Overview Of The Khodorkovsky Case

Persecution of Mikhail Khodorkovsky In 2003, in the blink of an eye, Mikhail Khodorkovsky (“MBK”) was transformed from Russia’s most respected businessman as head of Yukos Oil Company (“Yukos”), to Russia’s most famous political prisoner. And Yukos went from being Russia’s most progressive and profitable company, lauded for its transparency, corporate governance, and international business practices, to a bankrupt company under the burden of more than $40B in fictitious tax debt. The regime stole its assets, selling them in sham auctions to state-owned companies at knock-down prices. Its shareholders, many of them US citizens, lost $40 billion in equity. MBK and his colleague, Platon Lebedev (“PLL”) were jailed, charged and convicted, in a show trial of theft, fraud and corporate and personal tax evasion. They were sentenced to eight years in a Siberian penal colony. The European Court of Human Rights has found that PLL’s rights were violated during the pre-trial phase of the proceedings. Appeals to the ECHR by MBK and PLL are pending. MBK and PLL became eligible for parole in 2007, which was denied. Just before they became eligible for parole, the Russian government again charged both men, this time with embezzlement and money laundering. Specifically, the regime alleged that MBK and PLL embezzled all of Yukos’s oil production (350 million metric tons) and shares held by a Yukos subsidiary in six operating companies, and laundered the sales proceeds of the oil and the shares themselves. The trial on these charges began in March 2009 and is ongoing. The current allegations against MBK and PLL go beyond meritless; they are absurd. The oil embezzlement charge requires that MBK and PLL physically stole the oil. However, the prosecution offers no evidence that any oil was ever missing or of where the defendants may have stored 20% of Russia’s annual production. In fact, the allegedly embezzled oil is more than Yukos produced in six years. Contrary to what is alleged, Yukos booked all oil sales revenues on its independently audited financial statements. Yukos could never have paid operating expenses, taxes (Yukos was Russia’s largest taxpayer), capital expenditures, dividends, or acquired companies for cash, if they had embezzled the oil. The allegedly embezzled shares were actually moved for a legitimate business purpose, asset protection, as part of transactions that benefitted all of the company’s investors. What’s more, the allegedly embezzled shares remained on Yukos’s books as reflected in its independently audited financial statements. In essence, MBK and PLL, as part of the majority shareholder in Yukos, are accused of stealing from themselves! The new charges cannot be squared with the prior tax evasion conviction. The new charges are irreconcilable with MBK and PLL’s conviction in the first case. MBK and PLL could not have caused Yukos to evade corporate taxes on the sale of oil, i.e., the first case, if, as they are now being charged, they embezzled the same oil and laundered the proceeds for their personal gain. The impetus for what is now known as the “Khodorkovsky Affair” was the fear among Russian President Putin and his supporters that MBK and Yukos’s success posed a political and personal financial threat. World leaders are united in condemning the attack on MBK, PLL, and Yukos as politically motivated. For example President Obama, VP Biden (then Senators) and Senator McCain co-sponsored a Senate Resolution 322 (in 2005) condemning the prosecution of MBK and PLL. German President Merkel publicly condemned Russia’s political prosecution of MBK and PLL. The Parliamentary Assembly of the Council of Europe has adopted reports and passed resolutions finding the attack violated human rights and was politically motivated. Recently, the Italian Parliament called for government officials in Italy and throughout Europe to use diplomatic channels to compel Russia to give MBK and PLL a fair trial.

Committee for Russian Economic Freedom Twitter @RusEconFreedom http://russiafreedom.wordpress.com/

1

Perhaps most telling, in July 2009, ex-Russian Prime Minister Mikhail Kasyanov, in a sworn affidavit to the European Court of Human Rights based on his first-hand knowledge, confirmed that the Yukosrelated cases were politically motivated. Kasyanov was stating fact, not opinion, based on his direct conversations, as Prime Minister, with then-President Putin. The reliability of Kasyanov’s remarkably courageous testimony must be read in the light of Russia’s history of retaliation against political opposition. Independent Courts in the United Kingdom, Switzerland, the Netherlands, Lithuania, Cypress, Israel, and the Czech Republic have ruled that the attacks on MBK, PLL, and Yukos are politically motivated and have refused extradition requests, denied Russian mutual legal assistance requests related to the attack, and refused to recognize related Russian Court Orders, respectively. Several courts expressly found that no one affiliated with MBK or Yukos could receive a fair trial in Russia.

Committee for Russian Economic Freedom Twitter @RusEconFreedom http://russiafreedom.wordpress.com/

2

A Life in the Day: Mikhail Khodorkovsky From The Sunday Times September 13, 2009

A Life in the Day: Mikhail Khodorkovsky Once Russia’s richest man, the former oligarch speaks to The Sunday Times secretly from his jail cell in Moscow

Mikhall Khodorkovsky Interview by Mark Franchetti

Wake-up call is at 6.45. I have an hour for breakfast, to exercise, clean, shave and watch the news. Most days I have porridge and coffee. It's a time that makes me pine for my kids, because I always used to have breakfast with them before going to work. I'm being held in the toughest type of jail in Russia. There are three to eight men in each cell and I have less than five square yards of space. Unless I'm being taken to court, I'm in my cell 23 hours a day. The guards allow me out for one hour to pace in an "outdoor" cell, which is covered with metal netting. I'm under constant surveillance and the light in the cell is kept on around the clock. I'm allowed to shower once a week. An hour after wake-up call they move me to go to court. Because of the security procedures, it takes two hours to get there and two hours to get back. I'm taken in a truck, inside a metal booth — 4ft by 2ft 6in by 1ft 6in. I spend four hours in it a day. In court I and my former deputy, Platon Lebedev, who is also on trial, are locked up in the "aquarium", a 1.5-ton bulletproof glass cage. The courtroom is full of guards cradling machineguns. I always wonder who they are intending to shoot at. Court sessions last eight hours, four times a week, and will go on for the next year. There's a short break for lunch, when I'm allowed to eat my daytime prison ration: biscuits, tea, sugar. And instant porridge. I tried it. Best not to. I drink water. I grew up in a family of Soviet engineers. My parents were not Communist party members and had no connections. They earned 300 roubles a month. Half went to rent; a third to food and the remaining 50 roubles had to suffice for clothes, transport, school books and so on. In those days 50 roubles could buy you a pair of trousers. That's why I went to work early. I became an engineer in 1986, at 23. By the time of my arrest in 2003 I had built

Committee for Russian Economic Freedom Twitter @RusEconFreedom http://russiafreedom.wordpress.com/

3

Russia's largest oil company, Yukos. The campaign against me was organised by the Kremlin. The first case, which got me eight years, was out of greed; the current one is out of cowardice, and I’m facing up to 22 years. It's hard to say what my enemies convinced Vladimir Putin of. Maybe he really thought I was plotting some coup — which is ridiculous, as I was supporting two opposition parties which at best could have won 15% of votes in elections. More likely it was an excuse to raid Russia's most successful oil company. I'm often asked why I did not flee abroad. I thought it would be admitting I was guilty and I'd be leaving Lebedev in the lurch. But I also thought I would face a proper trial. Instead there has been no fair trial. Even in Russia few people now believe my trial is fair and unbiased. After court I am driven back to jail. Hello cell! I then have two hours to eat, read the newspapers, do my laundry, write letters. I have already spent more than 2,000 days like this. Who knows how many more await me? One of the hardest things is not being able to predict one’s future. Guards use it as a psychological tool. Watches are forbidden, and you are never told why you are being led out of your cell. One just has to relax and take things as they come. That's how I deal with the fact that I'm searched so often. That after my hour outside the cell, it's clear the guards have gone through my papers. That I'm not allowed simple things like a laptop or a marker pen. But that's no big deal. What's far worse is that I'm allowed to see my family only twice a month for an hour, through a glass partition. It's been like that already for six years, except for one year in a penal colony, where the rules are more relaxed. Meanwhile, my children are growing, my son is getting married, my daughter is going to university, and my younger children started school. My parents are not getting any younger. No one except the country's top leadership can say if I'll ever be released. So I live as if I'll be in jail for the rest of my life. For dinner I have bread, cheese and coffee. The prison gives porridge and once in a while fish soup. Food is especially important. It's very bad if you don't have someone on the outside to send you food parcels. You get ill without proper food and sun. I'm lucky, I have a big family, so if there's need I can help my cellmates. The years in prison, the isolation — it's not easy, but it is bearable. I always used to read much. Now I read very much. Education and reflection are prison’s pluses. I sleep well and have no nightmares. Let those who are persecuting me have a heavy conscience. END

Committee for Russian Economic Freedom Twitter @RusEconFreedom http://russiafreedom.wordpress.com/

4

Corruption: Russia’s Economic Stumbling Block From BusinessWeek

Viewpoint August 27, 2009

Corruption: Russia’s Economic Stumbling Block American and European anti-corruption laws could help solve a longtime problem in Russia By Carol M. Welu and Yevgenya Muchnik

Corruption as a transnational threat was high on the discussion agenda in early July when U.S. President Barack Obama traveled to Russia. It is clear that Russia needs to add anti-corruption to the long list of issues it must tackle to be considered a global economic powerhouse. International investors fled in droves from Russia last summer: First, there was Russia's brief war with Georgia. Then Prime Minister Vladimir Putin conjured up memories of the demise of Russian oil giant Yukos with a cryptic suggestion that steel giant Mechel (MTL) should be investigated for tax evasion. Coupled with the chilling effect of the TNK-BP and Telenor (TEL.F) disputes over corporate governance, these events have curbed investors' appetite for Russia. Those events played into ongoing fears and frustrations over Russia's reputation for seemingly pervasive corruption. The nation ranked No. 147 out of 180 countries in Transparency International's 2008 Corruption Perception Index. According to a 2008 U.S. State Dept. report, corruption amounts to an estimated $300 billion annual tax on investment and is one of the greatest barriers to foreign investment. Roughly 50% of Russians believe corruption is a permanent fact of life, stemming from official greed and immorality, according to a recent nationwide survey. According to TRACE, a U.S.-based anti-corruption nongovernmental organization, 41% of reported demands for bribes are from government officials and employees, and 50% are demands from the police or the military. Despite these dismal statistics, Russia has launched some significant initiatives to mend its reputation. For example, soon after his election, Russian President Dmitry Medvedev made it clear that tackling corruption is foremost on his agenda. Last year he surprised critics by delivering on his promise and signed the new anti-corruption legislation package. The legislation was a good first step. According to the Investigative Committee of the Russian Prosecutor General, since the start of this year, 106 investigations have been initiated, and 12 corruption cases were tried involving bribes and damages totaling approximately $29 billion. The accused include Interior Ministry officials, customs agents, Audit Chamber members, prosecutors, and local officials. Recent convictions include the sentencing of a former Russian government investigator to eight years in prison for bribery. What's Missing in Russia's Anti-Corruption Law But the legislation falls short because it does not criminalize the offering of a bribe—only completed acts of bribery. This is a significant problem because many enforcement actions begin when an honest official reports that he or she has been offered a bribe. Another defect of the new law is that it does not target judicial corruption. This is a serious shortcoming, since both the police and the judiciary are perceived by many Russians to be highly corrupt. A recent Transparency International progress report for the Organization for Economic Cooperation & Development (OECD) Anti-Bribery Convention quoted a popular Russian saying: "The severity of Russian laws is balanced by the fact that its enforcement is optional." Until Russia puts in place a system for systematically enforcing its anti-corruption laws, it will matter little how well or poorly those laws are drafted.

Committee for Russian Economic Freedom Twitter @RusEconFreedom http://russiafreedom.wordpress.com/

5

Russia's culture of corruption may simply be too deeply entrenched for the country's leadership to tackle on its own. But help might come from two unlikely rescuers: the U.S. Foreign Corrupt Practices Act (FCPA) and the OECD Anti-Bribery Convention. The FCPA forbids anybody within its sweeping jurisdiction to make or promise a bribe to an official to obtain business. This wide net reaches U.S. persons, non-U.S. companies with U.S.-listed securities and anyone who, however briefly, plots or carries out a bribery transaction while in the U.S. or using U.S. communications or transportation facilities. Thus, U.S. companies and non-U.S. companies with U.S.listed securities—and all subsidiaries of such companies—must comply with the FCPA or face criminal and civil sanctions. Out of self-protection, qualifying companies are increasingly implementing internal anti-bribery compliance programs and reporting to their national officials and international officials (such as the OECD) the corruption pressures to which they are exposed in Russia. Over time, these measures may induce Russian officials to take corruption issues more seriously. After all, it was exactly such measures that shifted the business and political climate in Europe from one that was highly tolerant of bribes to one that gave birth to the OECD Anti-Bribery Convention. Prosecution in OECD countries has already begun, with some cases including counts related to alleged bribery in Russia. The OECD's Best Weapon: Peer Review During Obama's recent visit to Moscow, the Russia-U.S. Joint Working Group on Investment & Institutional Integrity made a number of recommendations. Among proposals regarding integrity, governance, and transparency, the group advised that Russia become a member of the OECD AntiBribery Convention. Membership would enlist Russia's commitment to numerous legally binding decisions, including the Anti-Bribery Convention. The Convention would require thorough evaluation of Russia's current legislation and enforcement efforts. Further, it would require Russia to implement extensive legal, regulatory, and policy measures to prevent, detect, prosecute, and sanction the bribery of foreign officials. Most important, the Convention has a peer-review mechanism that monitors each country's enforcement record. In practice, peer review has pressured governments to tighten their anticorruption enforcement. The prospect of such peer review may also stimulate Russia to bring its anticorruption efforts in line with OECD standards. To many observers, the prospects for Russia's anti-corruption program seem bleak. Russia appears more on track, however, when its efforts are considered in the context of other countries' achievements. When U.S. companies first became subject to the FCPA more than 30 years ago, they lobbied for European and Asian companies to be held to the same standard. Many in Europe and Asia simply smirked at American naivete; after all, until 10 years ago, foreign bribes were legitimate tax deductions in many OECD countries. It has taken several decades to change that culture. Similarly, it isn't reasonable to expect Russia's business and political culture to change in this decade, or for at least several years to come. Change may come as Russia gets more integrated into the global economy. But it will come only if non-Russian companies doing business in Russia began to insist, lobby, and educate in favor of an anti-corruption culture and a level playing field. Carol M. Welu, a partner at the London office of Squire, Sanders & Dempsey, has acted as lead counsel in major international corruption investigations . Yevgenya Muchnik is a corporate lawyer at the firm's Moscow office.

Committee for Russian Economic Freedom Twitter @RusEconFreedom http://russiafreedom.wordpress.com/

6