Welcome to Penal Colony YaG 14/10

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Welcome to Penal Colony YaG 14/10

Billionaire Gets Six Years in Siberian Border Region

Newspaper article

By: Tom Parfitt

Date: October 25, 2005

Source: Parfitt, Tom. "Welcome to Penal Colony YaG 14/10." The Guardian (October 25, 2005).

About the Author: Tom Parfitt is Moscow correspondent for The Guardian. He previously worked for the Sunday Telegraph.

INTRODUCTION

The history of post-Soviet Russia has been characterized by the emergence of an enormous economic gap between the country's haves and have nots. As large parts of the country sank into economic and social turmoil following the collapse of the Communist state in 1991, a tiny elite—known as "oligarchs"—emerged. They amassed immense fortunes at a faster rate, according to the Economist, than any men at any other time in history. When Forbes published a survey of wealthy Russians in 2004, it claimed that the country boasted 36 billionaires—not bad for a country where personal wealth was a virtually unheard of concept barely a decade earlier.

Topping that list with a fortune of $15.2 billion was Mikhail Khodorkovsky, a thirty-nine-year-old oil magnate who faced charged of fraud, embezzlement, and tax evasion. Like many of his fellow oligarchs, Khodorkovsky had gathered his enormous fortune through a mixture of ingenuity, exploitation, luck, and fraud.

Khodorkovsky had been an official in the Communist youth league in the 1980s, giving him important friends when President Mikhail Gorbachev initiated his program of glasnost (change) reforms in the late 1980s. In 1988, ensuring he held a considerable stake, Khodorkovsky started what would become the Menatep bank, which began managing government money. When the USSR collapsed a few years later, Menatep began acquiring former governmentrun enterprises at prices far below their market valuation. Khodorkovsky also began buying up companies that had been privatized through the distribution of "vouchers" to their employees. Often this literally meant going to each company employee and paying each employee cash for the voucher. In 1995, Khodorkovsky bought Yukos, a vast oil conglomerate, at a state auction for just $350 million.

In the chaos of the immediate post-Soviet years, it was sometimes difficult to say which of Khodorkovsky's methods—and those of fellow oligarchs, which were usually the same—were actually illegal. The buying up of vastly undervalued state interests—known as "loans for shares"—was as much a symptom of the corruption of Russian President Boris Yeltsin's government as a reflection on the business practices of those who bought them. Yeltsin needed funds to remain in power and stave off Communist political challengers as his country teetered towards economic disaster. Naivety played a part also. Yeltsin's economic reformers were desperate to get rid of Russia's state assets so that economic reform could be properly initiated, even if it meant selling those assets far below their market value.

The buying up of vouchers by men like Khodorkovsky was arguably the biggest tragedy for the Russian people. This voucher scheme—which placed the ownership of industries into workers' hands through the distribution of shares—was intended in the late 1980s and early 1990s to be the state's mechanism to distribute the wealth it had held during the Communist era. However, the majority of the people who received the vouchers had no understanding of what they meant, what they were worth, or of concepts like entrepreneurship. When Russia went into economic meltdown in the early 1990s and many workers were left unpaid for months on end, it was only through selling these vouchers—at prices far below their actual value—that they could survive. Once in control of these new companies, the oligarchs rendered existing vouchers worthless by offering vast share issues.

Khodorkovsky was also an astute businessman. He modernized Yukos and attracted western invest-ment. By the end of the 1990s, Yukos was responsible for two percent of the world's oil output.

However, as Russia woke up to what Khodorkovsky and the other oligarchs had done, their unpopularity grew. When President Vladimir Putin came to power in 2000 an uneasy pact was sealed with the oligarchs in which they agreed to stay out of politics and the state's sphere in order to be allowed to continue their business activities. Khodorkovsky, however, continued to fund political parties across the spectrum. He also publicly clashed with Putin over government corruption in February 2003. There were also talks about a merger between Yukos and Sibneft, an oil company owned by fellow oligarch, Roman Abramovich. When these discussions collapsed, there were rumors of a deal with a big U.S. oil company. Either deal would have moved control of Russian energy policy farther away from the Kremlin.

In mid-2003, there was talk of a Khodorkovsky run for the presidency. This, however, appeared to be the final straw for Putin. In October that year, armed policemen stormed Khodorkovsky's private jet at an airfield in Siberia and arrested the tycoon on charges of embezzlement, fraud, and tax evasion. When the case came to trial in 2005 the charges focused on Khodorkovsky's partial privatization of Apatit, a fertilizer company. The accusations leveled against Khodorkovsky included the embezzlement of Apatit's profits and leadership of an "organized criminal group." Khodorkovsky defended himself by maintaining that he was not personally responsible for the alleged crimes and that, in any event, the actions were not illegal. The court disagreed and found Khodorkovsky guilty, sentencing him to nine years imprisonment. This sentence was reduced to eight years when the case was appealed, and Khodorkovsky also was given credit for the two years he served in prison while awaiting trial.

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SIGNIFICANCE

Human rights groups and supporters of Mikhail Khodorkovsky immediately condemned the trial and sentence as politically motivated, stating that it was merely the latest and most infamous example of political persecution in modern Russia. Within a month of his sentencing, in July 2005, even the British Foreign and Commonwealth Office, a keen ally of Putin's Russia, had expressed its concerns about the nature of the trial.

Within Russia, however, there was broad public ambivalence about the fate of the so-called robber baron. The sense that someone who had taken from the masses had got his comeuppance was palpable, and few inside Russia mourned the break up of Yukos. The Russian government's vast claims and penalties for unpaid taxes—eventually amounting to more than $28 billion—were also broadly supported by the Russian public.

Outside Russia, however, these vast government claims and penalties heightened the sense that the case was merely a state-led asset-grab. In one year, for example, Yukos was said to owe more in taxes than it made in revenues. Unsurprisingly, the company, and with it the bulk of Mr Khodorkovsky's wealth, returned to the control of the state.

The greatest significance of the Khodorkovsky case was the clear signal it sent to other oligarchs—that they should stop using their money and influence in the political sphere and accept Putin's hold on Russia. Roman Abramovich, for example, resigned his governorship of the Chukotka province in Siberia, and also protected himself by investing heavily in Chelsea Football Club. Practically overnight, he created the world's richest and most expensive soccer team, and he became a global celebrity, presumably more difficult to prosecute than Khodorkovsky.

Khodorkovsky maintains his innocence. He has used his time in prison to denounce the inequities of the reforms that made him rich and what he calls the "tyranny of wealth." Still a relatively young man, it has even been rumored that he may run for President upon his release from prison.