Yukos

When Khodorkovsky was arrested last year, the close to consensus explanation was the political motivation driving Vladimir Putin. That particular tycoon was allegedly considered too ambitious and too dangerous a prospective rival to the current president. Last summer, Khodorkovsky was even mentioned as a possible leader of an "oligarchic coup" against the Kremlin. By now, the political motive has become a banality. Even Mikhail Borisovich himself has cited it in court as the principal reason for his persecution.

Sure enough, there is, no denying the fact that the main owner of YUKOS did defy rules set by the new president who promised not to prosecute oligarchs for law violations in the privatization campaign provided they did not interfere in politics. Vladimir Gusinsky violated that code first and had to flee the country followed by former "Kremlin godfather" Boris Berezovsky. Khodorkovsky ignored those lessons and paid the price.

But for the Meschansky district court in Moscow the Kremlin's political motivations are not a subject of consideration. Strictly speaking, it is only interested in whether Khodorkovsky, Platon Lebedev et al. did break the law in acquiring former government-owned companies or not. Neither is it interested in why these particular tycoons were singles out for activities that were a common practice in the early and mid-1990s. And its decisions may serve as a precedent in possible future cases on matters of privatization.

More important is what is happening outside that court room with YUKOS a case of non-payment of back taxes brought against the company rather than its owners). Together with fines, the tax claim amounts to $6.8 billion for 2000 and 2001 but will certainly exceed $10 billion when the bill for 2002 arrives. Because the company is unable to pay that money (and even its first installment) right away, it is faced with either bankruptcy, forced sale of assets, takeover by other owners or some other unfavorable settlement with the government.

Therefore, as matters stand now, whether Khodorkovsky and Lebedev are found guilty (and that, in my mind, is a practical certainty), they and their partners will also most probably lose control over YUKOS. For the Kremlin, keeping the tycoons in jail is as important as taking away their company. Because setting them free would make it easier to fight for the return of their fortunes.

It is interesting that the government's tax claim on YUKOS came as late as spring 2004, i. e. long after Khodorkovsky and Lebedev were safely behind bars. Why? One explanation is that the government was late to realize the real prize of taking over YUKOS. The APATIT case was a good enough pretext for arresting the tycoons but not good enough for divesting them of YUKOS. But in the summer and fall of 2003, the government did not have the necessary information to make that decisive move.

The necessary information appeared only after Stephen Curtis, a British lawyer, was appointed in December 2003 president of MENATEP, Platon Lebedev's former job. According to a special investigation by the Financial Times, Curtis had been over the years instrumental in building up a network of offshore companies, through which MENATEP, YUKOS and their owners had continuously hidden from Russian tax authorities a substantial part of their revenues. The amount of underreported profits stashed away annually via Curtis was measured in billions of US dollars.

Only Curtis knew the true extent of that hidden network and its true worth. After he took over at MENATEP, he was apparently pressured by the Russian authorities to reveal those truths. He also apparently encountered serious problems in the process because at one point he had to seek personal protection from British special services. Then, on March 3, 2004, he was killed when his helicopter crashed on the way home from his London office. Apparently, he knew too much to keep enjoying life in the luxurious castle that was his home.

Similar information came from voluntary disclosure to the Russian authorities from another former MENATEP and YUKOS agent in France. With that information in hand, the Kremlin was now ready to make its decisive move against YUKOS.

When the Russian government presented YUKOS with its claim for back taxes for 2000, the sum net of fines was $1.8 billion. Based on the 24 percent profit tax rate, that implied a total pre-tax profit of $7.5 billion. That was much more than the $4.9 billion shown in the company's financial statement for that year.

In such a way, the Russian government was finally attempting to capture much of the real amount of oil rent representing the difference between low domestic and high world prices. So far, the existence of that superprofit was denied by the oil tycoons.

However, there is no attempt by the government to tax away similar rent revenues of other Russian oil companies. And there is no word of plans to use these newly recovered moneys for financing investment in some of the capital-hungry sectors of the Russian economy or for expanding federal social expenditures. Quite the contrary is happening.

The absence of such plans seems to confirm the long existing suspicion that the real purpose of the attack on YUKOS was to start redistributing property taking it away from old oligarchic groups formed under Yeltsin and passing it on to new groups favored by the current president.

The new owners of YUKOS are not yet known. Speculation has it that the controlling stock of the company might be bought by foreign investors or transferred to a domestic concern close to the government, for instance SURGUTNEFTEGAZ. But another and more likely scenario is some form of control by the government.

That need not be re-nationalization. YUKOS would remain a separate corporate entity with a large, not necessarily majority share owned by the state and with top management appointed by the government. Like GASPROM or RAO UES (the electric power monopoly). Then the main question would be which klan of the bureaucracy actually controls the company and its financial flows. In the case of RAO UES, it is still dominated by Anatoly Chubais and his group while GASPROM is being run by men directly appointed by and personally loyal to Vladimir Putin. YUKOS is likely to follow that example and become a crown jewel in what could be called the Putin oligarchic group.

Such a group already exists and is dominating natural gas, diamonds, armaments exports, Sberbank and Vneshtorgbank, the two largest commercial banks in Russia. With the valuable addition of YUKOS it will be by far the largest oligarchic group in the country, a source of dominant economic and political power exercized by the Kremlin.

Make no mistake, the Putin group will operate outside the formal federal government and its financial flows will, as they do now, be separate from the federal budget. Putin's chosen men will control this part of national expenditure and they will not be accountable to parliament or any other entity of public power. Today, Sergey Ivanov, the Defense Minister is not, by his own admission, aware of how money earned from armaments exports is being spent and by whom. The same is apparently true of the revenues from trade in diamonds.

There is probably little doubt that at least part of these money flows are ending up in private pockets or on private bank accounts. As recently revealed by the Hermitage Investment group and publicized by Business Week, close to $800 million annually of GAZPROM's revenues from pumping Turkmenistan's gas via Ukraine further West through the company's pipelines is given away for free to EVRAL, a firm registered in Hungary and belonging to nominee persons of British, Romanian and Israeli nationality. The final recipients of those millions are not yet established but will no doubt be found to be insider members of the Kremlin oligarchic klan.

This is also the future of YUKOS after it is merged into the cobweb of the Putin group. What Stephen Curtis created for the benefit of Mikhail Khodorkovsky will become one of the profit centers for its new owners.

In his last interview to Izvestiya, five hours before he died, Paul Klebnikov mentioned the existence of a two-tier group of tycoons close to the Russian president and feeding upon his favors. We do not know whether Klebnikov planned to develop that idea. What we do now know for sure is that being too nosy about the current and aspiring super rich, particularly with close ties to the authorities, is a very risky business in Russia.