Khodorkovsky – a murderous thug whose comeuppance was well earned – has corrupted the Anglo-Saxon media much as he corrupted the Russian Duma in the late 90s… and it shall do him about as much good… the following e-mail exchange between T&B and one of the best New York investigative journalists, summarizes our view:

Dear Eric,

I picked up New Yorker today and read a lead editorial by its editor David Remnick stating as a fact that the charges in the Yukos case were entirely trumped up.

David states that K(hodorkovsky) did nothing wrong other than offending Putin.

Didn't the authorities have specific charges about Yukos? As I recall, the Yukos owners were found to have siphoned off $24 billion or so through Cyprus dummy companies?

Is this case better reported in Moscow? In the US, every editorial starts with it as a frame-up and does not discuss any of the actual charges.

David

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Dear David,

The main charges against Yukos are so obviously true that only someone who had never lived in Russia during the 1990s could harbour any doubt as to their veracity.

The only possible defense is that "everyone else was doing it too"… And of course, they were. Yukos went down because Khodorkovsky refused to stop playing that game when the umpire, Vladimir Putin, called time. The game had changed and Khodorkovsky massively overplayed his hand, believing that he and his brethren still owned the Kremlin outright, and could continue to dictate Russian economic policy.

The problem, of course, with the “everyone else” argument is that it has no judicial validity – the fact that other folk were running pyramid schemes was not considered exculpatory for Madoff, nor before him for Boesky, Milken, Cornfield, et al. All of them are guilty of far less criminal behavior than was the Russian Godfather.

To put it very simply, in the 1990s there was one game in town – natural resources.

The privatized successors to the Soviet extraction industries all played the same game. They all "sold" their output to captive offshore entities, including both the foreign-domiciled structures you refer to, and to the notorious "onshore-offshores",

i.e. postbox entities domiciled in the most far-flung and impoverished areas of the Russian Federation, which had been granted special tax treatment, especially if they hired the handicapped. Every one of them had an office cripple or two, who did nothing but sit, drink tea and watch the tele.

These dummy trading companies then resold the commodities onto the global markets at market prices, banking the proceeds abroad.

The Russian budget was starved for taxes as the main Russian entities officially made no profits. Substantially all of the gains from the sale of Russian export commodities accrued to the foreign bank accounts of the owners - direct or indirect.

Ultimately, this eventuated in the financial crisis of 1998.

What is truly outrageous here is that all of this was public knowledge in the 1990s!

Every hack, every investment banker, every investor knew the score. No one even bothered to keep it particularly secret – since the oligarchs owned the State outright, they had little reason to fear its wrath. It is amazing how selective memories are – just do a Google search and see what was being written about Khodorkovsky at the time!

The Russian market went from a floating craps game to a real (if still very imperfect) market when the exporters - oil, fertilizers, minerals, metals - were forced to buy in their trading vehicles and repatriate their cash flows. I should know – I was involved in several such transformations in the early part of the decade.

It was the high taxation of oil exports that rebalanced the Russian budget – and set Russia on the path towards fiscal stabilization. Needless to say, the oligarchs did not look favourably upon this massive increase in taxation.

Khodorkovsky went down for blocking the mineral extraction tax and similar legislative/fiscal changes in the Duma (Russian Parliament). Yukos owned outright a block of Duma voters who, in conjunction with the various "opposition parties" (from the Communists to the liberal splinter groups - most of which were funded by other oligarchs), could block any legislation not to Khodorkovsky’s liking… It was not a

challenge Putin could ignore, and the Alfa bull took him out.

And, as old Ezra put it – “All the rest is litr’tur”.

Eric

Eric Krause is the publisher of Truth and Beauty (& Russian Finance) where this article originally appeared.