Last week, a Russian court ordered ex-oil tycoon, the CEO of once Russia’s largest, most vibrant, successful, and as some said its best-managed oil company Yukos, Mikhail Khodorkovsky and his partner Platon Lebedev to stay in prison until 2017. Judge Viktor Danilkin found the two guilty of money laundering and embezzlement, while they were in control of Yukos.
In the new trial, he was charged with embezzling 218 million tons of oil from Yukos between 1998 and 2003 and laundering 487 billion roubles ($16 billion) and $7.5 billion. The defense says that the charges are absurd, since the amount of oil said to have been embezzled would be equivalent to the entire production of Yukos in that period.
Once Russia’s richest man, Khodorkovsky’s fortunes changed in 2003 when he challenged then-President Putin and supported his opponents.
Yukos was created in April 1993 by the merger of two state companies, the Siberian oil producer Yuganskneftegas and Volga refining company Kuibyshevnefteorgsintez. By end 1995, Yukos was close to bankruptcy amid falling output and rising debt; it owed the government alone $3.5bn.
During 1995-96, through a series of share offers, Yukos became the first fully privatized integrated oil company in Russia. Mikhail Khodorkovsky, a billionaire whose main fortune was in banking until then, acquired the firm for a sum variously put at between $200m and $1.5bn.
Khodorkovsky is often credited for undertaking major restructuring and modernisation programme in 1998, with the aim of making Yukos one of the few large Russian conglomerates to match international standards for corporate behavior and financial stability. In 2000, Yukos launched a corporate governance charter publishing its accounts to international standards. In 1999, the company was punished by regulators after neglecting to file its quarterly results.
In 2001, Yukos shares were listed in New York, London, Frankfurt, Berlin and Munich. Yukos becomes a major supplier to China after the acquisition of a refinery and other assets in the Russian Far East.
In 2002, the company’s global ambitions stepped up a gear, with the acquisition of Lithuania’s main oil company, a move into Slovakia, and the plan to develop a crude pipeline to China.
In 2003, Khodorkovsky got into his first public row with the Kremlin, disagreeing over state control of the pipeline industry. He complained publicly about corruption, and began funding various opposition parties and finally on Oct. 25, 2003, Khodorkovsky was arrested, flown to Moscow and charged with various counts of fraud of tax evasion. And the saga continues to this day.
Privately, current and former officials say the case was an effort to scotch Khodorkovsky’s bid to challenge Kremlin political control. It also turned into a move to renationalize Yukos. The company was broken up and sold off, mostly to state companies, to pay off billions of dollars in back-tax claims levied after Khodorkovsky’s October 2003 arrest.
While the Putin camp and the opponents continue to debate the undercurrents behind the saga, the verdict is bound to chill the business climate in Russia further.
In the immediate aftermath of the verdict, US, German and UK officials said the trial undermines confidence in Russia’s commitment to a fair legal climate for business. The case “raises serious questions about selective prosecution — and about the rule of law being overshadowed by political consideration,” US Secretary of State Hillary Clinton said in a statement.
Richard Ottaway, chairman of the UK Parliament’s Foreign Affairs Select Committee, underlined that the outcome “has serious implications for the confidence of overseas investors and on British investment in Russia.”
Khodorkovsky’s imprisonment is “one of the irritants that investors traditionally react to,” German Gref, chief executive officer of OAO Sberbank, Russia’s largest lender, said in an interview earlier this month. “We have our work cut out for us to improve the investment climate,” said Gref, who was economy minister when Khodorkovsky was arrested.
A full conviction and long sentence is priced into the markets, said Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow. A reduced conviction would be “positive factor for those strategic and portfolio investors that remain distant from Russia,” he underlined prior to the verdict.
Bruce Misamore, the Houstonian and former Pennzoil executive who served as the chief financial officer Yukos, while Khodorkovsky was at he helm, said the verdict simply shows once again that businesses can’t operate safely in Russia. The courts, he said, operate at the political whims of the Kremlin. “If you run into trouble over there, nobody’s going to help you,” he emphasized.
Misamore, who’s now retired but continues to work on behalf of Yukos shareholders through legal cases pending in Europe, called the charges against Khodorkovsky “bogus.”
The charges seem to pertain to the company’s exports in the years leading up to Yukos’ takeover by the government.
“It was alleged that he stole everything we exported for several years,” he said. “None of that oil was ever stolen. It was all completely accounted for,” said Misamore, who now lives in Houston and is retired. “The biggest thief is Mr. Putin himself. He stole the biggest oil company in Russia.”
After the fall of the Soviet Union, Western oil companies flocked to Russia, hoping to develop its vast oil and natural gas reserves. Most have since pulled out or significantly reduced their operations there, a trend that’s certain to continue in light of the Khodorkovsky verdict.
Companies that invest in Russia must realize they have no legal recourse if the government or a government-controlled company decides to come after them, Misamore said.
When government agents stormed Yukos’ offices in Russia, Misamore was in London. He returned to Houston and, listing his company laptop as the only asset, attempted to put Yukos into Chapter 11 bankruptcy to stop the seizure by the Russian government.
The tactic didn’t work, and the laptop was later stolen in a mysterious home burglary.
The forced bankruptcy of what had been a blue-chip stock continues to worry many potential investors.
Twice this week President Dimitry Medvedev admitted that Russia’s investment climate is “bad,” though he didn’t single out the impact of Yukos. Struggling to attract the hundreds of billions of dollars in capital it needs, the Kremlin now says it wants to improve the environment for business. Yukos saga makes the task still more difficult. Not good news indeed for the overall health of the energy world.
Yet let me finish this column, the first in 2011, on a positive note. May the New Year herald better understanding and accommodation of the ‘other’ viewpoint. The world needs cooperation and not confrontation.
Availing the opportunity, let me also extend season’s greetings to the energy fraternity and not least to Mssrs. Khodorkovsky and Lebedev too.
