January 5, 2014

Who Is Mikhail Borisovich Khordokovsky?

By Dr. Gary K. Busch 21/12/13
Dec 21, 2013 - 10:32:50 AM

Yesterday the jailed oligarch, Mikhail Borisovich Khordokovsky, was freed from his prison cell and flown to Germany. Vladimir Putin issued an amnesty and Khordokovsky was free. The impression of the journalistic treatment of Khordokovsky is that he was the richest man in Russia who was unlawfully imprisoned by Putin because of Khordokovsky's support to dissident political parties. While an attractive hook on which to hang this story this analysis misses out a wide swath of modern Russian history. It is a trivialisation of what is a more important story. It is a very uninformed and misleading comment on just why Khordokovsky was in jail and what his career had been before his arrest.

The story of Khordokovsky is the story of the post-Soviet transformation of the Russian political and economic economy. To understand what Khordokovsky represents it is necessary to look back at the 1990 crises which beset Russia.
By 1990 Russia stood in a very precarious position. It had vast wealth in terms of resources but no way to trade them; a mighty army but an army that was retreating from Eastern Europe without a shot being fired; a banking system with no liquidity as all funds were held in Moscow and there were no regional banks.

There was a gold rouble trading at $1.20 to the U.S. dollar and a free rouble trading at $0.66. Behind all of this was a nervous and hostile West, especially the glavni vrag, the "€œmain enemy"€ the U.S., who would certainly prevent Russia from dumping its products on the world market and who was refusing realistic credits to Russia. In addition, the break-up of the USSR into Russia and the CIS left many of Russi'€™s ports in the hands of local nationalists in Lithuania, Estonia and Latvia which restricted Russian access to the markets.

There were several major crises with which the Russians had to deal all at once. The first was food. There was little food in Russia at the best of times, exacerbated by the problems of logistics and supply. Under the Soviet system the factory or place of work in rural Russia often offered most of the social services provided by the State, including food. With the end of the Soviet system these factories or places of work had no ability to fulfill these tasks using their own resources. Because their factories operated under the strictures of the command economy there were no profits, no accumulated savings or other funds upon which they could draw. They couldn't buy raw materials; they couldn't pay for utilities or services; and they had no reachable market for their goods. In the giant aluminium plants there was no way to pay for the alumina (which was derived from bauxite imports from Guinea); no way to pay for electricity; and no way to pay wages and no way to get the finished aluminium to market.

Equally there was no way to price these internal transactions as there never was anything other than notional prices for transport, notional prices for raw materials and notional prices for finished products. There was no money in the system, only a notional internal clearing mechanism.

The leaders of the First, Fifth and Sixth Directorates of the KGB developed a two pronged plan. The first part of the plan included inviting in foreign capitalists to prepay the expenses of the factories to get production moving. These capitalists would pay for raw materials, pay for transport and earn the right to sell the completed goods on the world market. They would pay, in addition, a fee or "toll" to the factory for producing the goods. This system of tolling would only work if there were an internal currency which could be used to start the payment system and establish prices. There was no state mechanism capable of handling this. So, the planners decided on an ambitious, if risky, system. They would make an alliance with the small and disorganised criminal groups in Russia to develop a parallel system to the government's official currency business. They opened up the floodgates on a massive haemorrhage of roubles onto the world markets to get hard currency and to prime the rouble pump inside Russia. In a little over a year over US$22 billion in gold left Russia at a heavy discount to cover the massive rouble river costs. Europe was full of stories of this group or that offering to place $140 million with one bank or the other. What did happen is that most of this money, in roubles, returned to Moscow; albeit at a discounted rate.

When this money returned to Moscow it had to be used and directed for the urgent projects decided upon by the leaders. The KGB and its allies, under Silayev, Kryuchkov, Kasbulatov and Soskavets set up a system in which loyal and trusted members of the Komsomol system and friendly businessmen could form their own banks - Russian banks. Men like Khodorkovsky, Aven, Fridman and others were chosen from the ranks of the Komsomol and set up in the money business. They used the banks to channel the returning Mafia money into long-term businesses.

During 1986 and 1987 Khordokovsky was deputy secretary of the MKhTI Communist Youth League (Komsomol) committee for the Frunze District of Moscow... From this position, Khodorkovsky became director of the Centre for Scientific and Technological Programs of the Foundation of Youth Initiative, where he served until 1989. He got his start in business when Communist Party Deputy General Secretary Yegor Ligachev decided to encourage youth activists to enter business. A technology business centre was attached to each district in Moscow. In 1987, Khodorkovsky was named the head of the centre in his home Frunze district. ("Menatep" is the acronym for Frunze's "Inter-Branch Centre for Scientific and Technological Programs" the local chapter).

The Menatep Group evolved from these business activities, especially through the resale of computers, where profits were made capitalizing on the difference in price between domestic and foreign markets as well as the differential rates of exchange. The young men running Menatep formed allegiances with many of the fringe operating groups in Moscow then entering into the business of "trading" and provided the foreign currency exchange function to their businesses.

Khodorkovsky was chosen to start the Menatep banking project because he belonged to the former Communist Party elite in the country. A number of powerful figures within the Central Committee decided to set up the bank and provided guidance to Khodorkovsky and his institution along with introductions to the so-called "right people" in Russian government, trade and, especially, intelligence circles. These powerful and influential persons assisted Khodorkovsky and his new project while it was in its infancy. Some of this assistance came in the form of funds that were, in the source'€™s words, "pumped" into Menatep Bank. One source identified the source of some of the funds as "Stankoimport",€ a trading company that was a subsidiary of the Russian Ministry of Foreign Trade. Stankoimport's use of Menatep Bank was arranged by Khodorkovsky's powerful friends, who wanted to insure that the bank "got off to the right start". At that time Pyotr Aven (currently head of Alfa Bank) was the head of Russian Foreign trade.

In the beginning of the Menatep Bank operation, despite its government and intelligence service "backing", the bank was a normal Russian financial institution, engaged in the buying and selling of currencies. Soon, however, the bank became involved in the building of a large-scale "trading company" called Kentavr. This entity began as a top distributor of Nestle, Wrigley and Coca-Cola products in Russia and the former Soviet republics. Subsequently, Menatep became a partner and financial backer of another company, the Paris-based, multi-billion dollar concern known as Sucden. This company became a “major player” in the Russian sugar market.

The development of Menatep is a good example of how the Chekists ran the Russian transition. The Menatep Group evolved from these business activities, especially through the resale of computers, where profits were made capitalizing on the difference in price between domestic and foreign markets as well as the differential rates of exchange. Menatep was selected as the KGB conduit for external money placements. Soon they had enough working capital from these groups to start a bank. The bank was officially registered in 1988. Its patron in 1990-91 was former Russian Prime Minister Silayev. The bank's public offering in 1991 was the first since Bolshevik Revolution. The bank grew quickly after 1991 on currency speculation. This speculation put them in close relationships with many Russian entrepreneurs and politicians.

Menatep had ties to a wide range of Russian leaders, including Anatoly Chubais and Viktor Chernomyrdin, though the links appeared much stronger to the conservatives. The most important of these links was with former Deputy Prime Minister Oleg Soskovets, former presidential bodyguard Aleksandr Korzhakov, former Oil and Gas Minister Yuri Shafranik and former Supreme Soviet Speaker Ruslan Khasbulatov. Through these men the new metal magnates, oil magnates and gas magnates drifted towards Menatep as their bank. By 1995 Menatep had grown into the holding company, Rosprom, and acquired the majority assets of the second largest oil and gas company in Russia, Yukos.

In 1990 Khodorkovsky was appointed adviser to the Russian premier-minister Ivan Silayev. In 1992 he was appointed chairman of the Power Industry Investment Fund and adviser to the Prime Minister. In March 1993 he was appointed Minister of Power of the Russian Federation. In April 1993, Khodorkovsky together with Smolensky (bank "Stolichny"), Gusinski (MOST-Bank), Agapov (Credobank) established a national joint-stock company, which issued credit cards in conjunction with foreign banking partners.

Khodorkovsky enjoyed a close relationship with Chief of Presidential Administration Aleksandr Voloshin. Voloshin was considered as the most powerful Russian government official after President Putin. While then Prime Minister Mikhail Kasyanov held the actual “title” of Prime Minister, he did not, in practice, enjoy as much "real power" in the Russian government as Voloshin. Alexander Voloshin, in addition to his Kremlin post was head of the board of directors at United Energy System (UES). In 1996 he was appointed president of the Financial Funding Corporation (FFC, part of the State Federal Property Fund) and was charged with supervising state property auctions. It was Voloshin who helped Boris Berezovsky and Roman Abramovich to acquire (reportedly illegally) 85 percent of the Sibneft oil company (thus causing a large loss to the federal budget). Sibneft had proven reserves of 4.1 billion barrels of oil and produced 342,000 barrels of oil per day, a third of which was exported. This acquisition allowed Abramovich and Berezovsky to buy into the Russian aluminium industry. It was Voloshin who tried to merge Yukos with Sibneft to form the abortive Yuksi.

The ties with the intelligence and security interests were equally as good. According to Russian sources, Mikhail Khodorkovsky had close relations with the Soviet and later the Russian security services from the start of his career in private business. Menatep Bank was set up under the direct control of the Committee for State Security's (KGB) First Chief Directorate (foreign intelligence service) and Fifth Chief Directorate (ideological arm of the KGB). Later, the Russian foreign intelligence service (SVR) succeeded the KGB as his controller. Khodorkovsky's business was used by the KGB to take large amounts of money out of the country shortly before and after the disintegration of the Soviet Union.

In 1993 Khodorkovsky was used as a "front" for a major Russian intelligence operation aimed at establishing a Russian bank in the US. When this plan failed, the SVR attempted to use US territory to establish a bank in Uruguay. According to the plan, the bank, with an initial capitalization of $1 billion, was to receive a large amount of cash from Russia. The other part of the plan was to obtain foreign (preferably diplomatic) passports for approximately 100 Russian citizens, each of whom was worth at least $100 million. These citizens were supposed to become the first customers of the Uruguayan bank, and they needed foreign passports to flee Russia in case of major social upheaval.

This information is supported by September 1999 Congressional testimony before a House Banking and Financial Services Committee hearing on Russian corruption and money laundering. This testimony states that in 1993 Khodorkovsky and his Menatep lieutenant, Alexander Konanykhin, operated "a KGB money-laundering operation with stolen funds that were passed through Khodorkovsky of Menatep Bank as a KGB-controlled front firm". According to the testimony, Konanykhin ran the US side of the operation out of the Willard Hotel in Washington. The hearing witness, who had acted as an "unpaid intelligence asset" in investigating the operation, testified to the CIA's, FBI's and Department of Justice's interest in Khodorkovsky and Konanykhin at that time. The witness went on to state that the investigation of the operation was compromised by convicted spy Aldrich Ames and was never reported to Congress.

According to Russian sources, this entire operation was coordinated by SVR headquarters in Moscow and was personally supported by Aleksandr Korzhakov, former President Boris Yeltsin's personal bodyguard. Khodorkovsky reportedly financed the operation though Menatep. According to sources, the initial stage of the operation in Washington, D.C. cost him at least $1 million.

Sources report that "€œRussian security agencies"€ also helped Khodorkovsky forge strong business relations with the former bosses of the Bulgarian security agencies, who became businessmen after the collapse of communism. These connections helped Khodorkovsky to expand his oil business to Bulgaria. According to expert sources, this kind of connection with the KGB usually gives a human asset “no chance to ever sever ties for the rest of his or her life.” Even though burgeoning personal wealth made Khodorkovsky more independent, the Russian security agencies have continued to exert some influence over him. It was not coincidental that when Yevgeniy Primakov, former head of the SVR, became Prime Minister, he would take along on foreign trips only one oligarch€ Khodorkovsky, who was "the most trusted and reliable KGB asset among the oligarchs".

During the mid-1990s it was common knowledge among the Russian business elite that Khodorkovsky enjoyed a close friendship with General Mikhail Stepashin, who served until 1997 as the head of the Federal Counterintelligence Service (FSB), the domestic internal security agency of the Russian government. This agency was formed from personnel of the Second Main Directorate of the former Soviet KGB. However, the sources indicate that Khodorkovsky does not enjoy the same relationship with Stepashin'€™s successor. Khodorkovsky reportedly handled his connections with the security agencies as an "€œopportunist".€ At the start of his business career, he was totally subjected to the KGB'€™s control because at that time he had no chances of succeeding without KGB patronage. Later, when the KGB'€™s successor temporarily lost its grip on power, Khodorkovsky tried to become more independent. When Vladimir Putin became president and the security agencies again took over the country, Khodorkovsky reportedly became as "€œforthcoming" in his relations with the SVR as he had been at the beginning of his career.

The main man who was responsible for security operations in Khodorkovsky'€™s companies was Mikhail Yosifovich Shestopalov, former head of the Division for Combating Thefts of Socialist Property and Speculation of the Moscow Main Department of Internal Affairs. Shestopalov was described as €"one of the closest and most trusted" associates of Khodorkovsky. Shestopalov had arranged extensive contact between Khodorkovsky€'s group and the Ministry of Internal Affairs (MVD) and the tax police. In the Russian regions, Shestopalov also cooperated closely with local departments of his former organization that combat economic crime, and he ensured that Khodorkovsky’s interests were represented in these departments.

The head of Yukos' information and analysis division, Alexander Karbainov, was the former head of the KGB's Center for Public Relations and the man put in charge of improving the KGB'€™s image under Gorbachev. He ran tours of the Lubyanka and gave press interviews on the KGB. He is most famous for his "€˜Miss KGB€" contest in which he tried to put a human face and a superhuman body, as the image of the Chekists. Karbainov first joined Khodorkovsky's organization in 1994 as the head of the information and analysis division of Menatep.

There was virtually no aspect of what Menatep was doing which wasn't controlled by, monitored by and directed by these same KGB-SVR leaders. This included providing government-sanctioned services to organised crime. From its early days the young men at Menatep provided financial services to the Solntsevo, Lyubarsky, Uralmash and Izmailova families. Through his connections with Semyon Mogilevich, Menatep began moving currencies and investments to and through Hungary and then to the U.S. Menatep handled the foreign exchange business of Grigory Luchansky of Nordex and moved large sums into the U.S.

Menatep Bank was crucial to the movement of money in and out of Russia. Menatep (Khodorkovsky's bank) was the vehicle through which almost all the transfers of serious money in and out of Russia took place from 1992 to 1998. When the aluminium corporations started 'tolling' aluminium and others started tolling copper and nickel they did not send the proceeds of their sales back to Russia. On the advice of Russian Prime Minister Silayev, Deputy Prime Minister Oleg Soskovets, presidential aide Aleksandr Korzhakov and Speaker Ruslan Kasbulatov they were told to make all payments to Menatep Bank. Sometimes it might be Menatep Cyprus, sometimes Menatep Gibraltar, Menatep Finance Geneva, Menatep Inc. New York, etc. When they sold the metals they had tolled, a small fee was paid to the smelters. A payment was sent to them through their designated bank, often Citibank in NY. However, the bulk of the money was sent to Menatep marked "for onward transfer to "---Company"€ or "---€œAccount"€ at "---Bank". The aluminium traders did not know the recipient at the end of the chain. It wasn't their business. They paid what they had agreed and that was all. Only Menatep know exactly to whom these payments were going after they deposited the funds. These were not trivial sums; the payments for aluminium alone often amounted to US$60 million a month. Menatep monitored the cash flow and directed the funds to the accounts of the highest powers in the land (the Presidency, the Government and the Chekists) that staffed the parallel infrastructure. Menatep had been set up by these people and Khodorkovsky was chosen to be at its head; not the other way round.

In addition to its foreign currency and money laundering business Menatep also provided investment services. In the submissions before a U.S. judge in the "Avisma Case" Menatep was said to be the perpetrator of a gigantic con in which tens of millions of dollars were diverted from the company. Khodorkovsky and fugitive banker Alexander Konenyikin started the Antigua-registered European Union Bank which was described in a House Banking and Financial Services Committee as a "KGB money-laundering operation with stolen funds that were passed through Khodorkovsky of Menatep Bank as a KGB-controlled front firm" According to the investigators the entire operation was coordinated at SVR headquarters and was personally supervised by Yeltsin confidante, Aleksandr Korzakov.

There were Chekists at every level of Menatep and Yukos. There were no mysteries. The politruks and the pakhans supervised everything. Everyone knew what was happening. It was quite public. Because of Menatep the international tolling companies had no direct ties with the invisible government, except when they had to provide credit cards to top key individuals. One might reflect that Vladimir Putin's first job when he left the KGB was to supervise metals sales for Sobchak in St. Petersburg. The first contract to ship metals through St. Petersburg was signed on the bottom by Vladimir Putin.

However, in the modernisation of Yukos, and its introduction of Western business practices, the traditional post-Soviet system began to break down. The rule was that, in the absence of any trained or effective middle managers, the Russian oligarchs would deal with the local Mafia families across the broad expanse of Russia to take on these functions in the installations and factories in their region. This was cheap and secure. As Yukos began to modernise the Mafia families began to grow restive.

Yukos, after it was taken over by Khodorkovsky, began a program of intense modernisation. It employed imported management techniques from the West, as well as a number of Western managers. It modernised rapidly and became very successful. In mid-2004 it was producing 1.7 million barrels a day; about 2% of world oil production. It is committed to establishing an oil pipeline to China which will allow it to utilise many of its Eastern Siberian fields currently underutilised. Except for the actions of the Russian Government it would be a profitable and expanding company.

Moreover, Khordokovsky began to support several of the political reformist movements which were gaining traction across Russia. Putin and the Chekists were not worried about these dissident movements but they did worry about Khordokovsky’s willingness to keep his mouth shut about where all the money which passed through Menetep ended up; particularly the private accounts. His information was very dangerous to the national stability and the international view of Russia. As he refused to give a guarantee of silence t was deemed necessary to remove him from the public scene. Moreover the removal would make the insiders and the ‘siloviki, as lot of money in the process.

The Yukos case has often been seen in the West as an isolated case in which a ‘rogue’ company and a ‘rogue’ chairman decided to take on a political character and thus invited retaliation from the powers that be. There have been all sorts of allegations that Khodorkovsky was "€œinterested in politics" and that is why he was brought down. Khodorkovsky might well have been interested in politics but that is not, in any rational society, the reason for throwing him in jail and attacking one of the most successful private companies in the state. If being rich or hoping to be rich were a bar to political ambition there would be no one in charge of any country in the world.

The root of the attack on Yukos lies with the change of governance of the Russian state which has accompanied Putin’s rise to power. The Putin Government also runs a parallel political system which exists behind the facade of an elected President and Duma; the coterie of the "silovikiâ€"; the men from the KGB, the GRU, the MVD, the FSB and the other "€˜control organsâ€" who have slipped back into power under the cloak of Putinism.

There is no mystery about their growth and strength. The group includes a collegium of former Chekists who moved in with Putin from St. Petersburg and who first replaced the Yeltsin "Family" and then the Chekists associated with Yeltsin; thereafter they moved to take on the oligarchs. They include among them Sergei Ivanov, Igor Sechin (now head of Rosneft), Sergei Stepashin, Nikolai Patrushev, Vladimir Ustinov, Vladimir Yakunin, Nikolai Negodov, Yury Skuratov, Vladimir Osipov, Vyacheslav Soltaganov , Murat Zyazikov, Vladimir Kulakov, Viktor Maslov, Vyacheslav Trubnikov, Vladimir Kozlov, Gennadi Moshkov, Vladimir Strzhalkovsky, Vladimir Makarov, Leonid Lobzenko, Igor Mezhakov, Sergei Verevkin-Rokhalsky, Anatoly Tsybulevsky, Vladimir Lazovsky, Alexei Sedov, Vladimir Senin, Alexander Grigoriev, Alexander Spiridonov, Valery Bykov and Yuri Volkov, to name but a few. These men are Ministers, Deputy Ministers, Governors, Procurators-General, heads of the tax police, managers of the transportation system, leaders of banks, and heads of the customs departments. In short, they are the people who administer Russia while Putin meets Western businessmen and declares his liberal credentials and democratic leanings. These men (there are precious few women), like Putin, moved over from the Organs to play a role in government; primarily as advisers and then as Ministers or officials.

There have been many reasons given for why the "€˜siloviki"€™ and Putin acted against Yukos and its other targets, like Alfa Bank. One of the most compelling, but naive, was that the Chekists were trying to turn the clock back to a time when the centrality of State ownership of the nation's assets was the rule. A more compelling reason was that the international oil market fluctuated as the news on Yukos was made public and the absence of an "€˜insider trading"€™ law allowed the siloviki to get rich on their prior knowledge. These "€˜siloviki"€™ who ran the banks, the stock brokerages and financial institutions knew in advance when Putin would make an announcement about Yukos that would drive the price up or down and would position themselves properly in the market. Large fortunes were made on the insider trading generated by Yukos before it was finally closed down. Even more money was made on the fictitious purchase of the shares in Yukos by a shelf company before they were turned over to Rosneft.

It seems a though Khordovovsky has learned the value of silence and that the information he holds is so stale or unimportant that he can be let out without worry. However it would be a great mistake to think that Khordokovsky is, in any way, a victim of Putin. The kindest way to view him is as a participant-observer whose services were no long required.


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