Darlings of the West – IV

Had he been an American, Mikhail Khodorkovsky would have been names such as thief, money-launderer, fraudster, and thug. But, since he is in Russia, Western media worships him as a symbol of the struggle for freedom and democracy in Putin’s Russia.

Matt Taibbi stands out odd among American journalists – probably a reason why he had to leave NY Press. His writing is laced with great wit and biting sarcasm. For an article about the U.S. presidential election, Taibbi went undercover and infiltrated a Republican party campaign office as a volunteer. In a story about the USA Patriot Act, Matt wondered if the John Ashcroft character was hiding something in his pocket or was just happy to see him. His review of New York Times columnist Thomas Friedman’s book World Is Flat was blistering. (Many die-hard followers of Friedman now claim they never considered the NYT columnist very seriously.) Matt’s coverage of Pope John Paul’s (How could they tell?) death offered an opportunity for his detractors to make it personal. NY Press is a free newspaper (i.e. it is distributed free) and could not stand up to the pressure.

But, it wasn’t his ruminations about the dead Pope or the vain Friedman that got him in trouble. Taibbi was a marked man because of his unusually frank and informative articles on Russia and Eastern Europe. During the Balkan crisis, American journalists simply added a by-line to Pentagon press releases and printed them as news stories. Taibbi, who had lived and worked several years in Russia, was different. In Meet Mr. Massacre, he revealed that the U.S. claims of genocide* by the Serbians were false and that the allegations were being vetted by dubious individuals with little or no credibility. His Oligarch R Us article about Mikhail Khodorkovsky was probably the last straw. Wall Street must have decided enough was enough.

Mikhail Khodorkovsky

So who is Mikhail Khodorkovsky? Well, he is an interesting character to say the least. A piece of work, some people say. If you believe the BBC or the CNN, then Khodorkovsky is someone whose industriousness has caused all-round envy and whose “political ambitions” had put him in direct confrontation with President Vladmir Putin. No mention about his dubious rise from rags to riches; nothing about his connections to Western capital; just the oft-repeated rant about the lack of democracy and the return to the Soviet-style command economy.

The Khodorkovsky story began in the final years of the Soviet Union. Although the Soviet Union was rich in resources, gross inefficiencies in the system had created artificial shortages. Because of its arms race with the West, the USSR was spending nearly one-third of its GDP on defence. When Gorbachev came on the scene, he initiated the Perestroika reforms that allowed a limited form of private enterprise. Because much of the populace was doctrined in Marxist ideology, it was only natural-born crooks who made it first through the gate. Boris Berezovsky (the biggest of the notorious “Oligarchs”), for example, took to looting state enterprises. The Soviet Union had incentive program to encourage foriegn investment in the country. To take advantage of this scheme, Berezovsky formed a front company in Switzerland, which then created a joint venture with a Soviet automobile company. He also started a car dealership for selling the cars created by the joint venture. Cars were bought at less than cost price by the dealership and sold at an enormous profit. After systematically destroying the company, he then proposed to buy it. Berezovsky made more such purchases including that of the Aeroflot airline company. After the fall of the communism, Berezovsky emerged as the richest man in Russia. He had prominent holdings in the media, whose partisan coverage helped determine the outcome of elections.

On his part, Khodorovsky took to importing computers to kickstart his rise to fame(?) and fortune. The U.S. had placed severe restrictions on export of dual-use items to Warsaw Pact countries. Because the socialist block could not manufacture top-performing mainframes and servers like the West, the Kremlin devised elaborate smuggling and transshipment routes. For items like pesonal computers, it was willing (thanks to Gorbachev’s Perestroika) to allow a few private individuals to devise their own schemes to import computers. Khodorkovsky was one of the few individuals to enter this business and because of the huge demand for PCs, he became enormously successful. Banks at that time charged huge amounts of interest to provide hard currency. So, Khodorkovsky decided to enter the money business. Although dealing with hard currency was the privilege of a select few, Khodorkovsky had no trouble in obtaining the necessary permissions and started the Menatep Bank. Khodorkovsky’s associate Platon Lebedev helped the bank setup a labyrinth of offshore entities where illicit money from Russia could be hidden. Soon, big government departments including the Ministry of Finance, the State Taxation Service, the Moscow city government and the main Russian arms exporter were doing business with him and large sums of money were suspected of being secreted out of the country through Menatep. The money laundering business is supposed to have netted him a rich crop of contacts and supporters in the Party.

George Soros meanwhile had failed in his attempt to court the Gorbachevs with his money. He had pumped enormous amounts of money into the charirty efforts of Raisa Gorbachev. It was to be a cover for money laundering but the Gorbachevs would not take the bait. The mini rebellion by foriegn minister Eduarde Shevarnadze did not cause any serious damage to communism. Soros then switched camps and started backing rising star Boris Yeltsin. Like Barkis, Yeltsin was willing. Foriegn consultants were now running his election campaign. Arun Nehru, who was part of Rajiv Gandhi’s cabinet, recalled in an op-ed article a meeting between Gorbachev and the late prime minister. Gorbachev asked how Rajiv managed to get dissidents in his party to stop bothering him. Rajiv replied that he gave them important positions in the government, which seemed to satisfy them. Nehru speculated whether this advice prompted Gorbachev to let Yeltsin become the President of the Russian Federation, the largest republic in the USSR. Yeltsin, however, could not have been made to lie low. Encouraged by the West, he wanted more. His insidious campaign and Gorbachev’s failure to contain him led to a coup by the KGB. Although the coup failed and added much to his popularity, Yeltsin still was not top dog. Yeltisin exhorted other Soviet republics to clamour for as much freedom as possible and they responded by secession. USSR was no more and Gorbachev’s post was made obsolete. Where the CIA had failed, Soros had won.

After Yeltsin took charge, he initiated the ruinous economic reforms under the advice of economists nominated by the World Bank. Insiders in his government began to put the Russian state to sleep. The socialist setup was torn down, which left millions without job security. Senior citizens were denied their pensions. Corrruption became endemic and tax collection fell. Roman Abrahamovich, the owner of the Chelsea football club, had a novel way of beating taxes. He got himself elected as the governor of the remote province of Chukotia. Then, he gave huge tax-breaks to locally registered companies, namely his own oil companies, which had moved their registered office to the area.

Meanwhile, valuable state enterprises in oil, gas, banking, etc., were being driven into mountainous debt by deliberate mismanagement. Taibbi gives a modus operandi:

I’ll set down one example, from a story I did many years ago about Russian minerals company called Avisma, which eventually filed suit against its owners here in the States, naming Khodorkovsky’s Menatep as the chief villain. Menatep (allegedly, I have to say in America) bought the company, then forced its directors to sell its commodities to a Menatep shell company called TMC at pennies on the dollar. TMC then sold the goods (mainly titanium) to Western investors at cost. To make matters worse, TMC then (allegedly) induced Avisma to buy materials from them above cost. Readers are invited to imagine what words like “forced” and “induced” mean in this context. In the end, nothing was left but a skeletonized carcass. Any Brooklyn restaurant owner who has been taken over by the Lucchese or Gambino families will recognize this technique.

Thus, billions of dollars were taken out of the country every week. Meanwhile, newly rich Russians started importing all kinds of consumer goods. As the value of the local currency started plummeting, Russians were beginning to hoard American dollars. Politically, things could not be worse. Yeltsin used tanks to shell the White House, the Russian Parliament, where MPs had staged a rebellion. The Western governments did not even blink. In Chechenya, the state first allowed an insurgency develop and then used excessive force (much of it directed at civilians) to quell it.

In 1996, Yeltsin was up for reelection. It was certain that he was going to be trumped by Communist leader Gennady Zhuganov. So, in 1995, under the advice of the World Bank, Yeltsin initiated a massive privatisation programme where Russia’s most valuable state enterprises were auctioned off at rock-bottom prices, under the direction of Yeltsin daughter’s Tanya. Only a select few were invited for the auctions and winners were selected in a totally opaque manner. Among the companies sold in this manner was Yukos, Russia’s second largest oil company. The auction was conducted by Menatep bank and the winning bid (although it was not the highest bid) was made by a company controlled by Menatep! Menatep agreed to pay $300 million and take on debts of about $2 billion. However, by the end of 2003, Yukos’ market capitalization stood at $27 billion.

Apologists for Khodorkovsky say that under his astute management, Yukos had turned valuable. Apparently, but if one digs deeper, situation was quite different. Yukos had proven reserves of over 12 billion barrels, which puts it in the same league as Chevron. Getting Yukos for $2.3 billion was a steal in every sense of the word. Because Menatep had no experience in the oil industry, they employed foreign oil services companies to improve Yukos’ oil production. Just anybody with a lawyer and a telephone line could have done this. When Khodorkovsky was in good terms with Yeltsin-nominated successor Vladimir Putin, the oligarch was noticeably quite frank about the nature of the sale.

In those days, everyone in Russia was engaged in the primary accumulation of capital. Even when laws existed, they were not very rigorously followed. Therefore, if you conducted yourself too much in a Western manner, you were simply torn to pieces and forgotten.

– Khodorkovsky in an interview to Paul Klebnikov, the author of Godfather of the Kremlin: Boris Berezovsky and the Looting of Russia and The World’s Billionaires: The Oligarch Who Came in from the Cold

Outfits like Menatep acquired many such companies. Because they had no experience in managing the industries they bought, the oligarchs called themselves as financial-industrial groups. But, basically, they were just crooks with top political connections inside the country and good financial links to the world outside. In time, they went on to own 90% of the Russian economy. The oligarchs had complete control of the media and were able to get Yeltsin reelected. Uri Avnery in Counterpunch explains:

At the time, President Boris Yeltsin was in a steep decline. On the eve of the new elections for the presidency, his rating in public opinion polls stood at 4%. He was an alcoholic with a severe heart disease, working about two hours a day. The state was, in practice, ruled by his bodyguard and his daughter; corruption was the order of the day.
The oligarchs decided to take power through him. They had almost unlimited funds, control of all TV channels and most of the other media. They put all these at the disposal of Yeltsin’s reelection campaign, denying his opponents even one minute of TV time and pouring huge sums of money into the effort. (An interesting detail: they secretly brought over the most outstanding American election experts and copywriters, who applied methods previously unknown in Russia.)
The campaign bore fruit: Yeltsin was indeed reelected. On the very same day he had another heart attack and spent the rest of his term in hospital. In practice, the oligarchs ruled Russia. One of them, Boris Berezovsky, appointed himself Prime Minister. There was a minor scandal when it became known that he (like most of the oligarchs) had acquired Israeli citizenship, but he gave up his Israeli passport and everything was in order again.

Because of failing health, Yeltsin nominated Putin as his successor and left the scene altogether. The oligarchs thought Putin would also dance to their tunes but the man whom the Voice Of America would get hoarse calling the “ex-KGB spy” had other plans. He began put a stop to rot that was eating away the state. He re-established state control of the oil assets of the nation. The oligarch control of the media was broken and were asked to keep off politics. Tax collection improved and at last things started taking a turn for good. Khodorkovsky decided this was bad and started financing political parties and media opposed to Putin. Khodorkovsy confessed he had even given money to the communists. Taibbi explains what happened next.

I’ll give Putin this: He has balls. Unlike Boris Yeltsin, who dropped to his knees for every greasy hood with a dollar for eight consecutive years, Putin decided to make an example of Misha. In America, we settle these disputes by giving the F-117 contract to a different company. In Russia, the methods are a little different: an untimely car accident, an exploding briefcase, a mysterious fatal illness contracted after a routine phone conversation. Absolutely the most civilized of these options is imprisonment and seizure of assets. This is the route Putin took with Khodorkovsky. In response to the latter’s decision not to abide by the laws of gangsterdom, Putin decided, for once, to enforce the laws of the state.

Wall Street reacted with horror. Khodorkovsky was trying to sell his stake in Yukos to ExxonMobil. This would have allowed the U.S. to counter-balance the OPEC in the oil market. They had undertaken a massive PR exercise to make Khodorkovsky more ameliorable to the West. The way he had came to fortune made him look like a modern-day version of the original robber barons, Rockfeller and Morgan. Lord Jacob Rothschild, giving his approval, said, “Khodorkovsky is a progressive businessman who is devoted to Russia.”

Here are some excerpts from an interview given to Kommersant, in June 2002, fifteen months prior to his arrest. The interview was not published on a request from Khodorkovsky’s office, which thought he had been too outspoken. They allowed it to be published in 2005 soon after his sentencing.

They write about you and YUKOS much more in the West than in Russia. The situation was the same three-four years ago but back then the publications were negative. Whereas now they are only positive. This strongly resembles “promotion” in the West. Has the time come?
It is a bipartite situation: we have changed and the attitude of the West has changed. If we take the time when business began things were pretty clear: one should abide by the laws but there are no laws.
Or there were laws but with loopholes.
Which means there were none. So people did what they wanted. These were the conditions under which the original accumulation of capital took place. We did shape some moral requirements to ourselves but those were our moral requirements so we should not even mention them today. They corresponded to the society we lived in. Then gradually the legislative field began taking shape, we continued functioning in its boundaries but it was still quite wide. Which it remains today by the way.
The term “money laundering” is quite widely used. However, apparently there exists the notion of “image laundering” as well. It was not for nothing that in your interviews in the West you mentioned Rockefeller as an example for imitation. However, Rockefeller “got laundered” only in the third generation – it was only his grandson that became “clean”. There were 100 years separating him from his grandfather. And it seems as though you would like to race through these 100 years during your lifetime.
I sure would. This is an objective requirement in business – the one who is faster will win. You are not surprised by the fact that the way from a horse to a railroad took thousands of years whereas from a railroad to a spaceship – only one hundred years. The same applies to the Rockefeller issue. I was in Harvard and heard the director of their business school speak. He said that Khodorkovsky was Rockefeller, Rockefeller’s son and Rockefeller’s grandson in one person.

Nationalisation of Yukos undid everything. Both Khodorkovsky and Lebedev were jailed. Menatep partners Leonid Nevzlin and Michael Brudno were absconding and later surfaced in Israel. Although Yukos affair was not to the liking of Russia’s fledgling stockmarket, the public’s attitude to the saga has been largely indifferent. However, if you believe the Western media, Khodorkovsky has numerous supporters among ordinary Russians and on the surface it seems to be true. The millions of dollars that the US embassy and the Open Russia Foundation spends on “civic education programs to promote democratic values” is being put to work. Taibbi explains how.

The papers have gone so far as to portray Khodorkovsky — a man whose name causes grown men to spit uncontrollably in every part of the Russian empire — as an anti-Soviet martyr along the lines of Andrei Sakharov. The Globe, normally the most sensible source of Russia coverage, even ran an AFP photo showing a woman holding a sign that reads, “Free Khodorkovsky.”
The “pro-Khodorkovsky” demonstration that this woman was a part of is the kind of thing that no journalist with any shame would ever touch. In Russia, it is well-known that “spontaneous” demonstrations on behalf of elitist monsters are usually paid productions. I once went to a demonstration of “Moving Together,” the so-called Putin Youth movement, in which the attending kids were given tickets to see Shrek in return for appearing. At another, a demonstration on behalf of Vladimir Zhirinovsky’s neo-fascist LDPR party, demonstrators were given free beer. They even gave me some. The LDPR has the best parties in town.

Taibbi concludes:

Many of us who spent the 90s in Russia became aware over time that the aim of the United States was to create a rump state that would allow economic interests to strip assets at will. The population in this scheme was to be good for consuming foreign goods produced abroad with Russia’s own cheaply sold raw materials. The aim was a castrated state, anarchy, a vast, confused territory of captive consumers, cheap labor and unguarded oil and aluminum.

* – Genocide was cited by Clinton administration as the reason for the NATO bombing of Yugoslavia.

† – In December 2001, the Open Russia Foundation was established by Khodorkovsky in London. Jacob Rothschild and Henry Kissinger sit on its board. The foundation formally awards grants to academic institutions and non-profit organizations. It is also active in the U.S. where it was launched in the heart of the U.S. establishment, the Library of Congress.