The Yukos War: The Five Year Anniversary

186 Pages·2016·2.06 MB·English

by  Dmitry Gololobov

From the SelectedWorks of Dmitry Gololobov
2008
The Yukos War: The Five Year Anniversary
Dmitry Gololobov,University of Westminster
Available at:https://works.bepress.com/dmitry_gololobov/7/
The Yukos War: The Five Year Anniversary

by
Dmitry Gololobov*

*Dmitry Gololobov, Juris Doctor, University of Tver (Russian Federation), PhD (Russian Federation),
LLM Corporate Finance Law (University of Westminster, School of Law, London), PhD Candidate of
Queen Mary College. Member of the Moscow Bar.
Deputy Legal Counsel to Rosprom-Yukos Group (1996-2003). General Counsel to Yukos Oil
Company (2003-2004). Principal of Gololobov and Co Russian Legal Advisers, London, UK. Email:
[email protected]. Tel: [phone]
1
"He [Khodorkovsky] is already a hero in the eyes of everyone who opposes the way President Putin
runs the country"
Valery Panyushkin1 

“Corruption has started from us. With us the corruption has to end”
Mikhail Khodorkovsky2

“If you hate Putin you may die early through your own fault”
A new Russian national joke3

1 Z Dzieciolowski, 'Mikhail Khodorkovsky's Shadow' (2006) 3 April OpenDemocracy
<http://www.opendemocracy.net/globalization-institutions_government/khodorkovsky_3416.jsp>accessed 28 June 2008.
2 See <http://prigovor.com>
3 --, 'Putin Jokes: Happy 55th Vlad!' (2008) <http://blog.creativethink.com/2007/10/putin-jokes-hap.html>accessed 17 June
2008.
2
Table of Contents 
Part I 
1.  INTRODUCTION .......................................................................................................................................... 5 
2.  A GLIMPSE OF HISTORY: MENATEP, KHODORKOVSKY, YUKOS, PRIVATISATION, OLIGARCHS AND
ALL.. .................................................................................................................................................................... 6 
2.1.  Perestroika, Financial-Industrial Groups, Privatisation and the Menatep Bank. ................................. 6 
2.2.  Russia after Yeltsin: Putin, his “Strong State” Strategy and the “Equadistancing” of Oligarchs ..... 20 
2.3.  The Beginning of the Attack on Yukos. ............................................................................................ 22 
3.  YUKOS AND KHODORKOVSKY: PRIDE AND PREJUDICE ........................................................................ 27 
4.  THE BEGINNING OF THE CASE: SECHIN AND CO VS. YUKOS ............................................................... 38 
4.1.  Particular Political Grounds for the Attack on Yukos. ...................................................................... 39 
4.2. The Main Political Condition for the Attack on Yukos. .................................................................... 41 
4.2.  State and Putin’s Reaction to the Case. ............................................................................................. 44 
5.  THE STRUCTURE OF THE YUKOS CASE ................................................................................................... 49 
5.1.  The Arguments of Khodorkovsky’s Defense Regarding the “Organized Criminal Group” concept in
the Case. ........................................................................................................................................................ 51 
5.2.  APATIT “Privatization” Case ........................................................................................................... 54 
5.3.  The “APATIT Trading” Case ............................................................................................................ 56 
5.4.  The “NIUIF” Case. ............................................................................................................................ 57 
5.5.  The “Most” Case ............................................................................................................................... 59 
5.6.  The “ZATO” Case. ............................................................................................................................ 60 
5.7.  The “Personal Tax Evasion” Cases. .................................................................................................. 61 
5.8.  The “Charity” Case. .......................................................................................................................... 65 
5.9.  The “VNK” Case. .............................................................................................................................. 66 
Part II 
6.  YUKOS TAX CASE: YUKOS, DUKE AND RAMSAY ................................................................................. 71 
6.1.  Russian Civil Anti–Avoidance Doctrines before the Yukos Tax Case. ............................................ 71 
6.2.  Russian Tax “Evasion”: the Definitional Aspect. ............................................................................. 73 
6.3.  The System of Sanctions for Tax Avoidance/Evasion. ..................................................................... 74 
6.4.  The Yukos’ Operational (Trading) Scheme in the Context of the Situation in 90s in Russia. .......... 76 
6.5.  Transfer-Pricing in Russia and the Yukos Case. ............................................................................... 83 
6.6.  The Tax Avoidance /Evasion Allegations Against Yukos. ............................................................... 85 
6.7.  The Yukos Position. .......................................................................................................................... 90 
6.8.  The Court’s Rulings on the Yukos Tax Case. ................................................................................... 93 
3
6.9.  The Main Legal Implications of the Yukos tax case. ...................................................................... 102 
7.  LAUNDERING THE LAUNDERETTES ...................................................................................................... 109 
8.  THE ECHR AND THE POLITICALLY NON-POLITICAL CASE .............................................................. 122 
9.  YUKOS: THE AFTER LIFE ...................................................................................................................... 136 
9.1.      “ The Two Faces of Yukos” ............................................................................................................. 136 
9.2.  Banks Begin and Sell ...................................................................................................................... 141 
9.3.  Unfortunate Dutch Fortune ............................................................................................................. 150 
9.4.  Ante-Mortem Corporate Governance or Somebody’s Garb? .......................................................... 158 
10.  THE FIVE YEARS’ REPORT OR THE RUSSIAN IN AN IRON MASK ............................................ 160 
10.1.  Putin & Khodorkovsky: Personification of the Conflict. ............................................................ 161 
10.2.  Political Landscape: The Aftermath of the Yukos Affair. ........................................................... 163 
10.3.  Steering the Economic System. ................................................................................................... 164 
10.4.  The Money Laundering Story ..................................................................................................... 165 
10.5.  Public Opinion and the Yukos Affair. ......................................................................................... 165 
10.6.  The International Agenda. ........................................................................................................... 170 
10.7.  Release or Not Release... ............................................................................................................. 171 
10.8.  General Lessons of the Yukos case. ............................................................................................ 182 

4
Part I

1. INTRODUCTION

‘Two of the favourite and overused quotations of Russians are: what is to be done and who is to
blame? But when nobody is to blame, what is to be done?’

Sergei Kiriyenko, Ekho Moskvy radio, 25 August 1998.

The present article aims to summarise the findings of several academic publications made by the
author in U.S. referenced journals4 and in the Russian business press5 from 2006 to 2008, describing
different aspects of the Yukos Affair. The primary goal is to highlight the current position of the main
players in the “Big Yukos game”: Putin’s administration, the siloviki group, the prosecutors,
Khodorkovsky’s lawyers, and to analyse their past mistakes and their strategies for the future. The
article has been prepared for the fifth anniversary of the Khodorkovsky-Yukos case and is based on
author’s personal experiences, data from his archive and numerous meetings with former Yukos
managers, employees and lawyers, who are involved in different Yukos-related cases.
The Yukos Affair is known as a politicised story, and as the case that has created a new political,
legal and literary concept of a “jailed oligarch” and as an example of a new restoration of the Rule of
Law in Russia. The Yukos Affair crystallises the substance of an informal Russian national notion: the
confiscation and redistribution of allegedly illegally acquired property from the rich.

4 D Gololobov, 'The Yukos Money Laundering Case: A Never-Ending Story ' (2007) 28 (4) Mich J Int'l L 711-64; D
Gololobov and J Tanega, 'Yukos Risk: The Double Edged Sword' (2007) 3 (2) NYU J L & Bus 557-648; D Gololobov,
'The Yukos Tax Case or Ramsay Adventures in Russia' (2008) 7 (1) Fla St U Bus L Rev 165-253.
5 D Gololobov, 'Pyatiletka Ykosa: Tupikovoe Delo [The Yukos' Five-Year Plan: A Deadlock Case]' (2007) 26 July
Vedomosti <http://www.vedomosti.ru/newspaper/article.shtml?2007/07/26/129922>accessed 26 July 2007; D Gololobov,
'Pered Vyborom [Facing an Alternative]' (2008) 16 June Vedomosti <http://www.vedomosti.ru/newspaper/article.
shtml?2008/06/16/151352>accessed 16 June 2008.
5
The Yukos case is also known for giving rise to a number of the quasi-legal concepts such as
“Bassmanny Justice”,6 “silovarchs”7 and others. The impact of the Yukos Affair on Russian business
and political life is huge, demonstrating that the Perestroika and Glasnost were just mere words, which
could be swept away by the forces emerging from the Stalinist past and the ‘Putinist’ present.
The Yukos case, whilst having a significant international aspect, is based on distinctly Russian
grounds, therefore two unmistakable Russian questions have to be answered: who is to blame and what
has to be done?

2. A GLIMPSE OF HISTORY: MENATEP, KHODORKOVSKY, YUKOS, PRIVATISATION, OLIGARCHS
AND ALL

‘What has Yeltsin done in three years that communists could not do in seventy years?’
‘Make communism look good’
A Russian joke8

With its complex mixture of political, social, economic and legal factors, the Yukos case can
only be properly assessed within the socio-economic context of the last two decades of Russian
history, which represent a tumultuous period of transition from the command Soviet system to a free
market economy.9

2.1. Perestroika, Financial-Industrial Groups, Privatisation and the Menatep Bank.

The general reform of the Soviet financial sector that occurred during Gorbachev’s governance
resulted in the emergence of a new financial institution known as the ‘commercial bank’, which played

6 See eg C Belton, 'Shock and Then Boredom in Court ' MosTimes (Moscow 26 June 2008)<http://www.cdi.org/russia/
johnson/9165-9.cfm>accessed 20 July 2008.
7 See D Treisman, 'Putin’s Silovarchs' (2007) 51 (1) Orbis 141-53.
8 B Adams, Tiny Revolusions in Russia (Routledge, London 2007) 167.
9 See eg VB Supyan, 'Privatization in Russia: Phases and Effects' in MD Hancock and J Logue (eds) Transitions to
Capitalism and Democracy in Russia and Central Europe: Achievements, Problems, Prospects (CT: Praeger Publishers,
Westport 2000) 11-28; JR Wedel, 'Clans, Cliques, and Captured States: Rethinking 'Transition' in Central and Eastern
Europe and the Former Soviet Union ' (2001) WIDER Discussion Paper No 2001/58 <http://www.wider.unu.edu/
publications/working-papers/discussion-papers/2001/en_GB/dp2001-58>accessed 10 August 2007.
6
a critical role in the formation of the new Russian economy. Several of these institutions later became
the centres of large business conglomerates10: These conglomerates were the Financial-Industrial
Groups (FIGs) which aggressively participated in the privatization of the of the former Soviet Union
economy.11
The business conglomerate known as the Menatep Group went through the same development.
Its founder Mikhail Khodorkovsky used cash from his small co-operative firm to found the Menatep
Bank.12 In August 1988, the co-operative, established by him with his friends, was reorganized into the
Interbank Organization for Scientific Technical Progress. Later, in 1990 the Commercial Innovative
Bank was rechartered as Menatep, a joint stock company, and Khodorkovsky became chairman of the
board of directors.13 In 1997 Menatep was ranked 10th amongst the largest Russian banks.14 In the mid
1990s the bank was at the heart of Khodorkovsky’s empire, but after the rise of Yukos, Menatep began
playing a subordinate role, as its income could not be compared with Yukos’s oil revenues. In 1998
Menatep, like many other Russian banks, was hit by Russia’s biggest financial crisis.15 As a result the
bank was liquidated, but the Menatep Group and Yukos organized a complex buy-out scheme that
helped them to accumulate the bulk of bank’s debts for a fraction of their real price.16 This scheme
helped Khodorkovsky to rescue his reputation, as the other liquidated banks had paid nothing to their
creditors.17

10 D Lane, 'The Evolution of Post-Communist Banking' in D Lane (ed) Russian Banking: Evolution, Problems and
Prospects (Edward Elgar Publishing, Cheltenham 2002) 9-35, 14.
11 SM Cox, 'The Politics of Russia's Financial-Industrial Groups' (2000) 1 (1) Doğuş University Journal 28-42, 30.
12 H Fraser, 'Russia's Oligarchs: Their Risky Routes to Riches' (2004) 27 July BBC World Service business reporter
<http://news.bbc.co.uk/2/hi/business/3927523.stm>accessed 26 July 2007.
13 MI Goldman, The Piratization of Russia: Russian Reform Goes Awry (Routledge, New York 2003) 147.
14 Y Iji, 'Corporate Control and Governance Practices in Russia' (2003) University College London, School of Slavonic and
East European Studies Working Paper No33 1-37, 13 <http://www.ssees.ac.uk/publications/working_
papers/wp33.pdf>accessed 5 April 2007.
15 See eg J Johnson, A Fistful of Rubles: The Rise and Fall of Banking in Russia, (Cornell University Press, New York
2000); A Steinherr, 'Russian Banking since the Crisis of 1998' (2004) September Sacred Heart University Research Papers
<http://www.shu.lu/images/pages_content/02_Faculty/04_research/NewRussia-Steinherr.pdf>accessed 1 September 2007.
16 See Yukos, Annual Report for 2000 (2001) 45-46.
17 See AS Alexandrovich, 'Bankruptcy Law, an Economic Medicine: How Russia's New Bankruptcy Legislation Faciliated
Recovery from the National Financial Crisis of August ' (1998) 34 Cornell Int'l LJ 95-119.
7
Russian privatization began in late 199118 as an experiment, only to emerge as the government's
most popular reform.19 The premise of privatization was that companies would perform more
efficiently if they were controlled by private owners rather than by governmental officials.20 The
results of the privatization are closely linked to the approach to privatization that was adopted by the
Russian government.21 In a substance, the privatization in Russia was both rapid and pervasive.22 The
gigantic Soviet economy was privatized within a three-year period.23
Russian privatization was conducted in several distinct stages and gave rise to the notorious oli-
garchic system.24 Three main models of privatization were adopted in Russia in line with practices
existing in transitional economies: Mass Privatization (MP), Insider’s Model, (MEBO – Management
and Employees Buy Out), and Initial Majority Shareholdings (IMS).25 The first stage was originally
meant to symbolize populist capitalism, which was compliant with Yeltsin’s statement that Russia
needed millions of owners, but not a handful of billionaires.26
Among many other foreign innovations imported to Russia and used in the privatization process,
the Russian Government resorted to the use of holding companies.27 The holding company structure
was suitable for a situation when the state planned to reserve a majority ownership in a large number
of enterprises in the same or related industries. 28 Instead of achieving this objective by retaining a

18 See Wedel, 'Clans, Cliques, and Captured States: Rethinking 'Transition' in Central and Eastern Europe and the Former
Soviet Union ' 11-12.
19 M Boyckoand others, 'Privatizing Russia' (1993) 2 Brookings Papers on Economic Activity 139-92, 178.
20 MDV Coco, 'Towards Enterprisation: Shareholder Rights and Economic Reform in Russia' (1998-1999) 39 Va J Int'l L
169-80, 181.
21 International Labour Organisation, 'Privatization: Lessons from Russia and China' (2000) Enterprise and Management
Development Working Paper N EMD/24/E <http://www.ilo.org/public/english/employment/ent/papers/
emd24.htm>accessed 24 January 2006.
22 MB Fox, 'Corporate Governance Lessons from Russian Enterprise Fiascoes' (2000) 75 NYU L Rev 1720-80, 1721.
23 D Doeh, 'Oil, Law and Politics in Russia' (2005) 9 IELTR 205-09, 206.
24 See eg D Hoffman, The Oligarchs: Wealth and Power in the New Russia (Public Affairs, New York 2002); S Guriev and
A Rachinsky, 'The Role of Oligarchs in Russian Capitalism' (2005) 19 (1) J Econ Perspect 20.
25 RK Mishra, 'Privatisation and Economic Development Strategy in Russia' (2000) Argentine Center of International
Studies Working Papers - Programa CEI & Países Bálticos N 14 3 <www.caei.com.ar>accessed 21 March 2007.
26 V Coulloudon, 'Privatization in Russia: Catalyst for the Elite' (1998) 22 Fletcher F World Aff 43-56, 47.
27 N Poussenkova, From Rigs to Richers: Oilmen Vs Financiers in the Russian Oil Sector (James A Baker Institute for
Public Policy of Rice University Research Project Papers 2004) 2<www.rice.edu/energy/publications/docs/PEC_
Poussenkova_10_25_04.pdf>accessed 15 March 2007.
28 See eg D Lane and I Seifulmulukov, 'Structure of Ownership' in D Lane (ed) Political Economy of Russian Oil (Rowman
& Littlefield, Lanham 1999) 15-46, 16-19; Iji, 'Corporate Control and Governance Practices in Russia' 8-12.
8
majority interest in each of the numerous industrial producers, the state would obtain the desired 51
per cent interest in a holding company that controlled production companies.29
Yeltsin’s decree established vertically integrated oil companies (VIOCs) using the principles of
holdings with certain exemptions.30 Each oil holding company (VIOC) was made up of oil production
subsidiaries and refining subsidiaries.31 The first three vertically integrated oil companies were Yukos,
Lukoil and Surgut.32
On July 22, 1994, Yeltsin issued a decree on the second stage of privatization, which gave rise to
the notorious loans-for-shares auctions.33 Privatization of the major holdings, created in accordance
with the decree, took place from 1995 to 1999 via investment tenders and the loans-for-shares
programme34, as part of the ‘cash stage’ of privatization.35 The loans-for-shares scheme (LFS) was a
pseudo-privatization programme, whereby selected commercial banks served as trustees and
auctioneers for the rights to manage the stock in major Russian companies in exchange for loans.36 The
banks chosen to organize the auctions were controlled by the “oligarchs”. They had already obtained a
blessing from the Russian government to buy these companies, and camouflaged the real sale by
pledging the stock for loans.37
The result of the second stage of privatization (1992- 1997) was the formation of gigantic private
financial-industrial-media groups.38 For a short period, Russia seemed to have moved toward a system

29 WG Frenkel, 'Analysis of the Russian Regulations on Holding Companies: State Monopoly Duaring Market Reform and
Privatisation' (1993) 4 (6) ICCLR 226-30, 228.
30 See D Gololobov and S Bakhmina, 'Tri Etapa Razvitiya Kholdingovykh Kompanii v Neftyanoi Otrasli [The Three Stages
in the Development of Oil Industry Holding Companies]' (2001) 10 Zakonodatel'stvo i Ekonomika [Law and Business] 22-
28.
31 See P Rutland, 'Lost Opprotunities: Energy and Politics in Russia' (1997) 8 (5) NBR Analysis 1-30, 9.
32 Iji, 'Corporate Control and Governance Practices in Russia' 9.
33 See D Allen, 'Banks an the Loan-for Shares Auctions' in D Lane (ed) Russian Banking: Evolution, Problems and
Prospects (Edward Elgar Publishing, Cheltenham 2002) 137-59.
34 Coulloudon, 'Privatization in Russia: Catalyst for the Elite’ 49.
35 See Lane and Seifulmulukov, 'Structure of Ownership’ 30-36.
36 IW Lieberman, 'The Rush for State Shares in the Klondyke of Wild East Capitalism: Loans-for-Shares Transactions in
Russia' (1995-1996) 29 Geo Wash J Int'l L & Econ 737-68, 738.
37 MS Salter, 'Oao Yukos Oil Company ' (2001) Harvard Business School Cases N9-901-021 4
<http://harvardbusinessonline.hbsp.harvard.edu>accessed 10 July 2001.
38 Cox, 'The Politics of Russia's Financial-Industrial Groups’ 33; E Paszyc and I Wiæniewska, 'Big Business in the Russian
Economy and Politics under Putin's Rule' (2002) 5 Prace OSW / CES Studies 5-45, 46 <http://pdc.ceu.hu/archive/
00002224/01/big_business.pdf>accessed 23 July 2007.
9