November 08, 2003

Khodorkovshchina II

The Economist meditates on security of property in Russia:

Economist.com | Russia: INVESTING in Russia, a country where property rights are always someone else's, is for the brave, the connected or the Russians. Even all three attributes may not be enough, as the careers of Simon Kukes and Mikhail Khodorkovsky, the incoming and outgoing bosses of Yukos, Russia's largest oil company, attest.

In the late 1990s, the two aroused roughly equal loathing among western businessmen. As the boss of another oil company, Simon Kukes had masterminded a strategy in which his outfit, TNK, bankrupted a subsidiary jointly owned with BP in order to buy it on the cheap. That Mr Kukes, a Soviet-era émigré, had an American passport and western manners counted for nothing. “A creep fronting for a crook” was one British official's characterisation of him.

Mr Khodorkovsky was worse. He had assembled Yukos from a ramshackle collection of Soviet-era industrial assets, acquired in circumstances that bore little scrutiny. His management culture was impenetrable and autocratic, the accounts murky. An American investor, Kenneth Dart, who had unwisely bought stakes in Yukos's production subsidiaries, lost many millions of dollars as Mr Khodorkovsky stripped their assets and shovelled money offshore.

What a change a few years make. Since 1998, Mr Khodorkovsky and Mr Kukes in their different ways have smartened up their image. Mr Kukes was reconciled with BP. Mr Khodorkovsky hired a slew of western lawyers, consultants and oil talent from outside. Shares in Yukos soared. Even his harshest critics began to concede that this particular leopard had changed its spots.

Mr Kukes and Mr Khodorkovsky, in short, represented everything that foreigners found increasingly reassuring about Russia. They were businessmen who were prepared to play by the West's rules, and to treat investors well.

Eventually, Mr Khodorkovsky hired Mr Kukes as chairman of the Yukos board. A happy ending? No. The ex-KGB types in the Kremlin hated the idea of a truly independent institution in Russia. Mr Khodorkovsky was giving generously to opposition parties, and hinting that he might enter politics himself. So he went to jail, on flimsy charges of tax evasion. The Russian state, on even flimsier grounds, has seized a large stake in Yukos. And Mr Kukes is in the hot seat, running the company.

The moral of Mr Khodorkovsky's unhappy fate? Despite President Vladimir Putin's reassurances this week, Russia is a country in which laws mean what the Kremlin wants them to mean, property rights are notional and business depends far more on connections than on hard work and brains. Mr Kukes must be glad he has an American passport.

Posted by DeLong at November 8, 2003 06:36 PM | TrackBack

Comments

Brad, you don't have to worry about Putin. Bush has looked into his soul and everything in there is going great.

http://www.drudgereport.com/noonan.htm

Posted by: Nick on November 8, 2003 04:02 PM

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Brad, you don't have to worry about Putin. Bush has looked into his soul and everything in there is going great.

http://www.drudgereport.com/noonan.htm

Posted by: Nick on November 8, 2003 04:07 PM

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Brad writes:>"They were businessmen who were prepared to play by the West's rules"

Obviously no one will want to invest in Russia if they return to the habit of nationalizing all private businesses, but are all of the West's rules neccesary for Russian investment to succeed?

I mean, do Russian corporatations need to have all the rights of individuals, and is it neccessary to privatize nearly all public domains? Should ideas, words, phrases and melodies be propertized? How about rivers, lakes, and other natural assets?

The tone of the questions should tip you off that I don't think all American property rules are "good things." Not that Russia is the best place to have another, better try.

It seems to me that foreign investment is a double edged sword, in that the investment can help the nation in question in some ways, but it also can leave that nation vulnerable to the worst predatory threats of capitalism, like currency manipulation, excessive foreign ownership, and large loan burdens.

I think a nation should be free to decide how it wants to stucture it's rules of property, at least beyond the level of individual personal possessions, which is pretty clear to every human on the earth.

Some cultures aren't comfortable with corporate ownership of large swaths of natural resources.

Posted by: Joey Giraud on November 8, 2003 05:02 PM

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The divergence of points of view I've seen on this episode is enormous. I suspect that the truth depends on what ends up having happened, and doesn't even exist yet. Three pretty-bad guys, any of whom may end up having been a sorta-good guy. Or not. I thought that Khodorkovsky's and Kukes' supposed rehabilitation was slipped past us rather quickly.

Posted by: Zizka on November 8, 2003 05:05 PM

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Brad writes:>"They were businessmen who were prepared to play by the West's rules"

Obviously no one will want to invest in Russia if they return to the habit of nationalizing all private businesses, but are all of the West's rules neccesary for Russian investment to succeed?

I mean, do Russian corporatations need to have all the rights of individuals, and is it neccessary to privatize nearly all public domains? Should ideas, words, phrases and melodies be propertized? How about rivers, lakes, and other natural assets?

The tone of the questions should tip you off that I don't think all American property rules are "good things." Not that Russia is the best place to have another, better try.

It seems to me that foreign investment is a double edged sword, in that the investment can help the nation in question in some ways, but it also can leave that nation vulnerable to the worst predatory threats of capitalism, like currency manipulation, excessive foreign ownership, and large loan burdens.

I think a nation should be free to decide how it wants to stucture it's rules of property, at least beyond the level of individual personal possessions, which is pretty clear to every human on the earth.

Some cultures aren't comfortable with corporate ownership of large swaths of natural resources.

Posted by: Joey Giraud on November 8, 2003 05:07 PM

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The divergence of points of view I've seen on this episode is enormous. I suspect that the truth depends on what ends up having happened, and doesn't even exist yet. Three pretty-bad guys, any of whom may end up having been a sorta-good guy. Or not. I thought that Khodorkovsky's and Kukes' supposed rehabilitation was slipped past us rather quickly.

Posted by: Zizka on November 8, 2003 05:10 PM

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You guys really have to fix your posting system. When you post a message, there is no response page for a very long time ( actually, I've never gotten a response page, ) and the user is left wondering if their post "took." Natural move: press post again.

I'm tired of repeating myself. This site is as bad as my kids! :)


Posted by: Joey Giraud on November 8, 2003 05:12 PM

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http://edition.cnn.com/2003/WORLD/europe/11/06/russia.raid.ap/
(Hmmm?I didn't know that Dr. M. after his retirement went to Russia.)

Posted by: Gnao on November 8, 2003 05:46 PM

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As I said before, _The Economist_ has a definite agenda here which boils down to letting those with stolen wealth keep it.
Look at this claim, "So he went to jail, on flimsy charges of tax evasion." Really? FLIMSY charges? So _The Economist_ not only knows the details of of how Russian oil companies and oligarchs are or are not paying taxes and is prepared, against all common sense, to claim that everything was in order?

Listen to exactly what they are saying here. Apparently private property (even if stolen) is sacrosanct, SO sacrosanct that not paying taxes (ie breaking the law) is acceptable behavior. Let's face it, _The Economist_ has jumped the shark.

Posted by: Maynard Handley on November 8, 2003 06:10 PM

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http://edition.cnn.com/2003/WORLD/europe/11/06/russia.raid.ap/
(Hmmm?I didn't know that Dr M. after his retirement went to Russia, and became M(D)r. P.)

Posted by: Gnao on November 8, 2003 06:39 PM

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There was never significant Western investment in Russia and there won't ever be. BP and the rest are not investing in the normal sense of the word - they are trying to buy mineral rights for pennies on the dollar. Putin and his goverment consider this "investment" negative - and rightfully so.

Posted by: leopold on November 8, 2003 08:04 PM

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There was never significant Western investment in Russia and there won't ever be. BP and the rest are not investing in the normal sense of the word - they are trying to buy mineral rights for pennies on the dollar. Putin and his goverment consider this "investment" negative - and rightfully so.

Posted by: leopold on November 8, 2003 08:09 PM

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There was never any significant Western investment in Russia and there won't ever be. BP and the rest are not investing into the Russian economy - they are trying to buy mineral rights for pennies on the dollar. Putin and his goverment consider this "investment" a bad deal - and they are right.

Posted by: leopold on November 8, 2003 08:20 PM

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There was never any significant Western investment in Russia and there won't ever be. BP and the rest are not investing into the Russian economy - they are trying to buy mineral rights for pennies on the dollar. Putin and his goverment consider this "investment" a bad deal - and they are right.

Posted by: leopold on November 8, 2003 08:25 PM

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To have a half-*ssed chance of posting once:

Open a separate comments window. Write the comment, highlight the text and copy it.

Hit 'post'.

Wait 10 seconds, kill the window.

Refresh the whole blog page, and check the comments.
There's ~50% chance that the post went through.

50% of the time you'll have to repeat the process, which is why I recomend copying the text before posting.

There's still a chance of multi-posting, but it might only be 25% if you do it this way.

Posted by: Barry on November 9, 2003 06:12 AM

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Worked this time.

Posted by: Barry on November 9, 2003 06:13 AM

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If a country votes for a leader, again and again, who wants to Nationalize, or Subsidide, who is the World Capitalist Community, or the WTO, to tell them to f*** off?
America is supposed to be supporting Republicanism, not Capitalism (where Republicanism = Representative Democracy)

Posted by: Josh Narins on November 9, 2003 07:35 AM

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Barry: What I've found works 95%-plus of the time is:

1. Copy what you've written
2. "Post"
3. Wait ~5-10 seconds
4. "Cancel", closing the comments box
5. Immediately reopen the same comments box again and scroll down to see if your post is there. If it's not, paste and repeat.

IE: You don't have to refresh the whole blog page.

If I double post it's because I double-click for one reason or another.


P.S.: I find that this site loads painfully slowly, and others say it crashes their computer. Does anyone know why? Too many links?

Posted by: Zizka on November 9, 2003 08:02 AM

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For anyone who's interested, Georgia looks like it's about to go the way of Bolivia:

http://news.bbc.co.uk/1/hi/world/europe/3254335.stm
(incls quote: "More then half of Georgia's population lives below the poverty line, government corruption is rampant, $7 pensions are not paid for months and electricity cuts can last for days.")

http://news.bbc.co.uk/1/hi/world/europe/3254831.stm

Ah, market reforms, how I love thee, let me count the ways...

Posted by: October Revolution on November 9, 2003 10:18 AM

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Mine aren't working either, slow or dead.

Posted by: Lust for Life on November 9, 2003 11:15 AM

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if you go over to the other side, not the archiv but the main page it displays all messabes. this side won't

Posted by: Lust for Life on November 9, 2003 11:20 AM

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I'm pretty tired of the posting problems too. Fix it. Please. It's gone on far too long. I thought we were techno-savvy.

Posted by: JoJo on November 9, 2003 11:56 AM

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Hi,
I think the Economist is unfair to Mr Putin here. It is hard to imagine gentlemen like Mr Khorodkhovsky and Mr Berezovsky as victims of an oppressive regime. The "nationalisation leading to loss of investor confidence" is also a red herring. This is an assertion of political authority by Mr Putin and nothing else. The russian conglomerates are more than pure businesses. Many of them are infiltrated by the russian mafia, and their executives would very much like to gain political power as well at the expense of the political authority. I suspect that this is like in some Latin american countries wherein small cabals used to control the nation's policies. I think that Mr Putin's assertion of authority is actually neccesary to ensure proper growth of democratic institutions. An analogy to Mr Khorodkhovsky's dabbling into politics would be a scenario where the owners of the most powerful corporations in the US had no campaign finance laws as well as a weak criminal law system to prevent them from working for and ensuring the victory of the representatives of their interests by fair means or foul.

Mr Khorodkhovsky is not just the Chief Executive of a corporation who is wrongly being targeted, and he clearly had considerably more ambitious agendas.

Posted by: vkr on November 9, 2003 05:16 PM

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I agree with the posts that wonder exactly how, and why, Mr. Khodorkovsky and Mr Kukes "smartened up their image" and how much has changed in the substance of what they are about. I've read articles that describe Mr. Khodorovsky as more of wanna-be "super-Murdoch" who is quite interested in
1) using a media empire and money to acquire poltical power,
2) using this political power to exempt the oligarch's from any accountability in the Russian political and social system (which is much different from pleasing foreign investors, and impressing foreign elites in general)
3) perfers mutltinational financial deals and offshore bank accounts to investment in Russia.

I don't know the answer to the questions raised by some posts. But I would like to read more detailed accounts that give a more complete picture of Mr. Khodorkovsky's activities, plans and purposes.

The Economist article in this case seems to be falling back on its irritating habit of often offering mere glibness and throwing out a few catch phrases, rather than giving evidence and an argument when it wants to wrap up a case.

I will look for the articles I have read and post if I can find them again. In the mean time, anyone have any suggested reading on this issue, that is more balanced than the closed cases I see in most of the news and opinion pieces?

Posted by: jml on November 9, 2003 10:27 PM

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Vkr writes: "An analogy to Mr Khorodkhovsky's dabbling into politics would be a scenario where the owners of the most powerful corporations in the US had no campaign finance laws as well as a weak criminal law system to prevent them from working for and ensuring the victory of the representatives of their interests by fair means or foul."

Sort of like the 19th century in most Western countries or in most of Latin America today? What in Russia ISN'T stolen? Maynard Handley and Joey Giraud above complain about this but the cycle of expropriation has to end somewhere. If the choice is between a corrupt bargain and open warfare, I'd rather have the corrupt bargain. Hey, it works in Chicago.

It isn't like the Hohenzollerns, Saxe-Coburgs, Habsburgs, Wettins, and Bourbons weren't glorified thieves in their day. Or the Daleys and Kennedys for that matter.

Posted by: Chris on November 10, 2003 11:22 AM

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