The New York Times Magazine
August 2, 2004
Pity, if you can, the richest man in Russia. With a fortune estimated at $15 billion, Mikhail Khodorkovsky is on trial for fraud, embezzlement and tax evasion and faces a 10-year jail term. His oil company, Yukos, has been hit with a tax bill of $3.4 billion, and the government is threatening to seize its most valuable assets. Although many nations, including America, tend to err on the side of courtesy to wealthy defendants, Russia does not: denied bail since his arrest in October, Khodorkovsky has not been allowed to prepare for trial from the comfort of one of his mansions, and when he is brought to court, he is placed in a metal cage.
In today’s Russia, wealth attracts trouble. President Vladimir Putin, eager to punish billionaires who oppose his rule, has chosen to make an example of Khodorkovsky, though Khodorkovsky is not the first to face Putin’s selective wrath. Not long ago, Boris Berezovsky, a billionaire power broker in Moscow in the 1990’s, chose exile in London to the metal cage that might have been his fate if he stayed in Russia. Vladimir Gusinsky, a media baron, was next up: forced to sell his empire at fire-sale prices, Gusinsky must now content himself with exile in Israel.
Even with these departures, there is no shortage of the ultrawealthy in Russia; more billionaires now live in Moscow (33) than in New York (31), according to a survey by the Russian edition of Forbes. American tycoons tend to be celebrated by the public and politicians alike, but their Russian brethren are regarded, at home, as the reason so much has gone wrong since the Soviet Union ceased to be. The oligarchs, as they are known, amassed their fortunes during the gangster days of Boris Yeltsin’s presidency in the 1990’s, when the Russian economy operated on a regime of insiderism, bribery and coercion. Russia’s billionaires can afford an army of liveried servants and an air force of private jets–one tycoon has reportedly ordered a Boeing 767 equipped with its own antimissile system–but sympathy, in Putin’s Russia, is an item they cannot acquire at any price.
The smartest tycoons in Moscow are behaving as Charles Darwin would advise–adapting to their new environment by lying low and acting loyal. The man who has best mastered the art of cunning blandness is Vagit Alekperov, the president of Lukoil and reportedly one of the 10 richest Russians, with a fortune estimated at nearly $4 billion. He is the main rival to Khodorkovsky–until Putin’s crackdown on Yukos, their companies vied for the top standing in Russia’s oil industry–and for the moment it is Alekperov who has come out on top.
Alekperov, who is 54, has a laser stare that could melt an iceberg. His hair is a few millimeters longer than a crewcut, and with his stocky frame, he would be an apt candidate for the cast of “The Sopranos.” He speaks in a voice that often slides into a mumble, as if it is not his job to speak clearly but yours to listen closely. Most people choose to listen closely, because he presides over a company that controls almost as much oil as Exxon Mobil and employs more than 100,000 people.
The decor of an executive’s office, like the suit he selects each morning, is a telling choice. In Lukoil’s glass-and-steel towers in central Moscow, Alekperov’s office is expansive but sparsely furnished, the floors and walls covered with a tasteful cut of blond wood. The couches and chairs are upholstered in an understated red leather (red and white are Lukoil’s corporate colors). On a wall, there is a huge relief map of the world, with small lights denoting the places where Lukoil has projects. Russia is well-lighted, of course, but so is Saudi Arabia (a multibillion-dollar gas field is being developed there) as well as Iraq (in 1997, Lukoil struck a deal with Saddam Hussein to develop the West Qurna field, and the company is now negotiating with the interim Iraqi government to revive the deal). Egypt has a light, as does the United States, where Lukoil operates a string of gas stations on the East Coast.
Alekperov’s titanium-and-glass desk is fastidiously neat–he hates disorder–and behind it hangs a frieze of the double-headed eagle, which is Russia’s coat of arms. If a visitor doesn’t yet grasp his message, there is just one photograph on his desk, a black-and-white portrait that shows not his wife or teenage son but President Putin. If, in your mind’s eye, you replace the eagle with a hammer and sickle, and if you imagine a photo of Leonid Brezhnev on the desk, you could be back in the U.S.S.R.
“Politics are close to me, but there are different ways of participating in politics,” Alekperov told me during a talk in his office on a recent Saturday morning. “I can’t afford to be indifferent to politics, but I don’t have personal ambitions. I have only one task connected with politics, to help the country and the company. I’m not close to Mr. Putin, but I treat him with great respect.”
The rule for Russian billionaires these days is not to get in the way of the Kremlin and, if at all possible, not to draw attention to their fabulous wealth. For the oligarchs, boring is the new black. Alekperov wears a watch that doesn’t scream for attention, and most of the shirts I saw on him were fastened at the cuff with buttons, not links. His indulgences, if they exist, are kept out of view; he lives quietly though not uncomfortably. He travels, as all billionaires must, in an armored Mercedes sedan that is led and trailed by vehicles bearing bodyguards with customized assault rifles. Yet the executive jet he flies on belongs to Lukoil and is a standard feature for oil executives across the globe; there is no Boeing in his garage. He behaves as if his greatest wish is to be ignored by the public.
Yet Alekperov appears innocuous only to those whose attention he does not wish to rouse–politicians, the public and, to an extent, journalists. (He agreed to talk with me because Lukoil has embarked on a series of international projects and wishes to raise its global profile.) His unimpressiveness is calculated. He is a graduate of the Soviet system, known mostly for timeservers, ideologues and incompetents. But the system included a cadre of capable men and women without whom the Soviet Union would have collapsed decades before the Berlin Wall and without whom Yuri Gagarin would not have returned to earth with a pulse. Their competence was not flaunted, because their accession to positions of power depended on a degree of self-effacement; the gray men of the Politburo did not take well to rock stars.
The only time in our discussions that Alekperov became animated was when I asked why he didn’t covet the publicity and political station that were like oxygen to his financial brethren. “I am well known in my field,” he replied, briskly, referring to the global oil industry. “I’m quite satisfied with it. I don’t want anything else. I’m not an actor who appears on the stage and gives people advice on how to live or what to do and entertains them. It is not my specialty.”
I spent nearly a dozen hours with Alekperov, attending several meetings he led and flying to Azerbaijan with him on a business trip, and he never raised his voice or tossed his head back in laughter or displayed any vivid emotion other than impatience, which seemed to be his default setting. Still, I wondered whether his behavior might be different when a reporter is not present; ashtrays hurled at aides, perhaps, or bacchanalian fetes in gold-plated dachas. So I asked Mark Mobius, an emerging-markets investor who is on Lukoil’s board, whether he could give me any colorful examples of Alekperov’s style. We were sitting in Mobius’s office in Moscow–he was in town for a board meeting–and he broke into laughter.
“That’s a good question,” Mobius said when his chuckles faded. “I can’t think of anything he’s done or said that you would call colorful or out of the ordinary. I don’t know what the style of the Soviet executive was, but I think he probably reflects some of the best elements of that style. He is very much an organization man.”
In Russia these days, the only organization that counts is Putin’s.
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It is difficult to understand Putin’s organization without understanding its reliance on oil. In the 1980’s, the Soviet Union was the world’s largest producer of crude, ahead of Saudi Arabia. The bulk of the 12 million barrels produced each day fueled the Soviet economy and its anemic satellites in Eastern Europe, Cuba and North Korea. Yet there was enough left over–about two million barrels a day–for customers outside the Soviet bloc who would pay hard currency. This was an Achilles’ heel for the Soviets. According to “Reagan’s War,” a book by Peter Schweizer, “C.I.A. analysts had concluded that for every one-dollar drop in the price of a barrel of oil, Moscow would lose between $500million and $1 billion per year in critical hard currency.”
The Soviet empire was not extortionary, in the sense of providing a bounty of riches to the imperial center, as India and other colonial holdings had done for Britain in the 19th and 20th centuries; instead, it was a drain on Moscow. Without oil, the heirs of Lenin would have had great difficulty subsidizing their needy allies, their globe-spanning navy, their 45,000 nuclear weapons, their four-million-man army, their record-setting Olympians and their space stations. Oil was, in many ways, more crucial to the Kremlin than ideology.
Russian production dropped by nearly half following the Soviet collapse in 1991. The industry’s recovery has been a key goal of Putin’s government; just as the Soviet Union needed oil to finance its empire, Putin needs oil for his more modest task, to get Russia back on its feet. Since 1999, production has risen by 50 percent, thanks to an influx of investment and the incentive of rising oil prices. Russia is now the second-largest exporter of oil after Saudi Arabia. According to a World Bank report this year, energy revenues account for 20 percent of Russia’s economy and the bulk of its exports. In other words, Russia has become something of an oil state.
On the surface, this is good. The Russian economy, a wreck for most of the 1990’s, has begun to function in a manner that would appeal to Alan Greenspan. Growth reached 7.2 percent last year, and foreign-currency reserves surpassed $80 billion. Supply and demand are not the estranged cousins they used to be; many Russians no longer feel the threat of abject poverty. The government aims for a doubling of gross domestic product by 2013.
Yet across the globe, an abundance of natural resources has rarely been a long-term blessing for developing countries possessing it; their economies, even their societies, have been twisted by the corruption, megalomania and warfare that energy and mineral resources can foster. This is known in development economics as the resource curse. It is an inevitable temptation, in a resource-rich country like Russia, for leaders to misgovern for reasons of political or financial greed. There is simply too much easy money flowing through too few hands. Nigeria is a prime example: despite several hundred billion dollars of oil revenues in recent decades, Nigeria is a mess of instability, corruption and conflict. Saudi Arabia is a study in another variety of the resource curse–the country’s wealth, hoarded by the royal family, has also been used to buy the acquiescence of fundamentalist leaders, and the result has been a mushrooming of fanaticism throughout the Mideast and beyond. In Iraq, which possesses the world’s second-largest proven oil reserves, Saddam Hussein used his country’s windfall to underwrite wars against Iran and Kuwait.
More generally, resource wealth tends to be a disincentive to develop nonresource industries. After all, why work hard at such things if you have loads of money underground? The problem with this route is that a country whose revenues are tied to one commodity tends to experience a seesaw performance; when the commodity’s price takes a nose dive, so does the economy. Of course, oil and minerals don’t always lead to bad outcomes: Britain and Norway are 20th-century examples of countries that managed to invest their oil bounties wisely. Their success stemmed largely from the fact that they had well-developed political and economic institutions before they struck oil, and their fortunate outcomes have been the exception.
“The oddity of resource-poor economies outperforming resource-rich economies has been a constant motif of economic history,” wrote Jeffrey Sachs and Andrew Warner in a seminal 1995 study. “In the 19th and 20th centuries, resource-poor countries such as Switzerland and Japan surged ahead of resource-abundant economies such as Russia. In the past 30 years, the world’s star performers have been the resource-poor newly industrializing economies of East Asia–Korea, Taiwan, Hong Kong, Singapore–while many resource-rich economies, such as the oil-rich countries of Mexico, Nigeria and Venezuela, have gone bankrupt.”
In Russia, the oil bonanza–which may well be followed by a natural-gas bonanza, because Russia has a third of the world’s reserves of natural gas–played a key role in creating oligarch power. Without their control of much of the country’s resources, including metals, the oligarchs would have had a harder time buying influence and diminishing the power of the government. That’s why Putin’s crackdown has been welcomed by most nonbillionaire Russians and most foreign investors: the return of power to the government is a step that offers the possibility of Russia becoming something of a normal country–assuming Putin does not succumb to the financial and political temptations that are present at every waking moment.
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Vagit Alekperov knows the seductions of oil. He was born in 1950 in Baku, in Azerbaijan, which was then a Soviet republic and the center of the Soviet oil industry. His Muslim Azeri father, Yusuf, was an oil worker who died when Vagit was a boy; his Russian Orthodox mother, Tatiana, is still alive. (Alekperov prudently keeps leather-bound copies of both the Koran and the Bible at his office, to allay any concerns that he prefers one almighty to another.) He was a studious, fun-averse child–according to a semiofficial biography, his older sister had to order him out of the house to play. He did well in high school and graduated from the Azerbaijan Institute of Oil and Petrochemistry, after which he worked on the Oil Rocks, a fabled offshore field in the Caspian Sea. The facilities were Dickensian. He lived on primitive rigs prone to explosions, fires, storms and other disasters. On one occasion, a blowout on his rig threw him into the storm-tossed Caspian, and he had to swim for his life.
Alekperov was not just tough, he was also smart, and when western Siberia beckoned as the new mother lode of Soviet oil in the 1970’s, he was tapped to manage the new fields around Kogalym. The lore that now surrounds him includes the story that when repair workers were afraid of approaching a pipe that had ruptured–a spark could ignite a fireball–Alekperov went to the pipe, sat on it and told the workers to get to work. If the pipe exploded, the Soviet roughnecks would at least have the satisfaction of knowing that their boss would pay the price, too.
He was summoned to Moscow in 1989, becoming, before he turned 40, the youngest deputy energy minister in Soviet history. His timing, it turned out, was perfect. General Secretary Mikhail Gorbachev had opened the door to foreign investment, and Western oil companies were beginning to make friends in Moscow. When British Petroleum arranged a visit to Britain in 1990 for a group of Soviet oilmen, Alekperov was asked to select the delegation, and he selected himself to lead it.
Rondo Fehlberg, an executive at BP at the time, told me in a phone interview that Alekperov took control of the agenda during that 1990 trip, sternly asking the BP executives to explain how a modern oil company should be set up. The visitors from Moscow were skeptical when Fehlberg took them to a BP oil field that, by Soviet standards, was impossibly clean and quiet. “They initially refused to believe that oil was being produced there,” Fehlberg said. “They thought it was a propaganda effort by the West. We had them put their hands on pipes so they could feel the oil.”
Fehlberg noticed his visitors engaging in quiet discussions among themselves; it wasn’t until years later that he understood their conspiratorial air. Although the Soviet Union was a year from its unexpected death and although other billionaires-to-be were not yet dreaming of the riches they would acquire in the 1990’s, Vagit Alekperov was already planning to take charge of the imploding country’s prime oil facilities. He was, at the time, earning a monthly salary that would not have bought a business lunch at Claridge’s.
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The laws governing the privatization of state assets in the crumbling Soviet Union were quite simple: they hardly existed. In a frank interview last year with Sabrina Tavernise, a reporter for The New York Times working on a PBS documentary, Boris Berezovsky, the oligarch exiled in London, explained how he acquired some of his first holdings: “The Soviet bureaucrats didn’t believe that capitalism would prevail. You would give an official $10,000, and he’d give you the property title. Not for one second did he expect this factory to stay private. He was convinced that the Reds would return and take it back.” In the same program, Khodorkovsky, weeks before he was arrested, quietly admitted, “At the time, Russian law allowed us to do things that were unthinkable in the Western business world.”
Before the Soviet collapse, Khodorkovsky was among a group of strivers who took advantage of Gorbachev-era reforms to set up trading firms that operated, in the eyes of officialdom, as collectives. Khodorkovsky’s was called the Center for the Scientific-Technical Creativity of Young People. Its initial activities included computer sales and currency exchange, and its success derived from two factors: Khodorkovsky had one foot in the system, as deputy head of the Communist youth league committee at his university, and he had a brilliant business mind.
In contrast to these young protocapitalists, another group emerged, known as “red directors,” bureaucrats like Alekperov who used their positions of influence, as members of the Soviet nomenklatura, to take control of enterprises they were running when the system fell apart and everything was up for grabs. After returning from his trip to Britain and with the Soviet collapse nearing, Alekperov began laying the groundwork to create a vertical oil firm–one that finds, extracts, refines and sells oil. Those responsibilities were separated in the Soviet system, and it was an inspiration on Alekperov’s part to realize that it was important not just to privatize the oil industry but to do so in a fashion that created financially sustainable enterprises. In a nod to this innovation, his semiofficial biography is entitled “Vertical.”
Lukoil was created by an 11th-hour resolution of the Council of Ministers in November 1991, just weeks before the Soviet Union was dissolved. The company combined three of the largest fields of the Soviet oil industry–Langepas, Urai and Kogalym–as well as several refineries, and its name derives from the first letter of each field. Alekperov, stepping down from his evaporating job as acting Soviet oil minister, became president and chairman of Lukoil.
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And who owned Lukoil? The answer was simple: nobody and everybody. Like other enterprises carved out of the Soviet industrial base, Lukoil became the property of the Russian government. In 1993, the government converted it into a stock company and vouchers were distributed to Lukoil’s employees, among others. Throughout Russia, vouchers were thought, by the workers who possessed them, to be practically worthless. When shadowy financial firms began offering to buy the vouchers, most workers sold, eagerly; they were poor and needed the cash and had no idea that in many cases the financial firms they sold their vouchers to were owned by managers of the companies they worked for. The managers, with a broader view of the companies and the economy, knew the vouchers were in fact quite valuable. Still, it is not known exactly how Alekperov amassed his 10.4 percent stake, nor when he acquired it or the sum he paid for it. “I certainly don’t know how it was done,” Mobius said. “I don’t think anybody knows.”
It wasn’t until 2002, when Lukoil shares began trading on the London Stock Exchange, that Alekperov publicly disclosed how much of Lukoil he owned. Many financial analysts were surprised not by how big his stake was, but by how small. Khodorkovsky, after all, owns more than a third of Yukos, and Roman Abramovich, who last year purchased the Chelsea soccer team in London, is reported to own nearly half of Sibneft, another oil company. Instead of elbowing out rivals in Khodorkovsky’s uninhibited fashion–on one occasion, Khodorkovsky reportedly moved a shareholder meeting to a new location secretly and at the last minute so that minority shareholders would not be present to vote against the dilution of their holdings–Alekperov shared ownership with a larger pool of managers, bureaucrats, investors and workers. “He was more civilized,” observed one Western investment banker I spoke to in Moscow. “Because he was the first, perhaps he didn’t realize he could take it all.”
Khodorkovsky, by contrast, tended to take it all. The crime for which he is now being tried was a relatively minor one, but it is typical. In 1994, the prosecution claims, a firm controlled by Khodorkovsky and several associates acquired a 20 percent stake in a large fertilizer company, Apatit, for $225,000 in cash and a promise to invest $283 million. The stake was bought at an auction, and there were four bids–all tendered by front companies controlled by Khodorkovsky, according to the prosecution. Khodorkovsky and his associates won the auction at a price that would have been a great bargain even if they had remembered to invest the promised $283 million, which, according to the prosecution, they neglected to do. In court in mid-July, Khodorkovsky denied the accusations, saying, “These charges are just as absurd in terms of the law as they are in terms of common sense.”
The Apatit deal was a modest transaction compared with the biggest and most controversial transfer of state assets into the hands of oligarchs. In 1995, Yeltsin faced defeat to a Communist candidate in pending national elections, and he needed the support of the oligarchs, who were already quite wealthy and powerful. Yeltsin and the young reformers around him concocted a back-room deal that became known as “loans for shares.” Chrystia Freeland, a journalist and author of an authoritative book about that era, described it as a Faustian bargain. “At heart,” she wrote, “the loans-for-shares deal was a crude trade of property for political support. In exchange for some of Russia’s most valuable companies, a group of businessmen–the oligarchs–threw their political muscle behind the Kremlin.” The decision, Freeland concluded, “meant pawning Russia’s crown jewels.”
Yegor Gaidar, the economist who initiated the first wave of changes under Yeltsin, says now that the slaying of one monster–the specter of a Communist return–created a new one. “To some degree the oligarchs regarded themselves as the real government of Russia,” he told me, “and to some degree they were the real government. They could easily dismiss ministers and nominate people who would be loyal to them in ministerial positions.”
In July 2000, Putin, who took power when Yeltsin resigned on New Year’s Eve 1999, convened a now-famous meeting at the Kremlin in which he told the oligarchs that they could hold onto their shadily acquired businesses but would no longer be permitted to meddle in politics. “The vast majority agreed, and they are still wealthy and influential, with connections to various levels of the government,” Gaidar noted. “Some disagreed in an open way.”
Vagit Alekperov was not one of those who offered objections.
“We at Lukoil know how to act in our limits,” Valery Greifer, chairman of Lukoil and a confidant of Alekperov’s, told me. “Khodorkovsky didn’t know the limits. He didn’t realize that when power went from Yeltsin to Putin, things had changed. A lot had changed.”
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The defining feature of Putin’s tenure has been his war against the oligarchs, and that war’s centerpiece is the trial of Khodorkovsky, who made the mistake last year of opposing legislation to raise corporate taxes and compounded the error by financing the anti-Putin opposition in the run-up to parliamentary and presidential elections. It was an all-or-nothing gamble, and in October, when Khodorkovsky’s private jet landed at a Siberian airstrip, paramilitary officers stormed aboard and arrested him. Now the richest inmate in Russia, he shares a cell in Moscow with two men; prison regulations allow one shower per week.
It is the trial of the new century in Russia, and the principal defense lawyer is Anton Drel, who met me at one of Khodorkovsky’s mansions; this one was used primarily for meetings and receptions. We sipped espressos in the mansion’s cafe under stained-glass decorations as Drel, in a pinstripe suit, carefully said that although Khodorkovsky might have done some of what he is said to have done, it wasn’t illegal. “Everything he did was according to the law,” Drel explained. “Khodorkovsky talks about his moral guilt but not criminal guilt. The legislation covering privatization was not ideal, of course.”
Drel and the lawyers working with him are having a hard time making their case. Tax authorities have not only raided Khodorkovsky’s offices on multiple occasions; they raided Drel’s office, too. His jailhouse consultations with Khodorkovsky are monitored by a video camera, and Drel believes the room is bugged. Lawyer and client exchange cryptic notes on a legal pad, writing messages filled with code words, then flashing the messages to each other and scribbling them out. “It is like in the movies,” Drel noted dryly.
Khodorkovsky has issued several letters of apology for the manner in which he amassed his fortune. He even has called on Russians to support Putin. This has been interpreted as an attempt to gain Putin’s favor, because the trial is unlikely to be determined by the facts or the court’s interpretation of them but by a behind-the-scenes judgment by Vladimir Putin. It is a situation that keeps all of the oligarchs off balance. Because most of them (and probably all of them) acquired state assets in ways that were highly questionable–though winked at at the time–every billionaire knows that Putin could now, at his discretion, reach back into their history and pull out criminal, civil or tax charges that would send them to jail or into bankruptcy.
Putin’s mandate is strong: in March, he was re-elected with more than 70 percent of the vote. It was a notable achievement, even considering his nearly complete control of television news and his crackdown on Khodorkovsky, which deprived the opposition of a major benefactor and scared others away. Ordinary Russians rewarded Putin for bringing a sense of stability to their lives after the chaos of the Yeltsin era; most Russians don’t seem to mind the erosion of civil liberties or the war in Chechnya or the murders of 14 journalists since 2000 (including, most recently, the American Paul Klebnikov, editor of the Russian edition of Forbes) or the fact that evening news programs now tend to lead with a story about whatever Putin did that day.
But as political scientists will tell you, concentration of power is rarely a good thing in the long run. The underlying problem is that one man or one institution, operating in an environment of intimidating power, is more prone to error than a panoply of men and institutions operating in an open system. Democracy, in the economic and political spheres, is not just a theoretical good; checks and balances and laws that are fairly enforced have the effect of preventing the arrogance and error of absolute power.
So far, however, Putin has ruled as if political liberties were a hindrance to getting Russia off its back. On issues of politics and security, he is very much in the iron-fisted mold, surrounding himself with dour advisers who worked in military or intelligence posts during the Soviet era–the so-called siloviki, many of them colleagues from Putin’s pre-presidential career in the K.G.B. In an unusual acknowledgment of the thuggish climate, a Russian trade official, Dmitry Beskurnikov, during negotiations in July with William Lash, an assistant United States commerce secretary, explained, “People that don’t understand the rules get killed.” According to Lash, who later told reporters of the exchange, Lash asked Beskurnikov whether he meant that rule-breakers would face financial disaster. Beskurnikov clarified: “No, physically killed.”
Putin’s economic team is much more friendly to Western ways than his national-security team is. His senior economic adviser, Andrei Illarionov, is an enthusiast for the works of Ayn Rand (who was born in St. Petersburg) and gave Putin a collection of her works. Illarionov is so enamored with free trade that he has described the Kyoto Protocol, which would limit greenhouse emissions, as an “international Auschwitz” against economic growth; his views would make Jack Kemp blush. Putin doesn’t love capitalism for its own sake, but he believes a strong economy is Russia’s best hope for regaining a measure of greatness; capitalism, for him, is the economic means to a political end.
In Moscow, the man with the best answers to the riddle of Putin is Christof Ruehl, until recently the chief economist at the World Bank’s Russian office. I caught up with Ruehl at a conference on liberal economics at a Marriott hotel on Tverskaya, the city’s main shopping boulevard, and I asked for his opinion of Putin’s economic reforms.
“Really, Putin has done a lot of things exactly as I would have done,” Ruehl said. “What worries me is that I cannot find an example of somebody with his concentration of power who used it for the best. He has created this enormous sense of stability, which is so important, but in doing it, he has created a structure that has never been used in a good way. I am racking my brain and cannot find a historic example of someone who had this power and used it for good.”
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Innovative tycoons–whether of the Rockefeller, Hearst, Turner or Gates varieties–tend to be as reckless as they are brilliant, taking huge gambles that are pursued with a zeal that borders on the insane. So it is not altogether a surprise that the oligarch who possesses the greatest amount of this entrepreneurial right stuff is the one who is in jail.
Khodorkovsky was rapacious in assembling his oil empire, but when he completed that task by the end of the 1990’s he switched gears, focusing his energy and cleverness on running it in an efficient manner. This was born of pragmatism: he knew that if he continued to commit the moral crimes he has confessed to, investors would stay away from Yukos. With Russian markets stabilizing under Putin, it had become possible to make more money by raising the share value of a company than by stealing from it.
So he turned Yukos into a world-class company, reversing the hallowed Communist practice of institutionalized sloth. Cruel as the Soviet system was, it had a soft spot: you could be incompetent or drunk or asleep on the job, but you would not be fired. Capitalism is crueler in the sense that it encourages managers to show no mercy when the time comes to fire or demote workers for the sake of efficiency. Khodorkovsky was merciless. Inept managers were let go, drunks were fired–Khodorkovsky required weekly updates on the number of dismissed alcoholics–and old wells were shut. He brought into Yukos the best executives he could find, including several Americans. Yukos’s output and profitability soared as the firm became the most transparent and well-run enterprise in Russia. The market rejoiced, and Khodorkovsky became the country’s richest man. If Yukos’s figures are believed, it briefly surpassed Lukoil as the largest oil producer in Russia.
Since Khodorkovsky’s arrest, the share price of Yukos has plummeted, and the company, facing a $3.4 billion tax bill for 2000 alone and billions more, potentially, for subsequent years, is on the brink of bankruptcy. Khodorkovsky confronts dire financial straits personally, too: in addition to a potential 10-year jail sentence, he faces a $700 million personal tax bill.
It seems Putin’s goal is not only to sideline Khodorkovsky but also to gain some control over Yukos itself. In late July, the government took steps aimed at confiscating the company’s largest oil asset as payment for the huge tax bill. If successful, the confiscation would serve as a double warning to oligarchs–not only do they risk arrest or exile for displeasing the Kremlin; they risk losing their entire fortunes. Even foreign investors, who have looked warmly on Putin’s moves against the oligarchs, are growing worried about the president’s long reach.
That is why it is the politically cautious billionaires who are doing quite well these days. Alekperov, like Putin and unlike Khodorkovsky, was a product of the Soviet nomenklatura, and he shows signs of vestigial Soviet behavior. When he travels abroad, I was told by one of his aides, he always meets Russian ambassadors in the countries he visits. Government contacts of this sort are useful for any executive from any country, but Alekperov goes further than most. The Russian government owns a 7.6 percent stake in Lukoil, although Alekperov says it is planning to sell those holdings. In a vivid sign of the tight relationship between company and state, when Alekperov visited one of Lukoil’s gas stations in Manhattan last year, Putin was at his side, eating a Krispy Kreme donut.
Many financial analysts see Lukoil’s global projects and ambitions as uneconomical, more likely to bring prestige to Lukoil–and to Russia–than to generate corporate profits. Alekperov, who says the international projects will be profitable, has a hard time imagining any relationship with the government other than a close one. “It is impossible to divide the interest of a country and a company that works on its soil,” he said. “Our interests are the same. What’s good for Russia is good for the company.”
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The curious thing for Russia’s billionaires in the post-Yeltsin era is that they must answer to two masters, not one. In addition to Putin, there is the market, and Alekperov has attracted the unwanted attentions of Russia’s most aggressive shareholder activist, William Browder, an American-born capitalist with the intensity of a Bolshevik intellectual and a tendency to talk so fast that he doesn’t speak so much as he verbally scrolls.
As a young banker, Browder found his way to Russia in the early 1990’s and did so well for Salomon Brothers that he set up his own fund, Hermitage Capital Management, which now controls more than $1.5billion in assets; it is Russia’s largest investment fund. Browder plays tennis at one of Moscow’s best private clubs, dines at the finest restaurants and possesses a delightfully ironic decoration in his office–an oil painting of Lenin at the Finland Station, his arm waving toward the future. The painting is a nod at Browder’s unusual pedigree: his grandfather was Earl Browder, the head of the American Communist Party during the Stalinist era.
On a rainy April afternoon I visited Browder’s office, which is in one of Moscow’s newest luxury towers. Lenin stared from the wall as Browder led me through a report he was preparing for investors. Its draft title (later toned down) was “Lukoil: Hollow Promises, Wasted Value,” and at its core was the ungentle suggestion that last year Alekperov’s company had more than $1 billion in “forgone revenues”–a euphemism for money lost through corruption or ineptitude.
Browder has filed shareholder lawsuits against nearly a dozen Russian companies, including Gazprom, the natural-gas monopoly, and UES, the electricity monopoly; much of the time he loses, but he causes enough trouble to force shareholder-friendly changes. He has begun taking shots at Lukoil. He drew my attention to Page 15 of the report, which says Lukoil has 160 daughter companies and 600 affiliates–a complex structure that creates a screen behind which managers, if so inclined, can siphon off revenues. “The way they go about doing their business is very murky and untransparent,” he observed.
Browder has crunched Lukoil’s numbers and come up with figures that show the company’s oil output has grown far more slowly than that of its major Russian competitors, that its production per well also lags behind the industry norm and that its net income, on a per-barrel basis, is nearly 50 percent less than that of Yukos. Lukoil officials contend, however, that the company’s higher costs are due, in part, to their international projects, which they say are long-term investments. And the slow growth in production stems from a desire, Lukoil officials claim, to avoid depleting their reserves.
The upshot is that Lukoil’s stock price has been less buoyant than it could be. Paradoxically, no one has suffered more from this than the man who is most likely the firm’s largest individual shareholder, Alekperov. But this is where another oddity of the moment surfaces–the headstrong impulses that bring trouble to billionaires in Putin’s Russia also happen to be the impulses required to reshape a monolith like Lukoil. Two years ago, Alekperov began a restructuring and cost-cutting program, but many financial analysts dismiss it as ineffective. Alekperov, they say, is insufficiently aggressive in carrying it out; he doesn’t have the go-for-broke instinct of Khodorkovsky.
A sour expression crossed Alekperov’s face when, in his office, I mentioned that Khodorkovsky had become popular among investors by cutting Yukos’s costs; it was as if a crate of rotting fish had been dropped on the glass table between us. “What do you mean by lower costs?” he asked. “Not to pay taxes? Of course that would change a company’s balance sheet, but we have chosen a different way. During these years, Lukoil and Surgut”–a smaller oil firm–“have paid more taxes than all other companies. This is the truth.”
It is, yet it doesn’t mean Lukoil is better managed. When I raised the subject of corruption–Browder’s other big complaint–Alekperov seemed slightly exasperated, as if nobody understood how hard he was trying or how much he had done. “Corruption exists in all companies,” he mumbled. “The question is how to fight against it. We are fighting against corruption. Independent experts analyze all our reports and books. You can find examples of corruption in the West as well. You should evaluate a company by its actions but not by its location.”
He has a point–Enron, Tyco and Worldcom all managed to be corrupt and inefficient thousands of miles from Moscow. But even those companies are relatively small fish in the vast American economy. The concentration of wealth in Russia means that an Enron-style fiasco would rattle the entire country.
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The sleek jet was perched on the runway like a snow leopard waiting to pounce. As the pilot went through a final checklist, an attractive stewardess stored away the helpings of caviar and sturgeon that would be served, once airborne, on fine china. The cabin of the $30 million Falcon 900, one of several executive jets in Lukoil’s fleet, was outfitted with plush leather seats and cream-colored couches.
I had arrived at Lukoil’s hangar at Sheremetevo Airport in Moscow a half hour before Alekperov, who traveled there in his armored convoy, which had a police escort, as it often does. After the cabin door was closed behind him, the plane took off and we soared over Moscow, heading south to Azerbaijan. No one even loosened a tie. Alekperov sat at a small table and pored over reports with several aides; one of them showed me Alekperov’s daily digest, an assemblage of news stories and production figures that is more than 45 pages long. It was nearly an hour before the reports were put aside and the culinary delicacies were placed, feastlike, on the table.
Our destination was Baku, where Alekperov was born and reared, and this was a homecoming of sorts. The jet descended through the clouds and cruised above a patchwork of offshore rigs in the Caspian before skimming over an apocalyptic onshore field composed of withered rigs and ponds of stagnant oil. Alekperov peered intently through a cabin window as if he was seeing it for the first time. I asked why he was so attentive to what was just another stretch of rigs; he has seen tens of thousands in his lifetime.
“I used to work there,” he began, displaying, unusually, a storyteller’s interest in his tale. “That was the place where I first worked in the oil industry. I felt it was my calling. When I graduated from university, it was an honor to be an oilman. You can feel it in Baku. It’s a city for oilmen, like Houston. Oil is everywhere.”
Alekperov was smiling. When he began in the oil business, he was a nobody from a country of nobodies. Yet he had become one of the richest men in Russia, the negotiating partner to chief executives and ministers in whatever country he visited. When his Falcon touched down in Baku, the head of the country’s state-owned oil company was on hand to greet him, and the two sped off, with a police escort, to meet Azerbaijan’s president. After that, Alekperov went to Lukoil’s local headquarters, an attractive building in the center of town, and received, like a sultan, a succession of ministers.
Between meetings, I spoke with him in a reception room that had on its walls vintage maps of the Caspian basin, which is where, at the turn of the 20th century, the Nobel brothers and the Rothschild family learned that it was possible to earn a king’s ransom in the oil business. Those tycoons were interested in whatever made money, but Alekperov has been more focused: he is interested in oil, only oil.
“My mission,” he said, “is to show the world that Lukoil is as important as all other big oil companies, equal to them in the global market.” He did not smile and impatiently tapped a finger on an armrest. “My company is the first to break the attitude that a Russian company is second-rate,” he continued. “I have felt this responsibility for my entire life.”
His boastfulness about equaling the West, his pride in Lukoil’s global reach, his loyalty to the ruler of his country–it is reminiscent of another time, before decay and chaos brought the Soviet Union to its knees. In the 1960’s and 70’s, Alekperov’s formative years, there was no shortage of believers in the Soviet dream, and Alekperov was among them. His reluctance to fire or demote in the manner of Khodorkovsky, and in the manner desired by foreign investors, is an almost endearing holdover from those times, when it was acceptable to imprison a man for reading Solzhenitsyn but inconceivable to fire him for sleeping on the job.
Many of Alekperov’s aspirations–and Putin’s, for that matter–are rooted in Soviet notions of national greatness, although the nation, in the present case, is Russia, not the Soviet Union. The question of whether it can overcome its terrible past will depend, to an extent, on whether Putin and billionaires like Alekperov can overcome their pasts, too. History, like oil, is not a curse unless it is made into one.
