UNITED24 - Make a charitable donation in support of Ukraine!


Mikhail Khodorkovsky

Russia was ordered 28 July 2014 to pay $50 billion to former majority shareholders in the Yukos oil company. The arbitration court in The Hague said Russia acted in a "devious and calculated" manner when it seized Yukos' assets in 2003 and imprisoned company CEO Mikhail Khodorkovsky that year. Once Russia's richest man, Khodorkovsky controlled Yukos through the holding company that successfully sued Russia, but in which he no longer has an ownership interest. The verdict was half the $100 billion originally sought by the plaintiffs.

Mikhail Khodorkovsky was arguably the most powerful and influential of the Russian oligarchs that emerged in the 1990s. Once considered Russia's richest man, Forbes Magazine estimated Khodorkovsky to be worth $15 billion during the early 2000s. Analysts, reporters, and businessmen from the west believed Khodorkovsky personified Russia's post-communist version of capitalism and viewed him as a figure of success. Khodorkovsky was best known for directing the oil company Yukos, and was eventually a victim of the "Yukos Affair" that erupted in 2003.

Khodorkovsky began his career during the age of perestroika during the late 1980s. He founded the Menatep Bank in 1987, which grew exponentially after it attained large shares of companies that had been privatized following the collapse of the Soviet Union. By 1995 Menatep had purchased a significant portion of the oil company Yukos, which the state had put up for auction amidst growing levels of debt, at a discounted price. In time Yukos became Russia's first privately owned oil company with Khodorkovsky as its head.

The oligarch transformed Yukos into an extremely profitable and successful corporation during the late 1990s and early 2000s. The company augmented its oil extraction considerably after incorporating several minor energy businesses in 1997. By 2001 the corporation revealed its plans to become a transnational corporation by expanding its operations outside the Commonwealth of Independent States (CIS). In April 2003 Yukos merged with Sibneft to become Russia's largest oil company. Afterwards, Yukos controlled the biggest share of the globe's oil reserves (2.65 billion tones) and possessed the capacity to extract the fourth largest volume of oil per year (slightly more than 100 million tones). The company forecasted that it would extract close to 130 million tones by 2007, of which 100 million would exported to Europe, the United States, and China. Yukos also intended to enhance its development by procuring further enterprises, both at home and abroad, and by expanding into natural gas production.

Several aspects of Yukos' operations and intentions are believed to have been responsible for drawing the Kremlin's ire and were part of a larger ongoing conflict between the country's oil companies and the government. As Yukos' production increased substantially and transportation became a major issue, the company prepared to construct a series of pipelines throughout Russia. The first of these intended to traverse Western Siberia to the port of Murmansk, and by 2002 a consortium of companies had agreed to construct such a project. The designed route would have circumvented the state's transport monopoly Transneft, which controlled the country's pipeline networks. As a result, the government rejected the proposal.

Another transportation controversy rested on the proposed route for the Far Eastern Pipeline, a project that had been agreed upon but disputed since the late 1990s. The first option was known as the Chinese route, which would run from Angarsk in Russia to Daqing in China. The second option was known as the Japanese route, which would run from Angarsk to Nakhodka on the Sea of Japan. The path that was ultimately chosen would carry both economic and political consequences, and Moscow reportedly believed such a decision should be made by the government alone.

Yukos' future plans included China as a major market for exportation, however, and the company naturally favored the construction of the Daqing course. On the other hand, the Ministry of Energy and Rosneft, the state-run oil company, favored the Japanese route instead. In spite of President Putin's announcement in favor of the Nakhodka route in November 2002, Khodorkovsky promised a Daqing pipeline would be constructed and completed by 2005. In early 2003 Khodorkovsky threatened that Yukos would refuse to supply oil to the Nakhodka pipeline if it was created. Indeed, several months before the "Yukos Affair" began in 2003 Yukos came to an agreement with the China National Petroleum Company (CNPC) to ship upwards of 400,000 barrels of oil a day through a Daqing pipeline.

Reports surfaced that Moscow was also becoming concerned over control of the state's resources. In 2003 the Kremlin became aware of negotiations between Yukos and several foreign companies (Chevron-Texaco and Exxon-Mobil) concerning the sale of a major piece of the Russian corporation. In fact, a member of the company's board of directors admitted in 2005 that Yukos was close to selling more than 40% of its shares to Exxon-Mobil in October 2003. The decision to sell these shares became a legitimate option following the arrest of Platon Lebedev, Khodorkovsky's business partner and a major component of Yukos and Menatep, in July 2003. If Yukos had become internationalized in such a manner, it would have been extremely difficult for President Putin and the Russian government to exert influence over the corporation. In addition, a significant percentage of the state's oil reserves would be under foreign control, and Khodorkovsky's financial potential would be unmatched.

The businesses and shareholders that comprised Yukos and Menatep were active political lobbyists as well, and they were estimated to have spent somewhere between US$ 275-350 million annually on lobbying officials at various levels. In addition, reports also surfaced that more than 125 Ministers of Parliament (MPs) and quite a few legislative commissions were under the influence of Yukos. Although Khodorkovsky donated funds to the majority of the country's political parties, it became evident that he favored the groups directly opposed to President Vladimir Putin. In the months prior to the December 2003 parliamentary elections Khodorkovsky announced his support for the Union on Right-Wing Forces (SPS) and Yabloko, which reportedly received US$ 4-5 million and US$ 6-11 million, respectively.

Putin openly criticized Khodorkovsky following his public support for these groups, and officials within the Kremlin argued that the oligarch's actions were selfishly intended to augment the opposition's strength in parliament for the sole benefit of Yukos. Rumors began to circulate, however, that Khodorkovsky harbored political ambitions and could possibly enter the 2008 presidential elections. These allegations were enhanced by Khodorkovsky's announcement that he intended to retire from business altogether in 2007. Khodorkovsky's supporters have argued that his economic and political capabilities and potentials were viewed as a threat to the Kremlin and ultimately led to his demise.

Khodorkovsky was arrested in October 2003 at an airport in Novosibirsk, Russia. Among the numerous charges filed against him were tax evasion, embezzlement, and fraud. In May 2005 he was found guilty and charged with nine years imprisonment. Khodorkovsky's followers have popularized the name Basmanny, the court in which his trial took place, to embody corrupt justice. In conjunction with Platon Lebedev, who was also found guilty, the two men were ordered to reimburse the government approximately 17 billion rubles ($US 600 million at the time) in penalties and taxes.

In July 2003 Moscow implemented an audit on Yukos and levied a charge of $US 3.5 billion against the behemoth. By the time of Khodorkovsky's conviction less than two years later the total had skyrocketed to US$ 28 billion. These events forced an auction of Yukos and the majority of the company's shares were engulfed by Rosneft, which subsequently became Russia's second largest oil company. The "Yukos Affair" and arrests of Khodorkovsky and Lebedev altered the landscape of Russia's energy landscape considerably and placed the government in decisive control over these resources.

On December 27, 2010, after undergoing a second trial, Moscow's Khamovniki court found both Mikhail Khodorkovsky Platon Lebedev guilty of embezzling billions of dollars of oil from their own company. The court ruled that Khodorkovsky and Lebedev had headed an organized group committing financial crimes in Russia's oil business via their oil company Yukos. According to the ruling, Yukos had signed fake agreements with its Yuganskneftegas, Samaraneftegas and Tomskneft subsidiaries on the purchase of oil and buying oil products from them at reduced prices. A few other charges were reported to have been dropped due to expired status of limitations.

Russian oil tycoon Mikhail Khodorkovsky arrived in Berlin on 20 December 2013 after being released from prison. He flew out of Russia just hours after President Vladimir Putin signed a pardon for him - ending more than 10 years of detention for tax evasion and embezzlement. The former Yukos oil company head was greeted by former German Foreign Minister Hans-Deitrich Genscher at Berlin's Schoenefeld airport. In a statement following his release Friday, Khodorkovsky said he asked the Russian president on November 12 to pardon him in connection with "family circumstances" and that he was "glad" the response was positive. "The issue of admission of guilt was not raised," Khodorkovsky said in the statement.

Join the GlobalSecurity.org mailing list

Page last modified: 29-07-2014 18:36:37 ZULU