Friday, 31 December 2010

Khodorkovsky's Guilty Verdict

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KhodorkovskyRussia’s Trial of the Century has come to a close with the final ruling declaring former oil tycoon Mikhail Khodorkovsky guilty of embezzling over $25 billion dollars worth of oil from the Yukos oil company he founded and ran.

Khodorkovsky made a reputation for himself not only by being a self-made billionaire, through his oil company, but also by becoming a nettlesome critic of the Kremlin. Kodorkovsky has many critics of his own in Russia and the West who denounce him as a robber baron, a godfather of the Russian Mafia, and a corrupt "oligarch" — and just as many supporters who praise him as an entrepreneurial genius, political reformer and human rights champion. His Khodorkovsky Center carries out an aggressive public relations campaign that has won support for him among many political leaders, academics, human rights activists, and celebrities worldwide.

While many "facts" concerning Khodorkosky and Yukos are in dispute, his carefully cultivated image as an exemplar of "free market capitalism" does not exactly square with reality. There is little question that Khodorkovsky's priviledged status as a member of the Communist Party and the Komsomol gave him a leg up on most of his fellow Russians when the false "privatization" of state assets began under Yeltsin. And it was not only that this gave him a head start; Khodorkosky continued to benefit from assistance and sponsorhip from the Komsomol and crucial favoritism from the Yeltsin clique in power. This was especially true with regard to the special arrangement that put Khodorkovsky's Bank Menatep in charge of the "auction" of the massive Yukos assets, as is explained in this story from Forbes  in 2002:

Khodorkovsky's Bank Menatep was put in charge of processing the bids in the Yukos auction. The winner turned out to be a company controlled by ... Khodorkovsky and his partners. A rival bid by three big Russian banks, which offered more money than Khodorkovsky's outfit, was disqualified on technical grounds.

The $350 million that Khodorkovsky and his partners paid for control of 78% of Yukos was quite the bargain. It implied a value for the whole company of $450 million. When the shares began trading less than two years later, Yukos' market capitalization was $9 billion. Today the market cap is closer to $15 billion.

Instant Billionaire

That's not exactly the same as earning one's fortune "the old fashioned way." Not that Khodorkosky didn't exhibit some positive management attributes. Following the 1998 economic downturn that afflicted Russia, Khodorkovsky reorganized Yukos by giving his company a fresh start through cleaning up its accounts and replacing its old Soviet-minded managers with experts from abroad. In addition, he replaced obsolete and inefficient Soviet machinery and hardware with state-of-the-art Western technology. Ultimately, however, this served the purposes of the Kremlin leaders, providing badly needed modernization of the crumbling Soviet oil industry, even as they attacked Khodorkovsky for doing so.