Commentary Magazine


ExxonMobil’s Role in Oil Tycoon’s Arrest

On October 25, 2003, machine-gun bearing Russian police raided oil tycoon Mikhail Khodorkovsky’s jet as it was refueling in the Siberian metropolis of Novosibirsk. They arrested Khodorkovsky, and he remains in prison to this day–though his release date, which is consistently pushed back, is now set for the year 2017.

The story that led up to Khodorkovsky’s arrest is fairly well-known: he was one of the “oligarchs” who took control of a state oil company in the 1990s and openly challenged Vladimir Putin in the political sphere. Claiming justice for Russia, Putin charged Khodorkovsky’s firm, Yukos, with tax evasion, declared it bankrupt, and seized control of the oil giant for the state, keeping Khodorkovsky locked up on trumped-up charges. But now there is a new wrinkle in the story, and according to Steve Coll’s new book on ExxonMobil, out today, Putin may have been spooked into arresting Khodorkovsky when he did (it’s not a question of “if”) after a conversation with Exxon CEO Lee Raymond.

The backstory is as follows. In 2002, both U.S. and Russian leadership believed the moment was ripe for more integration of Russia into the global economy. While there was always risk, American officials and businessmen assumed (correctly) that foreign firms would be safer doing business in Russia, which lacked reliable law and order and which was rife with corruption, if Russian companies had investments in the West. It was an economic strategy based on bringing Russia into the 21st century with regard to global economic cooperation and the safeguards that came with it.

Much of this cooperation was, at least at first, centered on the oil industry. Raymond’s ExxonMobil was ready to invest seriously in the emerging Russian energy sector. At the same time, Khodorkovsky was looking to sell a stake in Yukos to Western investors. For Raymond, Khodorkovsky’s company made the most sense: Khodorkovsky had begun a campaign to clean up his own books as an example to other Russian firms in an attempt to change the culture of Russian business. Khodorkovsky was also young, charming, and well-connected in the West. He believed he was insulating himself somewhat against possible political backlash at home both with these foreign connections and with his popularity growing in Russia.

Raymond, however, was not interested in buying into a firm unless he had a clear path to owning a majority (and controlling) stake in it. Khodorkovsky balked at Raymond’s desire to buy a controlling share. So he suggested a compromise: ExxonMobil would purchase a 30 percent stake in Yukos, and then later attempt to get permission from the Kremlin to buy enough shares for a controlling stake. Putin was open to foreign investment but wary of the idea of an American oilman running one of Putin’s “national champions”–energy exporters of power and pride. Putin would have to sign off on any such deal. But Khodorkovsky told Raymond this was not a good time to approach Putin on the matter. Invest in the initial offering, Khodorkovsky suggested to Raymond, and then later on, when the time is right, seek expansion.

Raymond, understandably, took this to be a weak and opaque attempt at giving him the run-around. So as negotiations continued into 2003, Raymond eventually met with Putin one-on-one during Putin’s trip to New York. Raymond made his pitch. Putin asked, just to be sure he was hearing this correctly, if Raymond was suggesting that after this sale, if Putin wanted to do anything with regard to Yukos, he would have to ask ExxonMobil’s permission? Yes, Raymond responded. Coll then describes the reaction:

Lee Raymond’s remarks about what Russia would have to do to satisfy ExxonMobil may have grated on Putin, however. “The report that we got back later was that Putin perceived him as just totally arrogant and far too aggressive,” [Yukos CFO Bruce] Misamore recalled. “And he just really was totally turned off by Lee Raymond–this big U.S. industrialist coming, and his arrogance, and telling the president of a country how things are going to be, almost…. Putin was just totally turned off by the guy–that was the report we got.”

From Putin’s perspective, Khodorkovsky was challenging him at home and bringing in the well-connected Americans to box him in further. So he threw a brushback pitch.

Raymond’s meeting with Putin may have been something of a final straw, but it’s hard to blame him for Khodorkovsky’s arrest. It’s far more likely that Putin was waiting for an excuse to put Khodorkovsky away, and decided this was it. Though he said he’d never run for president, Khodorkovsky was exercising far too much personal autonomy for Putin’s taste, and Putin has only confirmed his bad faith and disregard for the rule of law since that episode. Nonetheless, it’s an interesting footnote to a case that has become emblematic of the perils of Putin’s Russia.

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