Friday, July 3, 2009

Mikhail Khodorkovsky: Russia needs independent courts

In June Jotman traveled to Helsinki to answer to the question: What kind of bear is Russia?

Our investigation here continues. Jotman contributor Sanjuro has translated a rare interview with the former president of the Russian oil conglomerate Yukos, Mikhail Khodorkovsky. The interview was published in Gazeta in June 2009.

First, have a look at the following timeline. It provides some background concerning recent events in the life of the imprisoned Russian oligarch.

Khodorkovsky Timeline*
  • 2004 - Khodorkovsky the wealthiest man in Russia.
  • 2003 - Khodorkovsky funded several Russian parties, including Yabloko, the Communist Party of the Russian Federation, and even, allegedly, the pro-Kremlin United Russia.
  • 2003 - October 25 - arrested at Novosibirsk airport by the Russian prosecutor general's office on charges of fraud. Shortly thereafter, on
  • ----- - October 31 - Vladimir Putin took actions against Yukos because of tax charges, leading to a collapse in its share price.
  • 2005 - On May 31 - found guilty of fraud and sentenced to nine years in prison. The sentence was later reduced to 8 years.
  • 2006 - October - Forbes estimates net worth under $500 million.
  • 2008 - August 22 - denied parole in Siberia, in part because Khodorkovsky "refused to attend jail sewing classes"
Here is Sanjuro's translation of the interview of June 26, 2009:

The Mikhail Khodorkovsky Interview

Former executive of the Russian oil company YUKOS Mikhail Khodorkovsky, who turns 46 today, answered selected questions posted by the Gazeta.Ru readers. In the interview he tells how he made his first money and why he optimized taxes, foretells the plight of the YUKOS minority shareholders and
the future of Russia’s judicial system.

(Translator: The interview is preceded by a statement from Mr. Khodorkovsky’s lawyers, which we omitted in this translation)

Gazeta: What’s your opinion on the privatization in general, and privatization of YUKOS in particular?

Khodorkovsky: I don’t think privatization was done fairly in Russia, and wrote about it in the article “Crisis of Liberalism in Russia”.

Most of our compatriots were not ready to take advantage of the available opportunities, and the government did not solve this problem using one or another mechanism, as it was done in e.g. the Czech Republic.

By 1995, unlike most of my generation, I had a decent education (technical, economic, law), eight years of business experience and some cash that I had saved up by that time. So I had some objective advantages during the privatization, and I used them. Was it the right thing to do – acquire YUKOS? I was 32, an entrepreneur, and I saw an opportunity.

An opportunity of great rewards, against great risks. On one side of the scale there was everything we had earned in 10 years, plus obligations towards the banks, which would have to be honoured, plus the elections that could results in confiscation of everything, plus three billion dollars of YUKOS’ debts to the fiscal authorities, vendors, employees, plus the declining oil production. On the other side of the scale were a unique team, a giant enterprise that after restructuring could be worth much more.

I decided to take the risk and never regretted doing that. Those seven years at YUKOS were probably one of my main achievements in life. By 2003 YUKOS became possibly the best oil company in Russia.

Q. Was there something new created at YUKOS, apart from the Soviet legacy?

I came to a company with an annual oil production of 40 million tons and it was declining. If we didn’t do anything, by 2003 it would be some 20 million tons. But actually by 2003 oil production rose to 81 million tons, i.e. the company was renewed by three quarters.

Just for instance, we started commercial development of the Priobskoye deposit on the right bank of the Ob River, started developing deposits in Eastern Siberia, started rebuilding the oil potential of the Samara Oblast – there’s more that our team can be proud of.

It sounds funny, but in 2003 Vladimir Putin publicly recognized that success.

Q. How do you explain the high performance of YUKOS?

I can tell that all Russian (oil) companies had a good potential. We could realize that potential. Since 1987 my team was developing IT solutions and implementing them at various enterprises in the industry. We all had either economic-engineering or computer science training.

It turned out that, in technical terms, the Russian oil industry was lacking exactly that component: large scale implementation of technologies already known in the world, based on computerized models. Plus economic assessment of every technological step.

Our modeling center was the first one in Russia and, by the way, both German Gref and Alexey Kudrin visited on various occasions (Translator: Both are top Russian officials: Mr. Gref was then the Minister of Economic Development and now head of Sberbank, Russia’s largest financial institution, and Mr. Kudrin was and still is the Finance Minister).

Our R&D center too was the first dedicated oil research institution started in the post-Soviet era and aimed at implementation of new technologies.

It’s simple: the right team in the right place at the right time all produce the right result.

Q. Were the “barbaric” oil production methods used?

I’ll take the risk of saying that was an outwardly unprofessional statement. Professionals look at the actual oil recovery ratio and compare it to the estimates. During my time recovery ratios at YUKOS sites only increased. And that’s the main indicator of the operation’s quality. When Rosneft came to YUKOS sites, they, I suppose, had every reason to find faults with our performance, but somehow they didn’t. And that’s a fact, the rest is just propaganda.

Q. What’s “pit hole liquid” and what was is invented for?

Pit hole liquid is a nature’s invention. And oil production techniques are by the earlier generations of oil engineers. Nowadays in Russia and in other countries it is not really oil that is pumped out of the pits, but a mix of 30% oil (average) and 70% of water, gas, mineral salts and other “mud”.

This mix is technically referred to as “raw hydrocarbon material” or “pithole liquid”.

After refining process which involves giant installations and thousands of workers, this “raw material” becomes actual “oil” that meets certain standards and is then transported to customers.

Those who call themselves oilmen and claim that in Russia pure oil comes right from the pits are simply crooks.

Q. Did you use tax optimization schemes?

Yes. And again: yes! Like any executive I was seeking to minimize the tax burden strictly within the legal limits and with minimal risks for the company. Otherwise we would lose to our competitors. Average tax burden in the industry was about 30–35% of the revenue when the oil price was about $20 per barrel, and it was thoroughly watched over by the tax people. I personally reported to the ministerial commission that included the minister himself.

Rosneft, Sibneft (that later became Gasprom Oil) and others all operated in similar ways, with very close taxation rates, plus-minus 2%.

Q. Did you steal money?

No! Never. I could perfectly earn money and stealing was just strategically stupid.

The main source of income for an owner of a large company is the growing value of his shares. Stealing destroys value; in return it only gives some petty rewards and then serious problems.

Real owner does not steal. It does not make sense. That is why state ownership is a symbol of mismanagement, theft and corruption (in the USSR included, even in the Stalin’s era). Despite all the efforts to camouflage this fact, the human nature is hard to change.

Q. How did you make your first money?

I am not shy at all of my first earnings. Since 1987 my partners and I were trading computers that were brought into the USSR by others who went overseas on lengthy business trips. These people, returning from overseas, would bring the PCs, sell them to us, and we would install Russian software (our own development, by the way) and reconfigure them as demanded by customers. That was the first “big money”.

A computer could be worst 40 thousand rubles. We sold over 5 thousand pieces.

For the business travelers it was more profitable than going through the pains of importing cars (which was the normal practice before computers became common) or importing tape-recorders. Why didn’t the state import computers? Because of the lobby of our “coffin”-makers who by then had already fallen behind by decades.

Q. Is it true that the (YUKOS) shares that you owned were transferred to Rothschild?

Not true. No shares were transferred to Rothschild. After I was arrested, I lost the right to the controlling stake. It automatically went to my partners. It’s a standard protection procedure: when taken hostage, owners lose the right to manage their property.

Q. What can the minority shareholders of YUKOS hope for?

According to the law, should Platon Lebedev and I be found guilty of embezzling all the oil from YUKOS, then all the taxes, all the assets are to be returned to YUKOS and repaid to the shareholders.

That’s about $40 billion US, maybe more. But I doubt that anyone will return anything of these assets. V. Geraschenko has once put it extremely clear (Translator: in July 2006, speaking of Rosneft taking over YUKOS assets, Viktor Geraschenko, former head of the Russian Central Bank, said something like “Bastards stole everything!” Mr. Geraschenko however used somewhat stronger Russian expressions). At the same time, I am totally convinced in the integrity of the YUKOS managers and have no doubts that whatever revenue made from the sale of the overseas assets will be distributed among all the shareholders after the legal formalities are over.

Q. Do you believe the court and generally in the possibility of independent courts in Russia?

My fate is not decided at the court. Everyone knows that. If there was an independent court, my trial would end without even having started.

However, there will be independent courts in Russia! This is absolutely imperative – if we want to keep the country, create an innovative economy based on the entrepreneurial initiative, if we want to be trusted and respected in the world.

Trust alone is not enough. Every one of us, and first of all, the judges themselves must continually and persistently push to move the system on. Even if by one-millimeter increments. Even with some sacrifices. The reward is a clean conscience. And that’s worth the sacrifice.

Q. What do you regret about today?

We should have started not from the industries, but from democratic institutions: from people’s education, from achieving a broad social consensus on the ownership issues.

Yes, there were things I did not understand. People change over time. I realized that in 2000, at 37. There were quite a few mistakes. And I attempted to radically change my life.

I started the Open Russia foundation, the Federation of Internet Education. I tried to facilitate the development of the political system. Not much came out of it, but that’s alright. Could I have lived my 46 years better? I guess so. It’s not up to me to decide. But it’s up to me to go on living and to right wrongs. As long as God lets me to.

*Timeline data source is Wikipedia.
See also the JOTMAN.COM live-blog of the Helsinki IPI World Congress discussion "What kind of bear is Russia?"

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