SUDDENLY YUKOS, Russia’s largest private oil company, is in the eye of the worst political storm of Vladimir Putin’s presidency. The firm’s CEO and largest shareholder is sitting in a Moscow prison, charged with assorted offenses from tax evasion to fraud, its company archive and computers raided by masked policemen. The Russian stock market is in turmoil, and civil liberties and the rule of law have been dealt a heavy blow. On one thing, both the Russian public and expert observers agree: Yukos was not singled out because its crimes were particularly heinous. All successful businesses in Russia broke laws in the 1990s, when the crimes with which Khodorkovsky is charged allegedly took place. They had to, in the face of confiscatory tax rates, if they were to survive and pay salaries, much less invest. Instead, what stuck in the craw of the senior bureaucrats–largely Soviet-era holdovers–who went after Yukos had nothing to do with criminality and everything to do with the rapid development of capitalism in the past ten years, as it struggles to break free of traditions that have bound the Russian state and economy together for the past four centuries.
For the fact is, Yukos, far from being the worst offender on the Russian business scene, is actually in the vanguard of liberal capitalism: It has traveled further than any other post-Soviet industrial giant from the mores and practices of the troubled 1990s.
Rising from near bankruptcy in 1996, Yukos in 2000 became the first Russian oil company to pay dividends to its nearly 60,000 shareholders. It paid out the equivalent of $300 million in 2000, $500 million in 2001, and $700 million in 2002–and has announced it will deliver over $3 billion in 2003. The company’s oil output grew 17 percent in 2002 and is expected to increase another 20 percent this year.
Even as it grew, Yukos was bringing to Russia crucial modern business practices. In 2001, it became the first Russian oil company to report its quarterly financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The company has several dozen Western accountants on staff. Its 2002 Annual Report was audited by PricewaterhouseCoopers. Independent directors make up a majority of its board. Today, Yukos is considered the most transparent of Russia’s largest industrial corporations.
This hasn’t happened by accident. Yukos CEO Mikhail Khodorkovsky–who last year led Fortune’s “Global 40 Richest Under 40” list, with an estimated net worth of $7.2 billion–wanted to be the first to make a Russian corporation a global player. At the time of his arrest, on October 25, he had just completed the purchase of another private Russian oil major, Sibneft, forging the world’s fourth largest oil producer. Today YukosSibneft pumps 2.3 million barrels a day and commands reserves of 19.4 billion barrels. At the time of Khodorkovsky’s arrest, ExxonMobil was reported to be interested in acquiring between 40 and 50 percent of YukosSibneft for an estimated $25 billion–the largest direct foreign investment in Russian history.
IT WAS AN ABRUPT FALL FROM GRACE. Only last year, Yukos garnered awards for “Best Manager” (Khodorkovsky), “Best Investor Relations,” “Best Website,” and “Best Annual Report” from the Association for the Protection of Investors’ Rights, which includes 27 of the largest Russian and foreign institutional investors in the Russian market. Also last year, the Russian government named Yukos the “Best Company for Compensation and Social Payments Programs,” as well as for the “Implementation of Social Programs at Enterprises and Organizations.”
That last citation must have been particularly gratifying to Khodorkovsky, who likes to describe himself as three generations of Rockefellers rolled into one. If he means that he’s gone from robber baron to respectable industrialist to leading philanthropist (possibly with political aspirations) in the span of ten years, he isn’t far from the truth.
At the fall of the Soviet Union, there were no private charities in Russia. Today, there are 70,000, through which some 2.5 million Russians help 30 million fellow citizens. Even so, Yukos and Khodorkovsky are in a class by themselves for the scope of their charitable giving. Yukos gave about $45 million to charity in 2002, and is projected to give $50 million this year. In addition, according to company sources, leading shareholders will donate up to $150 million of their personal fortunes in 2003.
What’s more, Khodorkovsky has been imaginative and farsighted in his public-service spending. Some of Yukos’s projects promote culture in Russia and abroad. Its $10 million grant to the Open Russia Foundation, for example, will support the first permanent exhibition outside Russia of art from St. Petersburg’s Hermitage Museum, to be installed at Somerset House in London. When billionaire George Soros last year ended a decade of charitable giving in Russia, Yukos stepped in with a $1.15 million contribution to the Eurasia Foundation, an American nonprofit, for the support of “small business and community development.”
Yukos also looks to the welfare of its employees, providing a home mortgage program that is projected to spend up to $15 million this year to subsidize below-market loans by participating banks. The company buys drugs and state-of-the art diagnostic equipment for hospitals in “company towns” like Nefteyugansk, Khanty-Mansiysk, Angarsk, Achinsk, and Tomsk, and runs so-called “social cafes” where anyone can get a free hot meal.
But it is Khodorkovsky’s investments in education that point to a larger strategy. Khodorkovsky is convinced that the export of raw materials (still Russia’s major source of foreign earnings and tax revenue) cannot make Russia a world-class economic power or secure a high standard of living for its people. For that, Russia must become a post-industrial society–which in turn requires nurturing a progressive, home-grown scientific, managerial, and technological elite, what Khodorkovsky calls the “creative minority.”
In that spirit, Yukos provides stipends to the children of its employees who are enrolled in college and receive straight A’s two semesters in a row. It also awards stipends to A-students majoring in oil engineering in colleges and universities. In 1996, the company launched a program called “New Civilization” to educate high school students in the principles of democracy, market economics, and civic responsibility. Classes participate in a role-playing activity in which they invent their own country, determining its political system, electing its government, introducing a currency, even opening a stock exchange. They compete for the best-governed state, and the winners represent their school at a district competition. According to the program’s website, each school is “transformed into an independent ‘children’s republic.'” By the end of 2003, over 200,000 Russian teenagers will have participated, mainly in the oil-producing regions. Another Yukos-sponsored program promotes Internet access and training for teachers and students across Russia.
GIVEN THIS RECORD, it made no sense to scapegoat Yukos for the excesses of post-Soviet capitalism. The company has clearly advanced Russia’s long-term interest in discouraging corruption, increasing transparency, promoting civic responsibility on the part of big business, and inviting foreign investment. As Russia’s leading political philosopher, Igor Kliamkin, put it, “If the war on the oligarchs begins with one of the most successful, effective, and transparent companies, then success, effectiveness, and transparency are no longer the priorities of the state.”
Instead, those who engineered the assault on Yukos must have other priorities, and these seem to be largely political.
In the short run, they hope to bolster the chances of the pro-government centrist party, United Russia, in the December 7 parliamentary elections. At the moment, United Russia is in trouble, running even with or slightly behind the Communists in the polls.
The attack on Yukos was expected to help United Russia in two ways. First, it would scare top entrepreneurs into contributing more to United Russia and less to opposition parties. Khodorkovsky has expressed concern about the possibility that pro-government parties might capture a “constitutional majority” in the Duma–the two-thirds majority required to alter Russia’s economic or political system under the 1993 Constitution. The reforms Khodorkovsky seems to fear are renationalization, extension of the president’s tenure to three four-year terms, and the imposition of a “development fee” or “rent” for the use of natural resources.
To prevent any faction from gaining control of the Duma, Yukos’s CEO gave generously this year to the major opposition parties: the Communists on the left and the liberals of the Union of Rightist forces and Yabloko on the right. In exchange, Yukos was able to name more than a dozen people to these parties’ national candidate lists. Meanwhile, Khodorkovsky repeatedly refused the Kremlin’s “requests” to finance United Russia.
The second way the Yukos crackdown was expected to help United Russia was by showing the government to be tough on a prominent “oligarch.” A selective reading of public opinion polls lent credence to the idea that this would be popular.
In Russia, hostility to big business–present to some degree in all capitalist countries–is reinforced by the legacy of almost three-quarters of a century of socialist autarky and anticapitalist propaganda, followed by the stresses of rapid privatization and the often unsavory spectacle, reported daily in the press, of the new rich getting richer.
Little wonder, then, that in July 2003, 77 percent of Russians viewed “big capitalists” somewhat or completely negatively. In a country where for almost four generations private wealth (apart from the carefully hidden possessions of the party nomenklatura) could be acquired only by breaking the law, 88 percent of respondents believed that large fortunes had been acquired “mostly” or “totally dishonestly.” The prosecution of “big capitalists” in connection with privatization drew unconditional support from 57 percent of those polled, while 31 percent supported criminal charges in “exceptional cases.”
Of course, Russians, like everyone else, are perfectly capable of holding contradictory opinions. When asked last year whether free-market reforms ever should have been undertaken, the yeas had it overwhelmingly, 62 percent to 22 percent. In 2002, 84 percent of those polled said they wanted to work for a private employer, up from 19 percent in 1990. This past summer, 53 percent of those surveyed felt that their country should “create favorable conditions” for the development of big business, and only 22 percent thought it should not.
As for whether private businessmen are good for Russia, the public is almost evenly divided: 45 percent consider them “useful,” 40 percent “harmful.” (Commenting on these numbers, the dean of Russian sociologists and pollsters, Yuri Levada, said: “Forty-five percent is not at all bad, not at all. With our poverty and our [Soviet] upbringing, the number could have been much lower.”)
A failure to appreciate these inconsistencies may explain not only the eagerness of those who plotted to bring Yukos down but also Putin’s silence: For almost three months after the first arrest of a top Yukos executive, Platon Lebedev, in early July, the Russian president said nothing to domestic audiences about the matter–and such responses as he gave to questions from foreign reporters were omitted from transcripts on government websites and television. When Putin finally spoke, two days after Khodorkovsky’s arrest, he warned against “hysteria and speculation” and expressed confidence that the prosecutor had had “good reasons” to act.
Putin’s reluctance to interfere probably stems from his reading of another set of polls–those showing voter preferences in the March 2004 presidential elections. While all the polls show Putin comfortably ahead, his popularity slipped just below 50 percent last spring for the first time since his election in 2000–and a showing under 50 percent in the election would force him into a runoff. For a man accustomed to approval ratings in excess of 70 percent and addicted to popular adulation, the possibility of carrying less than half the electorate is an affront. Reportedly near-obsessive about his daily poll numbers and often hesitant and indecisive to the point of paralysis, Putin may hope that the attack on Yukos will shore up his popularity just enough to spare him the humiliation of a runoff.
The prevailing conjecture among top analysts in Moscow is that Putin, as is his wont, approved the “investigation” of Yukos with a wink and a nod, not with his explicit blessing or, heaven forbid, written approval. But this time he may be denied the luxury of ambiguity. The matter has gone too far–with Russian and international public opinion keenly aroused and his own chief of staff, Alexander Voloshin, resigning in protest–for Putin to avoid making a clear, hard choice.
THERE IS, OF COURSE, much more at stake in the Yukos affair than short-term political advantage. In the end, the fight is over competing visions of Russia’s future. For the fact is that more than a decade after the collapse of the Soviet Union, the institutional and normative void it left has not been filled, and both elites and society at large remain sharply divided about what to fill it with. Still contested are the relationship between the state and the private economy (where over 70 percent of the country’s GDP is now produced), competing claims on the enormous wealth the privatized economy generates, and the role of “big capital” in politics and society.
Russia’s economic revolution in the 1990s was the largest denationalization of property in history. When the Soviet state fell, foreign investors stayed out of Russia for fear of a Communist comeback, and no Western Marshall Plan ever materialized. The only source of capital available to the new economy was the privatization of state assets.
Even as it emerged from the decay of Soviet socialism, Russian capitalism remained tied to the state by a thousand outdated regulations and nefarious links between businessmen and corrupt officials. Yet it was inevitable that sooner or later the most advanced, export-oriented, cosmopolitan Russian business leaders would come to resent the status quo and would claim greater independence and a role in civil society and politics unmediated by the state. That is what Khodorkovsky did.
But before such pioneers–never mind Russian business as a whole–can achieve anything resembling independence, huge obstacles must be overcome. Most difficult of all is finally separating power from property.
This is not a uniquely Russian problem. Perhaps more than anything else, the union of political authority and ownership sets the “poor democracies” of Eastern Europe, Asia, and Africa apart from more mature capitalist nations. In the West, after the Middle Ages, the union of power and property steadily eroded, until the king ceased to be the owner of his country. In the poor democracies, most of which came into being in the last twenty years of the 20th century, political power still tends to translate into ownership, or at least control, by the elder, the factory director, the tribal chief, the mayor, or the governor. The difficulty of severing power from ownership is the source of some of poor democracies’ most recalcitrant problems (corruption foremost among them).
In Russia, this difficulty is aggravated by an unusually strong legacy of patrimonialism, a political system in which rulers are “both sovereigns of the realm and its proprietors,” as Richard Pipes explains in “Russia Under the Old Regime,” and “political authority is exercised as an extension of the rights of ownership.” Between the 15th and mid-17th centuries, Russia was a full-fledged patrimonial state. The motto of successive Russian bureaucracies was: “That which I manage, I feed on.” Indeed, kormlenie, or “feeding,” was the official designation of the means by which the tsar’s district prefects were expected to support themselves and their families during their time in office.
Patrimonialism receded in the second half of the 18th century under Catherine the Great: Noblemen were no longer automatically commissioned as military officers at birth, and the crown began to surrender its monopoly on land by giving nobles title to their estates. The state’s grip on the economy weakened gradually, particularly after the liberal reforms of Tsar Alexander II in 1861-65, and in the first decade and a half of the 20th century, Russia had one of the world’s fastest-growing capitalist economies.
But after that brief respite, patrimonialism returned with a vengeance under communism. For sixty years, from 1929 to 1989, the Soviet state owned everything and employed everyone. Anyone who lived or traveled in the Soviet Union will instantly recognize this description of the fear surrounding private possessions and economic activity in Russia. It was written by Giles Fletcher, an Englishman who visited Russia in the 16th century:
The boyar and the nobleman have been replaced by the bureaucrat, and robbery has yielded to graft, but the idea that private business ultimately depends on the state’s good graces persists.
In the past few years, Yukos grew increasingly unwilling to play this game. It broke the rules when it opted for transparency and showed a newfound respect for Russian and international law. International accounting standards and audits by top Western firms left no slush funds for bribery. Yukos was attacked, many Russian analysts believe, because it was beginning to set an example of big business moving out of the “shadows.” “Our bureaucracy cannot stand clean and legal business,” observed three leading Russian political experts (Boris Makarenko, Mark Urnov, and Lilya Shevtsova) in a long newspaper commentary on the Yukos affair. “They are interested in keeping businesses in the shadows, . . . in pushing them into illegal, criminal space. Because an ‘oligarch’ who is the subject of a thick dossier in the prosecutor’s office is much easier to command and to use as a moneybags.”
When a country’s most successful, civic-minded, and progressive entrepreneurs are subject to arbitrary arrest, the rights of no one are secure. On Russia’s long road to dignity and prosperity, the Yukos affair seems at best a very costly detour. It demonstrates once again the tenacity of traditional Soviet and Russian ways of doing business and adjudicating disputes between citizens and the state.
Yet the history of Yukos also proves that Russian capitalism can evolve. Those who predicted that the Russian private sector would never develop beyond “bandit capitalism,” forever stuck in corrupt symbiosis with the state, stripping public assets, funneling capital abroad, and showing not an iota of civic responsibility, must concede that the causes of the Yukos affair lie precisely in the firm’s astonishingly rapid progress toward civilized capitalism and responsible corporate citizenship.
Because of Khodorkovsky’s leadership, Yukos was the firm that set the pace. But there are hundreds of other large, medium, and small businesses that are following a similar course and in the process working, against great odds, to build a liberal economy and civil society, pushing Russia forward.
Leon Aron is director of Russian studies at the American Enterprise Institute and the author of “Yeltsin: A Revolutionary Life.”
