Is end near for Russia's Yukos?

By James Cox, USA TODAY
WASHINGTON — Russian prosecutors are less than three weeks from striking a death blow against the country's biggest oil producer, Yukos — a move widely seen as a politically motivated legal assault.

On Dec. 19, they will auction off the company's top producing unit, keep the proceeds and, most likely, come back to seize even more of Yukos.

Does that mean Russians will have to bury any hopes for a free, open economy along with Yukos? Even Steven Theede, the American oilman battling to save Yukos, can't say.

"People want to believe what's going on with Yukos is just about Yukos and that things will quiet down and go back to normal," he says. "My response is, they may be right. We don't know. But ... stakeholders in Russia's future can't rule out that it can happen again."

Yukos' future has been in doubt since October 2003, when masked police stormed the jet of the company's founder and then-CEO Mikhail Khodorkovsky and hauled him away in handcuffs. He's been in prison ever since, and Yukos has faced escalating demands for back taxes from prosecutors who say the company is a world-class tax cheat.

So far, authorities in Moscow have calculated Yukos' bill for unpaid taxes and penalties at $24.5 billion. By their tally, the company owes taxes equal to or exceeding its entire annual revenue for the years 2001 and 2002.

Investors have fled. Yukos shares have plunged to $1 from a high of $16. The value of the company, once put near $45 billion, is less than $5 billion.

The tax claim is "absurd," says Theede, a 52-year-old Kansan who joined Yukos in 2003 and became CEO in June after a career at ConocoPhillips. "Yukos has paid taxes at or above the levels of the industry in Russia."

Many securities analysts and Russian political observers say Yukos was targeted by the Kremlin because Khodorkovsky dared to bankroll political rivals of Russian President Vladimir Putin.

Indeed, some other Russian energy companies have gotten demands for back taxes, but only for a fraction of what Yukos has been dunned.

And other Russian moguls have run afoul of Putin. But industrialist Boris Berezovsky, media mogul Vladimir Gusinsky and energy executive Roman Abramovich all eventually fled the country to escape prosecution.

Khodorkovsky's mistake was sticking around to call the Kremlin's bluff, says Mattias Westman, who heads Prosperity Capital Management, an investment fund that specializes in Russia and owns 5 million shares of Yukos.

Putin loyalists "thought Khodorkovsky would fold ... and when he didn't, there was no Plan B. (Now) it's (a game of) chicken. You can't find a way out even though everyone wants one," Westman says.

The crisis deepened over the weekend after word leaked out that several top managers at Yukos had fled Russia amid threats to their families and fresh inquiries from prosecutors.

Theede says he plans to return next week. Bruce Misamore, Yukos' American chief financial officer, says he wants assurances from authorities in Moscow that he won't be arrested if he returns to answer questions.

Says Theede: "What we are seeing is expropriation of property, 21st-century style. You use the legal system and the tax system to generate significant liabilities against the company, and then utilize the ability to dispose of assets to satisfy those false liabilities."

The Yukos saga has profound implications for oil prices and the Russian economy.

Crude prices have surged to record levels this year, driven by a combination of unprecedented global demand and threats to supplies in key producing nations such as Iraq and Saudi Arabia. Prices have often soared with news of another legal setback for Yukos, which produces 1.8 million barrels a day, or 2% of the world total.

Before it got caught in government cross hairs, Yukos was considered a jewel by international investors. ExxonMobil, ConocoPhillips and other energy majors sought to buy stakes in the company, which had the largest market capitalization of any in Russia. Shareholders' rights groups hailed Yukos for adopting Western-style corporate governance and transparency.

Yukos continues to pump at peak rates, even though Theede has drastically cut oilfield maintenance, stopped drilling new wells, deferred current taxes and delayed paying bills.

Theede still hopes to prevent the Dec. 19 auction of the Yuganskneft unit, which pumps 60% of Yukos' output. But authorities at various Russian ministries have failed to respond to more than 50 settlement proposals and other overtures Yukos has sent them, he says.

Meanwhile, buzzards are circling. On Tuesday, Gazprom, the state-controlled energy giant, said it would bid for Yukos' main production unit in the Dec. 19 auction. Its decision, made on recommendation from Deutsche Bank, Gazprom's investment banking adviser, shocked some close to Yukos.

Deutsche Bank is essentially pushing Gazprom to scoop up the spoils of an illegal expropriation, Westman says.

"It just shows you how mercenary they can be, advising a state-controlled company to take over a private company and renationalize them," Westman says. "It's quite scandalous considering how the assets have come up for sale."

Also scandalous, Theede says, is the fire sale price the government has set as an opening bid for Yuganskneft: $8.65 billion for a 77% share of a unit others value at $13 billion to $20 billion.

He holds out hope authorities will cancel the auction and allow the company to pay its taxes with oil revenue or by liquidating assets on its own.

"Everything in Russia is speculation until it happens," Theede says.

(From USA today, 11.30.2004)

Yukos considers self-destruction

Shareholders in Yukos are considering liquidation or filing for bankruptcy, after deciding against a rescue plan for the embattled Russian oil firm.

The question will be put to a shareholders meeting on 20 December.

Some form of liquidation is being seen as a way to avoid selling a large part of the business, something threatened by the Russian Government.

Bankruptcy would allow the company to unfreeze its assets, and raise much-needed cash.

No anti-crisis plan could be implemented while Yuganskneftegas, Yukos's main production arm, remained up for auction, the company concluded.

The management team had hoped to agree an anti-crisis plan covering the period 2005-2009, for how it could keep the business running.

Shares in Yukos dropped 6.25% to $1.05 in Friday morning trading.

In a statement on Thursday night, the company accused the Russian Government of seeking to bring about its "total destruction".

The entire management board has stayed abroad since prosecutors summoned Yukos's finance chief for questioning.

"The actions taken against members of the Yukos management team in the last few days are more deliberate than the cycle of raids and demands placed on the company in the recent past," the company said.

"It is our belief that this extraordinary pressure... has specific aims: the removal of the management, the derailing of any settlement process with the Russian authorities and the total destruction of Yukos."

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Yukos executives 'flee' Russia

Embattled oil giant Yukos has accused the Russian government of seeking to bring about its "total destruction".

It emerged on Thursday that fear of arrest has forced all the firm's top executives to remain outside Russia.

The entire management board decided to stay abroad after prosecutors summoned Yukos' finance chief for questioning.

Shares in the company plunged 30% on Thursday and are now worth less than a dollar each, a fraction of the $16 they were worth in October 2003.

Emergency plan

Executives currently in London include Steven Theede, the company's American chief executive.

It is understood that senior executives will be travelling in Europe and the United States in the next few days but will return to Russia if necessary.

"The actions taken against members of the Yukos management team in the last few days are more deliberate than the cycle of raids and demands placed on the company in the recent past," the company said in a statement, issued from London.

"It is our belief that this extraordinary pressure...has specific aims: the removal of the management, the derailing of any settlement process with the Russian authorities and the total destruction of Yukos."

Earlier, chief financial officer Bruce Misamore had told the Financial Times he was summoned by the Russian general prosecutor's office for questioning but told them he was on a business trip.

"I am not going to sacrifice my life for [Russia's] political purposes," he said, speaking from London.

When asked if Mr Misamore had left the country for good, a Yukos spokeswoman told BBC News that he is "awaiting counsel from the US State Department over whether it is safe to go back for questioning [by the Russian general prosecutor's office]".

Mr Misamore later told the Associated Press that if the threat of arrest was removed, "then the management will be in Moscow".

The Prosecutor General's office confirmed that he was summoned for interview but declined to offer further details.

Some commentators have accused Yukos management of exaggerating their plight to gain sympathy.

Last week, the government said it would sell the company's main asset in December, with a starting price which may be as little as half its value.

Yukos managers are talking to stakeholders including " investors, financial analysts and advisers, sharing scenarios for going forward," said a company spokeswoman.

They are to draw up an emergency business plan for the company over the next four months.

This will focus on preventing accidents at facilities which may be sold as a result of the likely break-up of the company.

The company is continuing to pump out oil, with the managers of individual operating companies still in place.


Until now shareholders in the company, such as Mikhail Khodorkovsky and Platon Lebedev, have been the main focus of the government's ire. Both are in prison, with Mr Khodorkovsky currently standing trial on charges of fraud and tax evasion.

Yukos faces a massive tax bill of more than $20bn. But Yukos executives say the government's actions are politically motivated.

Russian president Vladimir Putin is believed to have disliked oligarchs like Mr Khodorkovsky meddling in politics.

His government last week approved a forced sale of Yuganskneftegas, Yukos' main production arm, for as little as $8.6bn when independent valuations of the business by investment banks have assessed its worth at $15bn-20bn.

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We must not forget why Yukos matters

Well, would you go back? After the treatment meted out to Yukos, any executive in whom public prosecutors were showing an interest could be forgiven for hesitating before returning to Moscow.

There is a tendency to write off Yukos's fate as an isolated case. President Vladimir Putin, it is said, has convinced investors his vendetta against Mikhail Khodorkovsky, the oil company's majority owner, will spread no further. And the booming Russian economy is simply too attractive to resist.

That is short-sighted. As Andrei Illirionov, Mr Putin's independent-minded economic adviser, remarked to the FT last month, the country risks jeopardising growth by drifting away from market reforms. If it were not for oil prices and other favourable external factors, the economy would be shrinking, not growing as it did last year by more than 7 per cent.

The Kremlin's use of the legal system to crush Yukos cannot easily be separated from the slow pace of liberal reform. Mr Putin knows he needs a strong economy to be a big global power but thinks this can be built through greater state control. He is wrong, as a fall in the oil price might one day make plain.

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Gov’t accused of interfering with economy

The World Bank believes that the Russian government should reduce its interference in the economy, the bank said in a report. According to the World Bank, a politically charged attack on the YUKOS oil company and the government's apparent indecision over the country's economic course have hampered investment in Russia.

The bank said the tax case against YUKOS and criminal charges against its jailed former CEO Mikhail Khodorkovsky had created unwelcome uncertainty among investors. At the same time, it attributed increased capital flight from the country to changes in the Russian Central Bank's exchange-rate policy.

The government would profit from signaling its intention to continue the active pursuit of promoting private business and investment as the primary engine of growth through better regulation and less unwarranted government interference in the economy, the report said. While admitting a significant increase in investment in Russia over the past few years, the World Bank said the level of investment remained low. Russia could achieve a very high level of investment, John Litwack, chief economist with the bank in Russia, said at the presentation of the report. Investment in the Russian economy is currently at about 20 percent of the GDP, which is low.

The investment climate would certainly profit from a clarification of the government’s role in the economy, the bank said. Improving investment climate is a key task for Russia. Mr. Litwack said uncertainty had a negative impact on the investment climate. He said the impression was that the government might get into your pocket at any time, and the government’s decisions were inconsistent.

According to the report, Russia’s GDP growth was slowing down. In the third quarter, it grew by only 0.4 percent, against 0.9 percent in the second quarter. The GDP growth slowdown could be explained by rising production costs for local manufacturers and uncertainties in the government's economic policies, the bank's report said.

The World Bank also recommended that the Russian government reduce taxes in the oil sector. Mr. Litwack said it was important that taxes and other regulating measures stimulated growth in the oil sector.

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Russians See Bureaucrats Profiting From Yukos Affair — Poll

Many Russians do not see any benefits for the country in the so-called Yukos case and expect the authorities to repress more top businessmen, reads a poll conducted by Yuri Levada’s Analytical Center. Poll respondents said that civil servants were pursuing their own financial interests while destroying the country’s largest oil company.

According to the poll, 41 percent of Russians believe that the civil servants are deliberately hampering Yukos’ tax debt repayment and forcing the company to the verge of bankruptcy. 68.6 percent of the respondents were sure that Yukos’ bankruptcy and sale of its assets would be conducted for the benefit of the civil servants and businessmen close to the authorities. The country and the people will only lose from it.

The percentage of people who think that the trial of former Yukos boss Mikhail Khodorkovsky and his close associate Platon Lebedev is biased grew by 6.5 percent in October compared with September. Now, 48.2 percent of Russians believe that the authorities are pressuring court officials to pass a guilty verdict.

Only 10 percent of Russians said they saw an attempt by the authorities to restore justice by prosecuting Khodorkovsky and Lebedev. 35.9 percent of those polled said the reason behind the process was the desire to pass the assets controlled by Khodorkovsky under the control of government-appointed managers. 28.8 percent said the situation was caused by the authorities’ desire to limit Mikhail Khodorkovsky’s political influence.

In October over 57 percent of those polled said they foresaw more similar legal moves against businessmen in Russia.


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Yukos hits back with legal action against Kremlin

The core shareholder group of the Russian oil company Yukos has launched legal proceedings against the Kremlin under the international energy charter and says it will sue the company that wins its main production unit at auction next month, in a last attempt to frighten off bidders.

The latest moves at Yukos came as oil prices again nudged $50 per barrel, although they fell slightly later in the day.

Yukos's back-tax bill has grown to more than $24bn (£13bn). It is expected to face ruin after the auction of Yuganskneftegaz on December 19.

With the starting price set at just $8.65bn, far less than the $14.7bn to $17.3bn valuation by the government-appointed investment bank Dresdner Kleinwort Wasserstein, the company may face further sell-offs to cover the tax bill. It has so far paid only $4bn.

Group Menatep, through which the jailed tycoon Mikhail Khodorkovsky owns a majority share in Yukos, has promised that the next owner of Yugansk will face lengthy litigation. "Their [the government's] mission is to destroy the company," said Robert Amsterdam, Mr Khodorkovsky's lawyer.

Yukos has scheduled an extraordinary shareholders' meeting for December 20 to discuss the company's possible bankruptcy, though company executives have suggested the auction may force Yukos into bankruptcy sooner.

Yukos shares fell more than 10% yesterday.

A source close to the company yesterday confirmed Russian agency reports that Yukos's mid and senior-level managers have had their homes searched at night as part of the federal investigation. A Yukos lawyer, Dmitry Gololobov, is also facing an arrest warrant.

US oil rose 63 cents in early trading to $49.52 a barrel after an explosion on one of Iraq's export pipelines and further fears of global supply shortages as winter approaches. It later fell 14 cents to $48.75 while Brent blend in London was down 4 cents at $44.85.

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Menatep acts to block Yukos sale

Yukos' main shareholder has filed a legal complaint to prevent the Russian government selling off the oil giant's main production unit, reports say.

Group Menatep, which owns 60% of Yukos' shares, used the Energy Charter treaty to bring the proceedings, Russia's Interfax news agency said.

Moscow wants to auction Yukos' seized unit, Yuganskneftegaz, to recover the firm's huge tax bills on 19 December.

Group Menatep's managing director said the move would amount to expropriation.

"We are talking about the expropriation of our property, and we intend to protect it through all possible legal means," the managing director, Tim Osborne, told Interfax.

The former boss of Yukos had earlier spoken out against government plans to sell the key unit.

Mikhail Khodorkovsky, who is currently in jail, said the move would be the "worst solution" to the problems facing Yukos.

Russian President Vladimir Putin is widely believed to have targeted Mr Khodorkovsky, Yukos' founder and former chief executive, after he used his fortune to fund opposition groups.

Some investors have expressed fears that Yukos assets will be sold cheaply to a buyer friendly to the Kremlin.

International litigation

A 76.7% stake in Yuganskneftegaz is to be sold for a minimum of 246.8bn roubles ($8.65bn), well below the $20bn which Yukos says the unit is worth.

The move is aimed to help settle Yukos' total tax debt of $24bn.

Group Menatep has in the past threatened to initiate international litigation over the proposed sale.

The Energy Charter is an international treaty that establishes a legal framework to protect investments in the energy sector in the countries of the former communist bloc.

Under the terms of the treaty, shareholders may initiate international arbitration to reclaim damages if an amicable agreement is not reached within three months.

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Khodorkovsky lambasts Yukos sale

Mikhail Khodorkovsky, the former boss of Yukos, has spoken out against government plans to sell the oil giant's main unit Yugansk.

The government is to begin selling the crucial production unit, seized by the authorities in order to pay Yukos' huge tax bills, on 19 December.

Mr Khodorkovsky, who is currently in jail, said the sale was the "worst solution" to the problems facing Yukos.

The tycoon also criticised the recent arrest of several Yukos officials.

Shareholder role

Yugansk is to be sold for a minimum of 246.8bn roubles ($8.65bn; £4.7bn), well below the $20bn which Yukos says the unit is worth.

Mr Khodorkovsky, who is still a major shareholder in Yukos, said the firm's investors and not the state should decide the company's future.

"By their actions, the authorities are damaging not only the company but also the state, minority shareholders and society as a whole," he said in a statement.

Mr Khodorkovsky claimed that the arrest of key Yukos officials in recent days meant its oil production facilities were now effectively controlled by the government.

"Authorities are consistently and demonstratively pulling Yukos managers out of the process by bringing absurd charges and claims against them," he said.

President Putin is widely believed to have targeted Mr Khodorkovsky, Yukos' founder and former chief executive, after he used his fortune to fund opposition groups.

Mr Khodorkovsky was arrested in October 2003 when masked and armed members of the security police force FSB stormed his private jet at an airport in Siberia.

He has been detained ever since. His trial over fraud and tax evasion charges began on 16 June.

Legal move?

Confirmation of Yugansk's sale came at the same time as Russian authorities demanded Yukos pay an extra $5.9bn in unpaid tax revenues.

This additional figure is for 2003 and comes on top of the $18.5bn the Kremlin is seeking for 2000-2002, of which Yukos has paid about $4bn so far.

The company's president, Steven Theede, called the proposed sale of Yugansk "a government-organised theft to settle a political score".

The firm has argued that Russian law forbids the authorities from selling Yuganskneftegaz - the unit's full name - which pumps 60% of Yukos' oil output.

"The sale is clearly illegal under Russian law, which states that non-core assets are to be disposed of first in tax settlement cases."

Buyers and sellers

With most of Yukos' bank accounts frozen, it says it is being prevented from settling the tax demands.

Instead, the government wants the money to come from the sale of Yugansk.

The rules laid down on Friday morning demand a returnable deposit of $1.73bn from bidders.

The rules lay down no limits on foreign bidders - but observers said there was little prospect of a realistic bid from abroad.

"The idea that a foreign oil company will buy Yugansk is a joke," said Martin Taylor, hedge fund manager at Thames River Capital in London.

"Due diligence alone would take three months."

Others speculated that lawsuits could yet come in from shareholders - and pointed out that the company's final tax bill was completely impossible to estimate.

State sale?

Yukos has frequently said its expects Yugansk will end up in the hands of a state-owned firm, effectively renationalising it, or to a supporter of President Vladimir Putin - either way, at a knock-down price.

For months, the likely valuation has been the subject of rumour.

At one point, Yukos said the government might try to sell it for as little as $4bn, while the government's own advisors set a minimum of $10.4bn but said that would be "overly conservative".

"The game starts now," said Chris Weafer, chief strategist at Moscow's Alfa Bank. "Its going to come to an end one way or the other."

But he added: "Why have an independent evaluator if you ignore what they say?"

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Yukos under the hammer at $8.6bn

Russia pressed ahead yesterday with controversial plans to break up the country's biggest oil company Yukos, setting a date of December 19 for an auction of its main production unit at a bargain basement starting price of $8.65bn (£4.88bn).

The government also hit Yukos with a new tax demand of $6bn for 2003 to add to the existing bill of $24.5bn.

Yukos chief executive Steven Theede immediately branded the proposed sale a "government-organised theft to settle a political score".

The announcement could lead to new uncertainty on world oil markets as the Russian government's 16-month legal onslaught against Yukos, which produces more oil than Libya, moves into a final decisive phase. The move ended months of speculation over whether the government would go ahead with threats to sell off the Siberian unit, Yuganskneftegaz, as payment for back tax charges.

The sale looks likely to open the way for greater state dominance over the oil sector if, as expected, state-controlled energy group Gazprom makes a winning bid. However, it could force Yukos to retaliate by filing for bankruptcy, a situation President Vladimir Putin has said he wants to avoid. The news sent Yukos shares tumbling 22% to $2.29.

Several minority sharehold ers said they were considering whether to sue over the sale and even Mr Putin's economic adviser Andrei Illarionov decried the move. Dresdner Kleinwort Wasserstein has issued a report to the Russian justice ministry putting Yugansk's value at up to $17.3bn.

Analysts said they doubted any foreign oil company would bid for the unit because of the potential legal risks involved. Yukos' core shareholder Group Menatep has threatened any potential buyer with "a lifetime of litigation". Last night a BP spokesman ruled out bidding, while Royal Dutch Shell refused to comment.

Yukos' management and its core shareholder group, headed by jailed billionaire Mikhail Khodorkovsky, have previously pledged to do their utmost to maintain output at the oil major. But yesterday Mr Khodorkovsky appeared to issue a veiled warning that he could no longer vouch for the stability of supplies.

"These actions are putting all the responsibility for the operations of very dangerous Yukos production facilities, for supplies to regions, for social benefits to workers on the government," he said in a statement issued via his lawyers. "Mikhail Khodorkovsky hopes that this responsibility is exactly what [the government is] striving for."

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Yukos lawyer faces arrest warrant

Russian prosecutors have issued an arrest warrant for Yukos' chief lawyer and arrested another executive from the oil firm on suspicion of embezzlement.

The Prosecutor General's office said it wanted to apprehend lawyer Nikolay Gololobov on suspicion of embezzling shares in the firm's Siberian oil unit.

Mr Gololobov, who is in London, said the charges were politically motivated.

Prosecutors confirmed the arrest of Alexei Kurtsin, an official at Yukos' Moscow headquarters, following a raid.

Prominent figure

Yukos, Russia's largest oil exporter, faces ruin after being asked to pay $18.5bn (£10bn) in back taxes dating from 2000 to 2002.

Mr Gololobov has been a prominent figure in defending Yukos against government charges that it deliberately evaded paying taxes.

Interfax, the Russian news agency, said that Mr Gololobov had been accused of appropriating shares worth 3bn roubles ($105m).

"I believe that charges against me are falsified and politically motivated to force me as a lawyer to give evidence against my clients-oil company Yukos and its shareholders," Mr Gololobov said in a statement.

Offices raided

Mr Kurtsin was arrested following a raid on a Moscow office on Wednesday.

Interfax said the official was alleged to have embezzled 22m roubles ($766,000) by passing the money off as charitable contributions for the disabled.

Yukos' huge tax bill could be set to rise again.


The Interfax agency quoted an unnamed official at the Russian tax ministry as saying that bailiffs could seek an additional $6bn in taxes from the firm for 2003.

Yukos could be broken-up in the face of a government backed onslaught against the company and its founder Mikhail Khodorkovsky.

Russian authorities had threatened to sell off the firm's main production unit, Yuganskneftegaz, if Yukos did not pay $6.2bn in tax by the end of Wednesday.

Yukos has said its sale could forced the firm into insolvency.

Mr Khodorkovsky is in custody, facing charges of tax evasion and fraud relating to business deals in the 1990s.

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Authorities Arrest Yukos Unit Manager

Authorities ratcheted up the pressure on the embattled OAO Yukos oil giant Thursday, arresting a manager at a key subsidiary and issuing an international arrest warrant for the company's chief lawyer.

On a day that saw the threat of new tax claims against Russia's biggest oil producer, law enforcement agents detained Aleksei Kurtsin, a manager at the subsidiary Yukos-Moskva on charges of embezzling about $766,000 disguised as charitable contributions for the disabled in a remote Russian region.

Later, the Prosecutor General's Office announced that it had issued an international arrest warrant for Yukos lawyer Nikolai Gololobov on charges of misappropriating billions of rubles worth of shares in 1998, Interfax reported. Gololobov himself confirmed the warrant from Britain where he is on a business trip, the news agency said.

"I think that the case has been resumed against me personally for the simple reason that I am Yukos' lawyer and have been working hard to protect the company's interests both in courts and law enforcement agencies," he was quoted as saying.

A Yukos spokesman, who asked not to be named, confirmed both reports Thursday evening.

"This is unexpected and reflects an escalation in the political pressure on the company," he said.

Gololobov had been expecting the announcement and has been working from London in recent months, the spokesman said.

The legal assault against Yukos and its jailed ex-CEO Mikhail Khodorkovsky is widely considered to be punishment for Khodorkovsky's political activities and an attempt for the state to reclaim lost influence in the strategically important energy sector by selling Yukos assets into Kremlin-friendly hands.

Yukos faces total tax claims of $18.4 billion for 2000-2002 and bailiffs have said they will sell off Yuganskneftegaz to foot the bill.

Russian newspapers reported that President Vladimir Putin's top economic aide said Yukos' main subsidiary, Yuganskneftegaz, could be used to cover some $14 billion in back taxes which Yukos has yet to pay.

The criminal cases against top Yukos officials comes just one day after a raid on Yukos-Moskva - the management branch for Russia's largest oil producer - and the reported search at Yukos's main subsidiary, Yuganskneftegaz, which already faces multiyear, multibillion-dollar tax bills of its own.

On Thursday, Yukos' massive back-tax burden only looked set to grow.

Citing an unidentified source in Russia's tax authorities, the Interfax news agency reported that a new back tax bill for 2003 would slightly exceed the amount of its $6.76 billion claim for 2002.

According to Interfax, the source said Yukos' other major production subsidiaries, Samaraneftegaz and Tomskneft, as well as the Achinsk refinery, could soon face back tax bills of their own for 2001.

Tax authorities have already presented Yuganskneftegaz with a bill for $2.35 billion for that year.

Yukos was not the only Russian major oil producer reportedly facing new tax bills on Thursday.

A source in the Tax Ministry told Interfax that Russia's No. 5 producer Sibneft had been slapped with a tax claim for 21 billion rubles ($732 million) with respect to 2000-2001, though confirmation could not be obtained from the company or the Tax Ministry.

Sibneft is controlled by oil tycoon Roman Abramovich, the billionaire owner of Britain's Chelsea soccer club. Abramovich is thought to have close ties to the Kremlin and notification of a $1 billion tax claim sent to Sibneft in March this year, has yet to be enforced.

"There's a big difference between Sibneft's treatment and the conduct we've seen with Yukos," said Edward Parker, director in Sovereigns Group of international ratings agency Fitch Ratings, according to Dow Jones Newswires. Yukos' bank accounts and assets have been frozen.

"In the case of other oil companies, these are tax bills they owe and are given scope to pay," Parker said.

Fitch also on Thursday upgraded Russia's sovereign rating to investment grade. While Fitch said the Yukos affair was negative, it also noted that fears of widescale property distribution in the wake of the campaign against the oil company had not materialized.

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'They show up to search and we don't know why'

Yukos, the embattled Russian oil and gas company, was raided for the 150th time yesterday by state prosecutors and the company warned that oil exports would be hit if it was driven to the wall by the Russian government.

Officials entered Yukos's headquarters in Moscow and the offices of its main production operation Yugansneftegaz in Siberia as part of the government's pursuit of Yukos for $18.5billion (£9.96billion) in taxes.

Steven Theede, Yukos's chief executive, confirmed the raid during a visit to London yesterday. Speaking just 45 minutes later, he said he had no idea what the officials were looking for.

He said: "It is really becoming just farcical. There is nothing left to take. They have all the information. Today they were looking around our financial floors."

Mr Theede, 52, said Yukos had been raided 150 times since the end of June when prosecutors first started to press for the repayment of back taxes.

The prosecutors always came without warning, he said. "They just show up, they want to search and we don't know why.

"It is extraordinary. Sometimes it is very businesslike, sometimes very intimidating."

Yukos's options are narrowing. The company's hareholders will vote next month on whether to put it into bankruptcy. This would let it sell off assets - half of which have been frozen by the state - to pay part of the bill.

However, it is a risky business. Mr Theede said Yukos's senior managers face criminal charges if bankruptcy is declared too early and criminal charges if it is declared too late.

The company has paid just $4billion of the $18.5billion total tax bill for 2000, 2001 and 2002 (the tax bill represents 67pc, 100pc and 105pc of Yukos's total revenues in each of those years). However, the government has not yet filed a claim for 2003.

Mr Theede warned that if Yukos collapsed then its oil exports would suffer, potentially driving up global oil prices. Yukos supplies 2pc of world oil production.

"If and when we finally hit the wall and our suppliers won't give us credit, there is a reasonable chance that production will begin falling," he said.

He complained bitterly that Yukos was being pursued for political and not business reasons, because of the anti-Vladimir Putin political activities of its biggest shareholder and former chief executive, Mikhail Khodorkovsky.

The Yukos chief said that the company could pay the tax bill, as long it could be sure there were no more shocks to come. Until then, Yukos was living on the edge. "We are working on a day to day basis," he said.

Mr Theede added that Yukos's travails could act as a disincentive for Western companies to invest in Russia.

He said: "I don't think that the Yukos situation has helped Russia's image. Most people I talk to believe this is not about taxes.

"Every company that is investing in Russia wants to believe that what is happening to Yukos is specific to our company and will not happen again. But if it could happen to Yukos, it means it could happen again."

Russia has had to reassure investors of the independence of its judiciary.

Mr Theede said: "If the judiciary can be used as a tool of government rather than as a fair and independent body like in most Western countries then there is the chance that it can happen again."

HERE

Russian authorities pile up yet more pressure on Yukos

Russian authorities piled up yet more pressure on the embattled Yukos oil giant, issuing a warrant against its chief lawyer and promising to increase its multi-billion-dollar tax bill.

Dmitry Gololobov, the firm's chief attorney, told Interfax that a Russian court sanctioned his arrest on November 12 following a request from the general prosecutor's office, which has been leading the case against Yukos.

Interfax said Gololobov was currently in Britain.

The prosecutor's office said it had issued a warrant for Gololobov on suspicion of embezzling three billion rubles' (104.5 million dollars') worth of shares in a Yukos subsidiary, the Eastern Oil Company, Interfax reported.

Meanwhile an unnamed official with the tax ministry told Interfax that the Yukos tax bill, which currently stands at 18.4 billion dollars for the years of 2000-2002, is likely to jump by at least another six billion dollars as the authorities turn their attention to back debt of 2003.

"They used the same schemes (as during 2002 for which it is alleged to have underpaid 6.7 billion dollars in taxes), but the volume of production and exports increased, so the sum of the tax debt will increase," the official said.

The official also said that the tax burden will increase further as authorities issue additional tax bills to Yukos subsidiaries.

"We have only presented Yukos with (taxes) that concern the head company," the official said. "We are separately checking subsidiaries."

Separately, a chief office manager at Yukos's main subsidiary, Yukos-Moscow, was arrested on suspicion of stealing 22 million rubles (766,550 dollars) from the firm, Yukos officials and Interfax reported.

Yukos has been under fire from prosecutors for most of this year in what many analysts say is a politically motivated case that aims to disassemble the company as punishment for the political ambitions of its founder, Mikhail Khodorkovsky.

Thursday's news further pressured Yukos shares, which fell by 1.5 percent on the dollar-denominated RTS Index. The shares closed at 2.97 dollars, down more than 80 percent from their one-time high of 16 dollars prior to Khodorkovsky's arrest.

The capitalization of Russia's largest oil producer, once considered its most transparent and best-run and an investor darling, today stands at 6.8 billion dollars, or 37 percent of its outstanding tax bill.

Khodorkovsky has been in jail since his arrest on October 25, facing seven counts of fraud and embezzlement that could land him in jail for 10 years.

The news came a day after tax authorities gave the firm an impossible demand to pay up billions of dollars within hours, raising the spectre of a rapid fire sale of its main production asset.

Investigators descended on the Moscow headquarters of Yukos, a company spokesman told AFP, with another simultaneous raid reported at the Siberian offices of its main production unit.

11/18/2004 - 18:39 GMT - AFP

Father to the Oligarchs

Anatoly Chubais is rich by Russian standards, but not as rich as the billionaires created by his privatisation reforms. The lurch into capitalism won him enemies but will history forgive him?

By Arkady Ostrovsky
Arkady Ostrovsky is an FT correspondent in Moscow.

Few people in Russia attract as much public hatred and as much private admiration as Anatoly Chubais - the red-haired and charismatic father of Russian capitalism.

In 1992 Chubais, deputy prime minister in charge of privatisation in the first government of Boris Yeltsin, launched the biggest and fastest sale of state assets in history. It put 80 per cent of the economy into private hands, made a few Russians very rich, while most remained poor. Naturally, many of the latter blame the former for their continuing poverty. And they blame Chubais for making it so.

His name became associated with everything that went wrong with Russian capitalism. As Yeltsin famously said before firing him from the government in 1995: "It is all Chubais's fault." (This did not stop Yeltsin from appointing Chubais his chief of staff a few month later and keeping his friendship to this day.)

The man who privatised Russia and created a new class of billionaires - the "oligarchs" - does not appear in public much now. I meet him in a private dining room in the exclusive Restaurant Count Orlov, after his bodyguard has checked it for any security threats. He has good reasons to be careful.

One of his "creations" - Mikhail Khodorkovsky - is in prison awaiting trial for fraud and tax evasion. Khodorkovsky's company Yukos, once the showcase of Russian capitalism, is being stripped of its assets - not by greedy oligarchs, this time, but by the Russian state. Two other oligarchs, Boris Berezovsky and Vladimir Gusinsky, are in self-imposed exile, and the rest -
including Roman Abramovich, the owner of Chelsea Football Club - are keeping their heads down in fear of reprisals.

Chubais still has real power. He is the head of Unified Energy System, the Russian electricity monopoly. Unlike any ordinary manager who would try to preserve his company and with it his own status, Chubais is dismantling it - as one of the last pillars of central planning.

The father of billionaires, he is only a millionaire himself. He is not among Russia's 100 wealthiest men, although he is well off compared with most Russians - last year he declared an income of $1m. Even the most venomous-tongued admit that Chubais did not privatise Russia for personal gain. "Chubais is a Bolshevik and people like that work for an idea, not for bribes," one oligarch told me.

Chubais does not do small talk. We have a brief discussion about current politics in Russia - hardly an uplifting subject - and for all his power, Chubais is not on the ascendant team. He did not support the nomination of Vladimir Putin as president in 2000; he was the only business leader who spoke out in defence of Khodorkovsky after his arrest; and his record as the creator of the class now regarded with extreme disfavour by the president and his circle deprives Chubais of the support that has always been more important than formal legal or constitutional guarantees. Chubais shrugs it off. It is not that he is unaware of the risks, but he has a higher tolerance of risk and danger than most.

"I know of at least three contracts that were taken out on me. I know all the details and the names of those who were to carry them out. The last contract was taken out 18 months ago. It was on purely political grounds - hatred that I sold out Russia. When you go home every night and think that there may be an assassin around the corner with an anti-tank launcher, your
perception of political risk changes. Yes, the risks today are perhaps a few percentage points higher than they were in 2000. But between 1992 and 1999 these risks were several times higher."

To lift the mood, he orders a bottle of wine. He knows the dinner is on the FT, but, not having privatised it, he makes no assumptions about the paper's wealth. He asks politely: "Would it be all right to order Chateau Potensac 1995 - at $120 a bottle?" It is one of the cheaper bottles on the wine list and I appreciate Chubais's tact and manner. The restaurant is out of oysters, so we settle for vegetable salad, followed by osso bucco for Chubais and rack of lamb for me.

Chubais sees his achievement not merely in creating a class of private owners in Russia after 70 years of communism. More important is his destruction of the financial foundation of the communist regime itself. "We were perfectly aware that we were creating a new class of owners. The privatisation was not a question of ideology or some abstract values; it was a question of a real, political daily struggle.

"The red directors had enormous power - political, administrative, financial. They were invariably linked to the Communist Party. We had to displace them and we knew we did not have much time. The count was on days, not months.

"We did not have a choice between an 'honest' privatisation and a 'dishonest' one, because an honest privatisation means clear rules imposed by a strong state that can enforce its laws. In the early 1990s, we had no state and no law enforcement. The country's security service and police
were on the other side of the barricades. They were taught the Soviet criminal code, which implied three to five years in prison for private business activity. Our choice was between bandit communism or bandit capitalism."

Chubais makes no excuses and feels no remorse over the most controversial privatisation of all - the "loans-for-shares" deal, in which he handed control of Russia's largest and most valuable assets to the group of tycoons in return for loans and support in the 1996 election for the then
ailing Yeltsin. Truth be told, the oligarchs would have supported Yeltsin anyway. But Chubais argues that, by giving them control over enterprises with hundreds of thousands of workers, he was giving them real administrative resources to influence the outcome of the elections while
destroying the main support base of the communists.

"We had no choice. If we did not have the loans-for-shares privatisation, the communists would have won the 1996 elections and this would have been the last election Russia ever had, because these guys do not give up power easily."

A communist victory would also have cost Chubais his life. "I was one of the top targets for the communists, after Yeltsin." Ironically, soon after Yeltsin's election, Chubais also became a top target of the oligarchs, who had him fired for refusing to play by their rules.

I suggest that loans-for-shares was a Faustian bargain that haunts Russia to this day.

"At the time I did not entirely understand the price we would have to pay," says Chubais. "I underestimated the sense of deeply rooted injustice it would leave in people.

"We finished the privatisation in 1997-1998. Five years on people still reject any rational arguments that the oligarchs did not just steal these enterprises but made them work better, that they started to invest and pay salaries on time, that taxes they pay to the budget help to pay pensions. But most people don't want to hear this because the feeling of injustice of
the privatisation works on the subconscious level."

Chubais says this is one reason why the Union of Right Forces, a liberal conservative party he helped to set up, lost in parliamentary elections last year. It is also a reason why democrats in Russia are associated with impoverishment of the country, and why the imprisonment of Khodorkovsky and the assault on Yukos has been welcomed by millions of ordinary Russians who saw it as a well-deserved punishment.

"The institution of private property is not just a set of laws, or a class of owners who have real power - it is 146 million people who must agree that private property is sacred. I doubt this can happen in one generation."

As the waiter brings tea with honey, I ask Chubais if he believes that capitalism is not suitable for Russia, with its popular disdain for the rich and belief in the moral superiority of the poor. "You know, I've re-read all of Dostoevsky over the past three months. And I feel nothing
but almost physical hatred for the man. He is certainly a genius, but his idea of Russians as special, holy people, his cult of suffering and the false choices he presents make me want to tear him to pieces.

"At the start of our reforms, some of my opponents argued that Russia's century-old traditions make it less suitable for capitalism than Europe. Perhaps. But what are the choices in the economy? Central planning, socialism - thank you, we had enough of it. Capitalism may be harder to establish here, but I am convinced it is the only way. The market values have taken root here and the growth of the economy is the proof of that.

"My opponents tell me that the privatisation was wrong, that it was against the interest of the people. But I did not do it for the people of my generation. I did it for our children. I am convinced that in a generation or two, people will look at us differently, and the sense of injustice will pass in those who will come after us."

He leaves in his black, bullet-proof BMW with a flashing blue light and a one-car escort. I think of the final lines of Three Sisters by Chekhov - someone else who disagreed with Dostoevsky: "Time will pass, and we shall depart forever. We shall be forgotten. But our sufferings will turn to joy for those who live after us. Peace and happiness will dwell on earth, and people living now will be blessed and spoken well of."

It may be a long wait.

Restaurant Count Orlov, Moscow
2 x salad Bulvar
1 x osso bucco
1 x rack of lamb
1 x Chateau Potensac 1995
1 x mineral water
2 x tea
Total: Dollars 230

(From The Financial Times, 13.11.2004)

Ousting of Russian law chief 'saved Chelsea boss billions'

From Dominic Kennedy in Moscow

RUSSIA’S prosecutor-general was preparing a case to seize back Roman Abramovich’s oil company over an allegedly rigged privatisation while investigating a string of other Kremlin scandals when he was ousted from office.
Mr Abramovich, the oligarch and owner of Chelsea Football Club, risked losing the prime source of his £7.5 billion fortune as investigators looked into his financial and political links at a pivotal stage of his high-flying career. The prosecutor was acting on a report from Russia’s highest auditing body which said that the privatisation, among others, should be declared invalid because of multiple legal violations.

Mr Abramovich was also being investigated over allegations of unpaid company tax and the possible misuse of a $4.8 billion loan from the International Monetary Fund to Russia.

In a curious twist, The Times has established that some documents purporting to link the oligarch with the loan scandal are crude forgeries. The forgers’ motives remain unclear.

The investigations were dropped after Yuri Skuratov, the Prosecutor-General, was removed from office following an apparent “honey trap” operation. A videotape surfaced showing a man resembling the middle-aged official in bed with two young women. The grainy video failed to show the man’s facial features although the tubby physique might have been his.

The episode casts fresh light on Mr Abramovich’s fortune, his relationships with Boris Yeltsin and Vladimir Putin, and the jealousies provoked by his swift rise to influence and fortune.

Mr Abramovich’s fate stands in contrast to Mikhail Khodorkovsky, Russia’s richest oil baron, who challenged President Putin while the Chelsea football club owner remained a Kremlin loyalist. Mr Khodorkovsky is now on trial for alleged tax irregularities and has lost control of his Yukos company.

The disclosure that a prosecutor almost brought a case to renationalise Sibneft shows how vulnerable Mr Abramovich’s empire is to the Kremlin’s mood.

Asked about the former prosecutor-general’s disclosures, Mr Abramovich issued a statement to The Times through his lawyers Skadden, Arps, Slate, Meagher & Flom. “The allegations concerning Mr Abramovich have been strongly denied,” they stated. “It has been pointed out that allegations of this nature have been made before and no reliable evidence supporting them has been produced. Indeed, certain of the allegations are plainly based upon forged documents and made by people with obvious personal or political grudges.”

A tale of sex, intrigue and blackmail was divulged by Mr Skuratov, now a law professor at Moscow State Social University. “It might be that today England regards Mr Abramovich as a good businessman because he was very smart to choose such an investment resource as a football team, so he now is a good guy for all the football fans in Great Britain,” Mr Skuratov said.

“I am afraid that these so-called ‘New Russians’ will soon buy everything that Great Britain has, if their Government continues to be so passive.”

Sibneft, combining Russia’s finest refinery with a prime oil production company, was created by President Yeltsin’s decree in August 1995.

In December 1995 a tender was held by the cash-strapped Kremlin for a substantial loan. President Yeltsin offered as security a 51 per cent stake in Sibneft. Companies controlled by Mr Abramovich or his partners won the tender at a price of just over $100 million. Higher bidders complained that they were excluded.

The Government’s 51 per cent shareholding was sold by auction in May 1997. A company part-owned by Mr Abramovich was the winner.

The Audit Chamber, in a 1998 report criticising four major privatisations, said the allocation of Sibneft shares involved blatant legal violations and should be considered invalid. The shares had been worth $2.8 billion, so the state lost $2.7 billion.

“The prosecutor’s office prepared the official lawsuit in order to terminate this transaction,” Mr Skuratov said. “There was no open tender. There was rather a conspiracy back at that period of time. We prepared all the documents (to) prove that the transaction carried out was void. However, I had not enough time to do this.”

Mr Skuratov said that he examined Sibneft’s premises over alleged tax evasion but the Kremlin halted the investigation. A third probe into the oligarch involved the possible misuse of an IMF loan to support the rouble in 1998.

The Times has already disclosed that the Swiss investigated whether Mr Abramovich might have channelled IMF money through their country but dropped the case when Russia declined to help.

The oligarch’s spokesman has pointed to statements by the IMF and the Russian Central Bank saying a PricewaterhouseCoopers audit had determined that the IMF funds were used properly.

Mr Skuratov believes Russia refused to assist Swiss investigators “because high-ranking officials were involved”. Mr Skuratov said: “When the governmental circles felt I went too close to the President, to Mr Abramovich (and others) there was an illegal criminal investigation against me and I was suspended so I didn’t have time to finish what I had begun.”

Mr Skuratov was alerted to possible corruption at Russia’s highest levels by Carla del Ponte, a Swiss investigator, now chief United Nations war crimes prosecutor. “The fact that we both left our offices naturally had a negative impact on the co-operation between the prosecutors’ offices and basically the investigations were not finished,” he said.

A member of the Russian Parliament passed Mr Skuratov papers purporting to prove Mr Abramovich was linked to the loan’s misuse. He said that he ordered an examination of the data contained in the documents. “However I don’t know the results of this examination,” Mr Skuratov said.

The Times has seen the papers and it is clear that some, including a Foreign and Commonwealth Office letter filled with misspellings and bad grammar, are forged.

As Mr Skuratov probed allegations of wrongdoing among powerful figures in the Kremlin, Mr Yeltsin suspended him.

Hours after the Russian Parliament refused to confirm Mr Skuratov’s dismissal, in March 1999, television viewers were shown the three-in-a-bed film. “I knew that this video existed before it was aired and Mr Yeltsin tried to use it to put pressure on me so that I would agree to resign,” Mr Skuratov said. He neither admits nor denies being the man on the video but suggests the person might be a lookalike.

He blames Mr Putin, then head of the KGB’s internal successor, the FSB, for the film: “They were thinking in panic what to do in order to make me leave and they chose this way.” The prosecutor was accused of accepting prostitutes as bribes but the case was dropped.

Press coverage at the time linked the removal of the prosecutor to his inquiries into alleged corruption by senior officials renovating the Kremlin.

The Chelsea owner’s lawyers told The Times: “Mr Abramovich had nothing to do with Mr Skuratov’s improprieties, nor with the fact that they were exposed and publicised. He was also not involved in Mr Skuratov’s dismissal from office.”

Mr Skuratov was prevented from standing in elections last year on a technicality. The Organisation for Security and Co-operation in Europe complained that the ban on Mr Skuratov “suggested an inconsistent and selective” use of rules.

Observers have wondered why Mr Abramovich has thrived while Mr Khodorkovsky is on trial. “I believe that Mr Abramovich is exempt of Russian laws,” Mr Skuratov said.

Challenges have persisted to Sibneft’s privatisation. In 2003 a Duma member asked the Prosecutor-General to investigate Mr Abramovich. But Alfred Kokh, the official responsible for privatisation, said that Sibneft “was one of the most painless privatisations and least scandalous”.

(From Times Online, 12.11.2004)

Sibneft still hot despite freeze

By Nic Hopkins

SIBNEFT, the Russian oil group controlled by Roman Abramovich, remains a takeover target of Western oil companies even after prosecutors in a Moscow court this week froze a large stake in the company held by its troubled rival Yukos.
Analysts said that freezing Yukos’s $6 billion (£3.2 billion) stake in Sibneft, a remnant of its failed attempt to merge and create the world’s fourth-largest oil producer, would not deter companies such as France’s Total and ENI of Italy from weighing potential alliances and mergers with Sibneft. “Sibneft’s owners have stated their long-term intention is to eventually merge or sell the business, and that does not seem to have changed in the past few days,” said Paul Collison, a senior analyst at UBS Brunswick in Moscow.

Sibneft is thought to have previously held talks to sell up to 50 per cent of the company to Total. Mr Collison said that a takeover or merger of Sibneft could occur within the next three years.

On Wednesday, Russian prosecutors froze Yukos’s stake with the threat of its confiscation from the oil giant, which is facing tax bills of almost $18 billion (£9.7 billion). The 34.5 per cent stake could be confiscated if it is proved that Yukos acquired it with illegal funds.

The proposed merger between Sibneft and Yukos unravelled after Mikhail Khodorkovsky, the Yukos chief, was arrested last October. Mr Khodorkovsky, who is being held in isolation at a Moscow prison, is on trial for charges of tax evasion and fraud.

The battle between the Government and Yukos is perceived as an attempt to thwart Mr Khodorkovsky’s political ambitions, rather than as a simple case of tax evasion.

(From Times online, 12.11.2004)

TNK-BP faces tax claims

MOSCOW - Russian tax agencies have filed tax claims against TNK-BP for 2001, totaling about RUR2.5bn ($87.2m), the company's press service reported to RBC.

According to a representative of the company's press service, the tax check dealt with operations of the Tyumen Oil Company JSC for 2001, and it was a regular check. The press service underscored that the company was rendering assistance to the tax agencies and was providing them with every document necessary within the framework of the check. At the same time the company pointed out that the amount of the claims was not final, and it could be corrected. TNK-BP has already prepared objections to the report on the tax check, and therefore, the final sum of claims has not been determined yet.

It was reported in the media earlier that Russian tax agencies were conducting checks of operations of some oil companies for 2001. According to unofficial information, such checks are being conducted at such companies as Rosneft, Slavneft, Sibneft and Tatneft.

(In The Russia Journal, 12.11.2004)

The Prosecution's Defense-Friendly Witnesses

The prosecution has alleged that the defendants committed crimes in the 1994 privatization of Apatit, a fertilizer production company located in the Murmansk Region, the 1995 privatization of the Samoilov Research Institute for Fertilizers, Insecticides, and Fungicides (NIUIF), and in evading the payment of taxes by YUKOS oil company through subsidiary firms registered in special reduced tax havens. Furthermore, the prosecution is attempting to link the failure of the defendants to fulfill the investment plan agreed to at the time of Apatit's and NIUIF's purchase to criminal charges of illegally privatizing Apatit and NIUIF.

As of October 5, 2004, the prosecution had called more than 50 witnesses. Remarkably, only three of these witnesses have given testimony that could be construed as even somewhat supportive of the prosecution's case, while almost half have provided testimony supportive of the defense. The witnesses that have been called by the prosecution are listed below in order of their appearance before the Meshchansky Court.

SEE THE SCORE CARD HERE !

Settle Yukos

The Russian authorities are moving in for the kill in their pursuit of Yukos, the oil group, and its founder Mikhail Khodorkovsky. Last week's news that the tax office is claiming an extra $10bn in unpaid taxes, on top of the $7.5bn already sought, increases the financial pressure on Yukos to breaking point. Meanwhile, Mr Khodorkovsky's lawyer disclosed his client faced up to 25 years in prison if he were convicted of multiple frauds with which he is charged.


The next few weeks are crucial. Yukos has called an extraordinary general meeting for next month to consider filing for bankruptcy; the verdict in Mr Khodorkovsky's fraud case is expected in late January; in the meantime, Yukos shareholders are launching international legal action against the Russian authorities.

It now seems beyond doubt that the Kremlin is not interested in seeing Yukos pay its taxes over time and survive. The authorities want to break the group and grab its assets, headed by Yuganskneftegaz, the key oil producer. It is surely no coincidence that the total $17.5bn tax claim roughly equals Yuganskneftegaz's estimated value.

Kremlin officials have said they see a greater state role in running the commanding heights of the economy, especially energy. The stage has been set for the transfer of Yukos's assets to Gazprom, or another state-controlled company.

Mr Khodorkovsky's personal fate is - grimly - far less clear. If he is very lucky, he will be exiled. If not, he will face long years in jail.

The authorities had good reasons for the prosecution and the tax investigation. Mr Khodorkovsky amassed vast wealth in murky circumstances and paid little tax. But so did other oligarchs. Mr Khodorkovsky was chosen because he was the richest and politically the most outspoken. That decision was arbitrary and immoral.

Russia today is a different country from 15 months ago, when the attack on Yukos began. After the awful tragedy of Beslan, the Kremlin is exploiting the climate of fear to brand its enemies as terrorists. It is most unlikely Mr Putin could now drop the Yukos case.

But, even at this late stage, he should look for compromises - on the treatment of minority shareholders, or the timing of tax payments. He may not care about the damage done to Russia's reputation for human rights or the rule of law. But he does care about the harm done to Russia's investment climate. Russian business oligarchs, who were starting to repatriate capital before Mr Khodorkovsky's arrest, are sending funds abroad again. International investors have been investing in oil and gas. But the prices paid would be much higher without the fears generated by the Yukos affair. A show of leniency now would not cancel out the wrongs done to the company or to Mr Khodorkovsky but it would limit the damage done to the economy. Otherwise, the international lawsuits alone could take years to resolve.

(From The Financial Times, 8.11.2004)

Yukos' Sibneft Shares Frozen Again

By Valeria Korchagina
Staff Writer

A Moscow court again froze Yukos' 34.5 percent stake in Sibneft last week, the embattled oil major said Wednesday.

"It has been arrested twice before as part of tax evasion investigations against the company for 2000 and 2001. And those arrests have not been lifted yet," Yukos spokesman Alexander Shadrin said.

In the notice served to the company, however, Yukos was told that the latest arrest is part of a criminal investigation, Shadrin said.

The arrest could mean that the stake in Sibneft -- estimated to be worth $6 billion -- could be seized by the state if prosecutors prove that it was initially acquired with funds earned through criminal means, Vedomosti reported Wednesday, citing an unnamed official familiar with the case.

By the end of 2003, Yukos had gained control of some 92 percent of Sibneft as part of a now-defunct merger between the two oil giants.

The merger, which has yet to be fully reversed following Yukos' change in fortunes, was completed in several stages, in which Yukos acquired different chunks for cash or share-swap schemes.

The 34.5 percent stake was bought for $3 billion in cash and Yukos treasury stock.

Following the arrest of Yukos founder Mikhail Khodorkovsky last October, the merger began to crumble.

Khodorkovsky has since been imprisoned on tax evasion and fraud charges, while Yukos has been besieged by back tax claims for more than $18 billion for 2000, 2001 and 2002.

The companies have been trying to negotiate a divorce settlement, and Yukos has already canceled a share issue for a 57.5 percent stake in Sibneft.

But even if an agreement on the remaining stake is found, nothing can be done until the arrested shares are unfrozen.

"Certainly this latest arrest is not going speed up the divorce. But essentially it does not change much since the two previous arrests are still firmly in place," a source in Yukos said Wednesday.

Sibneft was not commenting on the most recent arrest of shares, spokesman John Mann said Wednesday.

Sibneft directors Tuesday agreed to hold the company's annual shareholders meeting on Dec. 27.

Yukos shares closed down 4.76 percent on the RTS, after a day of gains on Tuesday fueled by speculation that the oil major's core shareholder, Group Menatep, would sell its 61 percent stake to save the company from ruin.

The sheer size of the tax claim could force the company into technical bankruptcy because of the negative ratio between the company's value and the size of its tax debt.

Yukos has so far paid off some $3.5 billion of the tax bill.

The company could cough up enough cash to cover the entire claim in the period of a year, provided the state provides such an opportunity and if the bill itself does not grow anymore, Yukos CEO Steven Theede said in an interview published by Expert magazine Wednesday.

"If we are talking about the sums that are known today, we could meet the claims within a year," Theede said.

With nearly all its accounts arrested, it was not clear how Yukos would come up with more than $14 billion in outstanding back taxes and penalties.

In a separate development, Yukos exploration subsidiary Sakhaneftegaz announced Wednesday that the unit's former director, Afanasy Maksimov, accompanied by armed men, seized company offices in Yakutsk last week.

Maksimov was ousted by Yukos management earlier this fall.

Yukos spokesmen were not able to provide any details on reasons behind the takeover.

Sakhaneftegaz has been largely left untouched during the month-long legal onslaught on Yukos.

The unit featured in only one complaint out of a multitude filed by different state bodies against Yukos and its subsidiaries.

Local authorities alleged a year ago that "unsystematic couplings" between rabbits took place at a Sakhaneftegaz farm.

The charges, however, seem to have been forgotten about.

"Maybe this time [the authorities] are trying out something more serious than just randomly mating rabbits," a Yukos official said Wednesday.

(From The Moscow Times, 11.11.2004)

Yukos’ 34% Stake in Sibneft Frozen by Moscow Court

Russia’s embattled oil giant Yukos said on Wednesday, Nov. 10, that a Moscow court has frozen its 34.5-percent stake in Sibneft Oil Company, thus halting a de-merger process that would provide Yukos with the cash it needs to settle massive back tax bills.

A Yukos official told France Press agency that the court ruling took effect a week ago, but declined to comment further.

Sibneft, controlled by Russian business tycoon Roman Abramovich who owns Chelsea Football Club in London, is in the process of unwinding a merger with Yukos. The merger was agreed upon before the Russian authorities launched a ferocious campaign against the country’s top oil producer and exporter last year.

While based in London Abramovich is believed to have kept on good terms with the Kremlin, unlike Yukos founder and former CEO Mikhail Khodorkovsky, who has been in jail for more than a year, facing a trial on counts of fraud and tax evasion.

The ruling by Moscow’s Basmanny Court was made on Nov. 3 means that Yukos cannot return the shares to Sibneft. This in turn could open the way for their appropriation if it can be proved they were acquired with illegal funds, Russian business daily Vedomosti wrote.

A prosecution official, quoted by the paper, said that the decision to freeze Yukos’ stake in Sibneft was linked to a criminal case for tax evasion against the head of Yukos’ accounting unit. However, a source in the United Financial Group brokerage firm said: “It is possible that the prosecutors’ actions have been inspired by influential enemies of Roman Abramovich or other principal Sibneft shareholders.” At the same time it was noted that a more likely interpretation is “that it is simply designed to ensure the destruction of Yukos”.

Yukos has already paid off $3.6 billion in back taxes for 2000, but faces larger bills for 2001 and 2002. The oil company stood to get back $3 billion in cash that it paid for 20 percent of Sibneft’s shares.

(From Moscow News, 10.11.2004)

Berlusconi linked to Yukos rescue plan

Carolynne Wheeler in Moscow
Wednesday November 10, 2004
The Guardian

Shares in troubled Russian oil company Yukos edged up yesterday on signs that its controlling shareholder, Group Menatep, may be ready to relinquish its hold.
The Russian daily Izvestia reported yesterday that Yukos chairman Viktor Gerashchenko was suggesting that Menatep may sell its 61% stake as a way of resolving its conflict with the Kremlin.

The company is facing a tax debt of $17.6bn (£9.5bn), which is expected to drive it into bankruptcy. Its former CEO and main shareholder, Mikhail Khodorkovsky, is on trial for fraud, tax evasion and embezzlement charges that are widely seen as a move to stifle his political ambitions.

"The problem can be solved if Group Menatep sells its share in the oil company," Mr Gerashchenko was quoted as saying. He would not say who might buy the stake, but hinted that Italian prime minister Silvio Berlusconi was among those interested.

Yukos shares jumped 11% in the first three minutes of trade on the Moscow Interbank Currency Exchange yesterday, finishing up 5% on the RTS and 8.22% on Micex.

Menatep spokesman Yury Kotler refused to comment on the report, though a source in the company said Mr Khodorkovsky, who controls Yukos through Menatep, offered to dispose of his shares months ago and got no response. Analysts have maintained that the only way to head off Yukos's bankruptcy and protect minority shareholders is for Mr Khodorkovsky to divorce himself from the company.

"As the game of 'chicken' between the state and Menatep has progressed, it has become clear that the state will not flinch from destroying Yukos completely if Menatep refuses to leave. So faced with the certainty of their equity in Yukos being wiped out, Menatep might change tack on the grounds that anything is better than nothing," wrote Christopher Granville and Dmitry Dmitriev at United Financial Group brokerage, cautioning that the new owner would have to secure Kremlin approval.

(From The Guardian, 10.11.2004)

Swiss Prosecutors Probed for Freezing Yukos Accounts

The Swiss Federal Prosecutor’s Office is being investigated for its role in freezing assets linked to Russia’s Yukos oil company, after complaints surfaced that Swiss justice authorities leaked information about the accounts.

Yukos’ main shareholder, Menatep, has accused the Swiss justice authorities of a breach of official secrecy rules, the Swissinfo news agency reported Monday. The Swiss judicial authorities allegedly gave information about a record $5.3 billion of Yukos assets held in five Swiss banks.

Menatep accuses the Federal Prosecutor’s Office of illegally passing on a document, dating from March 10, 2004, to the Russian authorities during an inquiry into Yukos.

Yves Maitre, a cantonal prosecutor, said the Swiss government appointed him in August to lead an investigation into the Federal Prosecutor’s Office.

“I have been appointed special prosecutor with a six-month mandate,” Swissinfo quoted Maitre as saying.

The Prosecutor’s Office, led by Valentin Roschacher, has refused to comment.

Maitre said the Gibraltar-based company, Menatep, the main shareholder in Yukos, filed a complaint earlier this year.

Swiss authorities froze the accounts in question last spring, as part of a Russian probe into fraud and tax evasion. However, Switzerland’s highest court in June ordered the release of most of funds blocked at the request of the Russian authorities.

The Federal Court said the measures taken by the Swiss Prosecutor’s Office had been disproportionate and had lacked sufficient information from Russia for legal assistance.

Lawyers of the former head of Yukos, Mikhail Khodorkovsky, also accused the Swiss authorities of acting hastily.

The Federal Prosecutor’s Office has dismissed the allegations.

(From Moscow News, 09.11.2004)

Former Yukos Manager Ready to Buy Menatep’s Stake in Yukos and Pay Tax Debt

Konstantin Kagalovsky, the former top manager of Yukos Oil Company and Bank Menatep told Russia’s Gazeta daily that he is ready to buy the stake in Yukos that belongs to the oil major’s largest shareholder Group Menatep and amounts to 60 percent.

The businessman also expressed his readiness to pay off Yukos’ burgeoning tax debt, the newspaper reported. An interview with Kagalovsky was published on Monday, Nov. 8. On Tuesday Yukos’ founder and former CEO Mikhail Khodorkovsky reiterated his readiness to sell his stake of 44 percent in order to save Yukos.

Konstantin Kagalovsky who now lives in London became the deputy CEO of Menatep Bank in 1995 and later served as the deputy chairman of Yukos’ board of directors. Kagalovsky left the company in 2002. The businessman’s name first appeared in the news surrounding the Yukos affair in July 2004 when he fronted the group of British investors who offered to pay the oil major’s tax debt and to bail out Mikhail Khodorkovsky in exchange for his stake in the company.

Group Menatep’s shares in Yukos were frozen along with all other securities and assets in early 2004, and the authorities are unlikely to unfreeze them. But although Group Menatep cannot sell its shares directly, it may sell securities in offshore companies registered in the U.K. Virgin Islands, said Kagalovsky.

(From Moscow News, 9.11.2004)

Khodorkovsky, Lebedev lawyers want Apatit charges quashed

Moscow. (Interfax) - Lawyers representing former Yukos CEO Mikhail Khodorkovsky and Menatep head Platon Lebedev have filed their third plea with Moscow's Meshchansky Court asking it drop charges claiming their clients stole a 20% stake in the Apatit fertilizer producer as the statute of limitations has expired.

When presenting the plea, Khodorkovsky's lawyer Genrikh Padva said the statute of limitations for this crime expired in July 2004, an Interfax correspondent reported from the courtroom.

"As both the prosecution and the defense have submitted all evidence, the defense teams of both Khodorkovsky and Lebedev file for the third time a request to close the case of a fraudulent takeover of Apatit's shares," he said.

"Both Khodorkovsky and Lebedev are charged with having done so in July 1994. This crime is regarded as grave, but 10 years after having committed it, a person is not supposed to face criminal charges," Padva said.

"We are not speaking of whether the crime was committed, but say that the statute of limitations has expired. This request cannot under any circumstances be construed as admission of Khodorkovsky's or Lebedev's guilt. Both have repeatedly said they are not guilty. What the defense calls for is the observance of legislation," he said.

"Once the period specified by law has expired, the state cannot legally bring charges," Padva said.

Khodorkovsky has said: "I support the defense's plea. I do not plead guilty of this or any other counts of charges. Furthermore, in my view, enough evidence has been presented to prove that I did nothing wrong."

"The circumstances under which I have lived for a year make me agree with closing the case on these grounds," he said.

Lebedev also supports the plea, while a third co-defendant, Andrei Krainov, said the matter is for the court to decide.

(From Interfax, 9.11.2004)

Washington concerned over Yukos affair: US ambassador to Russia

MOSCOW : The United States is concerned over the prosecution of the Yukos oil case and the sale of the Russian oil giant's crown jewel, the US ambassador to Russia said, reiterating earlier comments by senior US officials.

The United States "has already expressed its concern over the consequences this will have on the pre-eminence of the law in Russia and the inviolability of private property," Alexander Vershbow told Echo of Moscow radio.

Vershbow's remarks were broadcast in Russian.

Russian prosecutors have investigated Yukos for months in what many in Russia say is a politically driven campaign aimed at punishing the political ambitions of its founder and former chief executive Mikhail Khodorkovsky.

Russian authorities said they would sell Yukos' crown jewel Yuganskneftegaz in order to settle the firm's tax bill, at a price well under that at which it has been valued.

"We have clearly indicated that if Yuganskneftegaz is sold at a very low price, it will undermine confidence in the idea that the rights of private property are respected in Russia," Vershbow said.

The Yukos affair was crucial to determine Russia's attractiveness to foreign investors, he added.

Russia's justice ministry last month put a value of just 10.4 billion dollars on the main Yukos production unit Yuganskneftegaz -- a Siberian facility that pumps 62 percent of its oil and had been valued by the company itself at up to 30 billion dollars.

The justice ministry's valuation was the lowest figure mentioned in the independent valuation report the government commissioned from Dresdner Kleinwort Wasserstein (DrKW), which instead suggested a valuation closer to 17 billion dollars.

But the ministry then set the minimum bidding price for a 77 percent stake in Yuganskneftegaz at 3.73 billion dollars.

Some analysts said the ministry's low valuation confirmed fears that the Kremlin was plotting to split up the country's richest oil corporation among rivals that keep to good terms with the state -- the first step toward the creation of a super government-controlled oil giant.

Russian authorities Monday hit Yukos with a battery of fresh tax claims which could see the firm's total debt soar to an astronomical 17 billion dollars.

Yukos founder Mikhail Khodorkovsky has been in jail for over a year and is facing 10 years in prison if convicted of seven charges of fraud, tax evasion and embezzlement.

A.F.P.

(From ChannelNewsAsia, 08.11.2004)

Jailed Russian tycoon exits money dream

Mark Franchetti, Moscow

AFTER a year in jail on charges of fraud and tax evasion, Mikhail Khodorkovsky, Russia’s richest man, has told his family that he will give up making money if he is released.

The tycoon’s mother, Marina Khodorkovskaya, 73, said he had revealed to her during a recent prison visit that he intends to turn his back on business, dedicating his life to educational programmes aimed at creating a new generation of elite Russians.

“Mikhail used to say he would do business only until he was 45 and then concentrate on other projects,” Khodorkovskaya said. “He is 41 now and, if he were released in the near future, it would simply mean bringing his original plans forward. He wants to concentrate on educating young people. That’s his vision.”

Any such move by Khodorkovsky, who made his fortune with the Yukos oil company, would mark a victory of sorts for the Kremlin. It is widely believed to have ordered his arrest because he harboured political ambitions and was seen as an opponent of President Vladimir Putin.

The change of direction would not be out of character. Ten years ago Khodorkovsky opened Russia’s first boarding school run by a private charity for orphans and children from poor and broken families. Some 160 children now study at the Korallovo institute, which is entirely funded by the embattled entrepreneur.

The pupils are mainly children of army servicemen and border guards who were killed on duty. Others are victims of terrorism. One pupil lost both his parents in the Moscow theatre siege two years ago.

The school also plans to take at least two children from Beslan’s middle school No 1, the scene of Russia’s worst terrorist attack, which claimed the lives of more than 350 hostages in September.

The pupils are taught and housed free of charge for 10 years. Most of those who have left are now at university. Many want to pursue careers in the oil industry.

Khodorkovskaya said her son intended to expand the school after his release and open similar institutes across the country.

Khodorkovsky, who built a personal fortune of £4.3 billion, was dragged off his plane at gunpoint at the time of his arrest. He has since been charged with fraud over the purchase of a fertiliser company in the early 1990s and with £540m in tax evasion.

If convicted, he could face up to 10 years in prison.

Platon Lebedev, his number two, is in jail on similar charges and Alexei Pichugin, former head of security at Yukos, has been accused of murder. The three — all of whom are currently on trial — have denied any wrongdoing.

Shortly before his arrest, Khodorkovsky said that he would never flee Russia and would prefer prison to exile.

In a relentless legal campaign, widely seen as politically motivated, Yukos has been accused of owing more than £8 billion in unpaid taxes. If forced to pay, it would face bankruptcy.

In an attempt to save the oil giant from being taken over by the Kremlin and sold cheaply to the state, Khodorkovsky resigned as its head last year and offered to hand over his shares. He also promised to surrender his passport if released on bail.

Khodorkovsky’s life in one of Russia’s worst remand jails is a far cry from the days when he ran his business empire and met world leaders, including President George W Bush.
His mother said he was sharing a 130 square foot cell with two inmates, in which the lights were kept on around the clock. He is allowed out for one hour a day, when he jogs in a tiny courtyard, and can shower only once a week.

He is allowed to see his family for a maximum of two hours a month. They are separated from him by a glass partition and have to talk on an internal telephone.

Khodorkovskaya said her son spent most of his time studying the case against him, writing a prison diary and reading history books. Twice a week, she and his wife Inna take it in turns to queue up for hours with other inmates’ relatives to deliver his food parcels.

“He is very upset about the way the Kremlin is destroying Yukos,” she said. “But he does not regret his decision to stay and face it all instead of escaping abroad. He loves his country and is a true patriot.”

(From The Sunday Times, 07.11.2004)

Swiss prosecutors investigated over confidentiality breach in Yukos case

BERN (AFP) - The Swiss public prosecution service, which blocked billions of dollars of assets belonging to Russian oil giant Yukos, is itself being investigated for breaching confidentiality, the Neue Zuercher Zeitung newspaper said.

The inquiry was ordered as a result of a complaint by the Menatep holding company, the principal creditor of Yukos. The oil conglomerate warned earlier this month that it faces bankruptcy because of swingeing government tax claims, and its founder, Mickhail Khodorkovsky faces up to 20 years in prison on a charge of tax fraud and embezzlement, according to his lawyer.

Prosecutor Yves Maitre told NZZ that he was appointed on August 24 to begin a six-month investigation, following the publication in the Swiss magazine Hebdo of a letter revealing that the prosecution service had volunteered information to the Russian authorities about Yukos accounts.

The letter informed the Russians that 6.2 billion Swiss francs (5.3 billion dollars, 4.1 billion euros) worth of Yukos assets had been provisionally frozen in five Swiss banks.

The Moscow prosecutor then formally asked for the accounts to be blocked and the Swiss complied, making it the largest such sequestration on record.

Although the Swiss authorities claimed to be acting under the scope of international money laundering laws, Switzerland's highest court, the Federal Tribunal, later lifted the sequestration of more than four billion Swiss francs, saying that the original amount frozen was disproportionate.

But by that time, Yukos was fighting for its life as the Russian government slapped on tax claims that the company could not pay from its available assets. Many commentators said the action against Yukos was intended to thwart the political ambitions of Khodorkovsky, one of Russia's richest men.

Lawyers for Yukos accused the Swiss authorities of acting with excessive zeal, and of failing to properly invesigate the "insufficient" arguments presented by the Russian prosecutor.

Swiss federal prosecutor Valentin Roschacher has rejected these accusations, saying that his investigators had consulted the Russians on points that did not appear clear.

He also rejected criticism that he was acting as an "auxiliary" for the Russian government.

(From Yahoo! News, 07.11.2004)

Guest opinion: U.S. should pressure Putin Russia's democratic reforms slipping away under leader

By AMY RIDENOUR

WASHINGTON - "There is a bear in the woods," the announcer solemnly intoned. "For some people the bear is easy to see. Others don't see it at all. Some people say the bear is tame. Others say it's vicious and dangerous. Since no one can really be sure who's right, isn't it smart to be as strong as the bear? If there is a bear?" Twenty years ago, President Ronald Reagan used this commercial on nationwide TV with devastating effect.

No one had to ask what the bear symbolized: It was Russia, of course.

Reagan went on to win both the 1984 election and the Cold War.

But today Americans must ask themselves if a shadow of that old bear is back.

Despite years of reform, the rule of law in Russia is in decline. Elections are suspect, when allowed at all. Restrictions have been placed on the press. There is a climate of fear with regard to the government. Allegations of corruption are rampant.

Allegations of corruption

Twenty years ago, America's best defense against Moscow was a strong military. Today, our best defense against the emergence of the old, globally belligerent Russia ought to come from putting pre-emptive pressure on the government of President Vladimir Putin. Sadly, it is a course we have mostly neglected.

A featured speaker at two prestigious symposiums in Washington recently was a Russian government minister around whom allegations of corruption swirl. Leonid Reiman, Russia's minister of information technology and communications, was given prominent speaking roles at conferences that also featured Commerce Secretary Don Evans and Energy Secretary Spencer Abraham.

Americans involved in the conferences should have insisted on another Russian representative.

We Americans know that the rule of law is a cornerstone of economic prosperity. Strict - and enforced - rules against both public and private corruption give investors the confidence they need to take the steps that make economies grow.

When corruption is rampant, economies fail to thrive.

Even Reiman himself, when asked publicly at one of the conferences, acknowledged that public corruption is a problem in Russia. He claimed that new moves toward transparency in government would combat the problem by making corruption harder to hide. We should be forgiven if we fail to feel reassured.

Eliminating business rivals

It's difficult to imagine that there is a genuine trend toward government transparency in Russia, where the broadcast media is controlled by the state and other media are looking nervously over their shoulders.

Russia is a country where even its richest man is not safe. Oil tycoon Mikhail Khodorkovsky has spent the last year in jail and his company, Yukos Oil, may be driven out of business by the end of this year. Khodorkovsky's no saint, but his "crime" essentially came down to this: Putin saw him as a rival.

Envision a scenario in which Microsoft's Bill Gates made moves to challenge President Bush for re-election - and Bush responded by tossing Gates into jail and bankrupting Microsoft.

Imagine the chilling effect that would have on political freedom here and you have some idea what is going on now in Russia's infant democracy.

Welcome mat needed

With international concerns mounting, Putin must demonstrate that he and his government are putting out a welcome mat for business and investment. Instead of a welcome mat, investors should see in the prominence of Reiman a red flag of warning.

According to confidential sources, the Russian National Anti-Corruption Committee, a very prominent independent civic group, believes that Reiman has conducted dubious practices, such as siphoning money out of state enterprises for which he is responsible. Reiman is suspected of being the ultimate owner of several telecom and financial assets in Russia and has been accused of using his state position to channel business to companies in which he is believed to have a significant personal stake - and to weaken competing businesses.

Yet, Putin keeps him in charge of a prominent ministry and Americans honor him with speaking opportunities at prestigious, Cabinet-level business conferences.

Investors will not have confidence in Russia unless they are convinced that official corruption is in its past.

America can't, and shouldn't, try to run Russia's internal affairs, but we certainly can do a better job of insisting on honest business relationships. Pretending we don't notice the corruption is no way to help.

Amy Ridenour is president of The National Center for Public Policy Research (www.nationalcenter.org), a Capitol Hill think-tank. Readers may write to her at 777 N. Capitol St. NE, Suite 803, Washington, DC 20002 or e-mail to aridenour@nationalcenter.org.

(From Billings Gazette, 07.11.2004)

Return of the Show Trial

Stalin and the Czars Haunt Khodorkovsky in the Dock

By C. J. CHIVERS

MOSCOW — The defendant begins his day by taking a seat in a small metal cage. A prosecutor in a blue uniform sits across from him in the courtroom and accuses him of criminally undermining the Russian state. On some days the defendant's image is transmitted on television throughout Russia's vastness.

The message is clear: Behold the guilty man.

This unchanging spectacle, reinforced by repetition day after day for more than four months, has become the enduring impression of the case of Russia v. Mikhail B. Khodorkovsky, the billionaire businessman who is stuck in a trial that seems without end.

Oct. 25 marked the anniversary of the arrest of Mr. Khodorkovsky a year ago and the beginning of the unrelenting application of state power against both him and the oil company Yukos, which he founded.

Mr. Khodorkovsky faces charges of embezzlement, fraud and tax evasion; Yukos is laboring under an administrative tax case that could lead to insolvency and the redistribution of its assets in a state-supervised sale.

For all the questions the cases have raised about how post-Soviet Russia is evolving - about threats to property rights, the independence of the judiciary, the rights of an accused person and the centralization of power - the cases have a ring familiar in Russian history.

Political analysts say that President Vladimir V. Putin, who is believed to be behind the prosecution of Mr. Khodorkovsky, has placed himself firmly in line with his imperial and Soviet predecessors, using a pliable judiciary to bring his opponents to heel.

One result has been this long-running update on the Moscow show trial - one more Russian regime's demonstration, through procedures that look like law, of the power of the state and the will of its leader.

"In Russia we have some sort of genetic memory," said Leonid Dobrokhotov, an adviser to Russia's Communist Party and a critic of Mr. Putin. "Even when they are not understanding why, political figures are always repeating what was done before."

According to this line of thinking, and given the weight of Russian history, it was almost impossible for Mr. Khodorkovsky to avoid ending up in the cage.

Whatever sort of businessman he was - lucky gambler, ruthless swindler, state-anointed insider who went too far, some mix of the three - by the time he amassed his billions and began speaking out about political pluralism, he had become a challenger to the regime. And that status invoked a residual Russian reflex: the trial whose outcome is apparent long before it starts.

Such trials have long been part of Russia civic life, having been tools of czars and Soviet leaders alike. Mr. Putin has used parts of the old script, with similar goals.

Dr. Richard Wortman, a history professor at Columbia University who specializes in imperial Russia, said the case against Mr. Khodorkovsky has resembled the czarist "use of the judiciary to stigmatize revolutionaries."

In one of the more famous of those cases, in 1862, Nikolai Chernyshevsky, a social reformer, was arrested on suspicion of revolutionary activity after a series of spectacular fires in Moscow. He was exiled to Siberia, where he spent nearly 20 years. It has never been clear that he did anything wrong.

That case was only a hint of what awaited Russians in the 20th century, when the process of manipulating the judiciary for political aims reached its malevolent perfection under Stalin.

After torture and coercion by Stalin's secret police, even the most faithful of the Bolsheviks publicly confessed to participating in terrorist plots that did not exist. Then they were shot.

The show trials of the most famous victims - who were accused of planning the murder of Sergei Kirov, a Politburo member and leader of the Leningrad party structure who was assassinated in 1934 - launched what became known as the Great Terror. The icy spectacle of the party's judiciary moving with unblinking certitude toward each manufactured outcome gave Soviet-style Socialism its sinister stamp. Mr. Kirov's murder was later attributed to orders from Stalin, giving the trials an even darker cast.

No serious critics today directly compare Mr. Putin to Stalin, whose abuses of power and use of fear were of an entirely other order. But some still see strands of the Soviet technique in Mr. Khodorkovsky's dizzying fall.

"Putin is fighting his political adversaries not by political methods, but by using his enforcement agencies," Mr. Dobrokhotov said.

Mr. Putin has been much more selective than his predecessors, of course, and while his motives for punishing Mr. Khodorkovsky may be a mixture of political expedience and personal loathing, he has also skillfully used the man in the cage as a political symbol, a stand-in for the disparity between Russia's poor and its fabulously rich.

This is a potent theme here, and Mr. Putin has used it to position himself as a leader seeking to redress some of the wrongs committed at the public's expense during Russia's murky period of post-Soviet privatization, when Mr. Khodorkovsky enriched himself.

The strategy seems to have worked in the near term. In a survey of 1,500 Russians in late June, pollsters found that people sympathized with the state's position rather than with Yukos's by a ratio of more than four to one.

Still, if history reveals anything, it is that using the Russian judiciary for political showmanship is a sometimes perilous path. Political trials ultimately backfired for the czars, Dr. Wortman noted, in part because the accused often upstaged the accuser.

From his jail cell Mr. Chernyshevksy wrote a political treatise in novel form, "What Is to Be Done?" which became a manifesto among future revolutionaries (Lenin among them) and helped convert many to the cause. And even after years in exile, when the government extended to him the possibility of pardon, Mr. Chernyshevsky refused to make nice.

"It appears to me that I was exiled only because my head is differently constructed from that of the head of chief of the police," he was said to have remarked, according to "The Bolsheviks," by the late Harvard historian, Adam B. Ulam. "How can I ask for a pardon for that?"

Dr. Michael McFaul, a history professor at Stanford University, said that by moving so slowly after Mr. Khodorkovsky's arrest, Mr. Putin has played his powerful hand poorly, creating uncertainty in the financial markets and showing signs of indecisiveness that investors find worrying. "It's been the worst handling of these cases that you can imagine," said Dr. McFaul.

Critics of the cases say that if the trials undermine investor confidence in Russia over the long term, scaring away capitalism's richest fuel - money mixed with ideas - then Mr. Khodorkovsky, like Mr. Chernyshevsky and the innocents accused of murdering Sergei Kirov, might acquire an unexpected meaning: a man whose humiliation by the state guaranteed that the state ultimately weakened itself.

(From The New-York Times, 07.11.2004)