The Oligarchs (52 page)

Khodorkovsky saw the prize he wanted, but it took him several years to reach it. Shrewd and calculating, he found an inside track. During the first year of the Yeltsin government, Khodorkovsky became an adviser to Vladimir Lopukhin, Gaidar's minister of fuel and energy. The Gaidar cabinet was in office for less than a year, and the carving up of the oil industry had just begun, amid much uncertainty.
When Khodorkovsky took the job with Lopukhin, he did not want to leave Menatep Bank, so Lopukhin created an informal position, with the rank of deputy minister, putting Khodorkovsky in charge of the energy ministry's “investment fund.” What this really involved is not clear. However, it must have given Khodorkovsky an excellent source of intelligence about the oil industry. Nevzlin, Khodorkovsky's long-time partner, told me that “the only plus I remember” from Khodorkovsky's appointment “was that he managed to get acquainted” with the powerful Soviet-era directors of the production associations, known as the “oil generals.” At the time, few outsiders knew what was really going on in the oil production associations, and the oil generals were secretive, but Khodorkovsky got a glimpse of their closed world.
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What he found was that Alekperov had created his own empire in Lukoil. Another oil general, Vladimir Bogdanov, the strong-willed boss of the production association in Surgut, along the northern bank of the Ob River, created a similar kingdom of his own, Surgutneftegaz. Khodorkovsky was a Moscow financier, not an oil general, but had ambitions to stand shoulder to shoulder with Alekperov and Bogdanov. He set his sights on the new vertically integrated holding company that would eventually become Russia's second largest oil giant. It was called Yukos, and the core was a production association, Yuganskneftegaz, on the southern bank of the Ob River. (A second production association, Samaraneftegaz, was also added to Yukos.) The boss of Yuganskneftegaz was Sergei Muravlenko, whose father was a legendary Siberian oilman. Muravlenko became just the kind of contact Khodorkovsky later needed for his takeover. Yuganskneftegaz had enormous potential; it was extracting 33 million tons of oil a year in 1993, nearly 15 percent of all western Siberia's output. Yuganskneftegaz also had some of the largest reserves in Russia, including the biggest single undeveloped field, Priobskoye.
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Nonetheless, like most Russian enterprises, Yuganskneftegaz was not an ideal company—it had big tax debts and wage arrears, and it suffered losses by selling oil at Russia's artificially low domestic prices.
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Khodorkovsky was not the only one to spot an opportunity in Siberian oil. Foreign investors who came to the nascent Russian stock market avidly sought out shares in oil companies. It was said in the early 1990s that the cheapest place in the world to drill for oil and gas was on the Russian stock market. These stock market investors did
not really care about sloppy management, overdue taxes, and crazy prices; in fact, most never even visited the companies in which they invested. They just bought the stocks and hoped to make a killing. The investors, many of them really just sophisticated gamblers, were lured by cheap assets, and that meant oil reserves in the ground, of which Yuganskneftegaz had plenty. The former production associations, which I will call the oil field extraction companies, did the real work of the industry, bringing the oil out of the ground. On the Russian stock market, it was possible to buy large blocks of shares in these oil field extraction companies. Yuganskneftegaz was one such alluring stock. It was the equivalent of a midsized international oil company such as Amoco.
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The shares of Yuganskneftegaz started trading in the summer of 1994, and they were featured in research reports by Moscow's small but growing legion of stock brokers.
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Even for gamblers, there were risks in buying shares in oil field extraction companies like Yuganskneftegaz. First, there was the theft. Russian oil industry managers, local politicians, criminal groups, and assorted sharks and financiers discovered ingenious ways to leach the wealth out of the extraction companies. Buying the stock did not guarantee that you would get the oil wealth. The managers, for example, could easily siphon off the profits into an offshore private “trading company” and leave you with the debts and wage arrears. A common technique was called “transfer pricing.” An extraction company sold oil to another company at an artificially low price, say, $2 a barrel. The second company then sold it for export abroad at a much higher price, say, $18 a barrel. The result was that the extraction company, with all the drills, wells, fields, and workers, lost money, while the second company made a handsome profit. The wealth was transferred from one company to the other, often in secret using shell companies and offshore havens.

The second risk was ownership. For the hungry investors who bought up stocks of the oil field extraction companies, there was the prospect that they, in turn, would be swallowed up by one of the new holding companies that the Russian government was creating in the early 1990s. These holding companies became corporate energy giants practically overnight and ranked among major international oil firms. The holding companies were fattened up by the state, which awarded them lucrative stakes in the oil field extraction companies. In general, the Russian government gave the holding company at least 51 percent
of the voting shares in the extraction companies—enough to ensure the that holding companies got control. The government then planned to sell off its part of the holding companies after three years, reaping a nice chunk of cash.

The risk for investors in the extraction company was that, when the holding company took over, the new bosses could easily siphon off the oil wealth for themselves. The holding company could use transfer pricing, asset stripping, and other means to redirect the profits. The shareholders in the oil field extraction company would be robbed. They would have lots of stock certificates, but none of the profits. The situation was ripe for conflict. The holding companies, which had a majority of shares in the extraction companies, would naturally want to exercise their clout. The extraction companies had their own minority shareholders, who could be prickly and rebellious if they saw they were being ripped off.

The collision between oil field extraction company and holding company is exactly what happened at Yukos. A reclusive American investor, Kenneth Dart, heir to a foam cup fortune, bought tens of millions of dollars worth of stock in two extraction companies, Yuganskneftegaz and Samaraneftegaz, in those early years, figuring that, despite all the problems, they had cheap assets—oil in the ground. Dart's purchase was secret at first, but later led to a bitter public fight with Khodorkovsky, master of the Yukos holding company.
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Yukos was created as a holding company in 1992, incorporating Yuganskneftegaz, Samaraneftegaz, and refineries. Yukos was offered for sale three years later, in 1995. Khodorkovsky recalled that he doubted whether the government, having created the oil holding companies, would ever sell them off. “I could never believe that the state would sell oil,” he said, insisting that he did not contemplate becoming an oil general in 1992, while he held the informal post in the fuel and energy ministry. Only in early 1995, Khodorkovsky said, did he begin to believe it was possible to buy Yukos.

Why? Something Potanin had cooked up called “loans for shares.”

 

Vladimir Potanin was a member of the Sparrow Hills club but a latecomer to the world of the young Russian tycoons. He arrived on the scene long after the others had suffered the hard knocks of the cooperatives and their nascent business ventures. During the tumultuous
years of
perestroika,
when Mikhail Khodorkovsky was transforming worthless noncash into cash, when Boris Berezovsky was setting his sights on Avtovaz, and when Alexander Smolensky was building dachas, Potanin was a low-level bureaucrat in the Soviet Foreign Trade Ministry, where his father also worked. He started his first business in 1990, and he reaped his first fortune only after the Soviet Union vanished. Yet this pugnacious young man with thinning hair and a gravelly voice became ringleader of all the tycoons in 1995 in their greatest single property grab. He came on suddenly, out of nowhere, helping them and helping himself, enormously.

As a child, Potanin did not know lines and shortages. His family enjoyed access to special privileges, including well-stocked food stores and frequent travel abroad. When he was very young, Potanin lived in Yemen; later he spent four years in Turkey. When he was a teenager, his father was the Soviet trade representative in New Zealand. In Moscow, Potanin grew up in a tree-shaded neighborhood known as Matveevskoye, not far from where Stalin and later Brezhnev had their dachas. Alexei Mitrofanov, a childhood friend, recalled that they would often play in a nearby wood, hiding behind the trees and watching the Soviet bosses drive up to the dachas in their limousines.
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When I talked to Potanin's teachers at School 58, I got the impression of an independent young man who was surrounded by elite trappings. His classmates were sons and daughters of Soviet diplomats and KGB agents who often spent months or years abroad. “When they came back from their summers abroad, they gave a report about the country in which they had lived,” the head teacher, Nina Yermakova, told me over tea and cookies as she brought out well-worn class scrapbooks. “We are talking about the broad horizon that these kids had,” she said, pointing to a photo of earnest young Potanin, who scored top marks for an essay on Tolstoy.
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Potanin was admitted to the Moscow State Institute of International Relations, a training ground for the cream of Soviet officialdom, especially future diplomats, trade officials, and KGB agents. He graduated in 1983. “The school taught us how to behave in the corridors of power,” Mitrofanov said. “How to build relationships with people in power, what to say and what not to say.” These were the young men and women whom the Soviet Union wanted to send abroad, the future grain merchants, spies, and arms traders. Although surrounded by the ever present ideology, a certain pragmatism was the order of the day.
The future envoys had to know how to be clever in dealing with the capitalists they would meet. Oleg Churilov, a classmate of Potanin, told me “the emphasis was always on the practical issues” in their training, such as finance and currency, which Potanin studied in the International Economic Relations faculty.
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Potanin's textbooks included titles such as
International Currency-Financial Organization of Capitalist Countries, Currency-Credit Relations in World Trade,
and
Finances of the Capitalist States.
Soviet socialism was troubled within, but for Potanin and his classmates, the important lessons were about the capitalists outside.

His friends suggest Potanin saw clearly the real world outside, but not the Soviet Union's rot from within. His years at the institute were the final ones of the Brezhnev period, but in his crowd it was not certain, or even evident, that Soviet socialism was headed for a crack-up. “All of the students at that time did not think the period was a stagnation period,” Churilov recalled. “We did not think that the country was in a state of decline or that the economy was going through difficulty.”

After graduation, Potanin landed in the Foreign Trade Ministry, where his father had made a career. He was assigned to Soyuzpromexport, a Soviet state export company, first as an “engineer,” which was a clerk's position, and later as an “expert,” which meant a senior clerk. Oleg Klimov, who was Potanin's boss then, recalled the young man's enthusiasm. But his task was dreary—selling fertilizer abroad: nitrogen, potash, and phosphate. Potanin was a Soviet phosphate fertilizer salesman-bureaucrat.
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The job provided one clue to Potanin's future fortune, however: he traveled to the Far North, such as the Kola Peninsula, where the Soviet Union had a huge potash mine. In the same division of the Trade Ministry, there was also an ore section. In his visits to the North, and in the ore section, Potanin learned firsthand about a Soviet metals colossus that had been excavated out of the Arctic tundra, Norilsk Nickel. Founded in Stalin's era of industrialization, Norilsk was originally hacked out of the ice by prison camp labor. Later it became a major producer of nickel for the war effort. At the time of the Soviet collapse, Norilsk produced 98 percent of Russia's valuable platinum-group metals and 90 percent of its nickel.
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Potanin was just beginning to dabble in private business when the Soviet Union fell apart. Growing bored after seven years at the Trade Ministry, Potanin saw that many of his friends were going into business—the state trade monopoly was disintegrating and quick fortunes
were awaiting those who could master private trade deals, exporting cheap domestic oil, timber, and minerals to markets abroad and importing consumer goods like computers. In March 1990, Potanin prodded twenty small trade organizations, most of them state-owned Soviet agencies hankering to make deals, to give him about $10,000 in start-up money for his new trading company, Interros. Soon thereafter, Potanin realized the trade organizations really needed a bank, and in 1992 he set up one for them. This is when Potanin got his biggest break. For a young man who had done nothing exceptional in the
perestroika
years, Potanin exploded out of the blocks. As the Soviet trade bloc in Eastern Europe collapsed, a Soviet state-run bank, the International Bank for Economic Cooperation, was in financial trouble. The Eastern European states that had loans from the bank could not repay them. In 1992 the bank's management sent out letters quietly urging some of the bank's customers within Russia to shift their money to Potanin's bank. The suggestion was that this would save them from difficulties. How these letters came about is not clear, but it was one of those moments when Potanin most likely had a little help from the “magic hand” of power. Potanin appears to have effectively taken the deposits and assets away from the troubled state bank, while leaving behind the debts. Potanin inherited a $300 million windfall over a six-month period. He seems to have done nothing to earn the money other than offer a safe harbor. Almost overnight, Potanin's bank had become a major Russian financial institution. By comparison, Menatep Bank, which had been started several years earlier, had assets of $835 million.
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