Khodorkovsky 101: Summary of Motives Behind the Campaign Against Mikhail Khodorkovsky

[Editor’s note: this is the first in a series of background articles addressing the most frequently asked questions about Mikhail Khodorkovsky.] Summary of Motives Behind the Campaign Against Mikhail Khodorkovsky This summary outlines how interdependent strategic motives led to the imprisonment of Mikhail Khodorkovsky and the confiscation of Yukos’ prime assets. Khodorkovsky was increasingly considered a source of political opposition to the regime, and Yukos’ success was an unwelcome source of competition for state-owned energy companies. Ultimately, the elimination of Khodorkovsky as a political opponent and as corporate head of Yukos, and the eventual confiscation of Yukos itself, were politically engineered, and had little to do with law. There were thus two broad motives behind the campaign against Khodorkovsky: the elimination of Khodorkovsky as a political opponent, and the elimination of Yukos as a competitor to state-owned energy companies. The campaign against Khodorkovsky was initiated and led by the “siloviki”, ex-intelligence and ex-military strongmen who in recent years have come to dominate the Kremlin from within. The siloviki also control Russian state-owned energy companies. ― I. Elimination of Khodorkovsky as a Political Opponent Khodorkovsky was seen as an enemy for three main reasons: 1. Khodorkovsky was increasingly involved in politics and public policy advocacy – though merely exercising his civil rights, Khodorkovsky’s activities violated the administration’s unwritten edict that successful businesspersons stay out of politics – Khodorkovsky was outspoken on the need to end corruption and to create a more robust civil society – in a televised meeting with President Putin in early 2003, Khodorkovsky stated that corruption was spreading in Russia and that the administration “must be willing to show its readiness to get rid of some odious figures” in the regime, to prove it was serious about combating corruption – Khodorkovsky announced in mid-2003 that he would personally provide funds to the Yabloko opposition party and the Union of Right Forces (SPS) opposition party; both parties support the free market, democracy and the rule of law 2. Khodorkovsky led initiatives to promote civil society, democracy, the rule of law, education and economic development in Russian society, including small business development – Khodorkovsky created the non-profit “Open Russia” Foundation, with an annual budget of approximately $15 million in the first years of activity, and operating under high standards of transparency; funds were disbursed for philanthropic and competitive grant programmes in educational, cultural and social spheres, and for small business development – programmes promoted democracy, civil society, and market economics – Khodorkovsky’s foundation was one of few domestically-financed organizations that provided funding to Russian human rights organizations – Khodorkovsky also created the “New Civilisation” youth movement, dedicated to civic education; the “Federation of Internet Education”, an organization that established a mass Internet literacy programme in cooperation with the Russian Ministry of Education; and other projects training regional journalists and young political leaders II. Elimination of Yukos as a Competitor to State-Owned Energy Companies Khodorkovsky’s actions marked him as an outspoken leader who was pro-Western and challenged the non-transparent means by which government and business are conducted in the Russian energy sector: 1. Yukos championed Western standards of corporate governance – Khodorkovsky had embarked on an ambitious programme to transform Yukos’ corporate culture, with establishment of a Corporate Governance Charter and the most modern corporate governance and transparency practices of any major company in Russia – adoption of Western accounting standards and Western-style disclosure practices – hiring of Western management – creation of an independent board of directors with a corporate governance subcommittee – corporate growth through mergers and acquisitions and organic internal growth – corporate transparency of Yukos starkly contrasted with the opacity of the state-owned energy companies – when Yukos’ corporate transparency programme was fully implemented, Khodorkovsky began to advocate that other Russian corporations, including state-owned enterprises, should adopt similar transparency and corporate governance reforms; Khodorkovsky was challenging an established order that was highly lucrative for those involved 2. Yukos sought Western investment – Yukos was not as closely-held as other private-sector oil companies in Russia, and had significant foreign holders; as part of the transparency drive its ownership was to be diversified even further – Khodorkovsky was open to Western investment in Yukos, including increased foreign ownership; in 2003 Yukos began to discuss publicly the possibility of a significant foreign investment by a Western oil major; Yukos thus threatened to bring foreign ownership to the heart of Russia’s strategic oil industry – halting Yukos’ plans would ensure that the state regain almost complete control over the oil and gas industries; this control not only would enable the state, rather than private industry, to reap the financial benefits of world energy demand, but also would allow the state to withhold or to bestow energy supplies to other countries, thereby enhancing its global power through “fuel diplomacy” 3. Yukos competed successfully with state-owned energy companies The state-owned and state-controlled energy companies had interests that were often in direct competition with the interests of Yukos. Leaders of these companies concurrently hold positions of political power in the Kremlin. Yukos was an unwelcome competitor. – Transneft and Yukos were in conflict over the construction of a pipeline to China or Japan; the companies were also at odds over a plan to bring Western Siberian oil to a port near Murmansk for shipment to European and North American markets via economically efficient super tankers – the poorly-managed Rosneft was a minor player without any hope of competing successfully with Yukos – Yukos owned gas reserves in addition to oil reserves and already produced gas in certain markets; Khodorkovsky had stated publicly that Yukos could produce gas more cost-effectively than Gazprom, and Yukos explored building a pipeline to the Arctic Ocean where its gas could be liquefied at a terminal and exported to Europe, bypassing Gazprom’s pipelines and placing Yukos in competition with Gazprom in the sale of gas to Europe and beyond – Khodorkovsky stated publicly that with its falling production and rising costs, the privatization of Gazprom was necessary and inevitable