From Russia With Love: Russian Gushers
Forbes

Rank: 1  

Wealth: $7.9-8 billion

Age: 39

Company: Yukos

Title: CEO

Country: Russia

Profession: Engineer, Billionaire and Chairman of YUKOS. He muscled his Western partners aside in the late 1990s to gain control over Yukos, then bulked it up into Russia's second-largest oil company.

Steals: Right and Left Lies: Right and Left Hair: Black, relatively thick on head, car salesman-y mustache

Jewish: Yes

Connections: Security structures, security structures, security structures

Career Notes: Won massive stake in Yukos in loans-for-shares deal for almost nothing...Owned, through Bank Menatep, a 10% stake in Moscow Times's parent company Independent Media...Currently ensconced in Yukos minority shareholder mess... Got government to assume its private-depositor debts after August crash...Name instantly recalls phenomenon of postcommunist spook profiteers...We dare you to run up to him waving a toy water pistol.

Minor League Notes: Former head of the Moscow Komsomol.

So who in RED West is working with your Russian Friends and using a local Russian women to spy on me? Romeo? Or Octapussy? And why are they even interested?

Mikhail Khodorkovsky
OLIGARCH - ROSPROM
 

 With Warren Buffett
 

With Bill Gates  --

I wonder what Gates' Wife was doing while he and Mikhail were having their meeting.Ý Perhaps she was in a pow-wow with Mikhail's wife.Ý

HOW TO BECOME A BILLIONAIRE IN RUSSIA?
By Erlen Bernstein
Mikhail Khodorkovsky.

The transformation of his image Mikhail Khodorkovsky is the first person in Russia to publicly disclose the size of his personal fortune – $7.8 billion (according to the data of the Group Menatep). The authoritative Forbes magazine included him on its list of billionaires long ago. In the latest list the figure that they gave for his fortune was $3.7 billion. Khodorkovsky denied this for quite some time, and now we know why: he was offended. It turns out that he has many more dollars. He is the richest Russian billionaire. Roman Abramovich, the governor of the Chukotka Autonomous Area and the owner of the company Sibneft, is next with only $6.3 billion.

Billionaires have always appeared in prosperous countries. They are the first among equals there – general prosperity prods the ablest businessmen to become richer. And they have nothing to do and nowhere to go except becoming billionaires, that's if they are lucky enough. To put it in a nutshell: a billionaire is a very capable and lucky businessman living in a prosperous country.

But Russia is different. Comparatively recently everyone, even the members of the Politburo of the Communist Party Central Committee, were poor. Russia is still balancing on the brink of poverty. What qualities should a businessman possess to become a billionaire in such a country?

A contest of pledges

In 1987, Khodorkovsky organized a centre called Menatep (Russ. abbreviation for "Interbranch scientific-technical programmes") under the auspices of one of the district Komsomol committees in Moscow. It was supposed to make money by introducing inventions and innovations into industry, but its real activity was more varied – it included the import and sale of computers and …brandy. It was a time when there were almost total shortages of commodities and food products. However, natural intuition prompted Khodorkovsky to transfer his operations to a real gold mine – government funds which were becoming ownerless. Soon the centre was transformed into the bank Menatep. Khodorkovsky and his partners invested 2.7 million roubles made from trade speculations. Another 2.3 million roubles were from the sale of shares of Menatep stock which sold like hot cakes. But those who had hoped to become rich, had their hopes dashed. No one received the promised dividends. However, there is nothing surprising about that. We know from literature that foreign billionaires have not always worn show-white gloves and waistcoats, especially when they began to earn their first billion. Khodorkovsky's intuition did not fail him. The commercial banks then made transactions with budget money, but these rather risky operations brought fabulous profits. Menatep Bank joined in the "melee", and having obtained part of the Chernobyl and Moscow city money, it became one of the biggest Russian banks and its owner a very rich man. This is normal in the development of successful businesses.

It was then that Khodorkovsky decided to sharply change course, namely, to build an industrial empire, not a financial one. It was a bold step at the time. Suffice it to recall the flourishing banks and decrepit industrial enterprises. But he either foresaw the forthcoming stagnation of the bank system, or listened to an inner voice (he is a chemical engineer by profession). Menatep bought big blocks of shares of several Russian industrial enterprises, such as Apatit, Uralelectromed, the Krasnoyarsk Metallurgical Plant, etc., more than one hundred in all. The greater part of these enterprises were bought at the so-called privatization auctions. The entrepreneur who pledged to invest the most money won. That stage of Russian privatization can rightly be called a "contest of pledges".

Menatep Bank was in no hurry to fulfil its investment pledges, in other words, it was engaged in "big-time fraud". But such actions can hardly be regarded as a distinctive feature of Russian businesses alone.The risky operations brought fruit. In 1995, the epoch of investment auctions was replaced by bail and security auctions at which there was no need for pledges. At one of them Khodorkovsky bought YUKOS, the second biggest oil company in Russia, and the world's fourth, thus becoming a billionaire almost overnight. In oil reserves (11.4 billion barrels) YUKOS is close to British Petroleum (about 12 billion barrels). According to The Financial Times, the latter is worth $178 billion and holds 15th place among the world's biggest companies. Khodorkovsky bought 78 percent of YUKOS shares for $170 million.

That was a really unique operation. It was believed in the banking circles of Russia that after having made numerous haphazard purchases there was no money on the fixed assets balance of Menatep Bank except budget money. Thus, the sale of YUKOS to Menatep by the state was not so much a transaction to replenish the state budget, as the purchase of YUKOS by a private person for state money. Forbes magazine had another view of the situation, namely that Menatep Bank, which belonged to Khodorkovsky, had been entrusted with holding the auction to sell YUKOS. A company controlled by Khodorkovsky and his partners proved to be the winner. Although the sums offered by the three competing banks were bigger than that offered by Menatep, they were excluded from the bidding "due to technical reasons". It should be added that the conditions of the contest included $550 million worth of investment. Incidentally, this condition has not been fulfilled to this day.

By 1997 Khodorkovsky had finally decided that he would like to be a petrochemical tycoon, not a financial one. So he has sold his enterprises bought earlier and spent the money received on acquiring corresponding assets.

From being lucky to the owner

In 1997, ten years after the formation of Menatep Centre, the business pattern of the recent Komsomol member Mikhail Khodorkovsky was as follows: the fraud of gullible investors + transactions with state budget money + the buying up of industrial enterprises for investment pledges + the buying of a gigantic oil company for a song and failure to fulfil the pledged investment programme. The sum – a new billionaire, an extremely unpleasant result, which, at first glance, does not disclose the essence of the notion "billionaire Russian style".

For Khodorkovsky acted according to the situation, which is defined in the history of world capitalism as the period of primary accumulation. It is believed that Rockefeller, Vanderbilt, Morgan, Bill Gates, and others like them, had they been in his shoes, would have acted in the same manner.

In actual fact, they acted differently. Not in the sense of "wearing white gloves and waistcoats", it's quite another matter. The point is that they were the founders, the creators, the builders of their empires – oil, railroad, bank, computer, etc. They began to work on empty sites, from scratch, and they had to learn much. As for Khodorkovsky, he has received "finished products", as it were. The plants and oilfields were already commissioned and in operation. He simply wrested them from the weakened hands of the state, having ousted other competitors. This also requires knowledge and skill, but of another sort. If one adds numerous multimillionaires to a handful of billionaires, it will become clear who rules present-day Russia.

Five years have passed since Khodorkovsky became a billionaire and a full-fledged owner. All these years he had to sharpen his skills in order to better guard his property and come closer to BP in capitalization, income, taxes, etc. In short, he has been learning to work in "white gloves and a waistcoat".

But this is another subject – one about how to be a billionaire in Russia, a billionaire Russian style becoming simply a billionaire, about how the Russian economy is acquiring a human face.

Khodorkovsky is the wealthiest man in Russia and has been a billionaire for five years. This is his main distinction from Khodorkovsky the beginner. Along with his first billion he must have acquired the feeling of a real owner. He has now ceased to be a "lucky man", a fortunate owner of banks, plants, and an oil company of world stature. One could expect anything from a man of fortune, right up to squandering all his riches. Russia is still finding itself in great danger, having given itself over thoughtlessly to very rich people whom it did not know properly. In other words, it may fall victim to privatization Russian style.

But Russia is lucky as far as Khodorkovsky is concerned. His feeling of being an owner has become stable mentality during the five-year term of his "billionaireship".The basis of his wealth is oil, hence he must be patriotically-minded. He needs a prosperous Russia for the prosperity of his business. And the scope of his business is such that he can contribute to the flourishing of Russia to the degree at which patriotism and business are compatible. The five years of his "billionaireship" were spent on learning patriotism.

Reputation instead of protection

A regeneration began several years ago. Khodorkovsky said: "We have changed much since 1995. For example, I know many things about Mikhail Friedman, but I am sure that if we have agreed on something, both he and I will adhere to our agreement. In 1995 I couldn't say this, because at that time we would have searched for ways and means to bolster up our positions. Today the situation is different. From the model 'the strong always takes away everything from the weak' we are switching over to the model 'the strong looks for benefit in cooperation'. I am absolutely sure of this."

The present-day Khodorkovsky cherishes his reputation. According to him, "one can work with the companies which care about their reputation even if they are one's strong competitors. If a person or a company has no reputation, one may rest assured that one will be taken if one has business dealings with them. I personally will have nothing to do with them. So, reputation has a direct influence on business".

As for protection, or an "umbrella", in high-level business, it is provided by the law-enforcement agencies. "Perhaps, using the system of legal protection in a competitive struggle, one could gain short-term success. But for a longer period, one would only weaken one's own system. Because one either places the next order, or the legal protection system takes an order from another customer."

There has been talk recently about various gentleman's agreements, from informal to official based on a code of corporative behaviour. There is such a code at YUKOS. Mikhail Khodorkovsky said the following on the subject: "I don't believe much in informal agreements, codes and charters. But I do believe in a person's convictions. I am firmly convinced that law-enforcement agencies should not be used in competing with others. And I have decided that I will not resort to their use. Others may do it, if they like."

As for the numerous legal proceedings involving Khodorkovsky's company, he said that "the legislation on auctions, tenders and competitions was adopted in the interests of officials to enable them to earn additional money, and this is why controversial aspects arise all the time".

These quotations are taken from some recent statements made by Mikhail Khodorkovsky. His words are quite logical, and it would be advantageous to act as he recommends. But it would also be appropriate to remember the collapse of Enron and the WorldCom fraud. In reality there can be no good image of business tycoons of this stature. But one can object that Enron or WorldCom have nothing to do with us. They can swindle, but we must not. We have already been doing a great deal of shady business and now we should wash ourselves clean.

Oil becomes transparent

According to estimates in The Financial Times, the market value of YUKOS was about four billion dollars in 1999. RoyalDutch/Shell, which has a similar potential (a little over 11 billion barrels just like YUKOS), was evaluated at more than $200 billion by the world stock market. British Petroleum (about 12 billion barrels) was also assessed to be worth $200 billion. The financial market did not like YUKOS for some reason or other, its shares were not quoted on the New York Stock Exchange.

Ridiculously small dividends, false reports submitted to foreign investors, a great many assets of a secondary nature, redundant personnel, a lack of interest in the latest technologies, and the need to lower production costs, etc., were but some of the reasons given for that. Apart from that, the company ascribed little importance to "free floating" (the number of shares freely circulating on the market: the lower the number, the greater the opportunity for the company owners to manipulate them and the higher the risk of portfolio investors buying shares at artificially inflated prices). The company was also criticized for its lack of transparency, inadequate information about its operation, and the withdrawal of assets to offshore zones.

The financial indices reflect this. The annual turnover of YUKOS was $6,366.4 million, and the profits before deducting taxes – $1,917.9 million. The same indices for R D/Sh are $105,366.0 million and $24,036.0 million, and for BP – $83,566.0 million and $16,934.0 million. The figures speak for themselves.

When Khodorkovsky was the "lucky owner", as it were, he was not very worried, but he could not fail to see what was going on in the business where he was working in pursuit of his first billion.

The situation of the world oil business was alarming. The price of oil fell from 20 to 10 dollars per barrel, and there was the fear that it might even drop lower than five dolars per barrel. The search for new oil and gas deposits shifted to far-off regions with harsh climatic and geological conditions which entailed higher production costs. And the soulless markets of capital began to ignore the oil and gas sector, which they had loved so much previously, because the income on the capital invested in this branch fell lower than that in other branches, and the prospects for any improvement of the situation were quite dim. As a result, businessmen rushed to invest in telecommunications and high technologies.

A disproportion between loans and their own capital appeared even in big oil companies, and they began to examine the possibilities of merging with other holding companies as the only way to survive. There was a wave of mergers between such big and prosperous companies as Exxon and Mobil, BP and Amoco, the Total and Petrofina. YUKOS was nearing the brink.

In 1999, the prices of oil began to rise, but YUKOS with its very low capitalization, could not hope for any improvement of its situation. For the financial markets reacted to the growing prices by giving a surcharge for the size of the capital of oil and gas companies. The explanation was quite simple: given the high world prices, the big oil companies acquired the highest financial potential for implementing large-scale projects promising high incomes.

Khodorkovsky realized that his hard-won billion should be saved by hook or by crook. Besides, the ugly word "globalization" was now in everyday use. Farsighted people understood that it was meaningless to fight it, everyone wishing to survive should accept the new rules of the game. Under the impact of the new circumstances, Khodorkovsky sharply changed his behaviour and activity at the end of 1999.

YUKOS began restructuring, getting rid of the assets of a secondary nature, downsizing, introducing the latest technologies and slashing production costs. It was the first of all Russian companies to sharply increase the size of dividends, disclose information to analysts and create a civilized corporative image both in Russia and abroad.

Within two years YUKOS became the leader on the Russian stock market. According to Grigory Vygon, the leading expert of the Institute of Financial Research, "from a social outcast YUKOS has become a favourite with investors. By its example the company is forcing its competitors to change their corporate policy".

YUKOS has been offered many projects: in Azerbaijan, Kazakhstan, Libya, Angola and elsewhere. Why not in Russia? Khodorkovsky said to the Russian government: "It makes no difference to us where we work. But I don't want to hear accusations of unpatriotic behaviour. If you refuse to increase oil output, well, we have been offered many places to invest money in the development of the output of oil." Now YUKOS has been included in the circle of transnational companies where it should live and work according to the rules of corporate behaviour.

And here is the result: YUKOS has disclosed the information on its shareholders which is necessary for its shares to be rated on the New York Stock Exchange. The figures for the beginning and the end of the period are $3.7 billion and $7.8 billion respectively. It looks like "white gloves and a waistcoat" are now worn by Khodorkovsky all the time, thus showing that he has turned from a billionaire Russian style into a billionaire working in Russia.

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