Khodorkovsky's High Stakes Gamble

Editor's Note: This is the first in a three-part series on the rise and fall of Mikhail Khodorkovsky and his financial empire.

Several weeks before Mikhail Khodorkovsky was arrested at dawn by gun-toting special forces, the oil magnate was putting the finishing touches to a deal that would have earned him up to $3.6 billion and, potentially, vast political power.

Documents had already been drawn up for either Chevron or ExxonMobil to buy a blocking 25 percent plus one share in the combined YukosSibneft oil major, and all that remained was last-minute haggling over the price, according to a shareholder in Khodorkovsky's Menatep empire. Khodorkovsky valued the merged company at $48 billion. Chevron had signed off on $45 billion, he said.

"Chevron had agreed to this a month before his arrest," said the shareholder, a former business partner of more than 15 years who spoke on condition of anonymity because he said he feared attracting the attention of prosecutors. "But Khodorkovsky was still trading."

Neither Chevron nor ExxonMobil has commented on its negotiations with the Yukos CEO ahead of his arrest on Oct. 25, 2003.

There was another hindrance to the deal: the Kremlin. There, officials worried about the prospect of an ambitious, politically minded businessman with $3.6 billion in cash free to throw at any political or economic cause he saw fit, the former business partner, a senior U.S. administration official and analysts said.

Khodorkovsky, a chemistry graduate who worked his way up in business by trading computer parts and moving into banking and then to oil, had already started openly eyeing a piece of state-controlled Gazprom, the world's biggest gas company, and was lobbying for the construction of private pipelines, moves that would have broken into the state's closely guarded monopoly on its most strategic assets.

And, he was eyeing a post as prime minister, counting on support from the political parties he backed, the business partner and other observers have said. "I was witness to discussions about this," the Menatep shareholder said. "A prime minister with a strong personality could have immense influence on the country." Other Menatep shareholders, such as Mikhail Brudno, however, deny Khodorkovsky ever considered making such a move and say his political activities were aimed only at promoting democracy and civil society.

Whatever the real threat, the Kremlin responded to it with full force.

Today, Yukos has been partially taken over by the state. The Sibneft merger and any deal with Chevron or Exxon are long dead. Khodorkovsky and his business partner Platon Lebedev await a verdict on Monday in their fraud and tax evasion trial, and most of the remaining Menatep shareholders have fled to Israel, with warrants out for their arrest.

For a man from a family of engineers living in a communal apartment who had clawed his way up to become one of the country's most powerful men, the standoff with the Kremlin could be his wildest gamble yet. His refusal to back down has led to speculation that the oligarch, once reviled for his climb to wealth as the rest of the nation tumbled into poverty, could eventually emerge from his prison cell as a national hero and even a political leader, having suffered at the hands of the regime.

Ever since the soft-spoken chemistry graduate from the Mendeleyev Institute first made his way into business, he gambled for high stakes. Carving out a path to riches in the business operations that marked the collapse of the Soviet Union, the young Khodorkovsky stood out from the rest by his meticulous planning, willingness to take on major risks and uncompromising belief that he was always right, former partners said.

"He set about his work like a maniac. The business was his life. Nothing was left to chance, and he was constantly checking every detail. He has one single passion: building an empire. People like this are unstoppable, or stoppable only by a bullet," said Christian Michel, a founder of Valmet, a Geneva-based global trust business, which agreed in early 1989 to advise Khodorkovsky's group of young businessmen. Valmet later held the key to the Group Menatep fortune, holding shares via nominee ownership schemes and organizing the transfer of vast sums of money via its network.

"I think there could be a long-term strategy behind this," Michel said. "I wonder if Khodorkovsky is not going through a crossing of the desert, so that, eventually, he can look the Russian people in the face and say that he, too, has suffered.

"I think he will re-emerge transformed. I think it is a calculated gamble. I think he is driven by a consuming passion," he said.

The New Market

At the beginning of 1989, when Michel made his first trip to Moscow to meet Khodorkovsky, the group he met in a tattered room in the Ukraina Hotel was a determined change from the Soviet bureaucrats he was used to dealing with.

"In the early days, I was doing business with the apparatchiks. Many of them were dense: physically stout and intellectually stunted. They ran huge concerns where their sole responsibility was to keep churning out the product," Michel said. "They were often coarse and heavy drinkers. ... You could not have a lot of admiration for them. They had tedious jobs.

"But suddenly on the scene, these young people appear in jeans and say they are going to change the system. It's a shock," he said.

The new breed of hustlers he met had come from the fringes of Soviet society.

Khodorkovsky's part-Jewish background meant he could not count on fulfilling his childhood dream of becoming the director of a major Soviet plant. The system pushed ethnic minorities to the side. But in the early 1980s, opportunities slowly sprang up as a black market began to flourish under the watchful eye of the KGB. Soviet leader Yury Andropov, a former KGB chief, made a conscious decision to turn a blind eye to some black-market activities.

"As a good Soviet citizen, you would not want your daughter to marry a black marketeer. So the only people that went into it were the people who had no prospects in the normal Soviet system, the ones who had hit a glass ceiling and could go no further. These were the ethnic minorities: the Georgians, the Chechens, the Jews," Michel said. "The people that had money to start up were those who had begun by selling cabbages on the back street. They became the first bankers."

"But the stigma of their origin, although legitimate, stuck," he said.

As the Soviet economy began to kilter toward bankruptcy, opportunities arose for men like Khodorkovsky. In a desperate bid to restart the economy, Soviet leader Mikhail Gorbachev took steps to legalize part of this private business by signing off on a decree to allow the creation of "cooperatives."

As the leader of a Moscow Komsomol group, Khodorkovsky was chosen to head one of the earliest forms of private business, the so-called Centers for Scientific-Technical Creativity of Youth, or NTTMs. The centers were aimed at stimulating scientific research at the nation's institutes, which had been crimped by excessively controlled budgets. Under the new system, researchers were to make a cash percentage for the first time from the sale of their research.

As the 24-year-old Khodorkovsky explained the new system in a speech at a conference for programmers at the VDNKh exhibition center in 1987, the cash-starved researchers were dazzled, recalled Brudno, who was one of the programmers in the audience. "A really young person had come there and he was telling us of unimaginable things. But he was speaking with surety. So we decided to give it a try."

Brudno took along a colleague, Leonid Nevzlin, from Zarubezhgeologiya, the Soviet foreign trade group for geological and exploration services, for a meeting with Khodorkovsky. At first, he said, they were still unsure of him. But, as they worked, they formed a lasting team. So it was too for Vladimir Dubov, another future Menatep shareholder, who, after earning cash under one of Khodorkovsky's schemes at the Institute of High Temperatures, also became a lifelong partner.

Soon, the group was inseparable and the business was sprouting into new territories. With the help of a French-speaking partner, Yelena Legostayeva, and her French husband, Philippe Buratto, the group made its way into Western computer markets and began importing parts into Russia, a lucrative business for the time. "Khodorkovsky was always moving into unchartered territory," Brudno said. "He never stopped to rest on his laurels."

The group's cash pile was rapidly mounting. By 1988, they had enough for start-up capital for a bank. Initially named the Commercial Innovative Bank for Scientific and Technical Progress, in December of that year Menatep received one of the first licenses for private commercial banking and hard-currency operations issued by the Soviet government. Soon, Khodorkovsky and his team were being granted the right to manage government accounts.

How Khodorkovsky managed to get this role and how he was chosen to handle and make so much cash is still something of a mystery. From the NTTMs to computer imports to banking, all of these activities needed licenses and approval from at least some sections of a regime that was rapidly falling apart.

The Party and the KGB

Igor Tabakov / MT Khodorkovsky, photographed in 1995, worked his way up by trading computer parts and moving into banking and oil.

Suspicions that Khodorkovsky was given the right to run the vast treasures of the Communist Party out of the country via his new bank have now become almost legend. Brudno said the bank never knowingly managed Party funds. "It can't be ruled out that some companies that belonged somehow to the Communist Party were clients, but we were not able to identify them as such," he said, speaking by telephone from Israel.

According to Anton Surikov, an independent security expert who has known Khodorkovsky for more than 10 years, the drive to create a new class of private businessmen was partly a KGB operation from the start.

"It was impossible to work in the black market without KGB connections and without protection from the KGB," he said. "Without them, no shadow business was possible.

"There was a conscious creation of a black market," he said. "The creation of the oligarchs was a revolution engineered by the KGB, but then they lost control."

Behind the birth of this new breed of businessmen was an ideological clash between the powerful Fifth Directorate of the KGB, headed by Filipp Bobkov, and the Communist Party, Surikov said. The Fifth Directorate was in charge of fighting so-called ideological diversions and national minorities and thus was deeply immersed in these countercultures, he said.

"The KGB began to engage in ideology, too. Suddenly, there were two competing ideological centers, when before the Communist Party held a monopoly on ideology. This unavoidably led to a battle for power," he said. "The Communist Party was heading into a dead end, and the people from the Fifth Directorate saw that a new impetus was needed. This was how perestroika was started."

Even though KGB officers working outside the country were in a better position to see how Western economies differed, it was those inside the country who "were leading the rebellion," he said. "It was the Fifth Directorate and the Sixth Directorate ... to some extent that were leading the way."

The Sixth Directorate was in charge of economic security, and the Soviet-era mafia and the black marketeers were under its watch.

"The KGB really did help them, and at a certain stage, those who helped them began to work for them," he said.

In Khodorkovsky's case, he said, the patrons were Bobkov and Alexei Kondaurov, who also served as a general in the Fifth Directorate. Kondaurov left the service immediately after the October 1993 revolt and began working for Menatep as head of its analytical division, in charge of relations with law enforcement structures.

Bobkov, meanwhile, went on to head the security division for Vladimir Gusinsky, Khodorkovsky's fellow 1990s-era oligarch. Bobkov was unavailable for an interview. Kondaurov said Khodorkovsky was never an agent of the KGB, though he conceded that his future boss had made his way by doing a lot of work for state officials as the Soviet Union was collapsing. "Leaders from all levels of power, from the party nomenklatura to the red directors, were looking for people who would help them deal with the new economic realities," Kondaurov said. "Khodorkovsky and his group were these new young wolves."

Khodorkovsky himself has been extremely circumspect about his early climb. In an interview several months before his arrest, he was anxious to brush over details of those days.

Even though Valmet's Michel said Khodorkovsky was clearly well connected from the start, by the end of his rise to wealth and power, he was totally independent.

"He is very much his own man," he said. "Even if 15 years ago, as has been said, he was using Komsomol money and KGB money, and I have absolutely no evidence of that, he was indisputably the boss."