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Analysis & Opinion
15.03.10 Selective Justice
By Graham Stack

Newly published memoirs by Lord Browne, the former chief executive officer of British Petroleum, cast new light on the Yukos affair just as Yukos shareholders filed a lawsuit for $50 billion against Russia in the European Court of Human Rights. The book includes an insider’s view of Russia’s oil oligarchs, which could hypothetically reinforce the claim that Khodorkovsky’s prosecution was politically motivated.

The European Court of Human Rights held its first hearing of the lawsuit brought against Russia by the shareholders of the now-defunct Russian oil major Yukos on March 4 in Strasburg. Yukos, once one of Russia’s foremost oil companies, fell victim to massive tax claims in 2003 to 2004 that eventually led to its dismembering, while the company’s co-owners and top managers, oligarchs Mikhail Khodorkovsky and Platon Lebedev, ended up behind bars with lengthy sentences. The case was one of the major political crises during the 2000 to 2008 presidency of Vladimir Putin, with most analysts claiming that politics were behind the decision to level tax and criminal charges against Yukos and its owners.

The basis of the suit filed by Yukos is that the law was applied selectively against Yukos with the aim of expropriating the shareholders. Only days before the European Court hearing, Lord Browne of Madingley, better known as John Browne, star CEO of global oil major BP in 1995 to 2007, published his memoirs titled “Beyond Business.” Browne had extensive dealings with the oligarchs in his attempt to expand BP into Russia, eventually establishing a joint venture between BP and the local oil group TNK. But in his autobiography, Browne says that his first choice of partner in Russia was Yukos. He duly met with Yukos CEO and majority owner Mikhail Khordorkovsky. This was to be his first and last encounter with Khodorkovsky, since the tone of the meeting deterred him from further dealings with the oligarch – according to Browne, the “initially unassuming” Khodorkovsky started detailing the growing extent of his political reach. “As the conversation progressed,” writes Browne, “I felt increasingly nervous. He began to talk about getting people elected to the Duma, about how he could make sure oil companies did not pay much tax and about how he had many influential people under his control. For me, he seemed too powerful.”

Browne concludes that he was not surprised to hear of Khodorkovsky’s arrest in October of 2003: “It is easy to say this with hindsight, but there was something untoward about his approach.” He also records for posterity that shortly before Khodorkovsky’s arraignment, in a private conversation, Putin made a passing steely remark: “I have eaten more dirt than I need to from that man,” Putin said to Browne about Khodorkovsky. “Khodorkovsky did what Putin regarded as unforgiveable,” Browne writes. “He started meddling in the political arena when he was only a businessman. Putin’s rule was ‘stay out of politics, just do business, and you will be alright.’ Khodorkovsky crossed the line.”

Browne’s account of the politics behind Khodorkovsky’s arrest chimes remarkably well with another rare insider account of the affair: from late and much lamented former Prime Minister Yegor Gaidar. Gaidar’s hour in the headlines may have been in the early 1990s when he implemented radical economic reforms, but his most productive period may have been as a deputy in the State Duma in 1999 to 2003: Gaidar played a key role in shaping reformist tax legislation in Putin’s early presidency. But while it proved possible to get urgently needed legislation through the Duma for the first three years, starting in late 2002 things suddenly changed. “Everyone knows perfectly well what happened in February of 2003 in the Duma,” Gaidar told NTV talk show host Vladimir Solovyov in 2005. “Of course, Yukos was pursuing very energetic and fraudulent activity in the Duma. It was making use of the corresponding technologies and, in fact, already in 2002, toward the end of the year, it became clear that it was very hard for the government to get a single law through the Duma without a green light from Yukos.”

“I asked why the mineral oil tax was at the level it was, and was told that ‘Dubov wanted it like this’,” Gaidar recalled on another occasion. Vladimir Dubov was a Yukos shareholder, and as deputy head of the Duma tax committee he was the leader and organizer of the increasingly powerful Yukos lobby in the Duma.

Gaidar said that the Yukos lobby was in fact useful to the government for a time to get liberal reforms, such as the new tax code – with the introduction of a 13 percent flat rate income tax – through Parliament. “The interest of the oil lobby initially coincided with the interests of the country, because they wanted order and an efficient tax system,” Gaidar said. “But at a certain point in time they decided to measure up to the government.”

According to Richard Sakwa, a politics professor at England’s University of Kent who recently published the seminal cradle-to-grave history of Yukos, “by 2003 it was clear that Khodorkovsky was no longer willing to abide by the informal rules of the game. Putin was informed that 226 deputies in the Duma owed allegiance to Yukos, a simple majority of the total of 450, although this figure is probably exaggerated and the real figure was closer to 100. This was a Duma in which the word ‘lobbying’ barely describes the ability of interested parties to shape preferences, with activists running about with packets of money on the eve of important votes. The budget committee had practically turned into a structural subunit of Yukos.” Sakwa estimates that Yukos’ “lobbyist” work in the Duma saved the company around $3.5 billions in taxes.

But most experts believe that the Kremlin-Yukos standoff did not just relate to tax legislation, but cut across a whole range of issues essential to the state. The Duma being the most public area of Russian political life, it is simply the one that there is most information about. Other perhaps more critical aspects of the Yukos-Kremlin clash, which took place behind the scenes, are still shrouded in mystery, and await the memoirs of those involved.

Determining the direction of strategic oil pipelines was one such issue. But Sakwa recounts that it was the U.S. invasion of Iraq in March of 2003 that may have been the game-changer: Yukos aligned itself with the George Bush administration in assuming an active anti-OPEC and pro-Iraq war stance. Khodorkovsky, Sakwa points out, was positioning himself as the wingman in Russia for an increasingly unpredictable and penetrative U.S. foreign policy. He was also holding talks to sell Yukos – which after a merger with the oil company Sibneft would have controlled 50 percent of Russia’s oil reserves – to a U.S. super-major, a deal which would have made him one of the richest men on the planet. Khodorkovsky may have even appeared as a threat to Russian sovereignty in the eyes of the Kremlin, although he always denied harboring any presidential ambitions.

Whatever the behind-the-scenes maneuvering in this “great game” of global energy and geopolitics, it is clear from Lord Browne’s and others’ accounts that the decision to prosecute Khodorkovsky was political. The scale of Khodorkovsky’s tax evasion was probably not greater than that practiced by all other oligarchs. The others, however, went unscathed, although they apparently upped their tax payments by around 20 percent to stay on Putin’s good side. But no other oligarch so boldly violated Putin’s command to “keep what you own, but stay out of politics.”

The dilemma the European Court of Human Rights now faces is that of the selective application of justice. As Lord Browne observes of Russia in his memoirs, “the problem is not the lack of laws, but their selective application. This is what creates the sense of lawlessness. While bureaucratic legalistic processes are the hallmark of Russia, you never know whether someone will turn a blind eye or whether the laws will be applied to the hilt.”
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