The path less taken

American chose life at Yukos and now faces uncertain future

By ERIC BAUM
Houston Chronicle Foreign Service

MOSCOW - The view through a large window in Ray Leonard's Moscow apartment frames the fortresslike Kremlin and brightly colored domes of St. Basil's Cathedral, and it is a stark reminder of what it means to be a Western oil executive in Russia.


Leonard, vice president in charge of business development at Yukos, staked his career more than 15 years ago on a dream to unlock vast oil reserves in the former Soviet Union, which are believed to rival deposits in the Middle East.

For a period last year, it seemed Leonard's personal sacrifices had paid off.

In three years after joining Yukos in February 2001, he helped the company grow from a regional oil producer with shares valued at $2 billion to one with a $32 billion market capitalization, which represented 30 percent of Russia's stock market and one-fifth of its oil production.

But a government crackdown on Yukos orchestrated from the Kremlin moved into full force last October with the arrest of former Chief Executive Mikhail Khodorkovsky and cast a pall of uncertainty on Leonard's future. Reports carried Monday on Russia's Interfax News Agency predicted the government auction of Yukos' prime oil fields for a small fraction of their value to settle the company's $7.5 billion tax bill will begin Nov. 22.

In the midst of this battle, Leonard avoids speculating on the Russian government's motives.

But energy analysts here are openly characterizing the latest $4 billion appraisal of Yukos' Yuganskneftegaz oil fields as a thinly veiled step toward re-nationalizing key energy assets.

Analysts feared the showdown between Khodorkovsky and Putin would drive foreign investment away from Russia but the mood swung last month when ConocoPhillips purchased a nearly 8 percent stake in Lukoil, Russia's No. 2 oil producer. Executives from both companies heralded the deal as the beginning of a long partnership, in which ConocoPhillips reserves the right to increase its stake to 20 percent.

Investors perceived the deal as a vote of confidence in Russia's political climate. But Yukos executives felt betrayed because ConocoPhillips moved forward at a time when the Kremlin was running roughshod over Yukos.

"I remember walking into the executive dining room and all of the Russians turned to look at me. I was horribly embarrassed," Leonard said ConocoPhillips Chief Executive Officer James Mulva "was talking to Putin when some of the worst things were happening to us. It was devastating."

Leonard, who remains committed to working in Russia's oil industry, says shifting political climates are a hazard of the exploration business, but recent developments have made it more difficult for foreign companies.

Asked whether Russia is still on pace to reach its potential as a global oil exporter after tightening control over its assets, Leonard said: "If you asked me that question a year ago I would have said yes. If you asked me six months ago I would have said probably. Now I'd say perhaps."


The chosen path
On the surface, Leonard's travails form a cautionary tale for Western oil experts considering business opportunities in Russia.

Asked whether his personal gambles in life have paid off, Leonard, 52, spoke about the significance of former Soviet oil reserves in averting a global energy crisis.

"It's the direction my life has taken," he said. "I think Russia will be a very important in the next few years, and whatever I can do to help realize its oil potential is something that is for the common good."

Leonard's history here affirms that circumstances can change quickly even when the economy is on an upswing.

Yukos hired him after he'd been in the international oil business for 21 years. The company was an anomaly in the Russian oil business because Khodorkovsky made a practice of hiring foreign oil executives. One quarter of Yukos' senior executives were foreigners.

Leonard, who was raised in upstate New York, joined ConocoPhillips in 1977 after obtaining a master's degree in geology from the University of Texas. After two years of offshore assignments in the United States, he was hired by Amoco in Trinidad, which was the start of a long run of overseas assignments. He lived in Houston between projects but never again was based in the United States.

The next several years took him to Norway, England, Argentina and a handful of West African countries. By 1989 Amoco made him director of new ventures in Eastern Europe, the Soviet Union and China. But the constant travel took a toll on his family. He divorced in 1993 but kept custody of their three children.


Embracing the culture
In 1998 Leonard made a pivotal move and quit Amoco to become vice president of exploration of a newly formed oil company in Kazakhstan called First International Oil Corp., which was backed by several American venture capital firms, including a division of Merrill Lynch. In his new role Leonard made a break from the often closed-off culture of Western oil executives and lived modestly in local housing with his immediate peers, who were mostly Kazakh citizens.

During this period his Russian language skills improved dramatically, and he began to assimilate into the culture — a necessary step, he said, for future success at Yukos.

"Oil executives are often sequestered, but you have to fit in" when working for a local venture, he said. "You can't pretend you're in America. Expatriates who rotate through Russia within a few years remain outsiders.

"I made a decision years ago that the former Soviet Union was my home. Other people would come and go, but this has been 15 years of my life."

While working at First International Oil he got a call from a Yukos executive. At first he thought they were looking to buy the small private company.

But it soon became clear they wanted to hire him instead and were willing to pay his asking price for stock options that were of little value at the time.

Despite his rapid rise as an insider within Russia's bare-knuckles oil economy, Leonard never lost his intuitive soft-spoken manner in his job evaluating prospects and putting together deals to develop them. He often sold his ideas by intercepting top executives as they walked past his office when they were working late at night and quietly persuading them.

Years later, Yukos' then-president, Yuri Beilin, toasted Leonard at his 50th birthday party with an unusual invocation, "A lot of people are perplexed at how you can be very effective, when you're so quiet and courteous, and Yukos is filled with loud people."

Leonard distances himself from other expatriates within Yukos in day-to-day activities and mainly works with teams of Russians. Khodorkovsky respected his abilities and often invited him on small gatherings for top company executives.

One particular afternoon in June 2003 stands out in Leonard's memory as a turning point for Yukos. Khodorkovsky chartered a boat in Moscow for 20 people to celebrate record earnings.

Platon Lebedev, then chairman of the board at the Menetap Group, a holding company that owns a controlling stake of Yukos, chatted amiably with Leonard's daughter, and other passengers spoke of a now-failed merger with Sibneft, Russia's fourth-largest oil producer, that had closed in April.

The following week Lebedev was jailed for alleged tax crimes and other Menetap Yukos shareholders soon fled the country.

The deal with Sibneft began to unwind after Khodorkovsky's arrest in Siberia last October.

"That was high noon," Leonard said.

"The world was changing behind the scenes, but we didn't know it. It was revealed over the next week."

(From Houston Chronicle)