The Russia Conundrum

We had to do it the hard way. As I mentioned before, Soviet era employment practices were based on the old mantra of ‘we pretend to work and they pretend to pay us’, with the result that Yukos was saddled with hundreds of middle managers who turned up, clocked on and did nothing. To knock the company into shape, we had to move most of them on. Many people were fired. We introduced severe penalties for drunkenness on the job, which was running at catastrophic levels. And we cracked down on corruption, showing no mercy to those workers and contractors who were seen to be cheating the company or stealing its property. After seven years, Yukos was active in a total of 50 Russian regions, with an annual production of 80 million tons and a distinct upward trend. It became the second largest taxpayer in the whole country, after Gazprom, accounting for almost 5 per cent of all federal budget revenues – and all of this was achieved in a country that had just emerged from 70 years of communism, where we had to struggle to find managers and workers able to adapt to the new ways of private enterprise.

Turning round Yukos’s fortunes meant struggling against the backwardness and mental entropy of the Russian business world. In addition, we had to contend with sharp practice from Western business as well. There was underhand dealing, a systematic failure to respect agreements and an unscrupulous Wild West capitalism at play, which helped to undermine the esteem in which we Russians had held the West, denting our admiration for the ‘shining light’ of free-market democracy.

In particular, I saw how large Western companies used their negotiating experience to exploit the business illiteracy of Russian officials, trying to bargain with the government to snap up oilfields for 2–4 per cent of their real value. And I encountered examples of economic blackmail, so-called ‘greenmailing’, by Western investors. This was done by buying a minority stake in a company and then accumulating enough shares to be able to veto its management’s plans for restructuring and modernising the business. The greenmailers would offer to lift the veto in return for the management’s agreement to buy out their shares at a price well above market value. In our case, Western investors did this to us when we were trying to integrate some of Yukos’s subsidiary companies. We eventually managed to fend off the greenmail attempt, but the underhand methods they used against us shook my faith in the West as a model to be followed.

Then, in the second half of 1998, things went from bad to worse. Following the sudden plunge in world oil prices, the rouble was sharply devalued and the energy-dependent Russian economy went into a nosedive. The stock market lost billions of dollars. Many firms that had previously appeared impregnable went to the wall and it seemed Yukos might become one of them. The price of oil on world markets plunged to $8.50 per barrel, while the cost of production remained at $12 per barrel. It meant we were producing oil and then paying out money for doing so. With bankruptcy looming, I took drastic action. I had to cut the staff by 30 per cent: tens of thousands of people in just one year. It is not something I found easy, or am proud of, but there was no alternative. Those who remained, nearly 100,000 employees, agreed to take a 30 per cent reduction in their salaries (which was softened to less than half of that because of the devaluation of the rouble).

I went to Yukos’s main oil production facility in the town of Nefteyugansk and invited representatives of all the company’s workers to a meeting in the local theatre. I spoke with them to explain why I was asking them to vote to take a pay cut. Their agreement in a formal vote was legally necessary and the initial reaction was hostile, but by the end of the meeting I had convinced them that it was better to agree a temporary drop in wages to save the company for better days ahead. I promised I would make up for their lost wages within a year, and I am proud that I managed to do so. But even more important for me was the fact that I had gained the trust of the workers.

The economic crisis of 1998 was a wakeup call, though not everyone heeded it. Many Russians complained and blamed the West, but I decided it was time to concentrate on taking practical steps. Together with my business partners, we resolved to transform Yukos into a completely open and transparent operation, adopting Western reporting standards and respecting world-class environmental, employment and ethical practices. Without this, it was evident that we could not thrive in an international business sector where competition was fierce. We invited the best specialists from around the world to help us reorganise our production processes, and we secured the buy-in of the company’s employees. It paid off: production increased, costs fell, we were welcomed into the global market and our profits grew.