It took most of last week for Judge Viktor Danilkin to deliver the sentence against Mikhail Khodorkovsky, the former Russian tycoon.
On the morning of Dec. 27, Danilkin began reading his decision aloud, which is how decisions are rendered in Russia. Although it was instantly clear that he had found Khodorkovsky and his co-defendant, Platon Lebedev, guilty of embezzlement and money laundering, the written verdict was about 800 pages long; the judge didn’t finish until Dec. 30.
As Danilkin droned on, Khodorkovsky, who had built and presided over Yukos, the biggest and best-run company in the country — and who has been imprisoned on a different set of charges since 2004 — listened impassively. Lebedev, his former business partner, read a book through much of it.
Finally, on Thursday afternoon, at around 4pm, Danilkin imposed his sentence. To no one’s surprise, it was harsh: 13-and-a-half years. Khodorkovsky, the judge said, needed to be “isolated from society.” Though he will get credit for time served, Khodorkovsky will probably be behind bars until 2017.
It is hard not to view the entire proceeding — the plausible-sounding embezzlement charges, the 18-month-long trial, the formal reading of the lengthy decision and so on — as an effort to create the illusion of fairness. Russian Prime Minister Vladimir Putin has compared Khodorkovsky to Bernard Madoff in an effort to make the charges sound more credible. But no one was fooled.
Embezzlement? Give me a break. The defendants were accused of stealing every drop of oil Yukos produced from 1998 to 2001 for their personal gain — implausible on its face. Yukos, by far the most transparent company in Russia, was audited by PricewaterhouseCoopers (PwC), using Western accounting standards. Needing PwC to disown those audits, Russian prosecutors brought “unrelated” tax charges against the firm — and opened criminal investigations against several PwC executives — until the accounting firm caved. Then — how convenient! — the investigations went away.
I will leave it to others to examine the political and human rights implications of the Khodorkovsky case. The purpose of this column is to look at its implications for Russian investment and business. This is not an unimportant side effect. Russia is utterly dependent on its natural resource businesses, especially oil and gas. Its budget deficits have grown so large that the price of oil would have to reach US$120 a barrel to generate enough tax revenue to achieve a balanced budget. The country desperately needs foreign capital; indeed, it recently retained nearly two dozen investment banks to embark on a program of selling off minority stakes in dozens of state-run companies to help cover the ballooning deficit.
Given all that, one could hardly conjure up a more bone-headed move than turning the country’s best-known and most respected businessman into a martyr. But with its continued persecution of Khodorkovsky, that is precisely what the Kremlin has done. Last Tuesday, even as Danilkin was reading his verdict, Russian President Dmitry Medvedev acknowledged publicly that the Russian investment climate was “bad.” Is the problem that Kremlin officials can’t see the connection between its investment climate and their sordid prosecution of Khodorkovsky? Or is it that they don’t care?
“Yukos is a special case,” Putin said at a news conference a few months ago. That is what he and his Kremlin cronies would like the world to believe. The implication is that even if Khodorkovsky is being railroaded — something that Putin consistently denies, of course — it’s a one-off. Khodorkovsky’s mistake, it is said, was in getting involved in opposition politics, thus making an enemy of Putin, Russia’s most powerful man; businessmen who don’t make that mistake don’t have problems with the government.
But Putin’s line is just that — a line. In addition to tossing Khodorkovsky in jail on trumped-up charges, the Russian authorities also brought bogus tax claims against Yukos itself, shoving it into bankruptcy. Then the government created a dummy corporation to take over its assets, which it sold off, for far less than they were worth, to state-run oil and gas companies, primarily Rosneft, a poorly run company that is now the biggest oil producer in Russia.
“I have never witnessed a state steal such a large amount from investors,” said James Harmon, who, as president of the Export-Import Bank of the US in the late 1990s, spent much of his time dealing with Russia.
“They stole my investment,” said Edward Donahue, a Massachusetts accountant who had invested in Yukos.
Donahue was among a group of investors who tried to sue Russia to get their money back. (The case was thrown out of court.)
Even since the Yukos affair, corrupt Russian politicians and businessmen have routinely used arbitrary laws and regulations to grab assets that didn’t belong to them. Royal Dutch Shell was the majority partner in a group that included the state-owned monopoly Gazprom to develop a giant oil and natural gas field. Suddenly, in 2006, it ran into severe environmental and regulatory problems — problems that disappeared as soon as Shell ceded majority ownership to Gazprom.
A few years ago, BP was the controlling partner in a huge joint venture, amounting to 25 percent of its reserves, with a Russian company called TNK. TNK wanted to control the venture — so, naturally, BP suddenly had visa issues and other problems. Its business began to be disrupted. Robert Dudley, an American who was running the venture — and is now the chief executive of BP — had to flee the country and go into hiding for a time. Needless to say, the joint venture arrangements were rewritten.
Oil and gas companies aren’t the only ones running into government interference. A businessman who got the rights to redevelop the famous Hotel Moskva got into a commercial dispute with two of Putin’s allies. According to the Daily Telegraph in London, “he is now believed to be in hiding in California.”
One result of such tales, which are legion, is that many foreign companies that could help improve the Russian economy are leery of doing business there. In 2009, for instance, Ikea pulled the plug on a huge mall it had developed — because it was tired of bumping into problems and delays that were caused by government officials looking for payoffs. This kind of petty corruption is a large part of the reason that Russia ranks 154th (out of 178 countries) on the global corruption perception index, compiled by Transparency International, an anti-corruption organization in Germany.
Another consequence is that shares in Russian companies tend to trade at a severe discount compared with their peers in other countries. The Russian stock market, for instance, trades around 40 percent lower than other emerging markets. A few weeks ago, Russian Deputy Prime Minister Igor Sechin complained that Rosneft was undervalued.
“Compare the structure of Rosneft’s reserves and those of Petrobas” of Brazil, he said. “Rosneft is undervalued by around three times.”
Well, yes, but whose fault is that?
All of which brings me back to where it all began — the original government theft of those Yukos assets. Although the litigation brought by US investors went nowhere — because there is no investment treaty between the US and Russia — other investors are having better luck in forcing the Russian government to account for its misdeeds.
Using existing treaties, three separate investor groups have brought cases to arbitration in The Hague and Stockholm. In one of the cases, a three-member tribunal recently ruled unanimously that the Russian government had indeed stolen Yukos’ assets, using phony tax claims and other methods that were so out of line they could only be viewed as “part of a cumulative effort to prevent Yukos’ ongoing existence.”
The most important of the three cases — brought on behalf of investors who hold the stakes once owned by Khodorkovsky and other Yukos executives — has made a claim for around US$100 billion. Although the case has been proceeding slowly, the investors seem to be winning. If that tribunal ultimately rules in their favor, which seems likely, what will Russia do? Refuse to pay, thus showing the world just how contemptuous it is of the rule of law — and decimating its already damaged investment climate? Or pay a gigantic sum of money, thus adding to its already debilitating budget deficits? This is where Russia has put itself.
What is particularly tragic is that Khodorkovsky was the businessman and Yukos the company that were poised to lead Russia out of the business wilderness. Like all the Russian oligarchs, Khodorkovsky had acquired the assets that formed Yukos by taking full and sometimes unseemly advantage of the “wild, wild East” atmosphere that reigned in Russia in the early 1990s.
There are those, in Russia and the West, who can never forgive him for that. But Augustine was a sinner before he was a saint, and everyone I’ve interviewed in recent weeks who knew Khodorkovsky or worked for him insisted that he had genuinely changed. He had become a true believer in the kind of forthright company building that is routine in the West, understanding that good corporate governance, real accounting, adherence to shareholders’ rights — and abiding by contracts and the rule of law — helped the company and its share price. Had Yukos been allowed to continue — and had Khodorkovsky been allowed to continue running it — it is quite possible that the Russian investment climate would be far different than it is today.
Instead, Russia is reduced to selling off minority interests in its state-run companies, stakes that will reap far less than they would almost anywhere else. One of those stakes will be in Rosneft, the company that now controls most of Yukos’ best assets, including Yuganskneftegaz (aka YNG), a major oil and gas producer that was widely considered Yukos’ crown jewel. In that recent ruling in the investor arbitration, the tribunal concluded that “the auction of YNG was rigged.”
To put it more bluntly, assets that were stolen from Yukos investors like Donahue six years ago are now being recycled to a new group of investors via Rosneft. Plainly, this doesn’t bother the Russian government, and it probably won’t bother whichever investment bank handles the Rosneft deal. But it should bother the rest of us — a lot. After all, if you can steal the assets once, what’s to prevent you from stealing them again?
The Khodorkovsky verdict sent many messages about the state of things in Russia. But this was the business message. It has come through loud and clear.
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