Streetwise Professor

December 20, 2014

Can a Money Launderer Truly Come Clean?

Filed under: Energy,History,Politics,Russia,Uncategorized — The Professor @ 8:07 pm

During his press conference, Putin made a very arch reply to a question about Khodorkovsky’s ambition to be president: “Of what country?”

Well, Khodorkovsky is making it clear that the answer to that question is “Russia.” He gives voice to his ambitions in an extended interview in the FT, and repeats his forecast that Putin’s main danger comes from within his “entourage”.

In some respects, Khodorkovsky’s re-emergence and frank statements of his political ambitions and his vision of himself as savior of Russia are a favor to Putin. Especially in times that bring back uncomfortable memories of the 90s collapse, the most notorious oligarch from that era makes a perfect foil for Putin. Breaking the oligarchs was one of the primary foundations of Putin’s reputation and popularity (with the war in Chechnya being another). What better way for Putin to remind Russians of why he is needed than the reemergence of Khodorkovsky?

And Khodorkovsky is definitely a very flawed vessel. Even if his prosecution and imprisonment was a travesty of justice, that’s not to say that he couldn’t have been convicted in a fair trial. For contemporary reporting, both Russian and non-Russian, makes it clear that Khordorkovsky was a ruthless operator who used every trick in the book to avoid taxation, and expropriate minority shareholders and creditors. This article from April, 2000 provides the chapter and verse.

Most of these tricks involved offshore shell companies that he owned. For instance, Khordorkovsky would engage in asset stripping, whereby assets of his Russian enterprises were transferred to the shell companies he owned. Another trick was stock watering, whereby his entities would issue large numbers of new shares of stock that were sold to his shell companies, thereby diluting the ownership of outside investors. He used these devices to great effect in the immediate aftermath of the  financial crisis. Non-Russian banks who had made loans to Khodorkovsky’s Menatep Bank collateralized by Yukos shares saw the values of these shares plummet when he stripped Yukos assets and watered the stock in a way that would have made Daniel Drew and Jay Gould blush.

Khodorkovsky was also the past-master at transfer pricing schemes, whereby output of his Russian companies would be sold to offshore entities at a fraction of the world price; the offshore entities would then sell at the world price. According to the Foreign Affairs article, during the first nine months of 1999, Yukos sold 240mm barrels of oil at about 10 percent of the world price to offshore entities, pocketing $800 million.

And of course, there is the way that he acquired Yukos, via the Loans for Shares deal, and the rigged auction that followed the (inevitable) government default on the loans.

Khodorkovsky was definitely not the hero of western investors back then. In fact, he was a villain.

For all this, Khodorkovsky exhibits little remorse. Arguably none:

I ask about the “loans-for-shares” auctions in 1995 when a handful of businessmen — the oligarchs — lent money to the near-bankrupt Russian state and received stakes in state businesses as collateral. When the state failed to repay the loans, the oligarchs sold the stakes to themselves at knockdown prices. Today the auctions are seen, I remark, as a kind of “original sin” hanging over Russian business.

“I wouldn’t entirely agree,” Khodork­ovsky says. At the time it looked, he continues, as if a Communist candidate would beat President Boris Yeltsin in the elections, which would have spelt the end of private business. Given the risks, no foreign investor was interested. So the shares were worth only what Russian investors would pay — in Khodorkovsky’s case, about $300m, for just under 80 per cent of Yukos.

. . . .

The tax “minimisation” schemes — selling oil through onshore tax havens — at Yukos that were the heart of the trials against him were known to the authorities and even senior ministers, he insists. “In tax law, it’s a crime in most countries if you’ve hidden something. But we didn’t hide anything.” [This remark is particularly disingenuous.]

Note that his justification of the loans for shares fails altogether to address the issue of the rigged auctions. If no other investors were interested, why were the auctions rigged in order to ensure that none could possibly win?

The unapologetic attitude towards not paying taxes is not new:

Khodorkovsky was robustly unapologetic. ‘ As long as the tax regime is unjust, I will try to find a way round it.’

What complicates the Khodorkovsky story is his apparent conversion in around 2000, when Yukos adopted GAAP accounting and western governance standards, and began hiring American managers, including Bruce Misamore as CFO. Was this a Road to Damascus conversion, or a calculated strategy to make the company attractive to western supermajors? Certainly this was the effect: at the time of his arrest, he was on the brink of selling a large stake in Yukos to either Exxon Mobil or Chevron.

His late-in-the-day embrace of western business practices and his persecution are relevant in evaluating his character and motives today, but his history cannot be overlooked. I for one am very skeptical that he has undergone a fundamental change. The failure to repudiate some of his more outrageous actions certainly raises doubts. Someone should address them.

There’s a possible candidate. One of the initiatives that Khodorkovsky funds in order to advance his agenda is Interpreter Magazine, edited by Michael Weiss. This is beyond passing strange, because Weiss has crusaded against Russian money laundering through the use of shell companies and transfer pricing schemes-the very techniques that his paymaster refined into an art 20 years ago. Interestingly, I can find no evidence that Weiss has subjected his patron to similar scrutiny. Not even an acknowledgment that the denizens of Londonograd that he excoriates are pikers compared to his pioneering patron, let alone an inquiry that could attempt to determine whether the man who emerged from prison a year ago is different from the man who went into prison in 2003, and who did the things that put him there.

This would be a truly valuable investigation, far more important than anything Weiss or Interpreter has done. This is particularly true given Khodorkovsky’s return to political life.

There is another strange twist here. Khodorkovsky has come out in opposition to sanctions, and in support of Russia’s annexation of Crimea: he claims that returning it would be undemocraticthe act of a dictator. Given that Putin also claims to be carrying out the public will, this raises questions about how differently Khodorkovsky would act if he were in Putin’s place. It also raises questions about his commitment to the rule of law, which he claims to support.

In sum, Khodorkovsky is playing a political role. Indeed, he is holding himself out as the man who can put Russia on the path away from autocracy towards the rule of law and respect for civil society. He has a past. A very disreputable one, though one perhaps redeemed by reform and punishment. But one can never be sure that the past is truly gone. Given that the most scurrilous acts in the past involved money laundering and shell companies, you’d think that a journalist who has crusaded against those things would be the man to find out.

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  1. … unless the purpose of the crusading was to establish credibility of his threats so he could then go on and negotiate an amicable settlement with some target like Khodorkovsky …

    Comment by Ivan — December 21, 2014 @ 3:18 am

  2. It is pretty spectacularly how Khodarkovsky — who is trying to position himself as some kind of Russian savior — even in a PR puff pieces for the FT manages to come across as a brazen criminal who learned nothing. His excuses for Loans for Shares is particularly hilarious — the same Westerners that ‘werent interested’ rushed into Yukos as soon as they saw it had a political roof. But the actual megalomania comes through when he starts talking about his employees as his helpless charges. only the great man can lead the Russian rabble! I was always skeptical the way certain Western Russophiles and places like the Economist decided to make him the new Sakharov, but then of course like he reavels he still has a couple million to throw at the servile British press.

    But then again, the praise that Khodarkovsky manages to still engender from the Londongrand puffers makes you realize how badly Putin misplayed his hand vs the West. There are literally thousands of running dogs desperate for to take his money to make him look good and he cant even manage that. Compare/Contrast the way China/Russia are perceived in official circles. Even the servile Germans had to finally pretend they have a moral compass and ask Putin to cut his shit.

    Comment by d — December 21, 2014 @ 4:05 am

  3. I’m not too far lout on a limb predicting Khodarkovsky might become radioactive–literally. Pity how polonium poising happens to the nicest people. Or others.

    Comment by The Pilot — December 21, 2014 @ 11:03 am

  4. @The Pilot-Khodorkovsky’s life insurance policy may be his role as foil to Putin. He is a convenient bogeyman.

    It’s interesting that Khodorkovsky is going back on a promise he made to Putin before his pardon, i.e., the promise he would not engage in political activity. Putin was asked about this, and claimed that this promise had no influence on his decision to free Khodorkovsky. He seemed rather fine with what Khodorkovsky is doing. This is in marked contrast with Putin’s Pavlovian response to the mere mention of Khodorkovsky’s name in the past. This suggests that either Putin doesn’t fear Khodorkovsky any more, or that Putin actually welcomes having him around to serve as a bogeyman.

    The ProfessorComment by The Professor — December 21, 2014 @ 12:52 pm

  5. Khodarkovsky is the preferred alternative to Navalny. The later is still a rich, Jewish thief in the eyes of every Russian citizen. Navalny is getting 10 years because he can mobilize while under house arrest and without any money build up an anti-corruption organization. Khodarkovsky will be treated just like the LDPR or the Communists, an amusement that creates the figment of competitiveness.

    Comment by d — December 21, 2014 @ 1:49 pm

  6. @d-The latter (Navalny) or the former (Khodorkovsky)? I interpret your comment to mean that Khodorkovsky is viewed as a rich, Jewish thief by most Russians, which I agree is the case.

    The ProfessorComment by The Professor — December 21, 2014 @ 2:47 pm

  7. One day NoKo censoring an American movie, the next day Russia censoring an American social network:

    Will be surprising if Cuba does not censor some thing or other American tomorrow. Seems like Obama is just a symptom of much deeper problems in America, much in the same way as Putin is for Russia.

    Comment by Ivan — December 21, 2014 @ 5:12 pm

  8. whops, you are right Prof, I was referring to the former not the later in the original sentence.

    Comment by d — December 21, 2014 @ 5:35 pm

  9. SWP, your comments in the past saying that Russia has never governed beyond the Prince and vassal model still fits here. I suspect Khodorkovsky, regardless of original intent, would end up running the place with a bunch of his buddies. Since power-sharing has never been a big thing, there would have to be a “redistribution of assets” in the country. He might do it in a more enlightened way than Putin and become popular in the press, but the end result could wind up being the same.

    Despite this, he’d pale in comparison to the savagery that Berezovsky would brew if he had the reigns. I used to just laugh and laugh when I’d hear BB get on the air and demand democracy in Russia. Yeah right. You, of all people. When MK speaks, I listen a little more attentively. I think he could actually know how to do it, at least. But as what’s been said before, scratch a Russian, and you often find a dictator inside. It’s sad, but likely true. I used to have hope for them, but what we saw for a while was only a mutant blip in their history that we happened to see in the prime of our lives. The rest of the story is that of getting too big for their britches and self-imploding. It’s already interesting to watch.

    I’ve been meaning to say one thing here for a while, but am finally taking the time to do it. The most tragic (or comical) thing about what we’re witnessing today in Russia is that it is all occurring during the Obama administration. Obama starts with a reset, i.e. a free pass to give them a break for a while. We do a nuclear treaty with them and hardly give a wit about them the rest of the time. Yet this is what drives them over the edge! Wow. Pathetic. It’s hard to even talk to my Russian friends these days. I really feel despair for them.

    Comment by Howard Roark — December 21, 2014 @ 6:46 pm

  10. @d-That’s what I thought. Re Khodorkovsky’s religion, note that he is emphasizing his Orthodoxy now, including in the FT interview. I think that’s pretty futile. He will always be viewed as a Jew by most Russians.

    The ProfessorComment by The Professor — December 21, 2014 @ 7:44 pm

  11. @Howard-Good to hear from you. Yes, Russia hasn’t changed, and replacing Vova with Misha would only change who owns what (until the next shift in power), rather than something fundamental about the way the country is governed. That said, yes, there can be worse dictators, and Berezovsky would have been truly frightening.

    Re getting too big for their britches and self-imploding, as I said in another comment they remind me of Wile E. Coyote. Always concocting wild schemes to achieve dominance over their hated adversary, and then having the Acme Policy Fireworks blow up in their faces, or running full speed off the cliff. Right now they are in that awkward moment where the realization that they are about to plunge to the canyon floor hits them.

    I hope all’s well.

    The ProfessorComment by The Professor — December 21, 2014 @ 8:23 pm

  12. This suggests that either Putin doesn’t fear Khodorkovsky any more, or that Putin actually welcomes having him around to serve as a bogeyman.

    I’d probably agree with this. And just as he’s congratulating himself on his brilliance in neutralising the threat of Khodorkovsky, he’ll feel the knife enter his back from somebody who he didn’t identify as being dangerous.

    Comment by Tim Newman — December 22, 2014 @ 2:09 am

  13. @Tim. Et tu, Brute?

    The ProfessorComment by The Professor — December 22, 2014 @ 12:42 pm


    Comment by elmer — January 6, 2015 @ 12:31 pm

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