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October 25, 2003 by AK

The beginning of a disaster?

NYT: Police in Russia Seize Oil Tycoon. Actually, it is the FSB who arrested him, the successor to the KGB.

WaPo: Russia Arrests Head of Largest Oil Co.

Mikhail Khodorkovsky, the CEO and majority owner of Russia’s largest (by market capitalization) company, was arrested today on standard “asset theft” and tax evasion charges. The company in question, YUKOS (site), is also one of the world’s largest non-state oil companies; its market cap was over $32 billion as of this Friday.

A Russian source also reported Khodorkovsky was blindfolded, handcuffed and hit with a butt of a Kalashnikov after he refused to answer any questions or go anywhere, calling the FSB agents’ actions illegal. His lawyer, however, has repudiated the report, saying his client was treated “properly”.

Whatever is going on, it’s bad, bad, bad, and scary.

When it comes to big politics and big business, there is no rule of law in Russia; there is rule by law instead. I have little doubt Khodorkovsky did committ some of the crimes he is being charged with. I also have serious doubts Putin, once deputy mayor of St. Petersburg and therefore member one of the most famously corrupt city governments in Russia, managed not to run afoul of the law. Everyone’s in dirt up there on the top; there may be law-abiding millionaires, but there is no billionaire and only a handful of top politicians who cannot be charged with a felony with the prosecution having a solid, strong case.

Which means we have an A vs. B situation; it’s not the Russian Federation vs. Khodorkovsky. This is all about political and economic power and control. I’m proffering four guesses.

Guess 1. Putin wants to show Khodorkovsky who’s the boss. (This is what Roland Nash of Renaissance Capital, a Moscow-based investment bank, is saying in the NYT.) Khodorkovsky has been giving money to both free-market and communist opposition. He may have long-term political ambitions. He’s only 40, and a very handsome man. Putin is a little gray mouse in comparison; appearances matter a lot in Russian politics. But Khodorkovsky is unlikely to run for president before 2008.

If Guess 1 is right, Putin is close to becoming a true dictator.

Guess 2. Someone close to Putin is trying to show Khodorkovsky who’s the boss. There are rivalling groups wtihin Putin’s administration, each (or either?) tied to a certain group of business oligarchs.

Guess 3. Someone wants to prevent ExxonMobil from buying up to 40% of YUKOS from Khodorkovsky — or remind the US giant this shouldn’t be done without Moscow’s approval (and/or a nice kickback).

Guess 4. Someone wants to buy up YUKOS on the cheap. But how much is the free float? We’ll see what happens to the shares on Monday, but even if one buys up all the float, they’ll be far from getting control over the company. There may be pressure on Khodorkovsky himself and his associates (like the already arrested Platon Lebedev) to sell their stakes — but from whom? Could it be the same ExxonMobil? Another oil major? A Russian financial-industrial group? Or the Russian government itself?

Again, this arrest shouldn’t have happened. It’s going to do a heck of damage to Russia’s economy now that it so badly needs foreign investment. It’s going to make common people feel even less protected, no matter how much they hate the oligarchs. And who knows how Khodorkovsky will respond…


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