Mikhail Khodorkovsky - Fortune - Billionaire list

Mikhail Khodorkovsky
Mikhail Borisovich Khodorkovsky (Михаи́л Бори́сович Ходорко́вский born June 26, 1963) is a Russian businessman. As of 2004, Khodorkovsky was the wealthiest man in Russia, and was the 16th wealthiest man in the world, although much of his wealth evaporated due to the collapse in the value of his holding in the Russian petroleum company YUKOS. Until he was jailed, he was considered one of most powerful of the Russian business oligarchs.

Fortune
$2.2 billion as of 2005.
$15.0 billion as of 2004.

How Mikhail Khodorkovsky got Rich
Khodorkovsky grew up in a typical Soviet environment in Moscow in a two-room communal apartment. The young Khodorkovsky worked hard, received excellent grades and was deputy head of Komsomol (the Communist Youth League) at his university, the Mendeleev Institute of Chemical Technology.

With partners from Komsomol, and technically operating under its authority, Khodorkovsky opened his first business in 1986, a private café; an enterprise made possible by Soviet leader Mikhail Gorbachev's programme of perestroika and glasnost. Successful, they also imported computers, other technology, brandy and a wide range of goods to sell at a profit.

He proved himself a capable entrepreneur by building an import-export business with a turnover of 80 million rubles a year (about $10 million USD) by 1988.

Armed with cash from his business operations, Khodorkovsky and his partners bought a banking licence to create Bank Menatep in 1989. As one of Russia's first privately owned banks, Menatep expanded quickly, by using most of the deposits raised to finance Khodorkovsky's successful import-export operations.

Bank Menatap also got government business, awarded the right to manage funds allocated for the victims of the Chernobyl nuclear accident. By 1990, critics suggest the bank was active in facilitating the large-scale theft of Soviet Treasury funds that went on at the time prior to and following the collapse of the USSR in 1991.

Boris Yeltsin's elevation to power in 1991 meant an acceleration of the market reforms under Gorbachev and created a dynamic business environment in Russia for entrepreneurs like Khodorkovsky. By then Bank Menatep was by Russian standards a well-developed financial institution and became the first Russian business to issue stock to the public since the Russian Revolution in 1917.

The bank grew quickly, winning more and more valuable Government clients such as the Ministry of Finance, the State Taxation Service, the Moscow municipal government and the Russian arms export agency, all of whom deposited their funds with Menatep, which Khodorkovsky mostly used to expand his burgeoning trading empire.

Bank Menatep provided the foundation for Khodorkovsky's bidding for Yukos in 1995. Yukos says that approximately $1.5 billion USD has been spent purchasing the assets that now make up Yukos, with a market capitalisation of $31 billion USD.

In 1995, the Yeltsin Government decided to privatise sclerotic state industries, including the state owned oil company Yukos. They appointed Khodorkovsky's bank Menatep to conduct a public auction process.

A higher bid from a group of rivals was ruled out of the process by Menatep on a technicality. Menatep paid $350 million USD for 78% of the company, which inferred a value of $450 million. When the company was listed two years later, it was valued at $9 billion. That transaction—and dozens like it—has fed the envy and suspicion of many Russians, some of whom believe the oligarchs like Khodorkovsky have stolen their fortunes from the state.

Amoco—later taken over by British Petroleum—was an early partner with Yukos in a highly prospective Siberian oil field Priobskoye. Amoco spent $300 million developing the oil field before being completely squeezed out by Khodorkovsky, using methods that would be unlawful in most of the developed world. In 2003 Priobskoye oil production reached 129 million barrels.

When the Russian ruble collapsed in 1998, Bank Menatep collapsed with it as many of it had borrowed money in foreign currencies. It lost its banking licence. Three banks, the Standard Bank of South Africa, Japanese Daiwa Bank and German West LB Bank, had lent $266 million to Menatep secured by Yukos shares. Khodorkovsky offered oil instead. They refused and took possession of the shares. They dumped the shares very quickly, collecting less than half of their loan, prompted in a panic sale by Khodorkovsky's public threats of massively diluting their stake with new shares. While lawful in Russia at the time, it would not have been so in most of the developed world. Yukos also sold shares in its main production subsidiaries to offshore shelf companies believed to be linked to Khodorkovsky. Daiwa and West LB, suspecting they would end up with nothing if they persisted, sold out to Standard Bank in mid-1999, which in turn exited Yukos at the end of 2000.

The two deals gave Khodorkovsky, Menatep and Yukos terrible notoriety in Western financial circles. Only in 2003 did it feel sufficiently confident to return to Western banks with loan proposals.

Khodorkovsky is considered one of the first of the oligarchs to realise that in order to build a global business, one needed foreign investment. In order to attract foreign investment, investors would be motivated by both greed and fear. Khodorkovsky's tough treatment of some of the West's largest and most powerful businesses created a large amount of fear in most investors. His fellow oligarchs had acted similarly, if not more outrageously at times. Coupled with the collapse in the ruble in 1998, very few investors, oil companies or banks were interested in doing business with Russia.

Khodorkovsky introduced unprecedented transparency at Yukos. Having once denied owning any shares in Menatep and Yukos, he confessed his controlling stake. Yukos revealed the identity of its shareholders for the first time, published accounts following international standards GAAP, and started paying taxes and issuing large dividends. Khodorkovsky hired many executives from large Western oil companies, placing them in senior roles and appointed respected non-executive directors to the board of directors of Yukos.

Bank Menatep - by this stage rebuilt around its St Petersburg subsidiary which remained solvent—even started lending money to non-Khodorkovsky businesses. The Bank now claims only 15% of its loans are advanced to Khodorkovsky group businesses.

As his foreign executives and consultants had predicted the effect of the new corporate governance principles was a soaring share price as foreign investors forgave past atrocities and bought into Yukos, which continues to be heavily discounted for sovereign risk.

When rival Alfa Bank was successful in attracting BP to invest billions in its oil subsidiary in 2003 many regarded this as a turning point in Western confidence in investing in Russia. President Putin and Prime Minister Blair both attended the signing ceremony, signalling the growing respectability of business in Russia.

In April 2003, Khodorkovsky announced that Yukos would merge with Sibneft, creating an oil company with reserves equal to those of Western petroleum multinationals. Khodorkovsky has been reported to be negotiating with ExxonMobil and ChevronTexaco about them taking a large stake in Yukos. Sibneft was created in 1995, at the suggestion of Boris Berezovsky, comprising some of the most valuable assets of a state-owned oil company. In a controversial auction process, Berezovsky acquired 50% of the company at what most agree was a very low price.

When Berezovsky had a confrontation with Putin, and felt compelled to leave Russia for London (where he was granted asylum) he assigned his shares in Sibneft to Roman Abramovich. Abramovich subsequently agreed to the merger.

With 19.5 billion barrels (3 billion m³) of oil and gas, the merged entity owns the second-largest oil and gas reserves in the world after ExxonMobil. YukosSibneft will be the fourth largest in the world in terms of production, pumping 2.3 million barrels (370,000 m³) of crude a day.

Russian president Vladimir Putin had made a tacit agreement with the oligarchs soon after he was elected in 2000 that he would not touch the huge wealth they had gained in crony dealings with state officials in the 1990s. In return, they were told to pay taxes and keep out of politics. Most of the oligarchs have chosen to keep low profiles — but not Khodorkovsky.

The arrest in early July 2003 of Platon Lebedev, a Khodorkovsky partner and second largest shareholder in Yukos, on suspicion of illegally acquiring a stake in a state-owned fertiliser firm, Apatit, in 1994, was considered by observers a shot across the bows. The arrest was followed by investigations into taxation returns filed by Yukos, and a delay to the antitrust commission's approval for its merger with Sibneft.

The warning was not heeded, as Khodorkovsky continued his involvement in the political process in the lead-up to the presidential elections scheduled for 2004. Khodorkovsky has spoken out in favour of closer ties with the United States, was in favour of the U.S. toppling of Iraqi President Saddam Hussein and — paradoxically for an oil man — advocated lower but stable oil prices as being good for Yukos and the world economy. He cultivated close ties with government and business figures in the U.S.

Finally, Khodorkovsky was himself arrested in October, 2003, charged with fraud and tax evasion. The Russian Prosecutor General's Office claims Khodorkovsky and his associates cost the state more than $1 billion in lost revenues. Khodorkovsky's supporters say the arrest is politically-motivated and will have a devastating effect on Russia's nascent financial markets.

The spectacular and heavy-handed method of Khodorkovsky's arrest attracted as much attention as the fact he was charged with serious crimes. Many saw it as a sign that President Putin was favouring a very tough approach with prominent business leaders, regardless of how it was perceived by foreign investors. The received wisdom of Russian political circles is that tough, decisive leadership wins votes, particular if exercised against unpopular figures like the oligarchs.

Around 5 A.M. on October 23, 2003, Khodorkovsky's private jet landed in the remote Siberian Tolmachevo airport near Novosibirsk in transit to an even more remote Yukos refinery production centre in Angarsk, East Siberia. He had been making a series of visits to Yukos and Sibneft properties, which are in some of Russia's most remote territories. Forewarned to his arrival, FSB (the domestic successor of the KGB) agents lay in wait. The plane needed refuelling and had some minor technical problems.

Then two vans with heavily tinted windows drove across the airport. Fifteen masked operatives wearing FSB issued black combat fatigues leapt out of the vans and stormed the plane. Several dozen more agents armed with assault rifles and pistols surrounded the jet.

Khodorkovsky was in passenger compartment with several staff members and security guards, who were unarmed, as they were required to hand their weapons to the pilots while on board. He was arrested and immediately flown to Moscow and presented before the Basmanny Court, which ordered his detention pending further investigation and trial.