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The Verdict is in, but the Jury is out: A Post-Verdict Briefing on Mikhail Khodorkovsky, YUKOS, and Russia's Direction

Sanford Saunders, Senior Partner, Greenberg Traurig, LLP, and legal defense counsel for Mikhail Khodorkovsky; Sarah Carey, Partner, Squire, Sanders & Dempsey LLP, and former member of the board, YUKOS Oil Company; Clifford Gaddy, Senior Fellow, Brookings Institution

Date & Time

Friday
Jun. 24, 2005
10:30am – 12:00pm ET

Overview

At a recent Kennan Institute talk, Sanford Saunders, Senior Partner, Greenberg Traurig, LLP, and legal defense counsel for Mikhail Khodorkovsky; Sarah Carey, Partner, Squire, Sanders & Dempsey LLP; and former member of the board, YUKOS; and Clifford Gaddy, Senior Fellow, Brookings Institution, discussed the trial of Mikhail Khodorkovsky, the state takeover of Khodorkovsky's YUKOS Oil Company, and the potential consequences of these actions for the Russian economy. The imprisonment of Russia's richest man and the dismantling of the country's largest oil company has been a subject of intense debate in the international community. The panelists argued that the cases of Khodorkovsky and YUKOS demonstrate that Russia is far from achieving a state based on rule of law and a stable climate for business and investment.

Mikhail Khodorkovsky was tried and convicted for fraud in connection with a privatization deal that allowed the Menatep Group (the holding company which owned the majority interest in YUKOS) to acquire the fertilizer company Apatit in 1994, as well as corporate and personal tax evasion. Saunders argued that the extent to which the court disregarded both evidence and law in its verdict against Khodorkovsky came as a surprise even to the defense team, who were by no means expecting a fair trial. According to Saunders, the court allowed the prosecution to present evidence that was obtained illegally and ignored witness testimony that did not support the prosecution's case. He noted that in several cases, witnesses called by the prosecution gave testimony that supported the defense's claim that Bank Menatep did substantially fulfill the obligations of the privatization agreement. These witnesses were either discredited or simply ignored in the verdict. Most telling, in Saunders' view, is the fact that the court's verdict against Khodorkovsky is very similar to the statement of indictment—indicating that the verdict was predetermined and the trial itself was mostly for show. Saunders urged that the verdict not be afforded any presumption of regularity and that it not be seen as legitimizing future charges or legal actions against Khodorkovsky, his colleagues or Group Menatep.

According to Carey, the leadership of YUKOS originally assumed that because the government was pressing charges against Khodorkovsky as an individual, the company would be left alone. However, soon after Khodorkovsky was arrested, the state began a tax investigation against YUKOS. The tax police claimed that YUKOS was liable for billions of dollars in unpaid taxes and fines. Carey contended that these allegations of unpaid taxes were based on the company's use of tax shelters that were legal at the time, but have since been repealed. The combination of back taxes and fines placed a nearly unbearable burden on YUKOS. Nevertheless, Carey said, several of the company's leaders were convinced that it would be worth struggling through a few difficult years and selling some assets to pay the tax bill and preserve the company. YUKOS approached the government to negotiate a payment plan. The government's refusal to negotiate convinced Carey that the true goal of the attack on YUKOS was not to get the back tax payments, but to acquire YUKOS' assets in order to create a national oil company.

Gaddy observed that since the Khodorkovsky trial and takeover of YUKOS, Russia's oil production and exports, which had been growing rapidly since 1999, have stagnated. He argued that this was due in part to overproduction of oil in the past few years, including by companies like YUKOS. He identified two institutional factors that led to the overproduction. First, because Khodorkovsky and other YUKOS managers did not feel that they enjoyed secure property rights over their company and its profits, they had an incentive to get as much oil out of the ground and to the export market as quickly as possible. They were willing to sacrifice the potential of greater profits in the long term to get short-term gains. Further, Gaddy argued, there are in Russia strong political and social incentives promoting production for production's sake. The YUKOS strategy of rapid oil extraction and exports created a high demand for industrial products such as rail cars and in effect subsidized Russia's inefficient heavy industries. At the same time, YUKOS was able to compensate for these inefficiencies in its behavior thanks to its unconventional approach to oil production. YUKOS, Gaddy explained, was a "new" oil company, built by using innovative, primarily foreign, technologies to extract the remaining oil from fields that had been abandoned by the Soviet oil industry. He concluded that the prosecution of Khodorkovsky will hurt Russia because it will only reinforce the perception of insecure property rights for all businesspeople while discouraging others throughout the economy from emulating the innovative, risk-taking approach of Khodorkovsky.

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Kennan Institute

The Kennan Institute is the premier US center for advanced research on Russia and Eurasia and the oldest and largest regional program at the Woodrow Wilson International Center for Scholars. The Kennan Institute is committed to improving American understanding of Russia, Ukraine, Central Asia, the Caucasus, and the surrounding region though research and exchange.  Read more

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