Streetwise Professor

February 7, 2007

Mr. Khodorkovsky, Meet Mr. Kafka

Filed under: Commodities,Energy,Russia — The Professor @ 10:32 am

Mikhail Khodorkovsky and his colleague Platon Lebedev are the subject of new charges in Russia. These charges involve money laundering, supposedly involving sham sales of oil.

As yet, the charges have not been circulated publicly, and the evidence is unlikely to be. All indications are that the trial will be tightly controlled, and the result a foregone conclusion. The holding of the trial (illegally, as I understand it) in a prison complex in the isolated Siberian backwater of Chita rather than Moscow; the Kafkaesque procedural machinations; the intimidating security presence in Chita (complete with squads of Spetsnaz commandos in black balaclavas toting automatic weapons on the streets); and the ongoing intimidation of the defendants’ attorneys all make it abundantly clear that this is not about finding facts and dispensing justice, but is instead all about power. Indeed, as is common in authoritarian and totalitarian states, the blatant and unapologetic mockery of justice and due process is intended to send a message to anyone who dares challenge the authority of Putin and the siloviki.

The more outrageous the charges, and the more sinister the procedure, the more effective the signal. A fair and regular procedure with reasonable charges would be a far less effective method pour encourager les autres. Arbitrary and absurd charges are so much more . . . persuasive. They demonstrate that the law is not a constraint on the state, but its tool. It says “The state can do anything it wants. It can convict you on absurd charges if you challenge it. So be smart—don’t challenge.”

I do not know that Khodorkovsky and Lebedev did not break any Russian laws. However, a just government and legal system convinced of the truth of its charges and the strength of the evidence to back them would not hesitate to risk an open and fair trial operating under internationally recognized standards of due process. The Kremlin’s actions betray no such confidence, and provoke considerable skepticism about the truth of the allegations.

The single-minded intensity with which the Kremlin going after anyone connected to Yukos, which brings to mind Ahab pursuing the White Whale to the ends of the earth, or Inspector Javert hounding Jean Valjean, is truly creepy. The hatred is palpable. This is clearly very personal, which lends credence to the view that the true motive is deeply political, and that Khodorkovsky in particular is a mortal threat to Putin and his coterie.

In some respect, this fear is surprising, because Khodorkovsky is such a polarizing figure that there is reason to doubt his political viability. Like many of those who became unbelievably wealthy in the chaotic 1990s, he is widely resented in Russia, and his fate apparently attracts little public sympathy outside of the increasingly beleaguered liberal community. His supporters point to his corporate governance reforms; his critics claim that these were a newfound religion, and that his allegiance to clean governance was honored more in the breach than the promise during his rise to control of Yukos.

One accusation that seems difficult to credit is that Yukos is just a Russian Enron. The evidence that I have seen suggests just the opposite. Accounts from respectable independent sources state that under Khodorkovsky’s leadership, Yukos’s production and efficiency rose smartly—and that under Rosneft management, the same assets have become markedly less productive. That is, Yukos was a real company with real assets, and managed these assets well.

If it were not, why would the Russian government move heaven and earth to get control of it and its assets? If the US government had seized Enron, what would it have found? A shell of a company with far fewer assets and far more liabilities than it claimed. A knowledgeable government would have never tried to expropriate Enron (knowing that there was little to expropriate); a knowledgeable Kremlin’s expropriation of Yukos gives the lie to the Enron analogy.

What’s more, in a country where the rule of law is a nullity, and the government and its minions are willing to use any foul means to seize assets or cash flows that catch their eyes, it is understandable that corporate managers will engage in creative means to protect their companies’ assets. Again, I have no basis to determine with any certainty that the transactions at issue in the most recent Khodorkovsky allegations did not represent “tunneling” of Yukos assets for the personal enrichment of the firm’s management. I only mean to emphasize there are reasonable alternative hypotheses that could justify the use of complicated financial transactions by a firm rationally paranoid (which, as the Transplants song says, is “way past concerned”) about the predatory intentions of the government.

I obviously have no direct knowledge of which hypothesis is correct. I can observe, however, that the Russian government is bound and determined to avoid an open, transparent, and equitable process by which the evidence for each hypothesis can be presented and weighed by an impartial finder of fact to reach an appropriate verdict. And that speaks volumes.

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