Russias Arrest of Oligarch Mikhail Khodorkovskiy: Background and Implications for U.S. Interests
CRS Report for Congress
Received through the CRS W eb
Russia’s Arrest of “Oligarch” M ikhail
Khodorkovskiy: Background and Implications
for U.S. Interests
JimNichol
Analys t i n R ussian and Eurasian Affairs
Foreign Affairs, Defense, and T r ade Division
Summary
This report d iscusses t he Russian govern ment’s arrest of “oligarch” M ikhail
Khodorkovskiy i n l ate October 2003 and o ther moves against his Yukos oil company.
The b ackground of the arrest and s ubsequent political and economic fallout are
pres ented, as well as implications for R ussia and U.S. interests . This report m ay be
updated as events warrant. R elated products include CRS Issue Brief IB92089, Russia,
updated regularly.
Backgr ound1
The October 2003 arr e st of Mikhail Khodorkovskiy (purportedly R ussia’s richest
person) and o ther moves against his Yukos oil firm (among the world’s largest i n t erms
of reserves) h ave raised concerns among some U.S. policym akers and analys ts about the
stat us of economic and political reforms i n R ussia and repercussions fo r U . S . - R ussia
relations. S tepped-up Russi an government moves against Yukos became public in J u ly
2003 with the reopening of a s upposedly resolved privatiz ation fraud case and arrest of
Platon Lebedev, a m ajor Yukos shareholder and chairman of its ho l d i n g c o m pany
Menatep. Prosec u t o r s also revisited o ther Yukos cases, m any o f which ostensibly had
been settled o r d ropped, and l aunched s ev eral raids o f Yukos and M enatep offices.
The Yukos probe heightened concerns among many o f R u s s ia’s wealthiest
businessmen — t he so-called “oligarchs” who benefitted greatly from t he controversial
privatiz ation auctions of state-owned compan i e s i n the 1990s — o f a wide-scale
government reex amination of their personal fortunes, corporate empires, and private
propert y ri ght s i n general . S everal prom i n ent busi n essm en had i m p l o red R ussi an
1 Sources for t his r eport i nclude the Foreign Broadcast Informa tion Servi ce (FBIS), Central
Eurasia: Daily Report ; RFE/ RL Newsl i n e ; Johnson’s List ; t he State Department’s Washington
File;andReuters , Agence France Presse ( AFP) , Associated Press (AP), a nd other newswires.
Congressional Research Service ˜ The Library of Congress
Pres ident Vladimir Putin to intervene with prosecutors to releas e Lebedev and s cal e down
the i nvestigation, but Putin cl aimed t hat t he “rule o f l aw” d emanded h is noninvolvement.
Then, o n October 25, 2003, Khod o rkovskiy was arrested and charged with fraud,
embez z l ement, and e v ading personal and corporate t ax es. T o purportedly p rotect the
government’s interest in c o llecting t he tax es, the p rosecutor impounded 44.1% (later
reduced to 39.6%) o f s hares controlled b y Khodorkovskiy and other M enatep members.
The government seemed to be moving more br oadly against Yukos in November with the
opening of more investigations and t he reported flight of se v e r a l c o m pany officials t o
Is rael. S tressing that he hoped t o p rotect the future o f Yuk o s , Khodorkovskiy resigned
as chief ex ecutive o n November 3. T h e n e x t d ay, t he Yukos board appointed Simon
Kukes — a U.S. citizen and chief of a m aj or Russian oil firm — to replace
Khodorkovskiy.
Fal l out of the Ar r est
The fears of t he oligarchs and others that privatization might be at least partially
reversed has led Putin i n recent w eeks to declare that re-nationalization is not on his
agenda. H owever, p ercept i ons t h at p r i v at e ent erpri s e w as bei n g t hreat ened appeared
reinforced on October 2 9 when P utin’s Minister of Natural R es ources stat ed that oilfield
ex ploration licenses granted to Yukos woul d p robably b e c ancelled. Such perceptions
may h ave b een reflected in the p lummeting s hare price o f Yukos stock and in a C entral
Bank offi ci al ’s st at em ent o n N ovem b er 10 t h at m u ch-hai l ed n et capi t al i nfl o ws duri n g
early 2003 had reverted t o n et outflows. However, Russian officials h ave allowed Yukos
and t he S i bneft oi l fi rm t o p roceed wi t h t h ei r m erger, whi ch report edl y creat es t h e w orl d ’s
largest p rivate oil firm i n t erms of reserves and t he fourth-largest in terms o f p roduction.
M a n y anal ys ts speculate that the arrest was orchestrated by a group of Putin’s
a ppointees linked t o h is career in the s ecurity service and in St. P etersburg, i n c l u d i n g
presidential staffers Viktor Ivanov and Igor Sechin. Thi s group, termed by some the
“siloviki” (strong ones), came t o oppose Alex ander Voloshin, head of the p residential
administration, who was appointed by former President Boris Yeltsin and h ad purported
ties t o m any of t he oligarchs. Faci ng his l oss of i nfluence within the administration and
denouncing Khodorkovskiy’s arrest, Voloshi n resigned o n October 3 0 . Sechin and
Iv anov may not have gained more influence, however, s i n ce Putin quickly appointed
Voloshin’s assistant, the reportedly m oderate Dmitriy M e dvedev, to replace him.
Medvedev o n November 2 appeared critical of the br o a d e n ing i nvestigation of Yukos,
urgi ng prosecutors to “think through all the economic consequences of their d ecisions”
(Novosti , Nov. 3). P rime Minister Mikhail Kasyanov on November 11 likewise called o n
the government to ensure “unshakable” privat e p roperty rights. Anatoliy Chubais, chief
of the United Energy S ys tems el ect ric utility (UES; 51% of shares are s tate-owned) and
a l eader of the Union of Righ t Forces party (supported b y Khodorkovskiy) has b een the
most prominent company head to criticize Khodorkovskiy’s arrest. S ome observers have
warned that Chubais — who during t he 1990s led p rivatiz ation efforts and is hence widely
unpopular — m ay soon become a t arget o f i nvestigation.
It appears t hat after some temporizing, Putin moved during November to stanch the
intense domestic and i nternational criticism of t he moves against Yukos and t o p revent
the case f r o m s eriously damagi ng Russia’s energy s ector and economic growth. On
November 4, he argu ed that the Yukos c a s e w a s s i m ilar t o t he U.S. Enron s candal and
was a simple law enforcem ent m atter, and t he nex t day publicly rebu k e d h i s Natural
Resources Minister for s uggesting t hat licen ses might be revoked, stating t hat “the s tate
should not strive to destroy” Yukos. He also d iscussed t he arrest on November 13 with
the v isiting h ead of the International M onetary Fund, Horst Koehler, who later s tated t hat
he was convinced that Putin remained dedicat ed to free m arkets. P utin the n ex t d ay met
wi t h a l arge group of R u ssi an busi n essm en and p ledged to protect private p roperty rights,
but also pointedly warned them not to lobby legi slators and bureaucrats for favors.
Implications for Russia
Some observers in Russia have ex plained moves by t he Putin administration against
the o ligarchs i n t erms of a m arker l aid down by P utin in mid-2000. In a closed m eeting
with the oligarchs, Putin allegedly pledged not to revisit t he privatization deal s i f t hey did
not become involved i n opposition political activities. These observers suggest that the
Putin administration’s prosecution of Khodorkovskiy, as well as earlier m oves against
prominen t oligarchs, may be ex plained in part by the administration’s displeas ure over
thei r political activities (FBIS , S ept. 16, Doc. No. C EP-89; Oct. 29, Doc. No. C EP-309;
Oct. 30, Doc. No. C EP-316). In 2003, Khodo r kovskiy h ad become active i n funding
l i b eral causes and opposition p arties, and h inted t hat h e might eventually r u n f o r
presi d ent . Hi s arrest and P ut i n ’s Novem b er 14 speech t o busi n essm en served t o dri v e
home t his m essage to stay out of politics, in this view.
W h ile many Russian businessmen have argu ed that they ha v e t h e rights o f any
citizen to lobby the government for p referred po l i c ies and to otherwise p articipate i n
politics, Putin has s trongly asserted that th eir political influence s hould b e limited. To
these businessmen and o ther observers, t he government’s moves a ga i n s t Yukos have
indicated that neither the rule o f l aw nor pub lic opinion appear to offer m uch s upport for
thei r rights (Economist Intelligen ce U n it, Nov. 7). The moves against Khodorkovskiy
and Yukos were politically orchestrated and b elied t he independence o f t he judicial
syst em , accordi n g t o t hi s v i ew, and confi rm ed t hat “nei t h er dem o cracy nor capi t al i s m h as
taken hold i n R ussia.” (Washington Post , Nov. 12). A poll t aken by the respected ROMIR
public opinion firm at the end of October i n d i c a t e d s cant popular support for
Khodorkovskiy, with over h alf o f t hose who knew about his arrest (about one-fourth did
not) endorsing it and b elieving that his company had b roken t he law (Reuters , Nov. 5).
A S ea Change of Policy? Some observers have warned that the m oves against
Yukos mark the l aunch o f fundamental changes i n politics and economics. U.S. analys t
S t ephen F. C ohen h as argu ed t h at “t he st ruggl e over t he o l i g a r chi cal syst em , and t hus
once again the future o f post-Soviet Russia, is under way,” and t hat t he result may b e far-
reachi n g e c onomic changes, including the removal o f t he oligarchs (The N ation, Nov. 24).
International financi er George Soros has warned that Putin is creating “stat e capitalism,”
where t he private s ector is controlled b y t he state, while others have suggested that Putin
aims to creat e C hinese-style capitalism, where R ussian businessmen are not permitted t o
interfere in politics and foreign i nvestment is controlled. Other implications may i nclude
grea t e r efforts b y R ussia t o u se its energy firms as i nstruments of foreign policy, as
advocat ed by Defense M i n i s t er S erge y Ivanov (a siloviki) o n November 17.
Other an alysts v iew t he government’s moves against Khodorkovskiy as d esigned
mainly to wipe ou t h i s gr owing i nfluence over R ussi a’s energy s ect or and i ncrease t he
influence o f t he government over t his s ector. T hese anal ys t s suggest t h at P u t i n has h ad
an interest since he became prime minister i n 1999 in limiting t he i n f l u e n c e o f t he
oligarchs over oil and gas resources . They assert that the S tate Duma’s inability to enact
bills backed by the government to broaden s tate contro l s o v e r nat ural resource
development (legi slation t hat Khodorkovskiy l obbied against), calls by Yukos for an end
to the R ussian government’s total ownership of pipelines , challenges to tax rat es by
Yukos, and rumors that m a j o r U . S . and foreign o il firms might become major
shareholders in Russia’s l argest oil firm cont ributed to government’s retaliation against
Khodorkovskiy. U.S. analys t Anders Aslund, however, h as discounted the government’s
interest in the oil sector, s uggesting on November 4 t hat t he moves against Khodorovskiy
had primarily political motives of eliminating a rival for power (Voice o f A merica , Nov.
5). S uggestive o f t his m otive, Russia’s d e puty p rosecutor h as stated that Khodorkovskiy
might be detained for u p t o t wo years o r l onger, well b eyond the 2004 presidential race.
Having blocked Khodorkovskiy’s political am bitions, t he Russian government will not
further j eopardiz e economic growth, i n t his view. The p rivatiz ations of the 1990s, as well
as the domination o f t he economy b y m onopolies and the s tate’s partial o r controlling
interests i n m any m aj or firms, will remain in place (Moscow Times , Nov. 13).
The Rise of the S ilovi ki? The Yukos case a p p e a r e d t o high light increasing
contention within t h e P u t i n administration over economic policy, with one group
advoca t i n g s ome d egree o f free enterprise ( the p ro-oligarch “Yeltsinites,” who are
holdovers from t he previous admini s tration) and another group calling for more state
control over t he economy (the s iloviki). The s iloviki also tend to be more distrustful of
ties with the W est t han t he Yeltsinites. Puti n h a s appeared to support t he Yukos probe
launched by t he siloviki, although opinions differ among many observers on the d egree
of his s upport and control o v e r t h e m . To remedy the apparent rift within the P utin
administration bet ween the rising s iloviki and t he weakening Yeltsinites, Medvedev m ay
be seeking to forge a compromise between them. Although weakened by Voloshin’s
resignation, the Yeltsinites appear to retain some influence t hrough P rime Minister
Mikhail Kasyanov. The s trengt hening of the siloviki faction appears t o i nclude growing
support for it even among some administ r a t i o n m oderates, such as Fi nance M inister
Alex ey Kudrin, who on November 3 welcomed t he moves against Yukos as heralding a
more honest marketplace. S o me observers suggest that there are recent s igns that the
si l ovi ki m i ght be ex ceedi n g P ut i n ’s wi shes (al t ernat i v el y, t h ey m ay b e carryi n g t hem out ),
incl uding reports that the Natural Resources Ministry and regional authorities are stepping
up their t hreats t o revoke Yukos licenses. The government also reportedly h as eliminated
some tax ex emp t i ons affecting Yukos and orchestrated t he quick Duma repeal on
November 18 of a Khodorkovskiy-influenced law t hat h ad limited ex port t ax es on oil.
Investment Outc omes. The af fai r h as appeared t o del ay s om e forei gn
investment, although s ome caution m ay have more to do with t h e uncertainties o f t he
Russian election cycle than with the Yukos case, according t o s ome analysts. However,
the Yukos probe may h ave boosted i n v e s t o r concerns about the economic and political
policies t hat might be pursued by Putin in his s econd term (Andrius Vilkancas , Reuters ,
November 9). Although foreign investment is si gn ificant for major p rojects and sectors,
it currently plays a small role i n t he Russian economy compared t o domestic investment
by R u ssian firms. If there are further government moves against private p roperty, Russian
ent repreneurs m i ght react by eschewi n g i nvest m ent s i n p l ant and equi pm ent and sendi ng
t h ei r capi t al abroad ( Financial T imes , Nov. 11). The In ternational Energy Agency o f t he
Organiz ation for Economic Cooperation and Development warned o n November 13 that
Russian government moves aga i n s t Yukos an d possible d elays i n foreign investment
could contribute t o faltering production t hat m ay harm Russia’s economic growth. M ore
optimistically, t he credit rating firm M oody’s stated on November 12 that it would s tand
by its design ation t hat R ussian government bonds were investment-grade, reflecting its
assessment t hat t he Russian economy would retai n s trong growth. S everal international
energy and o t h er fi rm s h ave s t at ed t hat t hey are not changi ng t h ei r i nvest m ent pl ans.
Ca mpaign Effects. Although m uch o f t he Russian public appeared to be unaware
of or indifferent to the government’s moves against Yukos, t hey h ave b een prominently
di scussed b y Dum a candi da t e s duri n g cam pai gni ng ahead of t h e Decem ber 7 el ect i on.
Put i n ’s favored United R ussia p arty bloc has appeared to gain support b y attacking t he
oligarchs, effectively coopti n g an i ssue t hat was a s taple of t he Communist Party. The
Communists also appeared compromised by accepting s ome s upport from s ome o ligarchs
and even listing t hem as candidates. Two parties t hat h ad received m ajor support from
Khodorkovskiy — Yabloko and t he Union o f R ight Fo rces — warned o f an assault o n t he
market economy and the imposition of authoritarian rule. T heir efforts t o attract voters
appeared severely set b ack both b y t he c u t o ff of Khodorkovskiy’s funding and t he
perception o f m any voters t hat t hey represent the s uper-rich. Yabloko’s popularity also
may h ave s uffered when its offices were raided in October, ostensibly as part of the Yukos
case. A few observers have asserted that the Y ukos investigation aims to discredit both
the C ommunist Party and Yabloko in order t o so reduce t hei r appeal t h at t h ey fai l t o m eet
a t hreshold for any p arty list s eats i n t he Duma (Moscow Tribune, Nov. 21).
Implications for U.S. I nterests
Opinions varied somewhat among U.S. policym akers and analys ts about the
sign ificance of Russian government moves against Yukos and Khodorkovskiy t o U.S.
interes t s . A m ong those m ore critical of the R ussian government, U.S. d efense advisor
Richard P erle on October 2 9 condemned Khodorkovskiy’s arrest and called for Russia’s
ex clusion from t he Group of Eigh t (G-8) industrial n ations (Wa ll Street Journal , Oct. 30).
Others were more supportive o f t he Russian g overnment, with one former U.S. official
hailing P utin for revitalizing R ussian democracy and comparing him t o t he trust-busting
U.S. President Theodore R oosevelt (Washington Times , Nov. 11).
These d ifferences of viewpoint were apparent in assessments of the Bush
Administration’s response t o t he arrest. S om e v iewed t he response as m uted and m ainly
restricted to background and o ff-the-record criticisms, while others viewed it as relatively
forceful . Am ong offi ci al st at em ent s , t he S t at e Depart m ent on Oct ober 2 7 rai sed concerns
about the “selective” nature of the arrest and t he Russian government’s “confrontational”
moves against Yukos, and on Oct o b e r 3 1, stated that the impoundment o f Yukos stock
posed “serious questions about the rule o f l aw in Russia,” and “spark[ ed] concerns among
domestic and i nternational i nvestors about respect for o wnership righ ts.” Russian Foreign
Minister Igor Iv anov two d ays l a t e r d enoun ced these s tatements as i nterference i n
Russia’s domestic affairs. Perhaps i ndicating a more muted response, Secretary o f S tate
Colin Powell stat ed on November 4 t hat “the cas e i s playi ng out and I think it’s bes t for
us just to see how the R ussians handle it . ” S eeming m ore forceful, W hite House
spokesman Scott M cClellan o n November 6 s ta ted t hat “the m anner i n which the case i s
being addressed h as raised some serious con cerns about the s tate of rule of law and the
busines s and investm e n t cl i m at e ... It ’s important for R ussian authorities t o dispel any
concerns that this case i s politically motivat ed.”
Energy and Other U.S.-Russia Ties. Some observers have raised concerns that
the Yukos case could j eopardiz e t he U.S. national i nterest i n d iversifying energy s upplies,
including growin g oil imports from R ussia (currently over 500,000 barrels per d ay), as
well as development p roposals s uch as a Russian Murmansk pipeline and port t o s upply
oil for U.S. markets (Dallas Morning News, Nov. 10, p. 1D). They also c a u t i o n t he
United S tates t o closely monitor t he stat us of the s ilo viki and t he upcoming R ussian
elections, which could contri bute t o changes in Russian national s ecurity policy i nimical
to U.S. interests. Khodorko v s k i y and Yukos have played a p rominent role i n m eetings
of the U.S. -Russia C ommercial Energy Dialo gu e t hat were l aunched b y P residents Bush
and P utin at their M ay 2002 summit. Khodorkovskiy h ighlighted plans for the M urmansk
pipeline at t he September 2003 Commerci a l E n e rgy S ummit (Oil Daily, S ept 23; AFP,
Nov. 15). In addition, Khodorkovskiy’s Open R ussia Foundation charity has b een hailed
by U.S. officials as b olstering d emocratiz ation i n R ussia (Amb. Vershbow, M ay 17,
2002). S ome analysts argue that the Admin istration s hould not overreact to the m oves
against Yukos but should reaffirm core U.S. national i nterests by continuing t o e n gage
with R u ssia, to include cooperation o n counter-terrorism, NATO, Afgh anistan, and t he
nonproliferation o f weapons of mass destruction t o Iran and North Korea , a s w e l l as
cooperation o n energy d evelopment ( Reuters , Nov. 4). (For details on U.S.-Russia ties
and R ussian foreign policy, see CRS Issue Brief IB92089, Russia.).
Many U.S. oil companies have indicated that despite the Yukos case, Russia’ s o il
ex port s and reserves m ake i t a worl d p l ayer t hat i s h a r d t o i gnore. P erhaps refl ect i n g a
prevailing attitude, t he chai rman of the energy s ervices firm Halliburton on November 5
stated that he hoped h is firm would i n t he future play a b ig role in Russia, but that he had
some concerns that rule of law problem s “make the m arket i ffy,” in terms of profitability
(Reuters, Nov. 5). Kukes’ appointment as chief o f Yuko s (where h e j oins two o ther
ex ecutives who are U.S. citizens) brings to the fore s omeone who previously worked for
U.S . oil firms, p erhaps boding well for future cooperation b etween Yukos or its successor
and t he U.S . energy sect or.
Congressional Concerns. Several M embers of Congress have been at the
forefront in raising U.S. concerns about the Khodorkovskiy arrest and m oves against
Yukos. M eeting with Members o f C ongress on November 4 t o formaliz e cooperative ties,
the chairman o f R ussia’s upper l egislativ e chamber, S e rgey M ironov, endeavored to
reassu r e t h em that “there are n o political , economic, o r election goals,” in the Yukos
probe, and that U.S.-Russia ties t here fore should not be negatively affected ( ITAR-TASS,
Nov. 4). Des pite t h es e assurances , t hat s am e day Senate Foreign R el ations Committee
chairman Richard Lugar introduced S.Re s. 258, which calls for Khodorkovskiy’s human
ri gh t s t o be respect ed and for R u ssi a t o d i s pel concerns t h at cases agai nst busi n ess l eaders
are politically motivat ed and t hat t he legal system i s bei ng misused. Also among the
concerns are t he Russian government’s see ming preoccupation with prosecuting J ewish
oligarchs. Senate Commerce C ommittee chairman J ohn McCain al so strongly warned
t h at “a creepi n g coup agai nst t he forces of dem o cracy and m arket capi t al i s m i n R ussi a i s
threatening t he foundation o f t he US-Russia relationship,” and called o n t he U.S.
governm ent t o “cease al l gu arant ees of i nvest m ent i n R u ssi a due t o t h e unaccept abl e ri s k
of state i nterference a n d ex propriation.” The R ussian Fo reign M inistry responded b y
criticizing M cC ai n for “l apsing into Cold War s tereotypes ,” and “outrageously” t rying t o
harm the U.S.-Russian “str ategic partnership” (CR, Nov. 4, pp. S13866-7; AP, Nov. 4).