Life in a kleptocracy: How Mikhail Khodorkovsky came to own the giant oil company Yukos

Matt Taibbi, who once lived and worked in Russia, has an interesting piece about the current media concern over Putin’s prosecution of Mikhail Khodorkovsky, the head of both the massive Russian oil company Yukos and the large Russian bank Menatep.

For Taibbi, it’s foolish to feel bad about Khodorkovsky, since he’s not quite the “moderate businessman” he’s lately painted to be. My interest in the article is the story behind Taibbi’s justification for vilifying Khodorkovsky.

This is what life looks like in a kleptocracy, a state that’s run by crony capitalism on steroids. In a kleptocracy, everything owned by the government can be stolen or bought cheap if you have the right connections — and those connections are in government precisely for the purpose of selling public property to their friends for personal gain. It’s institutionalized looting.

Here’s Taibbi on how Yukos, the formerly state-owned oil company, was acquired. Note the role of the bank Menatep, which Khodorkovsky runs, in the process:

Khodorkovsky acquired his controlling stake in Yukos via the “loans-for shares” privatization auctions in the mid-nineties. In those auctions, the Russian state essentially sold off stakes in giant government-owned industrial companies in exchange for cash, the ostensible object being twofold: raise money for the cash-strapped state and also speed up the transformation from a Soviet command economy to a capitalist system.

But Khodorkovsky didn’t do much to add cash to the state’s coffers, because he got the money to buy Yukos from … the Russian government! In those days the Russian Central Bank farmed out some of its operations to private banks. As part of that policy, Menatep ended up holding billions in state funds that were meant to be distributed for government actions, like for instance the prosecution of a war in Chechnya. A state audit eventually found that some $4.4 billion in Russian government money was never returned to the state by Menatep. And a research paper by the Harvard Business School concluded that Menatep was many billions in debt to the the Russian state when it made its winning bid for a controlling stake in Yukos for the preposterously low price of $350 million.

Even better, Khodorkosky got his buddies in the Yeltsin administration to allow Menatep to administer the Yukos auction; it naturally excluded its rivals from bidding on the stake, making the Yukos auction a one-horse race.

In other words, he used public money to buy the company, and he ran a rigged auction in order to exclude rival bids (which, by the way, offered the state more for the sale). All because of his “connections.”

Taibbi concludes with a mafia metaphor:

To quote Goodfellas, this is all “real greaseball shit.” Khodorkovsky was an ex-Komsomol insider communist hack who was handed a huge company by his thug pals, but when his gang asked him to toe the line and his Don, Vladimir Putin, asked him to do a service, he balked and went solo. So they took back his cheese and threw him in jail.

We’re not there yet, but we’re closing in on it. The acquisition of Yukos is not much different from some billionaire financing the political campaigns of western senators; then getting the Senate to make public land available for private profiteering — oil leases, for example, or logging, or grazing rights; then rigging the auctions.

It’s only a question of scale. In Wisconsin, one of Scott Walker’s proposals is the right to sell off state-owned power plants and utilities. How is this different?

One final point — I’ve recently been posting about coalitions, the progressive coalition and the so-called Democratic “coalition” that contains both progressives and Rubinite neo-liberals. In what world are progressives not dead-opposite to neo-liberals on issues like “privatization” (aka looting)?

Conclusion? Strengthen the progressive coalition using Cruickshank’s suggestions, and show your teeth and your bite to the neos. They’ll never respect you otherwise.


Gaius Publius is a professional writer living on the West Coast of the United States. Click here for more. Follow him on Twitter @Gaius_Publius and Facebook.

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