Russia's Courts Go on Trial

Yukos Case Bears Witness to Series Of Defects in Legal System

By GUY CHAZAN
Staff Reporter of THE WALL STREET JOURNALMOSCOW

In March, defense lawyers for billionaire Mikhail Khodorkovsky brought out a star witness they hoped would blow a hole in a key charge against the jailed tycoon.
Lyubov Myasnikova, an official from the Urals, told the court that one of the tax-dodging maneuvers Mr. Khodorkovsky is charged with using was perfectly legal. Thanks to the taxes paid by his company, OAO Yukos, her town was three times richer than the surrounding region, she said. Three weeks later, prosecutors said Ms. Myasnikova herself might face a criminal investigation.
Last month, Secretary of State Condoleezza Rice said Washington would be watching the verdict in the Yukos case to "see what [it] says about the rule of law in Russia ."Those who have been watching the trial since it started last June say the answer to that question already is clear. Asserting a series of due-process violations and a pattern of intimidation of witnesses, they say the trial has revealed serious defects in the Russian judicial system -- defects that recent overhauls have failed to fix.
In general, "there has been a retreat from the right to a fair trial," says Tamara Morshchakova, a retired judge from Russia's Constitutional Court.Last week the three judges in the Yukos trial began delivering their verdict for Mr. Khodorkovsky, the former chief executive of Yukos, and his business partner, Platon Lebedev. Although the two have yet to be formally pronounced guilty, the judges' summation so far is an almost word-for-word repetition of the indictment, suggesting the two men will be convicted on almost all counts.
The Kremlin has portrayed oil company Yukos as Russia's version of Enron Corp., the U.S. energy titan whose collapse in 2001 led to criminal and civil proceedings against its former executives.Many observers say the trial is less about corporate malfeasance than about settling scores with a Kremlin foe who supported opposition parties and hinted at political ambitions. "This was a show trial, pure and simple," says Milan Horacek, a member of the European Parliament who has monitored the Yukos case. "Just look at the way they kept Khodorkovsky in a metal cage, like a terrorist."
During his first term, Russian President Vladimir Putin pushed changes to improve the rights of the accused in Russia's courts, marking a break with the Soviet legacy of prosecutorial bias and near-zero acquittals. Defense lawyers grew in stature, and trials became truly adversarial.But despite some improvements, defendants still have fewer rights than in Western jurisdictions. Defendants still are often arrested and kept in pretrial detention in cases where house arrest or bail would be more appropriate, says Ms. Morshchakova, the retired Constitutional Court judge. Defense lawyers still are largely barred from collecting evidence during a criminal investigation, and judges routinely declare defense testimony inadmissible at trial. This month, the Constitutional Court ruled that prosecutors can appeal acquittals or sentences they deem too lenient. In the U.S., by comparison, only defendants can appeal a verdict in a criminal case.
The Yukos case has exemplified these problems. Messrs. Khodorkovsky and Lebedev were refused bail -- unusual in nonviolent white-collar crimes -- and have been kept in prison throughout their trial. All prosecution motions for the two men's detention to be extended were upheld. In March, the judge, Irina Kolesnikova, ordered the 41-year-old Mr. Khodorkovsky to be kept in jail until July 14 before the prosecution had even asked for an extension. She also didn't hear defense objections, although that is required by law.The Parliamentary Assembly of the Council of Europe decided last year that the continued detention of the two men was one of the "most serious...shortcomings" of the Yukos prosecutions.
Other defense motions were turned down. Mr. Lebedev, 48, whose health rapidly deteriorated in jail, was denied an independent medical examination. Two key reports by the defense's expert witnesses were ruled inadmissible. Attempts to cross-examine the witnesses in court also were frustrated by prosecution objections, usually upheld by the judge."Unlike in Soviet times, our rights were formally respected," says Yuri Schmidt, one of Mr. Khodorkovsky's attorneys, who has been practicing law in Russia since 1961. "The judge listened carefully to all the defense motions. And then turned most of them down."
Ms. Myasnikova, the witness, is the 50-year-old deputy mayor of Lesnoi, a town of 56,000 people in the Urals. She told the court that Lesnoi had been saved from near-bankruptcy in the late 1990s when the Russian government allowed it to operate as an onshore tax haven. About 20 companies registered there to enjoy the tax breaks on offer, including four oil-trading companies affiliated with Yukos.
Prosecutors say Yukos wasn't eligible for the tax breaks because it didn't have any real operations in the region. Defense lawyers say they fulfilled the letter of the law that existed at the time. They say the companies were repeatedly checked by tax inspectors, who found no improper use of the tax breaks.
In 1999, the four companies paid their Lesnoi taxes in Yukos promissory notes -- common practice at a time when there was a shortage of cash rubles in the economy. The prosecution says that was a form of tax evasion. Ms. Myasnikova told the court it was "to the town's advantage" to be paid in IOUs, because of the interest that accrued. She said all the notes had been redeemed in full: In 1999, Lesnoi's budget received four billion rubles, or about $133 million at 1999 exchange rates, in Yukos notes, as well as millions of rubles in interest, or about 80% of its budget revenue for that year.
"There was no harm done to the town," she told the court. "On the contrary, [it] got an additional boost for its economic and social development." She said budgetary spending per capita was three times higher than on average in the region.Defense lawyers were jubilant, calling her their "strongest witness." State prosecutor Dmitry Shokhin began his cross-examination of Ms. Myasnikova by reminding her that Lesnoi's mayor was under investigation for accepting tax payments in promissory notes. Defense lawyers said the remark was an attempt to "intimidate" their witness.
Three weeks later, Mr. Shokhin asked the court to admit as evidence a letter from a senior federal investigator. It said he was considering filing criminal charges against Ms. Myasnikova herself, for illegally providing tax concessions to the Yukos trading firms."Some time ago we stopped calling witnesses, fearing they might face prosecution," said Konstantin Rivkin, one of Mr. Lebedev's lawyers. "We turned out to be right."

(The Wall Street Journal, 5.23.2005)