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The Eurasian Politician - July 2004
David Storobin 21.7.2004
On October 25, 2003, Mikhail Khodorkovsky was arrested at gunpoint on a Siberian airport runway and charged with tax evasion. Less than a week later, on October 31, the Russian government froze shares of Yukos due on tax charges. Given that the arrest took place not long before elections and rumors surfaced about the billionaire's desire to become President in future elections, many of his supporters saw the Kremlin's actions against him as retaliation for support of the opposition, and as suppression of any viable potential future opponents.
Khodorkovsky became Russia's wealthiest man and the 8th wealthiest person in the world by organizing shady schemes to profit from money in the Komsomol (Soviet Youth organization), then from the Russian government via the Bank Menatep that he set up, and finally by acquiring Yukos in the "loans-for-shares" program where the Russian government "borrowed" from businessmen, then purposely defaulted, resulting in the lenders taking over public companies (which served as surety) at low cost.
The program was initiated by Boris Yeltsin prior to the 1996 elections when it looked like the Communists may win unless economic circumstances changed rapidly. The money that Khodorkovsky, among many others, "lent" to the Russian government allowed Yeltsin to weather the economic storm and win the elections. But the price of victory was take-over of government assets by the businessmen.
As mentioned, this was not the first time Khodorkovsky was able to profit from the Russian/Soviet government. Even as a youth, he climbed up the ladder of the Komsomol and then used the organization's money for personal profit. Finding that Komsomol profits were not enough for him, Khodorkovsky set up a bank called Bank Menatep in order to use the money not just of a youth organization, but the whole Russian government.
It was therefore only natural that Khodorkovsky was able to take advantage of the loans-for-shares program. In a state where the criminal and the politician are business partners, businessmen bribed and otherwise "persuaded" Russian politicians to participate in the loans-for-shares arrangement.
To his credit, when Khodorkovsky took over Yukos, he built a fragile, questionable company into an oil superpower.
In 2000, Vladimir Putin came to power and offered a sort of amnesty program where the Oligarchs were forgiven their "sins" if they ended their corrupt practices and stopped meddling in political affairs. The compromise made a lot of sense to those familiar with Russia. Communism corrupted the nation beyond what is imaginable in the West. One could not do anything – buy a refrigerator, take a test in school, go on vacation – without paying a bribe. Naturally, to be able to pay bribes, one had to have income other than your regular monthly pay – which was not even enough to buy food, much less pay for housing, clothes and other expenses. It was simply impossible to prosecute the whole nation and it was clearly better to break with the past, so long as people did not commit unlawful acts in the future.
Yet, almost immediately, Putin went after the Oligarchs who threatened him politically. His enforcement of law was very selective, punishing only those he was afraid of.
First came Vladimir Gusinsky, the owner of a major media conglomerate Media-Most, who opposed Putin during the 2000 elections. Putin simply took over Media-Most and Gusinsky was forced to flee Russia.
Next came Boris Berezovsky, who actually helped Putin in 2000, but was seen as a king-maker, and thus, too powerful for the Russian President. He was followed by a number of less high-profile businessmen, including Platon Lebedev – Khodorkovsky's right-hand man. Finally, Khodorkovsky was arrested and his company assets frozen.
Meanwhile, the Russian government took over all major TV channels and almost all independent media of any significance, leaving only a few minor stations and newspapers, many of which support Putin anyway.
In an attempt to gain even more power, the President went after the weak opposition parties and by 2003, Yabloko, SPS and the Fatherland found themselves outside the Duma. Fatherland was a moderate party, while Yabloko and SPS were American-style parties that supported capitalism and human rights. Part of Putin's strategy in sidelining these parties was to intimidate and destroy anyone – including Khodorkovsky – who helps the opposition.
As Russia's wealthiest man with a fortune of $8 billion, Khodorkovsky had the means to politically harm Putin today and replace him in the future, even hinting his (Khodorkovsky's) desire to be elected President some day. That could not be tolerated by the current Russian President – a career KGB officer. What Vladimir Putin wanted was to become such a strong President that nobody would be able to stand up to him and he'll be able to push through the program that he thinks will save Russia.
From the start, Putin understood that private ownership of major business and the profits that result from it, major media and opposition can all limit his power. By offering a "compromise" in 2000, he lulled businessmen into hibernation, while "picking them off" one by one, and taking over their money and media ownerships.
By 2003, Russia had become a "managed democracy" where elections were held, but the media was controlled by the government, opposition was threatened, and the only people who could challenge the President – the wealthy elites – were on the run outside the country or in jails.
When Khodorkovsky was arrested, he was a model of a businessman. More than anyone else, he had taken the "Putin Compromise" to heart and ended his corrupt practices. Yukos subscribed to American-style accounting – the most intense and accurate way to calculate corporate activities; he kept only one set of accounting records; his employees were well paid and he gave a tremendous amount of money to charity.
His arrest signaled to the world that Russia is turning autocratic. After all, why didn't Putin go after less reformed businessmen? Why Khodorkovsky, the most honest major businessman in Russia today? And why was it done right before the elections?
Immediately $8 billion were taken out of Russia in the last quarter of 2003, compared to $100 million in the first quarter. This also reduced the power of the business class in favor of Putin, who swept the elections in March 2004 with a spectacular victory over sub-par opposition.
It would be wrong to say that Russia is no longer a democracy. It does hold elections with opposition. But what Putin's Russia lacks is equality under the law, total and complete individual and property rights, as well as free and independent media and opposition that is not harassed and assaulted by the government.
In the wake of the 2004 elections and Khodorkovsky's arrest, the Putin Administration is omnipotent. There is nobody to stand up to Putin -- every other businessman and opposition member is threatened to wind up in the same jail as Khodorkovsky. If Russia's wealthiest and most reformed businessman may be imprisoned and have his property confiscated (which will almost definitely happen in the near future), why not anyone else? Why not everyone else?