Mikhail Khodorkovsky was interviewed by Russian business magazine RBC (Daria Pylnova, RBC, September Issue)

On the eve of a journey through the regions in 2003, despite the already existing threat of arrest, the head of YUKOS continued making big plans for the development of business and many other projects. Nearly 9 years later, Russia’s most famous prisoner, Mikhail Khodorkovsky, discusses in an RBC interview how even 110 dollar a barrel oil threatens Russia with serious problems.

Tight bonds

Many Russian oil companies are busy expanding their geographic footprint nowadays. I am thinking here about both Lukoil’s production in Iraq (the Qurna-2 project) and Rosneft’s in Venezuela. You had planned to join YUKOS together with Exxon Mobil and to build the Murmansk and Russia-China oil pipelines for deliveries of raw material to Europe and China, but this did not happen. Why is it that these projects never did get the “green light”; surely their economic benefit was not in doubt?

A pipeline to China was built. True, they ended up spending several times more on it than we were planning to. And instead of the route to Murmansk, they are doing the BTC-2, while Rosneft is joining together with Exxon within the framework of large projects. In this way, the ideas we had proposed in the realm of business are being implemented, but with amendments, the reasons for which are the private interests of the bureaucracy and of the business that is connected to it with tight bonds. There are two things we can infer from this. First, that corruption is systemic (that is, it is what determines the advisability of implementing any project). And second, that the political interests of the regime – to eliminate the sources of independent funding of the opposition – often prevail over the economic interests of the country. You can choose for yourself which of these inferences seems the more credible to you. You can even choose both in some proportion.

Why are Russian companies aspiring to produce oil abroad?

This reduces territorial (country) political risks, thereby improving market capitalization (reducing its volatility). Besides that, in this way you acquire experience and you can nurture and pick out the best personnel without limiting yourself to the Russian oilmen’s community. Generally speaking, the oil business by its very nature is disposed towards globalization.

In one of the interviews you noted that increasing Russia’s oil production to 600-650 mln tonnes per year is economically unjustified. Fields can be exhausted, while the development of infrastructure requires no small investments. Is the management of the oil companies, in your view, putting enough into geological exploration and the modernization of equipment today?

I am convinced that production of 600-650 mln tonnes in “onshore” Russia will lead to the depletion of the fields at which production is taking place before the pipelines have reached the end of their service life. This problem is not as much of a concern for the rest of the world, inasmuch as our “overland haul distances” are the biggest. (I can clarify in greater detail as soon as I get out of places of deprivation of liberty, as there is no time now – the colony administration is constantly giving me more important assignments.) Geological exploration and the modernization of equipment is another topic altogether. I believe that the first ought to be providing for 100% replacement of the volumes of production in Russia for another 15-20 years still. If this is not happening, that means the investments are insufficient.

The changing of tax regimes for oil companies happens in many countries. You are a supporter of increasing taxes in this sector?

The tax regime in the oil sector needs to provide for a return on investment that corresponds to the level of risk. There are questions with respect to individual types of taxes, but judging by the market capitalization of Russian companies and taking into account the discount connected with their internal efficiency problems, the level of taxation of the oil industry now is on the whole normal. It could be noticeably increased by reducing non-tax (corruptional) expropriations and the cost of capital on account of a reduction in “political” risks, and increasing the efficiency of the intra-corporate procedures that have become fossilized by an unwieldy state bureaucracy and special services. What we are referring to, in my view, is a 10-20% “shortfall” in budget receipts at today’s price levels. If prices fall this percentage will go up, inasmuch as the above-mentioned costs do not diminish if things move in this direction.

What taxes, in your view, are there not enough of in Russia, and which ones are “excessive”? For example, the introduction of a “luxury tax” is currently being actively discussed.

I consider that the fiscal component prevails over all others in our country. And this is not right, inasmuch as taxes are one of the principal tools for managing the economy and not just that. From this point of view, a “luxury tax”, if it is well thought out and correctly administered, could have a significant “educative” significance despite a knowingly very low fiscal one. It would be a good idea to give some serious thought to differentiation of the inheritance tax, and in general to a major tax reform – to a return to a real “three-tiered” system of taxation (federal, regional, and local taxes). Transfers and subventions ought to be the exception, not the rule. Such a system has a serious impact on positive motivation for self-development.

Stress points are inevitable

An oil price of 100-110 dollars per barrel, in the opinion of Russian officials, may be stable for another 20 years (Elvira Nabiullina, for example, recently made an announcement about this). What should we be preparing for in such a situation – for sluggishness and stagnation or for an improvement in the standard of living?

If we assume a stable oil price in the next 20 years, then our country ought to be preparing itself for some serious political “perturbations”. Our citizens have become accustomed to a constant and rapid rise in their real incomes, based not on increased labor productivity and the quality of state administration, but on a rapid increase in the price of oil and gas, on a rise in the volumes of production, and on an influx of foreign short-term speculative capital. That is, factually – as hurtful as this may sound to some – on a parasitic, not constructive, model of the economy, the state, and society. The situation began to change in 2008, and the regime began to “limp”. It has enough reserves for now, and the problems have to do only with an unwillingness to spend these reserves. By the way, a perfectly explicable unwillingness – Putin is extremely conservative, and he is inclined to consider that the mere fact of the existence of large reserves guarantees the prolongation of the stability of the existing system, meaning of his power as well. But with a steady price for oil, changes will come very quickly (for example, by 2015). A 4% growth in the economy is a good result with a high quality of administration – that is, in the absence of systemic corruption, with an efficient bureaucracy and the like. In our situation, multiple stress points are inevitable.

If the dependence on a raw materials economy will remain the same, what socio-political scenarios do you see for Russia? Is an innovational path possible in our country, and how do you imagine it?

A classical raw materials economy allowed a power that is not dependent on society to be formed; a power that does not consider that it is living on the money of society and serves society. Nowadays the raw materials economy has already become a consequence of this power, under which an innovational path is impossible inasmuch as it contradicts the very philosophy of the country’s politico-economic system. When the priorities of the ruling elite change, or, more precisely – to the extent of the rotation of the elite as such, when the parasitic philosophy of managing the state and consuming the national wealth is replaced by an ideology of creating things – that is, when a qualitatively new politico-economic system is formed – then we will be able to speak of a breakthrough. But not before. And as long as the current regime remains, we are doomed to an industrial/raw material economy and “window-dressing” projects along the lines of Rosnano.

Tendencies of the last year: a significant outflow of capital from Russia (35 bln dollars according to the CB’s theory), and a reduction in the number of those desiring to emigrate from the country abroad (from 22% to 11% according to VTsIOM’s data). What are these trends pointing at? Why does the elite, earning in Russia, prefer to keep its money abroad? How would you act if you continued to be engaged in your projects as before?

For me, VTsIOM is absolutely not an authoritative organization; I therefore consider that commenting on their data is a pointless pursuit, besides the obvious conclusion that the power wants to hear about a reduction in the number of those who desire to leave for abroad. Now concerning the outflow of capital, the conclusion is even more trivial: a reassessment of Russian risks has led to a change in the perception of the efficiency of investments. To put it more simply, if Russia is developing along the Nigerian scenario, but wants to pay investors at European rates, then it is better to put one’s money into some other country. But even at Nigerian rates, not every investor is prepared to risk his capital. Many prefer real stability, not a fantasy thought up by propagandists. Our, Russian, elite understands the factual state of affairs better than many others.

Segezha, where your colony is situated, is a so-called mono-town, which arose around the principal enterprise – a pulp and paper mill. There are hundreds of such towns in Russia, which have turned out to be practically on the verge of bankruptcy. Is it possible to revive the Russian mono-towns and science-cities?

I have considered and do consider that it is imperative to diversify mono-towns. And if ecology or the climate do not favor this, then to resettle, converting the enterprises to the work team rotation method. But it is understandable that such measures should not lead to social convulsions. This is why it is important to work out conceptions for the development of each population center. And how should this be done? It’s really quite simple. First, restore full-fledged local power, a.k.a. local self-administration, on a country-wide scale. Second, as I have already said above, give the municipalities their own tax base, one that is commensurate with their tasks. Otherwise there is no way to get away from a regime of mass hands-on administration from the federal level, while provincial towns (first and foremost the mono-towns), deprived of development resources, will keep on gradually dying out anyway. As to the federal regime, it needs to be saved for exceptional situations, when the bankruptcy of a municipality is unavoidable while regional capabilities are insufficient.

All the other factors

Innovations and a favorable investment climate in Russia – both Vladimir Putin and Dmitry Medvedev are constantly making announcements about this. Why have neither the Skolkovo “inno-city” nor other projects yet become creative centers of gravity attracting unique technologies with high commercial potential?

An innovational economy and centers of innovation are based on creative people. That is, a place where we expect the emergence of such a phenomenon has got to be attractive, first and foremost, to specifically such a kind of people. To attract them with an uncompetitively high wage means to knowingly doom technological elaborations to too high a unit cost. And besides, far from every specialist will be tempted by earnings alone. The main thing is the opportunity for creative work, creative interaction, and comfortable living, including security. And for investors, things like the protection of their investments and intellectual property and the opportunity to use the result obtained are also important. Skolkovo is territorially not a badly selected place (moreover, in the same way as, for example, Troitsk), but all the other factors are making it not very competitive for now. The trials of the “scientist-spies” alone are capable of scaring to death any investor in science or scientist, while the authority of our justice is such that even the best laws on the protection of intellectual property can not assuage the fears of a potential investor. And there is a whole slew of questions like these. Our corrupt bureaucracy is not interested in resolving them, inasmuch as if such a precedent is created, the chair they are comfortably sitting on today is going to start getting a little wobbly. Do they need that?

Is an emphasis on developing innovational projects capable of seriously impacting the growth of Russia’s economy?

If we understand innovations broadly, as new efficient business and new methods and technologies for conducting it, then there simply is no alternative to innovations for ensuring growth. Extensive potential has been exhausted completely. If by innovations we understand our own scientific developments, then their impact on the Russian economy in the next 10 years is going to be marginal. Neither state institutions nor, correspondingly, industry are prepared for a knowledge economy. It is sad that we are practically not moving in that direction at all, while Putin is likely convinced that the opposite is true. Although, by the way, it is possible that Putin does not even think about these things. It can not be ruled out that he has other priorities.

What should the foreign entrepreneurs who are being told today about the tempting economic prospects in Russia be taking into account?

It is imperative for foreign entrepreneurs to take into account the fact that the Putin regime is building state capitalism in Russia. Corruption is an inalienable part of it. There is no need to depend on state institutions and their transparent and efficient functioning, comprehensible by all. The courts, the laws, the law-enforcement agencies – everything functions only in the presence of a “roof” and within its capabilities, at any rate, when it collides with the interests of the corrupt bureaucracy. And these interests are becoming more and more all-pervasive as time goes on. Your estimated income from a project has to correspond to these risks.

What can the power and business do for Russian innovations to become competitive on the world market?

Openness of the economy for participation in international competition. For this, the re-creation of state institutions (an independent judiciary and parliament), a real fight against corruption (the real and regular turnover of power and oversight on the part of civil society and the opposition are imperative for this), stability of the right of property ownership. In a word – they need to try to restore confidence.

At a meeting in the Kremlin 9 years ago, you spoke about corruption in the economy and preferences in oil production. If such a meeting were to take place right now, what questions would you raise first of all?

Today I would speak specifically about the need to restore confidence between the power and society and trust in state institutions. I would ask Putin if he is ready to risk his life and liberty for Russia. Is he ready for his retinue to answer for the lies and the corruption? Is he ready to make the power honest? Is he ready to entrust power to a new generation, or does he want to hold on to it to the bitter end?

To journalists’ question “do you intend to engage in business in the future”, you reply that “this is not interesting” for you. When and as the result of what did such a decision form, and in what manner did your priorities change by the present time?

In 2003, I announced that I wanted to get out of business at age 45. The reason was sufficiently simple: I had achieved what I had wanted to achieve in having created the biggest and most efficient Russian oil company. I would have been able to guide it out into the international arena, but an international company would have to be managed by some other, better prepared person. And besides that, 20 years in business in the post of a top manager is a very long time. I gained a lot, but I also missed out on a lot. The main thing – family, which was waiting and is waiting for me all these years. Business is not a game, and you need to carry out your duties, but it is uninteresting for me to keep on carrying that load any more. I am not a galley slave. And I never will be one, no matter how my fate turns out.

Mikhail Khodorkovsky was interviewed by Russian business magazine RBC (Daria Pylnova, RBC, September Issue)

On the eve of a journey through the regions in 2003, despite the already existing threat of arrest, the head of YUKOS continued making big plans for the development of business and many other projects. Nearly 9 years later, Russia’s most famous prisoner, Mikhail Khodorkovsky, discusses in an RBC interview how even 110 dollar a barrel oil threatens Russia with serious problems.

Tight bonds

Many Russian oil companies are busy expanding their geographic footprint nowadays. I am thinking here about both Lukoil’s production in Iraq (the Qurna-2 project) and Rosneft’s in Venezuela. You had planned to join YUKOS together with Exxon Mobil and to build the Murmansk and Russia-China oil pipelines for deliveries of raw material to Europe and China, but this did not happen. Why is it that these projects never did get the “green light”; surely their economic benefit was not in doubt?

A pipeline to China was built. True, they ended up spending several times more on it than we were planning to. And instead of the route to Murmansk, they are doing the BTC-2, while Rosneft is joining together with Exxon within the framework of large projects. In this way, the ideas we had proposed in the realm of business are being implemented, but with amendments, the reasons for which are the private interests of the bureaucracy and of the business that is connected to it with tight bonds. There are two things we can infer from this. First, that corruption is systemic (that is, it is what determines the advisability of implementing any project). And second, that the political interests of the regime – to eliminate the sources of independent funding of the opposition – often prevail over the economic interests of the country. You can choose for yourself which of these inferences seems the more credible to you. You can even choose both in some proportion.

Why are Russian companies aspiring to produce oil abroad?

This reduces territorial (country) political risks, thereby improving market capitalization (reducing its volatility). Besides that, in this way you acquire experience and you can nurture and pick out the best personnel without limiting yourself to the Russian oilmen’s community. Generally speaking, the oil business by its very nature is disposed towards globalization.

In one of the interviews you noted that increasing Russia’s oil production to 600-650 mln tonnes per year is economically unjustified. Fields can be exhausted, while the development of infrastructure requires no small investments. Is the management of the oil companies, in your view, putting enough into geological exploration and the modernization of equipment today?

I am convinced that production of 600-650 mln tonnes in “onshore” Russia will lead to the depletion of the fields at which production is taking place before the pipelines have reached the end of their service life. This problem is not as much of a concern for the rest of the world, inasmuch as our “overland haul distances” are the biggest. (I can clarify in greater detail as soon as I get out of places of deprivation of liberty, as there is no time now – the colony administration is constantly giving me more important assignments.) Geological exploration and the modernization of equipment is another topic altogether. I believe that the first ought to be providing for 100% replacement of the volumes of production in Russia for another 15-20 years still. If this is not happening, that means the investments are insufficient.

The changing of tax regimes for oil companies happens in many countries. You are a supporter of increasing taxes in this sector?

The tax regime in the oil sector needs to provide for a return on investment that corresponds to the level of risk. There are questions with respect to individual types of taxes, but judging by the market capitalization of Russian companies and taking into account the discount connected with their internal efficiency problems, the level of taxation of the oil industry now is on the whole normal. It could be noticeably increased by reducing non-tax (corruptional) expropriations and the cost of capital on account of a reduction in “political” risks, and increasing the efficiency of the intra-corporate procedures that have become fossilized by an unwieldy state bureaucracy and special services. What we are referring to, in my view, is a 10-20% “shortfall” in budget receipts at today’s price levels. If prices fall this percentage will go up, inasmuch as the above-mentioned costs do not diminish if things move in this direction.

What taxes, in your view, are there not enough of in Russia, and which ones are “excessive”? For example, the introduction of a “luxury tax” is currently being actively discussed.

I consider that the fiscal component prevails over all others in our country. And this is not right, inasmuch as taxes are one of the principal tools for managing the economy and not just that. From this point of view, a “luxury tax”, if it is well thought out and correctly administered, could have a significant “educative” significance despite a knowingly very low fiscal one. It would be a good idea to give some serious thought to differentiation of the inheritance tax, and in general to a major tax reform – to a return to a real “three-tiered” system of taxation (federal, regional, and local taxes). Transfers and subventions ought to be the exception, not the rule. Such a system has a serious impact on positive motivation for self-development.

Stress points are inevitable

An oil price of 100-110 dollars per barrel, in the opinion of Russian officials, may be stable for another 20 years (Elvira Nabiullina, for example, recently made an announcement about this). What should we be preparing for in such a situation – for sluggishness and stagnation or for an improvement in the standard of living?

If we assume a stable oil price in the next 20 years, then our country ought to be preparing itself for some serious political “perturbations”. Our citizens have become accustomed to a constant and rapid rise in their real incomes, based not on increased labor productivity and the quality of state administration, but on a rapid increase in the price of oil and gas, on a rise in the volumes of production, and on an influx of foreign short-term speculative capital. That is, factually – as hurtful as this may sound to some – on a parasitic, not constructive, model of the economy, the state, and society. The situation began to change in 2008, and the regime began to “limp”. It has enough reserves for now, and the problems have to do only with an unwillingness to spend these reserves. By the way, a perfectly explicable unwillingness – Putin is extremely conservative, and he is inclined to consider that the mere fact of the existence of large reserves guarantees the prolongation of the stability of the existing system, meaning of his power as well. But with a steady price for oil, changes will come very quickly (for example, by 2015). A 4% growth in the economy is a good result with a high quality of administration – that is, in the absence of systemic corruption, with an efficient bureaucracy and the like. In our situation, multiple stress points are inevitable.

If the dependence on a raw materials economy will remain the same, what socio-political scenarios do you see for Russia? Is an innovational path possible in our country, and how do you imagine it?

A classical raw materials economy allowed a power that is not dependent on society to be formed; a power that does not consider that it is living on the money of society and serves society. Nowadays the raw materials economy has already become a consequence of this power, under which an innovational path is impossible inasmuch as it contradicts the very philosophy of the country’s politico-economic system. When the priorities of the ruling elite change, or, more precisely – to the extent of the rotation of the elite as such, when the parasitic philosophy of managing the state and consuming the national wealth is replaced by an ideology of creating things – that is, when a qualitatively new politico-economic system is formed – then we will be able to speak of a breakthrough. But not before. And as long as the current regime remains, we are doomed to an industrial/raw material economy and “window-dressing” projects along the lines of Rosnano.

Tendencies of the last year: a significant outflow of capital from Russia (35 bln dollars according to the CB’s theory), and a reduction in the number of those desiring to emigrate from the country abroad (from 22% to 11% according to VTsIOM’s data). What are these trends pointing at? Why does the elite, earning in Russia, prefer to keep its money abroad? How would you act if you continued to be engaged in your projects as before?

For me, VTsIOM is absolutely not an authoritative organization; I therefore consider that commenting on their data is a pointless pursuit, besides the obvious conclusion that the power wants to hear about a reduction in the number of those who desire to leave for abroad. Now concerning the outflow of capital, the conclusion is even more trivial: a reassessment of Russian risks has led to a change in the perception of the efficiency of investments. To put it more simply, if Russia is developing along the Nigerian scenario, but wants to pay investors at European rates, then it is better to put one’s money into some other country. But even at Nigerian rates, not every investor is prepared to risk his capital. Many prefer real stability, not a fantasy thought up by propagandists. Our, Russian, elite understands the factual state of affairs better than many others.

Segezha, where your colony is situated, is a so-called mono-town, which arose around the principal enterprise – a pulp and paper mill. There are hundreds of such towns in Russia, which have turned out to be practically on the verge of bankruptcy. Is it possible to revive the Russian mono-towns and science-cities?

I have considered and do consider that it is imperative to diversify mono-towns. And if ecology or the climate do not favor this, then to resettle, converting the enterprises to the work team rotation method. But it is understandable that such measures should not lead to social convulsions. This is why it is important to work out conceptions for the development of each population center. And how should this be done? It’s really quite simple. First, restore full-fledged local power, a.k.a. local self-administration, on a country-wide scale. Second, as I have already said above, give the municipalities their own tax base, one that is commensurate with their tasks. Otherwise there is no way to get away from a regime of mass hands-on administration from the federal level, while provincial towns (first and foremost the mono-towns), deprived of development resources, will keep on gradually dying out anyway. As to the federal regime, it needs to be saved for exceptional situations, when the bankruptcy of a municipality is unavoidable while regional capabilities are insufficient.

All the other factors

Innovations and a favorable investment climate in Russia – both Vladimir Putin and Dmitry Medvedev are constantly making announcements about this. Why have neither the Skolkovo “inno-city” nor other projects yet become creative centers of gravity attracting unique technologies with high commercial potential?

An innovational economy and centers of innovation are based on creative people. That is, a place where we expect the emergence of such a phenomenon has got to be attractive, first and foremost, to specifically such a kind of people. To attract them with an uncompetitively high wage means to knowingly doom technological elaborations to too high a unit cost. And besides, far from every specialist will be tempted by earnings alone. The main thing is the opportunity for creative work, creative interaction, and comfortable living, including security. And for investors, things like the protection of their investments and intellectual property and the opportunity to use the result obtained are also important. Skolkovo is territorially not a badly selected place (moreover, in the same way as, for example, Troitsk), but all the other factors are making it not very competitive for now. The trials of the “scientist-spies” alone are capable of scaring to death any investor in science or scientist, while the authority of our justice is such that even the best laws on the protection of intellectual property can not assuage the fears of a potential investor. And there is a whole slew of questions like these. Our corrupt bureaucracy is not interested in resolving them, inasmuch as if such a precedent is created, the chair they are comfortably sitting on today is going to start getting a little wobbly. Do they need that?

Is an emphasis on developing innovational projects capable of seriously impacting the growth of Russia’s economy?

If we understand innovations broadly, as new efficient business and new methods and technologies for conducting it, then there simply is no alternative to innovations for ensuring growth. Extensive potential has been exhausted completely. If by innovations we understand our own scientific developments, then their impact on the Russian economy in the next 10 years is going to be marginal. Neither state institutions nor, correspondingly, industry are prepared for a knowledge economy. It is sad that we are practically not moving in that direction at all, while Putin is likely convinced that the opposite is true. Although, by the way, it is possible that Putin does not even think about these things. It can not be ruled out that he has other priorities.

What should the foreign entrepreneurs who are being told today about the tempting economic prospects in Russia be taking into account?

It is imperative for foreign entrepreneurs to take into account the fact that the Putin regime is building state capitalism in Russia. Corruption is an inalienable part of it. There is no need to depend on state institutions and their transparent and efficient functioning, comprehensible by all. The courts, the laws, the law-enforcement agencies – everything functions only in the presence of a “roof” and within its capabilities, at any rate, when it collides with the interests of the corrupt bureaucracy. And these interests are becoming more and more all-pervasive as time goes on. Your estimated income from a project has to correspond to these risks.

What can the power and business do for Russian innovations to become competitive on the world market?

Openness of the economy for participation in international competition. For this, the re-creation of state institutions (an independent judiciary and parliament), a real fight against corruption (the real and regular turnover of power and oversight on the part of civil society and the opposition are imperative for this), stability of the right of property ownership. In a word – they need to try to restore confidence.

At a meeting in the Kremlin 9 years ago, you spoke about corruption in the economy and preferences in oil production. If such a meeting were to take place right now, what questions would you raise first of all?

Today I would speak specifically about the need to restore confidence between the power and society and trust in state institutions. I would ask Putin if he is ready to risk his life and liberty for Russia. Is he ready for his retinue to answer for the lies and the corruption? Is he ready to make the power honest? Is he ready to entrust power to a new generation, or does he want to hold on to it to the bitter end?

To journalists’ question “do you intend to engage in business in the future”, you reply that “this is not interesting” for you. When and as the result of what did such a decision form, and in what manner did your priorities change by the present time?

In 2003, I announced that I wanted to get out of business at age 45. The reason was sufficiently simple: I had achieved what I had wanted to achieve in having created the biggest and most efficient Russian oil company. I would have been able to guide it out into the international arena, but an international company would have to be managed by some other, better prepared person. And besides that, 20 years in business in the post of a top manager is a very long time. I gained a lot, but I also missed out on a lot. The main thing – family, which was waiting and is waiting for me all these years. Business is not a game, and you need to carry out your duties, but it is uninteresting for me to keep on carrying that load any more. I am not a galley slave. And I never will be one, no matter how my fate turns out.