Will Russia's oil help fuel Asia's economies?

AS OIL prices hovered near record levels, United States President George W. Bush welcomed a personal assurance this week from his Russian counterpart Vladimir Putin that Russia would lift its oil production and exports to help ease the world economy out of a tight spot.

The Bush administration recently complained to Moscow about the Kremlin's crackdown on Russian oil giant Yukos and its impact on oil prices, which raised doubts about the reliability of supplies from Russia, the second-largest oil exporter after Saudi Arabia and a major alternative energy source to the increasingly volatile Middle East.

Rising oil prices threaten to rekindle inflation, slowing the US economic recovery as President Bush heads towards a tight autumn election battle against Democratic presidential nominee John Kerry, who is making energy security for the US a major campaign issue.

But it is not only the US that is worried. The Kremlin-Yukos brawl has also caused alarm in China, which has been looking to its neighbour Russia for increasingly large amounts of oil and gas to reduce reliance on the Middle East and Africa. In the first half of this year, Russia became China's fifth-biggest crude oil supplier, accounting for 8.5 per cent of total imports. Last year, it exported 5.25 million metric tons of crude to China, or 5.8 per cent of China's total. All of this oil is supplied by Yukos, whose output last year accounted for nearly 20 per cent of Russian production and 2 per cent of global output.

The Wall Street Journal reported on Aug 11 that the Chinese government had sent letters to Mr Putin and his prime minister seeking assurances that deliveries to China will not be disrupted. Russian officials say China recently agreed to step in and pay Russian rail fees to ensure that it continues to receive Yukos oil if the beleaguered company cannot cover the transport costs.

China is also interested in buying Yganskneftegaz, the top Yukos oil-producing subsidiary, which may be sold within the next few months.

This manoeuvring, often carried out or directed by government leaders themselves, is part of what Singapore's Foreign Affairs Minister George Yeo has called 'a new Great Game' as established and rising powers jostle to secure their critically important energy imports from Central Asia and other parts of the world.

Unlike the old Great Game - carried on by Russia and Britain for control of Central Asia and ultimately the Indian sub-continent in the 19th century - the new energy supply-and-demand chessboard has many more players, including India itself, and even wider geopolitical implications.

The tug-of-war over Yukos began with the arrest last October of the company's founder, Mikhail Khodorkovsky, on charges of fraud and tax evasion after he funded opposition parties and threatened to challenge Mr Putin in presidential elections earlier this year. The Russian government has given Yukos until the end of this month to pay a US$3.4-billion (S$6-billion) tax bill. Otherwise, its biggest oil-production units will be sold, probably to interests friendly to the Kremlin.

Yukos said in March it would more than double deliveries of oil by rail to China to at least 300,000 barrels per day by 2006. This was seen as a consolation prize for Beijing after the Kremlin decided against a Yukos-backed proposal to pipe oil from fields in eastern and western Siberia direct to Daqing in north-east China for refining and distribution in the Chinese market. This pipeline could carry as much as 30 million tons of oil a year to China - or up to 25 per cent of its current oil imports, which now amount to about one-third of total consumption.

However, Moscow appears to prefer an alternative plan, backed by Japan, to build a longer pipeline through Russian territory from Angarsk in eastern Siberia to the port of Nakhodka on the Sea of Japan - a route that would enable Russia to export oil to Japan as well as other Asian countries and the US.

Japan depends on the Middle East for about 85 per cent of its oil consumption. Like China, it wants to diversify its sources of energy supply and sees Russia as a good bet. The Japanese-backed pipeline project appealed to the Kremlin because it would avoid Russian dependence on a single market, namely, China. It also includes pledges of billions of dollars of Japanese investment in the pipeline construction and in oil exploration in eastern Siberia.

This, too, is in line with Kremlin plans to use Russia's enormous energy resources to develop its vast but sparsely populated region in the far east to ensure that it remains firmly part of Russia and is not drawn into China's orbit.

In his annual state-of-the-union address in May, President Putin said that the choice of pipeline routes should be determined by national interests, not those of individual companies - an apparent reference to the Yukos proposal to pipe oil from its wells in Siberia direct to China.

Despite the efforts of North-east Asian powers like China and Japan to secure more energy from Russia and Central Asia, they are heavily dependent on oil imports from the Middle East or Africa. This oil is shipped to North-east Asia via key South-east Asian waterways, mainly the Strait of Malacca and Singapore.

Brigadier-General (NS) Yeo noted that as global oil demand surges, security of supply becomes a strategic preoccupation for many countries. 'A good part of world energy supply comes from regions in the world which are politically unstable,' he told oil traders in Singapore on Aug 3, when he was still the trade and industry minister. 'Terrorism is also a growing threat to stable supply. The security of choke points like the Panama Canal and the Malacca Strait becomes very important.'

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New $1b Yukos fraud alleged

Russian investigators have raided the accounting division of embattled Yukos oil and seized boxes of bookkeeping records for 2003 and 2004.

The Prosecutor General's office said the search was part of an extended probe into the alleged embezzlement of $1.06 billion in 2001, the Interfax news agency reported Friday.

The alleged billion dollar scam was operated through a front company called Fargoil in the central Russian region of Mordovia, Interfax said.

Meanwhile, prosecutors in the Moscow trial of Yukos' chief shareholder and former chief executive Mikhail Khodorkovsky questioned two financial officials Friday, Interfax said.

Yelena Tyapkova, an accountant in the OAO Apatit company, and Konstantin Graudin, a senior specialist in the Menatep bank's investment department, testified as prosecution witnesses in the trial of Yukos chief shareholder and former chief executive Mikhail Khodorkovsky and his longtime associates Platon Lebedev and Andrei Krainov, the former general director of the Volna company, Interfax said.

The prosecution is trying to amass prove the defendants conducted gross improprieties in their conduct of Yukos business.

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PM Pledges Russia Will Meet Oil Goals

Russian Prime Minister Mikhail Fradkov pledged Friday that Russia would keep meeting its oil export commitments to China, an apparent reference to fears that a cut in production at the beleaguered Yukos oil company could harm Beijing.

"There are no reasons for any emergency," Fradkov was quoted as saying by the Interfax news agency. "Oil products will keep going to China the way they have been."

Yukos sends about 124,000 barrels of crude every day by rail to China, which is already the world's No. 3 oil importer. Earlier this month, Russian railway officials said they were told by China that it would cover Yukos' rail fees if the company became unable to do so.

Fradkov did not address Yukos directly in his comments.

Yukos is struggling to pay a potentially crippling $3.4 billion back-taxes bill for 2000. It faces a similar claim for 2001, and the total claims against it for the period 2000 to 2003 are expected to swell to some $10 billion.

Former Yukos CEO Mikhail Khodorkovsky is also on trial on charges including fraud and tax evasion, in what is widely seen as a Kremlin-backed campaign of punishment for his growing clout. Russia's richest man, Khodorkovsky helped finance political parties and had challenged Kremlin policy as head of Yukos.

The Yukos affair has drawn concern from foreign governments, and it has also added uncertainty to the oil market amid warnings by Yukos that it might have to cut back production.

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Russian court marginally reduces Yukos' back taxes bill

A Moscow court on Friday ruled to marginally reduce the multi-billion US dollar back-tax bill the tax ministry has ordered the embattled oil giant Yukos to pay.

The Moscow Arbitration Court lowered by about 1.1 million dollars the 3.4 billion dollars in 2000 back taxes, interest and fines owed by Yukos, according to Interfax.

However, it rejected Yukos's plea to invalidate the tax ministry's decision.

The tax ministry accuses Yukos of evading taxes by channeling funds through offshore companies. On April 14 the ministry completed an audit of Yukos tax payments in 2000 and subsequently hit the company with a 3.4 billion-dollar tax demand.

Earlier on Friday, the court also refused a request by Yukos torecuse the judge in charge of the tax dossier submitted by the company.

Yukos said it would appeal the court decision.

The company's 3.4 billion US dollar back-tax bill for 2000 is the first in a series of tax charges on the company levied after ayear-long investigation into Yukos, which many critics see as a Kremlin-inspired onslaught against Yukos former CEO Mikhail Khodorkovsky who reportedly sponsored opponents against President Vladimir Putin.

The company faces a similar claim for 2001 and is currently being audited for 2002.

The firm has warned that the tax bill will drive it into bankruptcy and has been trying to seek compromise with the government.

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Prosecutors Again Raid Yukos Offices

Russian prosecutors have again raided the offices of the country's giant oil firm Yukos, seizing financial documents covering the past two years.

Company officials say investigators confiscated documents and other data.

Yukos is already struggling to pay a $3.4 billion tax judgment for the year 2000 already upheld by the courts. A similar claim for 2001 is still before the courts.

Former Yukos chief Mikhail Khodorkovsky is on trial for alleged tax fraud, a charge he says was brought in retaliation for his support of the political opposition. The Kremlin denies the allegation.

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Russian capital flight triples

Russia's finance chief predicted that capital flight will triple this year but said the campaign against Yukos would barely affect the figure.

Finance Minister Alexei Kudrin forecast that net outflow of private capital from Russia in 2004 would reach about $9 billion (£5bn) in 2004. Capital flight from Russia last year was estimated at about $2.9 billion.

Mr Kudrin said the main reason for the increase is higher American interest rates and that the web of legal actions against Yukos and its main shareholders would have almost no effect on the process.

Capital flight, a significant concern for Russia's economy, declined sharply in recent years as economic growth and apparent stability set in under President Vladimir Putin after the chaos of the 1990s.

But the problems facing Yukos, Russia's largest oil producer, have raised questions about the security of property rights and investment in Russia, and analysts have predicted capital flight could reach at least $12 billion this year.

Yevgeny Gavrilenkov, chief economist of the Troika Dialog investment bank, said recently that Yukos was among a combination of reasons for the capital exodus - among them mixed signals from Russia's leadership about economic policy.

Mr Kudrin appeared to address that concern today, saying that there is no difference of opinion within Prime Minister Mikhail Fradkov's government about economic policy.

Meanwhile, Russian prosecutors today continued their onslaught against the country's largest oil producer, raiding the accounting division of Yukos and seizing documents.

The Russian Interfax news agency reported that investigators from Russia's General Prosecutor's Office seized boxes of bookkeeping records concerning the activities of Yukos and its subsidiaries for 2003 and 2004.

A Yukos spokeswoman said that the investigators were confiscating documents and electronic data. Officials at the prosecutor's office refused to comment immediately.

Yukos is struggling to pay a potentially crippling 99.4 billion ruble (£1.9bn) back-taxes bill for 2000. It faces a similar claim for 2001, and the total claims against it for the period 2000 to 2003 are expected to swell to some $10 billion (5.6 billion).

The former Yukos chief executive Mikhail Khodorkovsky is on trial on charges including fraud and tax evasion, in what is widely seen as a Kremlin-backed campaign of punishment for his growing influence beyond the busienss world. Mr Khodorkovsky, Russia's richest man, provided funds to opposition political parties and had challenged Kremlin policy as head of Yukos.

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Yukos Ordered to Pay for Missed Deadline

Russian oil giant Yukos, struggling with an enormous back-taxes bill, must pay 6.7 billion rubles ($223 million) for missing a payment deadline, a court ruled Wednesday.

Yukos already owes 99.4 billion rubles ($3.4 billion) in back taxes for 2000 that it warns it cannot pay, and the total claims against it for the period 2000 to 2003 are expected to swell to some $10 billion.

Russian law allows government bailiffs to levy fines of 7 percent of the amount they are collecting if payment is not made within the prescribed time.

Bailiffs had initially tried to assess the fee on July 9 after Yukos missed a deadline for payment of the 2000 bill. But a court blocked the move earlier this month, after Yukos' lawyers argued the bill was so enormous that it could not be paid within the period.

The government appealed, and Wednesday's ruling means Yukos will have to pay up.

The web of legal actions against Yukos and its jailed former CEO Mikhail Khodorkovsky are widely seen as Kremlin-approved punishment for the oil mogul's growing political activity in opposition to President Vladimir Putin's government.

Bailiffs have frozen company bank accounts and are currently evaluating Yukos' largest subsidiary Yuganskneftegaz for possible sale.

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Putin's hands on the oil pumps

For a decade Washington has backed the Turkish and Azerbaijan governments to steer the export of Caspian region crude oil away from Russia. Russia's newest riposte has been to ally the Russian and Iranian oil industries, and open up the shortest, cheapest and most lucrative oil route of all, southwards out of the Caspian to Iran.

The economics of the southward route are the latest blow for the Bush administration as it tries to redraw the geography of the Caucasus on an anti-Russian map. But for oil exporters and shippers in the Caspian, President George W Bush's jawboning looks to be as futile as King Canute telling the sea to roll backwards.

Early oil from Azerbaijan's newest offshore oilfields has been piped northwestwards through the Russian pipeline system to Novorossiysk port, on the Black Sea, along with crude from the Caspian shoreline of Kazakhstan. But there have been frequent arguments with the Azeris over volumes and transit fees, and these have led to frequent oil stoppages. Azeri oil for transit across Georgia to Supsa port is a costly trickle, by comparison.

Bosphorus chokepoint, Bosphorus bypass
In parallel, Turkey has been steadily tightening restrictions on tanker movements out of the Black Sea, through the Bosphorus Straits. The latest rules ban lengthy and large-capacity tankers - those which are most cost-effective for charterers and cargo-owners - from moving through the straits at night. The delay adds to the transport charges, creating an expensive chokepoint that has multiplied the costs of routing oil through the Black Sea for US allies, and Russia, alike.

As new Caspian oilfields come onstream, and the volumes of crude lifted grow beyond the capacities of the Russian pipeline system to absorb, the American strategy has been to press hard to redirect these exports across land towards Turkey. The pipeline route chosen is known by its origin and destination as Baku-Ceyhan (Azerbaijan-Turkey). It passes through Tbilisi in Georgia and is known as the BTC project.

The Russian government has always understood that the this pipeline was part of the broader US strategy to cut all links with Moscow of the former Soviet states in the Caucasus, building a new economic infrastructure that would dissuade the Caucasus group from ever renewing these ties. These efforts have proved to be a costly boomerang.

To thwart those in Turkey who view the Bosphorus logjam as leverage to promote the Ceyhan route, Russia's state-controlled pipeline agency Transneft has found a Turkish partner, and proposes building a relatively low-cost, short-distance pipeline to avoid the straits - and avoid the Ceyhan pipeline too.

Transneft disclosed its Bosphorus bypass plan in February, when chief executive officer Semyon Vainshtok said his company was interested in constructing a 193 kilometer pipeline on the territory of Turkey, with the local contractor Anadolu. Last year, he noted, Russian companies shipped 62 million tonnes of oil through the straits, or over 30% of all Russian export volumes. Compared with the Ceyhan's project cost of more than $5 billion, the bypass reportedly would cost about $900 million, with capacity estimated in the range of 50-60 million tonnes per year.

This is roughly equal to Russian shipments by tanker through the straits. Vainshtok also claimed that two major Russian oil producers, Tatneft and Tyumen Oil Company - now controlled by British Petroleum - have offered their guarantees to supply the bypass with crude. This was another slap at the Ceyhan project, whose backers admit it lacks guarantees of enough crude to justify its cost. According to the latest news reported in Moscow, the potential starting point for the Bosphorus bypass route could be Kiyikei on the Black Sea, and the end-point at an offloading terminal at Ibrikhaba on the Aegean Sea.

In June, while North Atlantic Treaty Organization (NATO) heads of state were holding their annual meeting on the shores of the Bosphorus at Istanbul, the Russian government despatched a warning that the security measures Turkey had implemented in the straits violated 68-year-old treaty provisions that still bind both the NATO states and the Russians. In an unusual statement, the federal Ministry of Transport in Moscow issued a warning to the Turkish government, accusing its ban on tanker traffic through the Bosphorus of being a violation of the Montreux Treaty.

According to the ministry, "unilateral actions undertaken by Turkey contradict Article 2 of the treaty of Montreux of 1936". The statement, drafted by the foreign relations department at the Transport Ministry, referred to the ban, in effect from June 27 to 29, on vessels carrying hazardous cargoes, notably oil and gas. The Montreux Treaty was the most recent in a series of last-century international pacts declaring the straits to be international waters, and prohibiting Turkey from taking unilateral action to interfere with innocent passage of vessels.

Ukrainian reversal, Croatian opening
The American effort at the north end of the Black Sea, on the Ukrainian shore, has had even less success.

A Ukrainian pipeline, designed to attract Caspian oil into Odessa port, on the Black Sea, and then pump it northwards to Brody, and thence into Poland and other central European destinations, has lain empty for almost a year. Despite US government prodding, even the major US oil companies in the Caspian cannot quite absorb the commercial disadvantages of the route. Nor can US allies in the Polish government overrule their colleagues with demands to buy this anti-Russian, but higher-priced oil.

The Russian government, together with Russian oil exporters, has countered with a proposal for the Ukrainian government to reverse the oil flow in the pipeline, and pipe Russian crude southwards to Odessa, for tankering out of the Black Sea. At first, the Ukrainians rejected the offer. But as port shipments of oil from Odessa dwindled, and the economics of the Brody direction began to talk louder than politics, a deal was done to accept the Russian oil, and reverse the pipeline direction.

The conflict in Kiev over the strategic pros and cons of these alternative oil routes has damaged another US ally in the region. Late last year, the Ukrainian parliament voted to block the Adria pipeline reversal project. This is aimed at delivering Russian crude to the deep-water port of Omishalj in Croatia, on the Adriatic Sea. The Ukrainian veto was retaliation by the anti-Russian oil lobby in Kiev for the failure of its Odessa-Brody project.

The irony of this outcome is that the Omishalj project was first proposed in 2002, and agreed upon by Russia, Belarus, Ukraine, Slovakia, Hungary and Croatia as a way of despatching Russian crude in large tankers to Bush constituents who own the refineries on the Texas coast of the United States.

Initial capacity, according to the Omishalj plan, was 5 million tonnes per year, rising eventually to 15 million tonnes. The Ukrainian deputies justified their no-vote because, they said, it would be the final blow to the proposed Odessa-Brody pipeline, should the Druzhba line be filled up west of Ukraine. "This is true," says Adam Landes, an oil analyst in Moscow. "But Odessa-Brody is doomed regardless. It offers no competitive advantage to potential Caspian shippers, or buyers of crude, and this is why it has been idle for two years now, since it was essentially completed. The longer Ukraine takes to face up to these rather obvious facts, the longer that this ill-fated pipeline will lie dormant." The Croatians, too, have now bowed to the realities of the oil marketplace, and Omishalj will soon start regular dispatches of Russian oil cargoes.

Embargo for Latvia
Another US ally to be caught in the cross-fire has been Latvia. As the anti-Russian pressure has mounted against Russian oil shipments in the south, Moscow accelerated the completion of a new oil outlet on the Gulf of Finland and Baltic Sea. This is Primorsk, which opened two years ago, and is being expanded by Transneft to become Russia's largest oil port.

Controlled by Transneft, Primorsk receives its crude from the Baltic Pipeline System - a network of pipelines linking Russia's new Arctic oilwells and expanding northwest Siberian fields to the sea lanes to Western Europe's markets. Once the Primorsk outlet was established, the Russian government ordered Transneft to turn off the supply of oil to Ventspils in Latvia. At one time the Soviet Union's northern gateway for oil exports, in 1990 Ventspils almost matched Novorossiysk in capacity and throughput. But no longer. The Latvians have appealed to Washington for help, but Moscow will not listen. The opening of Primorsk was the deathknell for Ventspils.

Checkmate for the Yukos-Houston alliance
The Americans responded in 2003 by pressing the Russian government to end Transneft's monopoly over pipelines, and allow the Russian oil majors to build a pipeline of their own to Murmansk. That, Washington energy officials claimed, would open a new, commercially effective route for crude deliveries to US East Coast refineries. Transneft has responded by accelerating the expansion of the Baltic Pipeline System, while the Kremlin has started prosecutions of Yukos, the oil company which was closest to Washington. The speed of this pipeline expansion effort will overtake the growth of Russian export volumes by 2005, Transneft officials have said. The Murmansk project will wither, they believe, for lack of oil to ship.

Beginning in May 2002, Russian and US energy officials appeared to endorse public announcements from the two leading Russian producers and exporters, Yukos and LUKoil, that they were prepared to start strategic shipment of oil to the US. Russian tanker operators were skeptical from the start. Yukos led with a shipment of about 250,000 tonnes of oil which was despatched to Houston in June of 2002 on three 80,000-tonne tankers, which transferred the cargo to a VLCC (Very large crude carrier) in the Mediterranean.

LUKoil followed with an announcement it was preparing a shipment at Malta. Dmitri Skarga, chief executive of Sovcomflot, Russia's leading tanker company, told Asia Times Online at the time that he thought the Yukos project "may be effective, but that depends on the level of prices and the tariff rates". He said that adjusting deliveries to refinery needs was a time-consuming and costly business. Yukos chief executive Mikhail Khodorkovsky then announced that the trade would not be profitable unless oil were above $25 per barrel.

Mikhail Perfilov, a leading Moscow analyst, noted skeptically, "LUKoil has been speaking of plans to start supplies to the US for years now, and I won't be surprised if they still continue this talk a few years from now."

By August, Russian oil industry sources were conceding that two years of publicity and political talks by the two governments had failed to produce a viable Russian supply line for crude deliveries to the US.

Sergei Grigoriev, vice president of Transneft and the company spokesman, told Asia Times Online that the Murmansk project - also known by the Russians as the North Project - is still under study, and no decisions have been made. "The pipeline direction starts from Surgut and goes towards to the Barents Sea, but we don't know where it will finish. We have two variants - a port in the Indigo area, in the Nenets region, or at an undeveloped site called Svyatoy Nos [Saint Nose], also in the Nenets region." In the ongoing feasibility studies, Grigoriev said the throughput target is "approximately 50-60 million tonnes".

But is this route a realistic option for Russia to supply the US? "I wouldn't talk about US shipments now," Grigroiev replies, "because currently there is no direct shipment of oil from Russia to the US. The numbers are insignificantly small - something less than 300,000 tonnes a year in 2002, and I don't know the later numbers. Maybe the US buys some Russian oil in Rotterdam. The only direct shipment project I know was the Yukos experiment, but it failed."

Two years ago, LUKoil, Russia's largest oil producer and second exporter after Yukos, waxed enthusiastic on the Murmansk project, but no longer. Spokesman Mikhail Mikhailov says now "it's too early to speak about the project. While it's at the feasibility study stage we aren't ready to announce how we will use it because a lot of necessary information is unknown." He claimed that LUKoil had earlier announced that it would contribute 20 million tonnes to the line, "but now the situation has changed, and the terms and extraction volumes are different".

Does LUKoil have a view of the projected capacity of Russia to supply the US with crude oil? "We are speaking about non-existent facts. Maybe some oil was shipped through Rotterdam, but its volume was very small." The commercial viability of Russian oil shipments to the US, LUKoil now concedes, depends not on the US, but on the Russian government. "[This] depends on the terms of the project, terms which Transneft will create." TNK-BP - the new British-controlled form of Tyumen Oil - is also no longer the talkative US booster it once was. A spokesman, claiming anonymity, would say only that the Murmansk project was "currently at such a preliminary stage we are not ready to discuss its details or its opportunities".

The data on Russian crude exports to the US confirm that the Yukos experiment has failed. Petroleum Argus reports that in the first half of this year, direct Russian exports to the US were "close to zero". Indirect shipments, through Rotterdam and other markets, were "approximately 250 to 270,000 tonnes per month". A Russian Energy Ministry official told Asia Times Online he lacked a precise number for total Russian exports to the US, but he acknowledged that there is no direct shipment, and the aggregate is "too small to report".

Yukos sources now say they believe Yukos, now close to insolvency after being held liable for billions of dollars in unpaid taxes from 2000, and former chief executive officer Mikhail Khodorkovsky - now on trial in Moscow on multiple charges relating to his share dealings - never intended that Russia should assist the US as a strategic oil supply partner. Rather, the sources believe that Khorokovsky and his shareholding allies in the company believed the oil shipments to Houston could generate favorable publicity as they sought to sell their shares on the New York Stock Exchange, or find a major US oil producer to buy up to 40% of the stock. "It was a case of what the US could do for the Yukos shareholders," one source said, "not what Russian oil could for the US." The arrest of Khodorkovsky in October 2003 exposed how far apart these two ambitious plans were.

Putin's hand on the oil pump - the eastern option
Until Vladimir Putin became president in 2000, Russian oil policy was dictated by a corrupt alliance of Russian oil producers and the US government. Putin's campaign against Yukos has put a stop to that. Even during the Boris Yeltsin period, however, Russian public policy was not to attack the Baku-Ceyhan pipeline on strategic grounds. Rather, Russian tactics were to play for time, and wait for the economics of oil transportation to tell against the US plan. So long as crude oil prices remained low, time encouraged delay in starting Baku-Ceyhan. The US war against Iraq threatened the pipeline plan too, by raising the prospect of a gusher of Iraqi crude on the market, cutting prices.

But now that Bush is proving that he cannot lift Iraqi oil, and oil has begun to substitute for the US dollar in international financial speculation, further counters to Baku-Ceyhan are being created by Moscow to retain the upper hand.

One new export route for Russian oil goes southwards by tanker through the Caspian to Iran. Russian oil producers and shippers say they are expecting the volume of crude oil and petroleum products shipped from the Russian Caspian port of Astrakhan to Iran to more than double this year. A spokesman for Volgotanker, the leading tanker operator in the Caspian, said it is expecting growth of its oil volume to jump 150% over the 2003 level of 800,000 tonnes.

Russian industry sources claim the expansion of the Iranian port of Neka, and the construction of a 120,000-barrels/day pipeline from Neka to Rey, is one of the new options for oil movement southwards. The Russian shipments of Caspian oil are paid for by swap arrangements with Iranian oil shipped out of Persian Gulf ports. Enzeli, the only Iranian Caspian port able to receive deep-draught vessels, is also being considered for receiving oil aboard railcars shipped by ferry from Astrakhan. LUKoil's new oil terminal at Ilyinka, on the Astrakhan shore, will reach transshipment capacity of 3 million tonnes annual capacity (60,000 barrels per day) next year; this year capacity is 1 million tonnes (20,000 bd).

Russian use of its oil exports in strategic policy has been frustrating to China, an erstwhile ally in the Far East. So far, despite years of negotiations, the government in Beijing has failed in its bid to get access to the pipeline flow of Russian oil exports. A non-binding agreement signed last year between the Chinese and Russian governments envisages that China will receive 700 million tonnes of Russian crude through the pipeline over 25 years at a current cost of about $150 billion. The price formula Russia and China would use for the oil has not been disclosed, and is apparently not settled. The strategic objective for Beijing is obvious: it wants to reduce its growing dependence on oil shipped from the Middle East, Africa and Southeast Asia, and lower both oil and delivery premiums Beijing is currently obliged to pay.

The target for this Chinese strategy has been the construction of a pipeline from the southeastern Russian refinery town of Angarsk to the northwestern Chinese terminal center of Daqing. The Chinese section of the pipeline is already under way. The Russian section is stalled on the drawing-board. An increase in rail deliveries across the border makes up only a fraction of the planned pipeline deliveries.

Statements to Asia Times Online by Transneft executives have backed the Russian and Chinese government decision of last year to build the Angarsk-Daqing line at a cost of less than $3 billion, in preference to the $7 billion line to Nakhodka. But Putin's campaign since last July against shareholders of Yukos has complicated the China project; that is because Yukos had been the intended oil supplier to China.

Japanese offers to finance the heavy cost of the Nakhodka line have been treated skeptically by the Kremlin, which wants to avoid single-market oil commitments - to repay Japanese loans, as much as to commit to Chinese supply terms. A Nakhodka oil shipping hub is, however, viewed in Moscow as potentially more open to spot-market pricing of oil than Daqing would be.

Transneft sources, along with oil industry executives in Moscow, agree on one thing about the eastern option for shipping Russian oil. The principal market for this crude will be Asia, and not the US West Coast. But think for a moment what might have happened if the Yukos owners had managed to sell control of their company last July to Chevron-Texaco or Mobil, as Khodorkovsky intended - Russia as an independent oil exporter would have been on its way to a level of independence that is less than Aramco, the Saudi oil company. It is unsurprising that the US media have failed to report the Yukos affair in this light, let alone to have noticed that the US, the world's largest oil consumer, has tried, but so far failed, to compel Russia, the world's second or first-largest oil exporter, to ship and market oil in the way Washington, or Houston, wants.


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Yukos gets watchdog's backing, secures export route

Russian regulators voiced their support for oil major YUKOS's integrity yesterday as it faced losing its main production unit to pay a huge tax bill but secured access to vital export slots for its crude oil.

Bailiffs have said they will rip out and sell YUKOS's Yugansk subsidiary, which pumps around one million barrels per day (bpd), if YUKOS misses an end-of-month deadline to pay $US3.4 billion ($NZ5.32b) in back taxes for the year 2000.

That would strip Russia's biggest oil exporter of more than 60 per cent of its output. To add insult to injury, bailiffs have charged the firm $US230 million for their services, a bill that was confirmed to be legal by a court yesterday.

But Russia's financial markets regulator said officials recovering the tax debts should seek to minimise damage to shareholders and sell only non-core assets.

"The Federal Financial Markets Service considers that the sale of company assets should take place with a minimum of damage to its shareholders," the regulator said after talks with minority shareholders.

It also called for the "maximum possible preservation of the integrity of the company's production operations and their ability to function."

The market regulator holds little weight, but investors hoped the comments signalled an upturn in YUKOS's fortunes.

"They didn't promise us anything, but their position gives us hope some actions will follow," Ivan Mazalov, a director at Prosperity Capital Management, said.

"However cautiously they might approach this matter, it's still positive compared to the behaviour of the bailiffs."

Its bank accounts frozen, YUKOS has had to fall back on export revenues for survival, and September schedules for cargo shipments through major ports showed the firm would be able to count on that income next month as usual.

September's loading programme for ports served by pipeline, seen by Reuters on Wednesday, allocates the company roughly the same export volumes next month as in August.

That means tankers will continue to ship YUKOS oil to markets where tight supply has kept prices near record highs.

YUKOS has been allotted 520,000 tonnes of cargoes through the Baltic port of Primorsk, 300,000 tonnes through its Butinge terminal in Lithuania, and 140,000 tonnes through Russia's main Black Sea port of Novorossiisk.

Markets have worried that an inability to access cash could mean the company would fail to pay transport fees to ship its crude through the pipeline network run by state pipeline monopoly Transneft.

YUKOS ships around 600,000 bpd through Transneft, and its presence in shipment schedules is vital for its survival.

YUKOS is battling claims for $US7b in back taxes and fines for 2000 and 2001 in a stand-off that could sink the company and has helped stoke fears of disruption to its output, which exceeds that of Libya.

The company's shares closed at 113.20 roubles on Moscow's MICEX exchange, down 75 per cent on their value in April as a tide of tax claims has pushed one of Russia's most profitable companies ever closer to collapse.

Those cases are widely believed to be linked with the prosecution of its main shareholder and former chief executive, Mikhail Khodorkovsky, whose political ambitions analysts believe were too much for a Kremlin ill at ease with serious opposition.

Khodorkovsky is on trial for fraud and tax evasion and faces up to 10 years in a labour camp if convicted.

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Prosecutors seize Yukos records

Prosecutors have seized financial papers for the last two years from oil giant Yukos, sparking fears of a fresh multi-billion dollar tax demand.

The Russian firm already owes $3.4bn (£1.9bn) in back tax for 2000.

A similar claim for 2001 is before the courts and Yukos fears a current ban on asset sales means it could go bankrupt.

Separately, Russian finance minister Alexei Kudrin said $9bn would flow out of Russia this year but he downplayed any link between this and Yukos.

He said that global factors dictated the movement of money, not nervousness about the security of investment in Russia in the wake of the Yukos affair.

Struggle to continue

Yukos is struggling to continue operating following the seizure of funds by bailiffs to pay off part of the bill. It has already cut output and reduced costs.

The company will have paid half the current bill by the end of August but that still leaves it $1.7bn short of the total amount, which has to be paid in full by 30 August.

This recent seizure of documents adds weight to fears among observers that Yukos, responsible for one barrel in five of Russia's overall crude oil output, could eventually face tax liabilities of more than $10bn.

This threat has seen its shares tumble.

Bailiffs have repeatedly threatened to sell off the company's biggest asset: Yuganskneftegas, the firm which produces 60% of its oil.

The state has hired Dresdner Kleinwort Wasserstein, the US investment bank, to value Yugansk.

Yukos fears the unit, which it claims is worth up to $30bn, could be sold off on the cheap.

Many observers believe the company's problems stem from President Vladimir Putin's desire to discourage political threats from Russia's super-rich business magnates.

Yukos founder Mikhail Khodorkovsky is currently in jail facing charges of fraud and tax evasion.

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Yukos Lawyers Say Prosecution Is Weak and Illegal

Lawyers for core shareholders in Russia’s troubled Yukos oil company said on Wednesday that evidence heard so far in their trial for fraud and tax evasion was weak and prosecutors had broken court rules, the Reuters news agency reports.

The case against Mikhail Khodorkovsky and Platon Lebedev has come in tandem with massive tax demands which threaten to sink Yukos, Russia’s top oil producer. Analysts see the twin actions as Kremlin punishment for Khodorkovsky’s political ambitions.

After a month-long reading of documentary evidence, the court began hearing witnesses last week, starting with the head of Apatit, a fertilizer company at the heart of the accusations.

“The witnesses were supposed to prove that there was an embezzlement of Apatit shares but in fact they proved quite the opposite, so it doesn’t have the faintest whiff of criminality,” Khodorkovsky’s lawyer Yuri Shmidt told a news conference.

Yevgeny Baru, a lawyer for Lebedev, said his client’s high blood pressure was one of the main concerns. On one occasion the defense team even called an ambulance to the Moscow court room where their clients watch proceedings from behind bars. “It could end very sadly, possibly even fatally,” he said.

He also complained that Lebedev’s defense documents were repeatedly searched by prosecutors. “How can we talk about confidentiality of our relationship with clients in such a situation?”

The prosecution also broke court rules by presenting the judge with new documents after the investigation phase was over, said Konstantin Rivkin, another of Lebedev’s lawyers.

But he said the witnesses called so far had given the defense hope of eventually proving their client’s innocence. “If other witnesses are the same, then we will be looking to the future with great optimism.”

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Menatep Head Ready to Sue Deputy Prosecutor, Paper for Slander

The head of Menatep group Platon Lebedev who is currently in custody is ready to sue Deputy Prosecutor General Yuri Biryukov and the newspaper Komsomolskaya Pravda for slander.

Lebedev quoted by Russian Information Agency Novosti said that Biryukov’s interview published by the paper in March “contains several deliberately false statements that undermine my reputation.”

In particular, Biryukov said that Apatit fertilizer company was Yukos’ property. Lebedev declared that this statement was not true, which was confirmed by 165 volumes of his criminal case, the agency reported.

Lebedev also demanded that the paper publish a refutation.

He and the former head of Yukos, Mikhail Khodorkovsky, are charged with illegal privatization of Apatit in particular.

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US$3b tax claims looming over Yukos unit

RUSSIAN authorities are considering launching a tax demand of up to US$3 billion against a Yukos subsidiary, in a fresh escalation of pressure on the embattled oil group, the Financial Times reported yesterday.

The newspaper, quoting an unnamed government official, said that Russia's tax ministry had prepared the additional tax claims directly against Yuganskneftegaz, Yukos' main oil production unit in west Siberia.

'The move would help reduce significantly the market value of Yuganskneftegaz, easing the way for efforts to strip out the group's core oil producer and sell it at a price affordable to a Russian company,' the paper said.

Neither Russian government officials nor Yukos officials were immediately available for comment.

Yukos, Russia's biggest oil exporter, has been close to collapse for months after authorities hit it with tax claims running to US$7 billion and bailiffs froze its bank accounts and assets. It needs to pay US$3.4 billion in back taxes for 2000 before the end of August.

Its troubles are part of a broader judicial campaign, seen by many analysts as orchestrated by the Kremlin to punish its politically ambitious founder Mikhail Khodorkovsky, currently on trial on charges of fraud and tax evasion.

Earlier this month, Russia hired investment bank Dresdner Kleinwort Wasserstein to value Yuganskneftegaz. Yukos has said Yuganskneftegaz is worth over US$30 billion, based on its reserves, but analysts have said that the unit could fetch anything from US$12 billion to US$20 billion if sold at an open auction.

State-controlled Gazprom and Rosneft have both been tipped as likely candidates to buy Yuganskneftegaz, while Surgutneftegaz, an oil group seen as loyal to the state, is also believed to be interested, the Financial Times said.

'Claims such as these could potentially be made against other production units which would only add to the already negative sentiment. It would bring the total outstanding claims against Yukos to US$10 billion,' said UFG brokerage. 'The aim of this new tax demand appears to be to reduce the value of Yugansk to enable some of the state companies to acquire it,' the brokerage said in a note.

Yukos fell 11.3 per cent on the Micex bourse by 0911 GMT after the report.

Many analysts say a fair price for Yugansk would be at least US$15 billion and only a Western major or a Chinese firm could afford buying it, while Moscow was very reluctant to let it end up in foreign hands.

'We reiterate our belief that no foreign company will be allowed to bid for Yugansk,' said Raiffeisenbank, which values Yugansk at US$16 billion.

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Yukos appeal thrown out of court

Under-fire Russian energy giant Yukos has had an appeal over the seizure of its main energy unit thrown out by a Moscow court.

Bailiffs are threatening to sell Yukos' Yuganskneftegaz unit to help pay off huge tax arrears that could bankrupt Russia's biggest oil company.

Yukos failed in the attempt to free up its shares in Yuganskneftegaz, which accounts for 60pc of the firm's 1.7 million barrels-a-day output.


Energy ministry officials will today meet their Chinese counterparts in Beijing to discuss key deliveries of Yukos supplies to oil-hungry northern China.

These talks may touch upon rumoured plans for a bid for Yuganskneftegaz by a Chinese firm.

Beijing has approached Moscow with its concerns over the handling of the Yukos case, which many people see as a Kremlin attack on company founder Mikhail Khodorkovsky, who had used his estimated USD15bn fortune to fund opposition political parties.

President Vladimir Putin, who was strongly criticised by Khodorkovsky before his arrest on charges of fraud and tax evasion, on Monday attempted to ease international fears of a global oil shortage in a telephone conversation with US President Bush.

Oil prices eased away from record highs in recent days on news that Iraqi supply was improving and as Putin made reassurances to Washington.

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Money Is Fleeing Abroad Again

Capital flight, which has drained the economy since the Soviet collapse, is back as fears over Yukos and property rights push Russians to funnel billions of dollars out of the country instead of investing at home.

The authorities are actually encouraging capital flight and discouraging domestic investment through their contradictory actions, foreign investors and economists said.

In doing so, officials risk undermining some of President Vladimir Putin's greatest achievements: economic growth and the perception of stability -- two things Putin says the country needs to be strong after the chaotic 1990s.

"The Yukos affair, random statements by top government officials and clashing policy priorities are not helping the doubling of Russia's GDP and the necessary diversification of the economy from oil-related industries," said Pavel Erochkine, head of research at the London-based Center for Global Studies and a researcher at the House of Lords.

"The government and the Kremlin seem to be encouraging capital flight," he said.

The attack on Mikhail Khodorkovsky and Yukos, the country's largest oil exporter, spooked people with money to spend, while the plethora of conflicting decisions about Yukos shows, some say, a disregard for property rights and a lack of authority on the part of Putin.


Not helping matters is government infighting, as illustrated by a heated exchange at a Cabinet meeting Thursday in which Finance Minister Alexei Kudrin and Economic Development Minister German Gref criticized Prime Minister Mikhail Fradkov for delaying key economic reforms.

Dealing another blow to confidence, the Central Bank sat idly by in May and June as rumors swirled about a looming banking crisis and clients made a run on banks.

Yukos, however, is the single driving force behind capital flight, said Yevgeny Yasin, head of the Higher School of Economics and a former economy minister.

"It is a symbol that the state wants to control the economy, and that has scared business," Yasin said Tuesday. "Capital flight is terrible because we could have used that money to modernize the country."

Capital flight bled Russia white in the chaos following the Soviet collapse. About $25 billion per year -- and perhaps much more -- was sent abroad in the 1990s, and the government attempted to stem the outflow. Last year, capital flight fell to $2.3 billion, and Kudrin told reporters in March that he hoped to record the first inflow ever this year.

But that won't happen. The actual amount of money being spirited abroad is impossible to count, but the Economic Development and Trade Ministry said it will grow to as much as $12 billion this year. Recent data from the Central Bank show money is leaving: Russia had a capital outflow of $5.5 billion in the first half of the year compared with a capital inflow of $3.9 billion over the same period last year.

Fitch Ratings estimates capital flight rose to $31 billion in the 12 months to July, from $20 billion over the previous 12 months. Standard & Poor's and Fitch cite concerns over Yukos and property rights as reasons for Russia's credit rating remaining one notch short of investment grade, known as a junk rating by bond traders.

While oil prices reached record highs this month, the growth of foreign currency and gold reserves has slowed, indicating that more money is leaving the country. The ruble has fallen while bond yields have risen, despite the billions of dollars of export revenue that are swelling the state's coffers. Industrial production growth has slowed.

"The data on the outflow of capital are negative, indicating a reduction in the investment capital that the country needs to develop the economy," said Garegin Tosunyan, president of the Association of Russian Banks, whose members own 90 percent of all banking capital.

Tosunyan said he has seen cases where foreign investors as well have put off investment.

"It seems that the government is trying very hard to discourage even the investors who are most favorably inclined toward Russia," said Hans-Jorg Rudloff, deputy chairman of Barclays Capital, the securities unit of Barclays Bank.

Two major investment banks -- ING Groep, the biggest Dutch financial services company, and Societe Generale, France's third-biggest bank -- pulled out of a loan agreement with TNK-BP recently because of the greater risks in Russia, Reuters reported.

Many potential foreign investors may find it hard to justify the perception of current risks to directors in London, New York or Tokyo.

"Foreign investors have been unsettled by the uncertainty from the banking crisis and the Yukos affair," said Sergei Rusin, a fund manager at Region Asset Management, which has 2.5 billion rubles ($85.6 million) of assets under management.

Nevertheless, some big foreign names, such as BP, Heineken, IKEA and Siemens, have boosted investment, attracted by Russia's unrivaled bazaar of commodities and a six-year economic boom.

The country's wealthiest, however, are less optimistic and leading the pack in sending their money abroad, economists said.

"Pressure on Yukos has undermined the level of confidence among so-called oligarchs, and they have resumed taking large amounts of capital out of Russia," Alexei Moisseyev, an economist at Renaissance Capital, wrote in a recent note to clients. He estimated that capital flight totaled $10 billion in the first six months of 2004.

This bodes badly for the economy, since the wealthiest Russians are the most business-savvy and, according to a World Bank report, already control about one-third of the country's industry.

"Russia needs Russian investment to build her economy, Russian small businessmen to invest and create jobs, but this is the very money that is going abroad," said Bruce Bean, chairman of the Russia/Eurasia Committee of the American Bar Association.

"This is going to hurt the economy. The scary thing is that big investors are not going to say they are putting off investment, they just won't invest. It will be very subtle."

But it is clear that some bureaucrats do not care: With billions of dollars flowing into the country from high oil and commodity prices, the economy is for now insulated from fallout from the Yukos affair.

Too much money sloshing around strengthens the ruble and leads to a rise in inflation, two indicators to which Putin pays a lot of attention in his televised meetings with Central Bank Chairman Sergei Ignatyev.

"Provoking capital flight in an environment of high oil prices is perhaps the only way to simultaneously achieve a weak ruble and reduce inflation," Moisseyev said.

Yasin agreed that some in government circles view capital flight as a tool to reduce inflation and reduce excess liquidity.

"There are some people -- and I won't name names -- who think capital flight is good as excess money leaves the country and that helps reduce inflation," Yasin said.

But producing varying degrees of chaos in some of the best economic conditions Russia has seen in more than 20 years cannot be considered success, and Gref warned at the Cabinet meeting Thursday that capital flight is threatening to put a dent in economic growth.

"The increase in capital outflows that is beginning to show in the second half -- and also the consequences of the crisis of confidence toward banks -- may exert a negative influence on growth," Gref said.

Gref also predicted, however, that capital flight will fall to $4.8 billion next year from $9.1 billion this year.

But provoking capital flight is dangerous because it is difficult to stop and the money is hard to attract back, Bean said. "A large part of capital flight is money that never comes back again -- it goes somewhere else and works for that country's economy," he said.

With dollars flowing into the country from commodity sales, there is too much cash following too few investments, whipping up bubbles in Moscow real estate and dacha country.

Yet the money is not going where it is needed because many sectors remain under the control of the oligarchs and corrupt officials discourage investment, making it simpler to go in search of profits abroad, often to countries in the former Soviet Union.

"Investor confidence has been hit and I don't think Russia has played it very well, but what we are seeing is an export of capital to invest in other places, like Ukraine, Belarus and Georgia," said David Mapley, chairman of Shimoda Group, which has $50 million invested in the former Soviet Union.

"With commodity prices so high, I am constantly racing against Russians who just come in and put the money on the table," Mapley said. "They are buying up everything in places like Ukraine and Georgia."

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Kremlin Aide Enters Oil Boardroom

The Kremlin has increased its influence over the oil industry with the election of a top presidential administration official to the board of Transnefteprodukt, analysts said Tuesday.

Vladislav Surkov, deputy head of the presidential administration, was elected to the company's new nine-member board at the annual shareholders meeting Friday.

Transnefteprodukt is the state-owned monopoly in the transportation of oil products.

The news comes nearly a month after another deputy head of the presidential administration, Igor Sechin, was voted to chair state oil company Rosneft.

Media speculated Tuesday that Surkov now has a chance to be elected chairman of Transnefteprodukt. The previous chairman was former Energy Minister Igor Yusufov.

The date for the board meeting, at which a new chair will be elected, has not been set, a spokesman for Transnefteprodukt said.

Surkov was appointed deputy head of the presidential administration in 1999. Previously he held various positions in Menatep Bank, established by now-jailed Yukos shareholders Mikhail Khodorkovsky and Platon Lebedev. From March 1996 to February 1997 he served as vice president of Yukos-Rosprom financial group.

Industry analysts said Surkov's new position is unlikely to affect the legal assault on Yukos.


Steven Dashevsky, oil analyst with Aton brokerage, said he does not believe Surkov's position will have any influence on the Yukos affair.

"The fact that he had worked in Menatep does not mean a great deal. The industry in Russia is relatively small" and has a high rotation of people, said Chris Weafer, chief strategist at Alfa Bank. "It does not indicate whether Yukos is going to be in any better or different a situation than it is today."

But Weafer said that having yet another top official from the presidential administration on the board of an oil company is an example of the Kremlin tightening its grip on the industry.

"It is entirely consistent with the appointment of Sechin to Rosneft," he said, "along with [Industry and Energy Minister Viktor] Khristenko's statement that the state plans to have direct involvement in the future development of the oil industry."

Weafer said that with Surkov's election, the Kremlin's control is now reaching out to include oil products.

"People have always focused on Russian crude exports, which is now 4.6 million barrels a day. But there has been a huge growth in export of products, from 260,000 barrels a day in 1999 to 2 million a day now," he said.

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Yukos suffers court setback

Yukos has suffered a fresh setback in its survival struggle against multi-billion-dollar tax bills after one of its appeals was thrown out and another adjourned by a Moscow court.

The Interfax news agency has said the Russian Arbitration court refused to unfreeze shares of Yukos's main Siberian oil producing unit Yugansk, which accounts for 60 per cent of the company's output.

Yukos must pay $3.4 billion (£1.87 billion) in back taxes for 2000 by August 30, something the firm says it cannot do as it is banned from selling assets to raise cash and can only generate $1.7 billion by the deadline.

Interfax said the court separately adjourned to September 7 Yukos's appeal against the bill for back tax for the year 2000 -- the latest in a string of largely unsuccessful appeals the oil giant has made ahead of an August 30 deadline to pay.

Yukos's troubles are part of a broader judicial campaign, seen by most analysts as orchestrated by the Kremlin to punish the firm's politically ambitious founder Mikhail Khodorkovsky, who is on trial on charges of fraud and tax evasion.

Industry analysts are increasingly convinced that the Kremlin is determined to break up Yukos and are now focusing on how quickly it will implement threats to sell Yugansk.

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Khodorkovsky's Trial Drags on in Moscow

Russia's richest man Mikhail Khodorkovsky briefly defended a 1994 privatization deal Tuesday as the trial against him and business partner Platon Lebedev dragged on in a Moscow court.

Dressed in jeans and a black T-shirt, Khodorkovsky spoke softly and slowly as he responded to prosecutor Dmitry Shokhin's questions.

Khodorkovsky confirmed that Menatep bank, where he was chairman of the board, had participated in the privatization of Apatit, which makes a key fertilizer component, but insisted that it had not broken the law.

Khodorkovsky said he was speaking to stop the court "wasting time" by explaining "self-evident circumstances." He said he would respond to the prosecutor's other questions after all the evidence had been presented.

Prosecutors accuse Khodorkovsky and Lebedev of being part of an "organized group" that won a 20 percent stake in Apatit through shell structures that bid for the shares.

The legal actions against Khodorkovsky and his Yukos oil company are widely seen as Kremlin-approved punishment for the oil mogul's growing political activity in opposition to President Vladimir Putin's government.

If convicted, the billionaire businessmen could face 10 years in prison.

The Apatit deal was just one of many post-Soviet selloffs of state property in auctions which often brought prices far lower than the enterprises' estimated value.

As government funding dried up in the early 1990s, many colossal Soviet-era plants, which whole regions relied on for employment, were crippled. The privatization auctions were devised as a way to pump money into the flagging industrial jewels, but the process saw them sold off to a handful of moguls close to then President Boris Yeltsin's Kremlin.

The third witness to be called in Khodorkovsky's trial took the stand Tuesday - Yevgeny Komarov, former governor of the Murmansk region.

Komarov was grilled by Shokhin and defense lawyers over whether Khodorkovsky had fulfilled the investment promises at the plant.

Komarov said that the privatization tender was legal, but that the investment program had not been fulfilled, citing projects such as the construction of an airport.

Khodorkovsky and Lebedev's lawyers said that these projects had not been included in the original investment plan.

Nevertheless, Komarov said that the arrival of Khodorkovsky's team had saved 1,000 workers from layoffs, kept production steady and pulled the company from the verge of bankruptcy after rail and electricity debts of 38 million rubles ($1.3 million) were paid off.

The trial was adjourned until Thursday.

Meanwhile, Yukos' appeal of its crushing 2000 back taxes bill was put off until next month, the Interfax news agency reported Tuesday.

The Moscow arbitration court delayed the appeal hearing until Sept. 7, satisfying a request from the Tax Ministry. The Tax Ministry said it wasn't ready as it was occupied with other matters, Interfax reported.

The $3.4 billion tx bill has already been upheld by local courts, and it is currently being enforced by bailiffs, who have frozen Yukos bank accounts and seized shares in Yukos subsidiaries.

Yuganskneftegaz, the western Siberian production unit that accounts for 60 percent of Yukos output, is being evaluated for possible sale as collateral for the tax claims, which are expected to rise up to $10 billion to cover the period 2000-2003. A Moscow court ruled Tuesday that Yuganskneftegaz shareholder documents had been legally arrested.

Yukos officials said Monday that they will have paid half of the 2000 claim by the month's end. But with other bills looming and a freeze on its accounts, the company has repeatedly raised the possibility of bankruptcy or production stoppages.

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Ex-official backs Yukos founder in court

A former Russian regional governor testified that Mikhail Khodorkovsky and oil giant Yukos broke no laws in acquiring a local firm during the country's freewheeling 1990s privatisation process.

"There were no violations of the privatisation process," Yevgeny Komorov, former governor of Russia's northern Murmansk region, testified before a three-judge panel hearing the trial of Khodorkovsky, the jailed Yukos founder.

"Everything was done in accordance with the law," he said, referring to Khodorkovsky's 1994 purchase through a Yukos subsidiary of a 20-percent stake in a fertilizer production company, a transaction at the centre of the state's case.

Komorov was the second witness in as many days to testify in support of Khodorkovsky's claim that he is not guilty of tax evasion and accounting fraud charges brought by Russian government prosecutors against him.

On Monday, the former chief executive of the fertilizer company provided similar testimony and said he was never misled by Khodorkovsky or his co-defendant, Platon Lebedev, in their purchase of the shares as the company was privatized.

Khodorkovsky, dressed in blue jeans and a polo shirt and appearing relaxed as he observed the court proceedings from inside a steel cage, sarcastically criticized prosecutors for asking leading, repetitive and irrelevant questions.

"I have the feeling, though perhaps I am mistaken, that the prosecution is trying to break down a door that is already open," the 41-year-old Khodorkovsky said, provoking hushed chuckles from several spectators in the courtroom.

There were reports in some Russian media that Khodorkovsky would deliver full-fledged testimony in his own defence during the session Tuesday, but he said he would not speak at length in the trial until all of the witnesses had been heard.

Khodorkovsky, technically still Russia's wealthiest individual, faces up to 10 years in prison if convicted.

In Russia, observers of the trial are split. Some regard it as a Kremlin-inspired personal vendetta in response to Khodorkovsky's funding of groups opposed to President Vladimir Putin.

Others say his amassing of billions of dollars in personal wealth over a period of a few years in the mid-1990s was both illegal and an immoral exploitation of the economic chaos in Russia in the immediate wake of the collapse of the Soviet Union.

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Yukos cuts output to save money

Yukos is to reduce the amount of oil it produces and cut other expenditure in an effort to keep its operations going.

The Russian oil company said it was having to introduce some "stringent" cost-saving measures in order to continue its "normal operations".

It will slash expenditure by $700m (£385m), cut annual oil output by 4.5%, and defer payment of current taxes.

Yukos said the government's seizure of money from company accounts to pay taxes had halved its monthly income.

Shares tumble

Yukos shares fell 7%, as investors digested the output cut as well as reports the government may lodge an additional $3bn tax claim against its key subsidiary Yuganskneftegaz.

Bailiffs have so far seized around $800m from Yukos accounts to pay a $3.4bn tax bill from 2000 which the government says was not paid.

Yukos has warned several times that its dispute with the Russian government could force it into bankruptcy, particularly if production is halted or key assets sold.

In order to save money, Yukos is to reduce its oil output target for 2004 from 90 million to 86 million tonnes.

The company will also reduce capital and operating expenditure, cutting social programmes.

Steven Theede, Yukos's chief executive, said the measures were necessary because the company could not gain access to cash stored in frozen bank accounts.

No option

"Half of our monthly revenue is not available to us to meet our day-to-day operating costs," he said.

"The management has considered all options open to it and concluded that there is no other choice than to effect, immediately, a reduction in our capital and operating expenditures."

By the end of August, half of the $3.4bn sought by the government will have been paid, Yukos said, leaving $1.7bn in penalty interest and fines outstanding.

Bailiffs acting for the Russian Ministry of Justice have previously indicated that Yukos would have until the end of August to pay the entire sum.

Yukos said it would continue to challenge the legal validity of the government's tax claim.

High-profile trial

The government is also pursuing a similar claim from Yukos for taxes from 2001.

Many within Russia believe that the government's pursuit of Yukos is politically motivated.

Mikhail Khodorkovsky, Yukos's founder and former chief executive, has funded opposition parties.

Mr Khodorkovsky has been behind bars since October.

He is currently standing trial on charges of fraud and tax evasion relating to privatisation deals in the 1990s.


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Khodorkovsky asks for courtroom contact with lawyers

Mikhail Khodorkovsky, the former chief of the oil company YUKOS, has asked for change in the procedure of his contacts with lawyers during court proceedings.

At present, guards do not permit to his lawyers to turn over any documents to Khodorkovsky and another defendant, ex-chief of MENATEP Platon Lebedev, during court hearings.

Khodorkovsky’s lawyer Genrikh Padva said “it is senseless to ask for a break every 15 minutes – this can protract the trial”.

Khodorkovsky, who is on trial on charges of tax evasion and fraud, also asked to be given an additional day for contacts with his lawyers.

“One day a week is not enough,” he said.

Judge Irina Kolesnikova said she did not object to communication of Khodorkovsky and Lebedev with their lawyers during breaks in proceedings, but contacts of the defendants in the courtroom were in the competence of the escort.

“Instructions of the escort cannot be of interest to either court or defendants when this infringes upon rights of the defence,” Khodorkovsky replied.

The court continued on Monday the questioning of the first witness of prosecution, former chief of Apatit company Anatoly Pozdnaykov.

State prosecutor Dmitry Shokhm at a previous court session pointed out to several inconsistencies in the testimony of Pozdnyakov during the preliminary investigation.

Khodorkovsky argued that the “protocol of the interrogation was unusual for me, as in my opinion, the investigator made several mistaken statements that the witness had to somehow explain later”.

“I’m afraid very much that now we have received mistaken information based on delusions. I believe that the investigator himself was in error and misled the witness, saying that investments must be without indemnity. As of today, after announcement of the materials of the case, we know for certain that the investments must not be without indemnity,” Khodorkovsky said.

“In terms of privatisation, the obligations of Apatit to issue and turn over to investors 50 percent of stocks were clearly stated, but this was not dine,” he added.

A break has been announced in the court proceedings.

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Yukos plunges on fears of asset sales

Shares of Russian oil company Yukos fell Monday as fears intensified that the firm's key Siberian unit would be sold cheaply after a deadline to pay back taxes expires next week.

Yukos had fallen 11.3 percent on the Moscow Interbank Currency Exchange by 5 a.m. ET after the Financial Times reported that state authorities were considering launching a fresh $3 billion tax demand against Yukos' main producing unit, Yugansk.

"The aim of this new tax demand appears to be to reduce the value of Yugansk to enable some of the state companies to acquire it," UFG brokerage said in a note.

Yukos must pay $3.4 billion in back taxes for 2000 by Aug. 30, something the firm says it can't do as it lacks spare cash and is banned from selling non-core assets.

Bailiffs are unwilling to unfreeze Yukos' assets, threatening instead to sell Yugansk, which accounts for 60 percent of output of Russia's top oil exporter. Last week the state hired investment bank Dresdner Kleinwort Wasserstein to value Yugansk.

Yukos' troubles are part of a broader judicial campaign, seen by many analysts as orchestrated by the Kremlin to punish its politically ambitious founder, Mikhail Khodorkovsky, who is on trial on charges of fraud and tax evasion.

"The new claim would reduce the market value of Yugansk, making its price cheaper and, therefore, easier to afford for any potential buyer," said Renaissance Capital.

Tax officials have said Yukos may be presented with a new tax evasion claim for a total of $3.4 billion for 2001. UFG said it expected the final total claim to amount to $10 billion, while Renaissance said it could rise to $14-$15 billion.

Many analysts said that pushing the total back tax bill to as high as possible was the only strategy left for the state in a situation when Dredsner was likely to announce a high starting price for Yugansk.

Many analysts say a fair price for Yugansk would be at least $15 billion, and only a Western major or a Chinese firm could afford buying it, while Moscow was very reluctant to let it end up in foreign hands.

"We reiterate our belief that no foreign company will be allowed to bid for Yugansk," said Raiffeisenbank, which values Yugansk at $16 billion.

"The latest move may be designed both to reduce the value of the main production subsidiary and to dissuade Western bidders from taking part in any future auction," UFG concluded.

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Customers come last on oil nations' political agenda

SO NOW WE KNOW. If demand for oil rises suddenly and the supply is constrained, the price will rise. Add myriad threats of supply disruption, and a producer cartel, and you get price increases that are sharp and enduring. Anyone who missed that lesson in his elementary economics course will certainly have learnt it from the business press in recent months.

Unfortunately, concentration on daily price movements diverts attention from the more threatening changes that are taking place in oil markets.


Most important, the consuming countries have realised that the political dynamics of their suppliers trump the needs of customers every time. Consider three of the largest producers, sitting on some 40% of the world’s reserves: Russia, Saudi Arabia and Venezuela.

Vladimir Putin is unconcerned about how the oil price is affected by his assault on Yukos, Russia’s largest and most efficient producer. He feels it imperative to eliminate Yukos’s principal shareholder, Mikhail Khodorkovsky, as a political rival, and to transfer Yukos’s main production properties to a company controlled by his former KGB buddies. If that means oil prices rise and abort America’s recovery, too bad for President George Bush.

Not even calls from national security adviser Condoleezza Rice to Dmitry Medvedev, Putin’s chief of staff, could persuade the Russian leader to abandon his assault on Yukos and help to bring down the price of crude.

Nor could pressure from his Chinese friends move Russia’s president, who must enjoy being in a position to ignore the pleas of the world’s greatest superpower and its potential challenger for that crown. Putin may no longer be able to send tanks rolling across Europe, but he can certainly make it very expensive for the world’s motorists to roll across their nations’ highways.

The important thing to note is that the world’s largest oil consumer (America) and the world’s fastest-growing importer of oil (China), although competing for supplies, now realise that they have a shared stake in the stability of Middle East producers, and the secure movement of oil on the world’s sea lanes. Politics may make strange bedfellows, but a thirst for black gold makes even stranger ones.

Then there is Saudi Arabia, which is no longer capable of controlling oil prices merely by issuing a press release about its production intentions. One expert on that country’s politics and industry tells me that Saudi promises to step up output are worthless because a significant portion of that country’s “reserves” are “political barrels”, reported to enhance Saudi prestige but not quickly extractable.

American defence and intelligence officials until recently assigned a 50:50 probability that the Saudi regime would survive for the next 10 years. They are now quietly speaking in terms of a mere five years. This means that there is an even chance that the kingdom’s royal family soon will be calling for help to prevent a takeover by Islamic extremists. China and America will find themselves with no choice but to join forces to protect the Saudi fields from a takeover that could halt production. So don’t look for China to oppose any steps America might feel necessary to keep Saudi oil flowing onto world markets while Russia, untroubled by the disappearance of a big rival supplier, would be likely to oppose Sino-American intervention.

Then there is the effect tight oil supplies are having in America’s backyard, South America. In this region, Venezuela is the key player. That nation’s pro-Castro, anti-American president, Hugo Chávez, is now firmly in charge of the western hemisphere’s largest supply of oil — a supply that is only six days away from America by tanker (Saudi oil is six weeks away). Buoyed by his recent referendum victory, Chávez plans to divert supplies from America to the South American countries he is wooing.

As in Russia and Saudi Arabia, the internal political goals of Venezuela’s leader override any desire to make life easier for America’s oil-fuelled economy. Putin wants to stifle political opposition, the Saudi royal family fears it will be overthrown if it invites American capital into the country, and Chávez wants to foment an anti-American movement in South America.

Meanwhile, as these ominous signs accumulate, politicians fret, strut, and do nothing. Bush has a multi-billion-dollar energy bill before Congress that at most would squeeze a relatively few extra drops of oil from the Arctic, perhaps a decade from now, and gives short shrift to any effort to increase the efficiency with which energy is used in America. Fortunately, Congress has so far refused to pass it, not out of any sudden spurt of parsimony, but because it wants still more goodies placed under this Christmas-tree of a bill.

Democrat John Kerry is proposing to denude American dinner tables of corn by converting the nation’s crop to expensive methanol, somehow force consumers to pay for expensive solar power, and in effect foreclose the nuclear option by opposing a bill he once supported that would create a storage site for nuclear waste at Yucca Mountain in Nevada, a state with five up-for-grabs electoral votes. How this will help Kerry to achieve his stated goal of “energy independence” remains a mystery to all serious observers of the energy scene.

Meanwhile, with America’s refineries operating at a stretched 96% of capacity, environmentalists continue to oppose any significant expansion of the nation’s creaking energy infrastructure, local groups continue to fight to prevent the construction of port facilities that would allow the needed increases in imports of liquefied natural gas, and voters remain unenthusiastic about a tax that might encourage them to use less petrol.

In sum, current high prices are the least of America’s energy problems.

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Khodorkovsky Complains Court Limits Contact With Lawyers

The jailed founder of Russia's troubled Yukos oil company asked here Monday to be allowed to talk with his lawyers during court sessions, but judges dismissed the motion as being outside their competence, news agencies said.

"The conditions for lawyers to consult with their client have changed," Genrikh Padva, a lawyer representing former Yukos chief executive Mikhail Khodorkovsky, told the tribunal hearing the state's case against the company's founder.

Padva complained that guards who escort Khodorkovsky from his prison cell to the courtroom, where he sits in a steel cage to observe the proceedings, prevented him from passing documentary evidence to his client for study during court sessions.

It was not clear whether such contact had been allowed previously in the courtroom.

Judge Irina Kolesnikova rejected Padva's motion to be given better access to his client.

"The court does not prevent lawyers from meeting with defendents during breaks in the proceedings," she said.

"As far as the handing over of court documents, this is a decision for the escorts, not of the court."

Khodorkovsky has been charged with tax evasion and embezzlement in connection with his acquisition of formerly state-owned entities that today consistitute the Yukos empire.

Many outside Russia regard his legal troubles as a Kremlin vendetta in response to Khodorkovsky's funding of political movements opposed to President Vladimir Putin.

Khodorkovsky has pleaded innocent to all charges.

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Crushing Democracy and Now the Economy in Russia

Russian President Vladimir Putin has squandered one of his most precious assets: the trust of economic experts.

Their opinion is important to those who would invest in Russia, but there doesn't seem to be a single optimist left in the economic community. The causes of their anxiety are obvious. The net capital outflow in 2004 is expected to be three times that of last year, according to a prominent cabinet minister. Private forecasts are even worse. Yet as recently as March the Russian finance minister had proudly announced that this year Russia would report a net inflow of capital for the first time since the early 1990s.

The Russian market fluctuates wildly, with a general downward trend: It has lost about one-third of its value in less than half a year -- at a time when Russia is making huge profits from exorbitant oil prices.

The cabinet, abruptly reshuffled by Putin shortly before his reelection in March, is torn by disputes. Some ministers in the economic sector are trying to bring back sanity and clarity to the reform effort, while the prime minister, Mikhail Fradkov, focuses on the drive to double gross domestic product -- the goal set by the president -- with barely a clue as to the strategy needed to bring about such growth. The professional team under his command talks about policies, trends and numbers, while Fradkov, as befits a Soviet-style apparatchik, demonstrates a belief in the inspirational force of plan and command and holds economic factors in contempt. Whether Putin shares his prime minister's economic approach is unknown.

Decision making is obscured and unpredictable; policy analysts are left to speculate on the basis of indirect and largely unreliable signs. Comparing today's scene with that of Yeltsin's days, Al Breach, chief economist with UBS Brunswick in Moscow, told Reuters that "under the Yeltsin presidency 50 to 100 people knew what was going on. Under Putin only a handful of people know what is happening, and they don't talk."

The negative developments and the ensuing loss of trust have been provoked by the Kremlin campaign against the oil company Yukos. Until a few months ago Yukos was Russia's most dynamic and well-managed energy company. It still accounts for about 20 percent of Russia's oil production and 2 percent of the world's, but its assets have lost the bulk of their market value because of heavy-handed, repressive measures. Yukos's persecutors do not seem to care about the damage they have inflicted on the Russian economy, the market or the trust of investors. They remain unperturbed by concerns over Russia's contribution to the dangerous upward trend in world oil prices.

In 1999 Putin demonstrated a shrewd vision of his country's economic situation when he wrote that Russia might expect to reach the level of Portugal in 15 years. He made it clear that he wanted Russia to narrow the gap separating it from more developed countries. No less obvious was his belief that Russia couldn't go it alone: He seemed to realize that there was no alternative to closer economic cooperation with the West, where capital, markets and advanced technologies are concentrated.

Putin opted for ensuring stability on the grounds that it would help attract foreign capital. His method for achieving stability was to reestablish state control, which had been dramatically weakened under Boris Yeltsin. He believed in a traditional strong state, in both the Russian and Soviet way -- that is, with a political system reduced to one power center. This vision may have disappointed those who care about democracy, liberal freedoms or civil society, but others saw it as perfectly rational. After all, there was the example of steadily developing China: Its government didn't pretend to be democratic, and foreign investors seemed not at all squeamish.

During Putin's first term, Russian macroeconomics looked increasingly sound. His enlightened economic team in the cabinet was moving ahead with some reforms, big businesses were flourishing and some of them even curtailed their notoriously disreputable practices. Rising oil prices gave the market a big boost. Economic experts issued encouraging statements. Meanwhile, voices lamenting the shrinking of democracy and warning about the growing numbers of Putin's ex-KGB colleagues in top government positions sounded ever more feeble. It appeared that Putin was delivering the stability Russia longed for.

The campaign against Mikhail Khodorkovsky and his company, Yukos, at least originally, may have been driven by the same logic. Khodorkovsky, who had challenged the state by acting too independently at home and abroad, had to be subdued so the government could consolidate control. Indeed, early on the economic experts were not at all upset about the arrest of Khodorkovsky.

But instead of improving government management, the people entrusted by Putin to conquer the arrogant tycoon engaged in a self-seeking campaign to strip Khodorkovsky of his assets. To them this was a chance to take revenge for the earlier postcommunist years they had spent in middle-rank state security jobs, while others had grabbed at the new capitalist opportunities or benefited from high-ranking positions as decision makers.

The lack of public political debate and the unaccountability of the decision makers in a noncompetitive political system enabled the newly empowered elite to have its revenge. A dismembering of Yukos -- the forced sale of the most appetizing chunks at marked-down prices and the establishment of state control over the property -- is what seems to be on the mind of Putin's topmost elite. They expect their effort to be rewarded by lucrative managerial positions overseeing state-controlled property.

The likelihood of this scenario was enough to remove the last benefit of the doubt that economic observers were extending to Putin. This week Christopher Weafer, chief strategist of the Russian Alfa Bank and a respected economist, wrote that the outcome sought by some among the Russian elite "may have more to do with wealth reallocation than preserving the goal of an attractive investment climate."

In Putin's Russia, government control has increasingly become an end in itself, not a means to achieve ambitious economic goals. As in the late Soviet Union, mediocre bureaucrats are in control, while those with skills, talents, high ambitions and, especially, critical opinions are treated with distrust. If Putin ever had a strategic economic vision for Russia, it has been blurred by his Soviet background.

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Moscow firm offers to play white knight to Yukos

Moscow-based oil firm Naftasib group is proposing a rescue for Russian major Yukos, a newspaper reported on Friday, adding another name to a growing list of investors hoping to step in to save the embattled firm.

The Kommersant business daily cited two London sources close to shareholders in Yukos and Sibneft, the rival it tried and failed to merge with, as saying that Naftasib had approached Russian authorities offering to help with the Yukos situation.

Sources said the offer is similar to another rescue plan that had been put forward last month by a British-based consortium headed by former Yukos board member Konstantin Kagalovsky, with $8bn to pay off Yukos’ debts in return for a controlling stake.

Kommersant said the little-known Naftasib had connections to the Russian emergencies ministry but generally shunned publicity. Yukos, one of Russia’s biggest oil firms, has been close to collapse for months, after tax authorities hit it with tax claims running to $7bn and bailiffs froze its bank accounts and assets.

Analysts believe its plight is Kremlin punishment for the political ambitions of its main shareholder Mikhail Khodorkovsky, who is on trial for fraud and tax evasion.

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Yukos trial calls first witness

Russian state prosecutors have called their first witness in the long-running trial of Mikhail Khodorkovsky, former boss of oil and gas giant Yukos.

Mr Khodorkovsky has been behind bars since October of last year and faces charges of fraud and tax evasion.

First to take the stand in Moscow was Anatoly Pozdnyakov, ex-director of Apatit, a chemicals firm that was auctioned off 10 years ago.

Prosecutors have questioned how the sale was conducted.

They allege that Mr Khodorkovsky did not fulfil the conditions of purchase because he did not invest money that had been promised.

Fact or fiction?

Mr Pozdnyakov said that Mr Khodorkovsky played a positive role in the life of Apatit, according to the Itar-Tass news agency.

He did, however, add that the company received no money at that time.

"I don't think they lied to us," Mr Pozdnyakov was quoted by Agence France Presse as saying.

"They just didn't give us the money."

Defence lawyers are now expected to question the witness.

Tax troubles

While Mr Khodorkovsky has been behind bars, his former company, Yukos, has itself been facing a legal onslaught.

The oil group has been battered by ongoing wrangling over a $3.4bn (£1.9bn) back tax bill for 2000, and has seen its share price tumble.

The Justice Ministry is trying to take control of, and sell, Yukos's key oil production unit Yuganskneftegaz to settle the outstanding bill.

The company could face more tax charges as the Russian government is pursuing it over a similar claim for 2001 and could seek additional payments for 2002 and 2003.

The problems faced by Yukos have stirred a up a wide range of emotions in Russia and are seen by many as resulting from government anger at the political ambitions of Mr Khodorkovsky.

Local press reported on Friday that a number of people were protesting outside of the Moscow courtroom.

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Yukos trial hears first testimony

The first witness to testify in the controversial trial of embattled Yukos founder Mikhail Khodorkovsky appeared in court Friday, defending the jailed tycoon against charges he lied in a business deal 10 years ago.

"I don't think they lied to us," said Anatoly Pozdniakov, former director of fertiliser production company Apatit.

"They just didn't give us the money," he said.

Khodorkovsky and his erstwhile top associate, Platon Lebedev, face a catalogue of fraud and tax charges in connection with their acquisition during the 1990s of firms that now constitute the Yukos group, Russia's largest oil producer.

Those charges include the illegal acquisition of a 20% stake in Apatit, then run by Pozdniakov. Although Khodorkovsky did not pay cash for the shares, he settled railway transport and electricity bills instead, the witness said.

Mikhail Khodorkovsky, 41, once Russia's wealthiest person, has been jailed since October after he was arrested and later charged with massive fraud and tax evasion.

He has denied all charges and pleaded not guilty.

His case is widely described outside Russia as a Kremlin attempt to punish Khodorkovsky for funding political movements opposed to President Vladimir Putin.

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We need Yukos, says US

John Snow, United States' Treasury secretary, yesterday said the US government had told the Russian government that the world needed Yukos to keep pumping oil.

A question-mark is hanging over the future of Yukos, which accounts for 2pc of world oil production. The company has to repay a $3.4 billion tax bill, relating to 2000, by the end of the month. There are fears that it might have to declare itself bankrupt if it can't pay.

Mr Snow confirmed the Bush administration had contacted Russia about Yukos's output. Fears that the taps might be turned off have helped push oil prices to record levels. He said: "I think the Russians understand the need for Yukos's production to continue. It's important to their economy, it's important to their standard of living, it's important to the global energy picture. I think they're being very responsible in that respect."

Meanwhile, lawyers for Mikhail Khodorkovsky, Yukos's former chief executive in jail on fraud and tax evasion charges, yesterday lost a bid to have some of the charges dropped.

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Ambulance Called to Courtroom for Menatep Chief

An ambulance was called to the Meshchansky District Court on Thursday to treat Platon Lebedev, Gazeta.Ru Internet newspaper reports.

According to the edition, Lebedev’s lawyer Yevgeniy Baru asked the court that doctors be called to treat his client. The judge, Irina Kolesnikova, announced a break in the proceedings and for time to call an ambulance.

Yevgeniy Baru said that he based his request on his private experience, on his knowledge of Lebedev and on external factors. The lawyer holds that Lebedev suffers from high blood pressure and he must be inspected by doctors.

Lebedev himself said that calling the doctors was not necessary and that the move could be used by the prosecutors to claim that the defense lawyers are deliberately lingering the process. He claimed that his health condition was “satisfactory”.

Lebedev’s lawyers have repeatedly complained of their client’s bad health and of the treatment he receives from the prison officers who refuse to allow the suspect a proper medical inspection.


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