July 7, 2005
Oil Tycoon, Mikhail Khodorkovsky: Guilty of Fraud and Victim of Politics?
tycoon Mikhail Khodorkovsky, the former head of Yukos Oil ("Yukos"),
was convicted of charges including fraud and tax evasion and sentenced him to
nine years in prison.
former head of Yukos and once Russia's richest man, has already spent 583 days
in jail, meaning he would serve about another 7 1/2 years in prison.
sentenced to nine years on the same charges was Khodorkovsky's business partner
Platon Lebedev. A third defendant in the case, Andrei Krainov, was given a 5 1/2-year
Supporters of Khodorkovsky
have claimed that his trial was part of a Kremlin driven campaign to punish him
for funding opposition political parties of Vladimir Putin. The sentence would
keep him in prison well past the 2008 presidential elections and potentially during
the 2012 elections as well should Khodorkovsky have any political aspirations.
The prosecution claims Yukos officials had illegally transferred
more than $6 billion of crude oil revenues out of the country into companies registered
in tax havens.
In the 1990s, Yukos established companies in domestic "offshore
zones", (regions within Russia with low tax regimes). Yukos used these companies
to lower its tax liabilities. The charges against Yukos are based on claims that
its affiliates helped the company avoid taxes.
a Moscow court froze the remaining assets of Yukos, (2 production subsidiaries
and 3 refineries),in response to a $5.6 billion lawsuit filed by the state-owned
oil giant, Rosneft.
The suit claimed that Yukos had underpaid Yuganskneftegaz,
formerly Yukos' biggest production subsidiary, for oil supplies from 1999-2003.
On May 13, a Moscow court upheld this claim. Yuganskneftegaz was sold to Rosneft
for $9.3 billion at an auction last December held to help bailiffs recover the
$28 billion in back taxes for 2000-2003 that the authorities are claiming from
The court ruling brings to $12.9 billion the outstanding claims
against Yukos by Rosneft and Yuganskneftegaz. Yukos' ability to pay its bills
is severely restricted by court orders issued last year freezing most of its cash
accounts. Yukos has already filed suit aiming to annul the auction when Yuganskneftegaz
was sold to Rosneft and to receive reimbursement for damages suffered as a result
of the auction estimated at RUB 324 billion ($11.4 billion).
will be reorganized into two subdivisions,Yukos EP, dealing with exploration and
production, and Yukos RM , responsible for refining and marketing.much
of what he is accused of was legal at the time, or at least not specifically barred
by the legal and tax codes.
a government is corrupt, its corporate management probably is too.
the privatization laws that were in place in the 1990s left much to be desired,
companies that were bought in allegedly rigged auctions are now open to attack
Mikhail Khodorkovsky bought Yukos, Russias second biggest oil company and
the worlds fourth biggest, paying just $170 million for a majority share
stake. With 11.4 billion barrels in oil reserves, Yukos is close in size to British
Petroleum (about 12 billion barrels), which is worth some $180 billion. Khodorkovskys
purchase of the company drew criticism, as the auction was held by Menatep bank,
which he himself owned. Khodorkovsky is now Russias richest individual with
a personal fortune of $8 billion.
Oil merged with Sibneft Oil. As a result of the $3 billion deal, the new giant,
Yukos-Sibneft, became the worlds leading oil company in terms of proven
oil reserves. Its assets of $35 billion make it the worlds fourth largest
publicly, traded oil producer.
and some other Russian corporations now recognize that they must at least appear
to be committed to good corporate governance in order to access foreign capital.
now portrays itself as adhering to world corporate governance standards and as
having an independent and international board of directors. The company has developed
its own code of corporate governance. To its credit, to eliminate dilution risks
for its shareholders, the company decided that new share issues can go ahead only
with the approval of shareholders who represent at least 75 percent plus one share.
The new board of directors, elected at the annual shareholders meeting in June
2003, dismissed all but three members of the previous management team. Two-thirds
of the board are representatives of the international finance and oil industries,
leading Russian academics, or officials of federal or local government agencies,
bringing a wide range of professional experience to Yukos. The chair of its corporate
governance committee is an attorney from Washington, D.C.
2005 Nelson Chin.
inquire about consulting or speaking engagements, e-mail: Nelson