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Kafka, Kanada and Khodorkovsky

The Ghosts of<br>Dorian Gray
Montreal 6 June 2005

“Let me remind you of the old maxim: people under suspicion from ghosts are better moving than at rest. At rest they may be sitting in the balance awaiting answers. They have obviously never spoken to ghosts. You'll never get a straight answer out of one of them.”

~ Franz Kafka, “The Trial”


“I can sympathize with everything, except suffering.”

~ Oscar Wilde, “The Picture of Dorian Gray”




Imagine if you will one of the world’s largest national land masses. Over 90% of the population living on less than 5% of the land. A nation that prides itself on a diversity of cultures. Governed by a seemingly democratically elected Parliament. Seemingly democratic because of a political culture that puts fidelity to the “leader” above responsibility to the led. A Parliament that is “supreme” in formulating law and legislation whose members are “immune” from legal consequences from any actions committed, or words spoken, within the walls of that Parliament.


A nation where, in the words of a leading human rights advocate, "…the judicial system is twisted for political aims." A nation where the leader forces the feckless members of the Parliament, the people’s representatives, to pass retroactive rule and regulation for the economic benefit of a handful of the privileged and powerful. A nation where less than 1/10th of 1% of the population controls 95% of the wealth.

Canada you say. No but close. Here in the true north, 4% of the population controls 80% of the wealth. No, the country we are talking about is Russia.

The conviction and sentencing of oil and gas billionaire Mikhail Khodorkovsky to nine years in prison for fraud and tax evasion in Moscow has gained the world’s attention this past week. But perhaps that attention is not focused entirely on all the right issues. Even more spectacular than his rise; more intriguing than his political challenge to Vladimir Putin; and more troubling than Putin’s inevitable usurption of law to attack him, are the dangers posed to any society when so much economic, social and political power is vested in the hands of so few. The story of that power, how it was acquired, compromised and debased, can teach us about the risks not only to Russia’s future, but to our own.



When the Soviet Union collapsed in 1991 it was an event that foreshadowed hope and possibility. The Cold War ended, and political, economic and military alliances that had shaped the world for nearly a half-century were reformulated practically overnight. The Soviet Union's fiercest enemy, the United States, hailed the fall as a victory for democracy and evidence of capitalism's superiority over socialism. For the majority of Russians however, the transition to a market system was painful, chaotic and anything but democratic.


Amidst the confusion of the country's reorganization, a few men acquired near total control. In short order, Russia’s vital financial assets, central infrastructure industries and natural resources became the private possessions of a small group who came to be known as the Oligarchs. The Greek word for “…the few who rule…”


Unlike the 19th-century American robber barons who built their monopolies from the wilderness, Russia’s oligarchs amassed their control and wealth from the political and bureaucratic vacuum that followed Gorbachev’s demise. The men had varying backgrounds. Some were factory managers who during Russia’s transition forced their employees to sell them their shares in the once-state-owned enterprises; others were senior government officials who found themselves sitting alone in abandoned Ministries and authored and doctored documents of fiat giving them unbridled authority; and finally there were those underground businessmen on the margins of society who came out of the shadows to profit openly in the security of general lawlessness.


Less than a dozen men ended up in control of 85 percent of the value of the country's wealth. And with their multibillion-dollar fortunes, protected by battalion strength private armies, they joined the top ranks of the world's wealthiest people.



In the attempted military coup of 1991 most of these oligarchs actively backed the right horse, and, with appropriate gratitude, President Boris Yeltsin turned a blind eye to their wheelings and dealings. While the majority of Russians queued for bread, thousands of financial “institutions” sprang up over an eighteen month period. Most ended up under the control of Boris Berezovsky, a former mathematician and Agriculture ministry bureaucrat.

When Vladimir Putin announced new western-style financial monitoring and reporting procedures in 2000, Berezovsky - literally overnight - ordered a fleet of armored trucks to take all the hard currency reserves out of his Moscow banks, packed them into planes bound for Zurich, and himself left for London where he remains to this day. Millions were left penniless. The shock of that banking blitzkrieg is still being felt today.


But not all the oligarchs commenced their rise with Yeltsin. It is a little known fact that Khodorkovsky actually started his entrepreneurial activities before the fall of Communism. During the time of Gorbachev’s “Perestroika”, economic re-structuring, Khodorkovsky began importing computers. He did it under the auspices of the Komsomol, the Young Communist League where he was a leader.

A competitor of his, Artyon Tarasov, decided to go into the same business, independently, at the same time. Though a loyal Communist, Mr. Tarasov even gave 3% of his revenue to the Party, his success and notoriety annoyed the authorities. When it became clear that he earned a million dollars in 1989 he was immediately put on trial for "economic crimes against the state". He was found to be innocent, but his business was ruined.

But in the 90’s the best way to make money was to work with money. Khodorkovsky used cash from his computer importing business to found Menatep bank, and Menatep is the holding company that controls Yukos, the oil and gas monopoly that Khodorkovsky and his partner Platon Lebedev built up.



Yeltsin had given the banks licenses to work in hard currency. Businesses needed dollars to import goods and banks charged high rates of interest for hard currency. Berezovsky helped Lebedev set up a labyrinth of offshore banking affiliates to avoid Russian taxes. Sound familiar?

Offshore banking was barred to all but the select few, but Khodorkovsky cultivated the right contacts to get approvals for his schemes. Those contacts arose from an intimacy born through Khodorkovsky’s presence in the Parliament buildings with Yeltsin during the 1991 attempted military coup by hard line communists.


He was perfectly placed when the “democrats” prevailed. Khodorkovsky even briefly served as deputy fuel and oil minister - which gave him the necessary contacts for acquiring Yukos – at the same time that Berezovsky was Yeltsin’s political mastermind.

Throughout the 1990s, many bankers met early deaths at the hands of hired assassins. Menatep's legal adviser was one of the first to be killed. But Khodorkovsky and his partners pressed on. In 1995 Russia’s government was broke and began to auction off the crown jewels of the economy. 



Minerals and oil assets were sold off en masse. Russia’s most valuable wealth was sold at bargain prices to insiders such as Khodorkovsky. Other assets were squeezed out by an infamous rigged process. It has come to be called the “loans-for-shares” deal which saw privatization at knock-down prices in exchange for political support for then President Boris Yeltsin.

The banker Vladimir Potanin, another of the oligarchs, got Norilsk Nickel, one of the world's richest suppliers of raw materials. It was at this time that Menatep got Yukos, Russia’s second largest oil company.

The auctions and share deals of 1995 are the most notorious episode in the rise of the oligarchs. It was truly the wild, wild west of “capitalism” One of the crazier financiers of the time, who never reached the level of oligarch, was Sergei Mavrodi who issued bank notes bearing his own face as part of a giant pyramid scheme.


When the Russian government defaulted on its international debt in August 1998, the oligarchs, like Potanin, Berezovsky and Khodorkovsky found even more power concentrated in their hands because they had more assets than the government, through their control of Russia’s resource wealth arising from the 1995 deals.

Khodorkovsky aided Yukos’ rise by manipulating on-shore tax regulations as well. He switched the headquarters, on paper, to remote Russian regions where tax rates were lower. But the “mind and management” of the company, to use a Canadian tax law term, was never there. Those moves made him vulnerable to many of the tax evasion and fraud charges which Putin has used to attack him with.

Khodorkovsky was not even the boldest in this regard. Another of the oligarchs, Roman Abramovich, got himself elected as Governor of the remote region of Chukotia. He moved the legal address of his oil companies to Chukotia and awarded them tax breaks. Chukotia has no resources whatever and very little industry or population. Abramovich was smart enough to get out of Russia when Putin started his reforms and now lives in London and socializes often with Berezovsky. He also bought the Chelsea United soccer club.

But Khodorkovsky was the boldest of the oligarchs in two other regards. He was the first to publicly declare his wealth in 2001 immediately catapulting himself into the Forbes top 50. More importantly, he was the first to openly and actively seek national power.

Other oligarchs who came from the political world have satisfied themselves with regional and local power bases from which to rape and pillage. Yuri Luzhkov, secure as the Mayor of Moscow, is believed to have the largest of the private “armies” in Russia proper. Former Foreign Minister Eduard Schevardnadze operated out of his home region of Georgia and survived 11 assassination attempts as its President until his recent retirement. Former Prime Minister Alexander Chernomyrdin continues to operate from his regional power base around St.Petersburg. And Gorbachev’s former Cabinet secretary Anatoly Chubais has publicly forsworn any political ambitions and runs his empire from Moscow.


But Khodorkovsky openly challenged Putin. He gave speeches around the country. He poured tens of millions into the “Yabloko”, or “Apple” Party, the Russian equivalent of the European Greens. He even poured equivalent amounts to his old friends in the Communist Party.

Khodorkovsky defense attorney Robert Amsterdam is clearly right when he called this trial "…an absolutely obscene show that should never have occurred in the 21st century. This case is probably the most hostile takeover in history, nothing but an attempt to justify the theft of Yukos." But of course it is more than about Yukos. It is about political control of Russia.

Other oligarchs, as we have seen, have been allowed to leave, or remain in Russia going about their business and adapting to the Putin reforms. None of these men acquired their wealth and influence in any legitimate way. But it could be argued that neither did Putin.

The one case that falls somewhere in the middle is that of Vladimir Gusinsky. Gusinsky, a flamboyant theatre director, rose to oligarchical status through a media empire built with the support of his banking friends. He established the Russian Jewish Congress and affiliated it with the World Jewish Congress whose President, Edgar Bronfman Sr., befriend him. Gusinsky financed newspapers and set up Russia’s first independent television station which he quickly turned into a weapon opposing pro-Putin forces. The station was eventually confiscated and Gusinsky fled. But apparently his financial machinations were so over the top that Russia convinced Interpol to help hunt him down for trial. Gusinsky was under house arrest in Spain, but with international interventions, including those of the World Jewish Congress, was allowed to leave. He is believed to split his time between Israel and Greece.


So there are no angels in this story. Though Putin’s prosecution of Khodorkovsky may be legal, it can hardly be called just. The 1995 auctions and share swaps have been left off the charge sheet. To include them would have been to attack all the oligarchs including those who remain so active in Putin’s Russia. Nor was any mention made of Menatep's offshore network which might have revealed many of the ill-gotten gains of those same men.

The events which have been left off the charge sheet speak volumes about the current situation in Russia. There are some stones which the authorities still think are best left unturned. Putin has clearly maneuvered the legal system for political deflection and political advantage. He has been accused by Natan Scharansky of "exchanging rule of law for proximity to power". Those words should resonate as a warning with us here at home.

Justice William O. Douglas once wrote that “In a civilized society the means are all important. It may seem unimportant that one person’s guilt is established through questionable means, but in the sweep of history a country that accepts indiscriminate practices as normal has no claim to a position of moral leadership among the nations.”

Every nation can lose its bearings - its legitimacy - because of the political avarice of its leader. Putin can still return Russia from the edge of the abyss and resolve to make of his land a true “Rodina” - a “Motherland” - loyal to the principle of equity of just consideration for all, and not just a “Motherlode” for the exploitations and manipulations of the few.


There is a quantitative and qualitative difference between a specific prosecution by the state made illegitimate through greed and opportunism during its execution, and a continuing and systematic pattern of subornation of law and legislation compromising the legal order on the basis of rule, not exception.


Both Putin and the oligarchs have been guilty of the latter. Only Putin can redeem himself by turning away from making the former the modus vivendi of the new Russia.

Nothing is black and white. Everything is grey. And if things don’t improve quickly, there will be nothing left but the degraded shades of Dorian Gray.



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