartment blocks, surrounded by high walls and barbed wire. The only thing lacking was a watchtower. It was extraordinary. They lived there like a commune. They worked together at the office, they were together after office hours. Their children played together, their wives spent much of their time in each other's company. None of them could receive a visitor without the others' knowledge," Michel said. "They reproduced the only lifestyle they knew befitting leaders of a powerful organization, that of Soviet government ministers."
It was also a vicious climate of little trust.
Worse still for the banking industry, there was no such thing as credit history. Clients were closely watched by security agents. "A typical credit committee of a Russian bank in 1989, 1990 would have to be entirely based on personal confidence in the entrepreneur. There was no balance sheet, no asset, no record to collateralize a loan," Michel said.
"When the payback time came, they would send someone to collect the loan. It went a little like this: They'd say 'we're here for the money and if you don't pay we'll nail your kneecaps to the floor,' so to speak," Michel said. "All the security people at the banks were debt collectors, I suspect."
It was a tough climate that continues to haunt all involved in the scramble to the top, including Valmet. Khodorkovsky's second in command, Nevzlin, now faces charges he ordered a double murder and the attempted murders of three other executives in a series of attacks in the late 1990s. Nevzlin denies the charges, which he says were motivated by the political onslaught against Menatep, but as one former senior Yukos executive puts it: It was a battle for empire. "Western countries also had colonial wars. But they do not carry any responsibility for those who got killed," said the official, Alexei Kondaurov, a former KGB general who headed Menatep's analytical department.
The risks indeed got higher as Menatep began to expand its empire out of banking and into industry. Most of the nation's biggest enterprises were sold off via voucher auctions. Meant to be distributed to the population, the vouchers were soon bought up by the rich few banking groups like Menatep as ordinary people, their savings ravaged by hyperinflation, sold them off for just enough to cover the cost of staple goods.
The Real Prize
For Samuelson and Michel, it was also a turning point and one they watched closely over. Used to dealing with the riches of Arab leaders, they found Menatep, by comparison still relatively small fry. By 1994, however, Menatep had started moving into all kinds of industries, from chemicals to textiles to metallurgy. But for Valmet, which by that time had already partnered up with one of the oldest banks in the United States, Riggs Bank, and for Menatep, the real prize was oil.
The West had long had its eyes on Russia's vast oil reserves. Exxon had hired a former high-ranking Soviet-era geologist, George Mirkin, who had left Russia for the United States before the perestroika era, in order to gain an inside view on where the biggest treasures were, according to Samuelson, who also had founded companies for Western investors to take stakes in smaller Russian oil ventures, such as via the Anglo-Siberian Oil Co. In one meeting between Exxon officials and Russian ministers, Exxon asked if they could run Siberia, Samuelson cited Mirkin as telling him. "The answer was: 'No way: We know what you did to Saudi Arabia.'"
Knowing it was going to be politically impossible for the new Russian government to sell its oil riches directly into the hands of big Western oil majors, even if it could have gotten world prices for the fields, Samuelson stayed on the inside track with the up and coming Russian business barons who could win them.
Samuelson said that he sat down with a couple of them with a Fortune 500 listing of the largest companies in the world, and after going through the first 30 or so, the message was delivered: The biggest fortunes had been made in oil.
As the government prepared to sell off part of its oil industry in the controversial loans for shares auctions of 1995, Samuelson and Michel were already getting a bird's-eye view of the choicest assets. Via a consulting arm of Valmet, GT Valmet, they won a contract in 1995 from the World Bank to make sure that $1.6 billion it had extended in loans was being spent properly by production units such as Yuganskneftegaz and Purneftegaz. These units, which were visited by Valmet consultants, formed the backbone of the soon-to-be-privatized oil companies Yukos and Sibneft.
By that time, Valmet was also acting as a consultant to Berezovsky, the Kremlin intriguer who won close ties with the Yeltsin family. Both Khodorkovsky and Berezovsky ended up big winners in the auctions of Yukos and Sibneft, gaining controlling stakes for just over $300 million and just over $100 million, respectively.
As Samuelson and Michel see it, there was no other way for the Russian government, which was being urged to privatize its assets by the Western world.
"The solution chosen was absolutely the right one for the country. Give the companies away! Give them to entrepreneurs who have demonstrated their ability to run a business," Michel said.
(From The Moscow Times, 5.17.2005)