#12
Los Angeles Times
December 26, 2001
An 'Oligarch's' U-Turn Toward Probity
Russia: Nation's richest man played fast and loose in business.
Now he sets the standard for good corporate practice--and it's paying off.
By MAURA REYNOLDS, TIMES STAFF WRITER

MOSCOW -- Russia's richest man is wearing new lenses.

Once upon a time, Mikhail Khodorkovsky shielded his eyes behind chunky, tinted eyeglasses so thick they might have been bulletproof. These days, he meets the world's gaze through stylishly square frames with lenses that are--as Russians say--"clear as a baby's tears."

The change is metaphoric as well as optometric. Khodorkovsky once had a reputation as the dirtiest of Russia's "oligarchs." These days, the oil magnate insists, his empire's affairs are as transparent as his glasses. "We used to think that all that mattered was to have good production figures," Khodorkovsky said in an interview. "We considered other matters less important: the environment, investor relations, public affairs, corporate governance as a whole. And suddenly it hit us over the head, hard, and we realized we were wrong."

In the 10 years since the collapse of the Soviet Union, the "oligarchs" have been blamed for much of the economic misfortune that has befallen Russia and the other post-Soviet states. In the popular imagination, the business elite plotted with mafia dons and corrupt bureaucrats to pillage the economy and impoverish ordinary citizens.

In the past, Khodorkovsky excluded minority shareholders by moving shareholder meetings at the last minute to remote locations. He ordered the issuance of shares to dilute the power of other stockholders. After the financial collapse of 1998, he shuffled his remaining assets through subsidiaries to hide them from creditors.

Once, at a time regulators were asking tough questions about operations by his bank, Menatep, a truck carrying Menatep documents happened to fall into the Moscow River.

Now, however, the 38-year-old Khodorkovsky is setting the standard for good corporate behavior. He has released four years' worth of financial records prepared according to international accounting standards. He has paid dividends on stock of his flagship company, Yukos Oil--a rarity in Russia. And he has repaid depositors who lost their money when Menatep collapsed in the 1998 financial crash. He even lectures his fellow oligarchs about the need for responsibility and transparency.

"He has completely turned around," said Peter Boone, head of research at the Brunswick Warburg investment firm in Moscow. "He has created one of the best-managed companies in Russia, certainly the best-managed Russian oil company."

Khodorkovsky's change of heart has been richly rewarded by investors: The share price of Yukos has risen from a low of 60 cents in mid-2000 to a high of $69.20 in mid-December, boosting the company's market capitalization from $350 million two years ago to an extraordinary $10.3 billion.

Along the way, Khodorkovsky's personal net worth topped $2.4 billion. Forbes magazine now ranks him as the richest man in Russia, and the 10th-richest in the world.

Crime might pay, but Khodorkovsky seems to be proof that honesty pays better.

"We have been lucky," Khodorkovsky said. "We were in the right place at the right time. And we took advantage of the place and the time."

But Khodorkovsky resists the label "oligarch," saying that by definition such a person uses political power to achieve economic ends.

"We have never had that kind of influence in more than 1,000 years of history," he asserted, "and we have not had it in the last 10 years. There is one simple reason: In Russia, in contrast to America, the government machine has always been much stronger than any individual or any company or any set of companies."

Khodorkovsky compares Russia's class of 20th century oligarchs to America's class of 19th century robber barons. But Chrystia Freeland, author of "Sale of the Century: Russia's Wild Ride From Communism to Capitalism," the definitive book on Russia's oligarchs, said the comparison "raises false hopes."

"It suggests that prosperity is inevitable, and I don't think it's inevitable in Russia," she said. "American robber barons carved their monopolies out of the wilderness. . . . [Russia's] oligarchs got what they got because it was handed to them by the state."

Still, a growing number of analysts now says that some form of oligarchic class may have been inevitable, and perhaps necessary, in Russia's primitive market economy.

Martin McCauley, a political scientist at the University of London, said that at the time of the Soviet collapse, the West's prevailing economic sentiment emphasized privatization and fiscal controls over the economy. Little attention was paid to creating the prerequisites for regulating a market economy--contract law, securities commissions, deposit insurance.

"They were being told: You must privatize," McCauley said. "But how do you privatize in a country with no money, a country with a collapsing economy? You just hand it over. And [the oligarchs] become your friends and are beholden to you."

Boone of Brunswick Warburg thinks that giving the government a greater role in overseeing the transition would have created even more trouble. The worst abuses remaining in the Russian economy are in those companies that still have partial state ownership, he said.

"In retrospect, fairness was not going to happen. The most important thing was to get concentrated ownership--and Yukos is proof of that."

Khodorkovsky says his wealth is a reward for taking risks that others wouldn't.

He was educated as a chemist, graduating from Moscow's prestigious Mendeleyev University of Chemical Technology in 1986. Even though the Soviet system made it difficult for Jews like him to advance, he was a model young Soviet bureaucrat, an officer in the Young Communist League, or Komsomol. In 1987, inspired by the liberalization under Soviet leader Mikhail S. Gorbachev, he founded a kind of economic collective called the Young Entrepreneurs Foundation, which started trading things such as computers.

"There was still a criminal statute on the books outlawing profit-seeking enterprises," he recalled. "And everyone was certain we would be put in jail, which explains why other people didn't do what we did. We were stupider than they were. But we lucked out anyway."

Privatization in Russia had two main stages--a massive voucher-based privatization in 1992-94 and a later "loans for shares" privatization in 1995.

The second stage came about largely as a result of a back-room deal between Russia's political elite, who wanted to keep President Boris N. Yeltsin in power, and the oligarchs, who wanted to protect their spoils.

In return for using their money and savvy to get Yeltsin reelected, oligarchs were promised the remaining morsels off the Soviet economic carcass. In 1995, in return for a small stake in his Menatep bank, the state handed 45% of Yukos to Khodorkovsky. He now is said to own or control between 70% and 85% of Yukos stock.

When President Vladimir V. Putin was campaigning for office last year, he pledged to eliminate oligarchs "as a class." But he seems to have taken aim only at those, such as Vladimir A. Gusinsky and Boris A. Berezovsky, who posed a political threat. Putin seems to have made his peace with Khodorkovsky and others who stay behind the scenes politically.

Khodorkovsky makes no apology for toeing the Kremlin line: "One of the factors necessary for running a successful business ought to be the support of the state," he said.