[Senate Hearing 109-83]
[From the U.S. Government Publishing Office]
S. Hrg. 109-83
DEMOCRACY IN RETREAT IN RUSSIA
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED NINETH CONGRESS
FIRST SESSION
__________
FEBRUARY 17, 2005
__________
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COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida
LISA MURKOWSKI, Alaska BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
(ii)
C O N T E N T S
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Page
Aslund, Dr. Anders, Director, Russian and Eurasian Program,
Carnegie Endowment for International Peace, Washington DC...... 43
Prepared statement........................................... 45
Jackson, Bruce P., President, Project on Transitional
Democracies, Washington, DC.................................... 49
Prepared statement........................................... 52
Open Letter to Heads of State and Government of NATO and the
European Union............................................. 58
Ledsky, Hon. Nelson, Regional Program Director for Eurasia,
National Democratic Institute, Washington, DC.................. 66
Prepared statement........................................... 68
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
statement...................................................... 1
Nix, Stephen, Regional Program Director for Eurasia,
International Republican Institute, Washington, DC............. 60
Prepared statement........................................... 63
Osborne, Timothy, Member, Board of Directors, Group Menatep,
United Kingdom................................................. 12
Prepared statement........................................... 15
Report of the Council of Europe Parliamentary Assembly....... 29
Theede, Steven, Chief Executive Officer, Yukos Oil Company,
Moscow, Russia................................................. 4
Prepared statement........................................... 7
Additional Material Received for the Record
Prepared statement received from Mikhail Khodorkovsky............ 82
Response from Steven Theede to question submitted by Senator
Hagel.......................................................... 83
(iii)
DEMOCRACY IN RETREAT IN RUSSIA
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THURSDAY, FEBRUARY 17, 2005
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 9:34 a.m., in
room SD-419, Dirksen Senate Office Building, Hon. Richard G.
Lugar, chairman of the committee, presiding.
Present: Senators Lugar, Sununu, Martinez, Biden, Sarbanes,
and Obama.
OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM
INDIANA
The Chairman. This hearing of the Senate Foreign Relations
Committee is called to order.
In his Inaugural Address, President Bush stated that,
quote, ``It is the policy of the United States to seek and
support the growth of democratic movements and institutions in
every nation and culture, with the ultimate goal of ending
tyranny in our world,'' end of quote.
I agree with the President. Democracy must be at the core
of United States foreign policy and diplomacy. Our country must
be prepared to play a leadership role in ensuring that
democracy and basic freedoms are promoted and preserved around
the world.
The states of the former Soviet Union present a special
challenge to the advancement of democracy. Some states, such as
Latvia, Lithuania, and Estonia, have solidified democracy, and
used this foundation to establish strong economic security
links to Europe, including membership in NATO. Elsewhere, the
people of Ukraine and Georgia have struggled and sacrificed for
democracy. Those efforts have paid off with new governments
based on democratic principles and the rule of law.
But these encouraging signs are not universal. Belarus is
the last remaining dictatorship in Europe, a virtual police
state. The countries of Central Asia are controlled by
strongmen, and the effective and consistent application of
democracy, the rule of law, and human rights remain, in some
cases a distant goal.
The biggest concern in the region for democracy advocates,
however, is Russia. Despite elections and the experience of
post-Soviet personal freedoms by the Russian people, the fate
of democracy in Russia is perhaps more ambiguous now than at
any time since the collapse of the Communist system. Russia is
a vitally important country with which the United States must
have a constructive relationship. Those who would discount
Russia's relevance to United States national security in a
post-cold-war world are seriously mistaken, in my judgment. The
interests of our two countries intersect in countless areas.
Russia can be a critical partner in the war on terrorism, in
preventing nuclear nonproliferation, in meeting world energy
needs, in organizing international responses to emergencies,
and in maintaining economic vibrancy in both Europe and Asia.
With the adoption and maintenance of strong democratic
institutions, Russia would develop from an occasional partner
of the United States into a close friend. The benefits of such
a relationship, for both countries, would be enormous.
However, the United States/Russian relationship cannot
develop in positive directions while basic freedoms are being
violated in Russia. This is not just a policy of the U.S.
Government. When a country does not respect the rule of law,
private businesses around the world impose market-driven
consequences on that country. Investment and other economic
links that would help Russia diversify its economy and improve
its trading relationships are far less likely to appear if
foreign companies cannot count on a fair and consistent
business climate and legal system.
The Russian people have suffered from suicide bombings and
terrorist attacks, including the tragedies at the Moscow
theater and the elementary school at Beslan. Russia is fighting
to overcome terrorist threats that pose grave risks to citizens
on its own soil. In this struggle, we identify with the people
of Russia, and we pray for their safety. But even as we
understand the complex choices facing the Russian Government,
we can attest that these horrible events should not be used to
justify the rolling back of democracy. This is a self-defeating
strategy that will weaken, and not strengthen, Russian society.
In recent months, the Kremlin has taken action to stifle
public dissent and political opposition. Rival political
parties have been suppressed; the election of regional
governors was canceled; and most of the media has been brought
under state control. This pattern of behavior has spilled into
the Russian Government's handling of the economy. The campaign
against Yukos and Mikhail Khodorkovsky reached a new low, on
December 28, when one of President Putin's senior economic
advisors criticized the forced sale of Yukos' main oil-
producing unit and its purchase by a state-owned company as,
quote, ``the scam of the year,'' end of quote. This honesty
resulted in the official being stripped of most of his
responsibilities by the Kremlin.
Outside of Russia, the Kremlin has attempted,
unsuccessfully, to alter the outcome of the election in
Ukraine, and has provided overt support to the breakaway
regions, specifically Abkhazia, in Georgia. Russian backing
remains a critical component in President Lukashenko's hold on
power in Belarus and in efforts by governments in Central Asia
to rebuff democratic advancements. These anti-democratic
actions do not make Russia safer, because they contribute to
regional instability.
The West's next opportunity to reinforce democratic values
is in Moldova next month. Moldova's path toward democracy has
been marked by free and fair multiparty elections. We must be
vigilant to ensure that the people of that country have the
freedom to choose their leaders.
As the United States encourages democracy in the former
Soviet Union, we must maintain the foreign policy tools that
support this effort. The administration's fiscal year 2006
request for the foreign-affairs account is an especially good
one. But one area that should be revisited, in my judgment, is
its 13-percent cut in the funding for the Freedom Support Act,
which underwrites democracy programs in the former Soviet
Union. With so much at stake in Russia, this is not the time to
diminish our funding in this area.
Next week, our President, President Bush, will meet with
President Putin in Bratislava. The discussion may focus on the
proliferation of weapons of mass destruction and the global war
on terrorism. There is much to discuss in these areas,
including the identification of additional weapons sites in
Russia in need of security upgrades and Russia's resistant
posture toward granting liability protections to United States
contractors working on the Plutonium Disposition Program.
In addition to these important subjects, President Bush
must make democracy, human rights, and the rule of law
priorities of the discussion. The United States must continue
to press Russia to adopt a free and fair political and judicial
system. Only then will the United States/Russian relationship
reach its full potential.
To examine the threats to democracy and the rule of law in
Russia, we are joined today by Mr. Steven Theede, the chief
executive officer of Yukos, and Mr. Tim Osborne, director of
Group Menatep. We appreciate their appearance, especially given
that hearings in the Yukos court case, including claims against
the Russian Government, are still continuing in Houston today.
On our second panel, we are pleased to welcome Stephen Nix
of the International Republican Institute, Nelson Ledsky of the
National Democratic Institute, Anders Aslund of the Carnegie
Endowment for International Peace, and Bruce Jackson of the
Project on Transitional Democracies.
Gentlemen, we thank all of you for joining us today. We
look forward to your insights.
Let me mention that my colleague, the distinguished ranking
member of the committee, may not be with us for a period of
time, or perhaps throughout the entire hearing, because a
bankruptcy bill, which he initiated 8 years ago as the original
cosponsor, is suddenly being marked up this morning in the
Judiciary Committee. That will necessarily require his
presence, and we understand that. That bankruptcy markup was
unknown when this hearing was scheduled. He deeply regrets that
he will not be present to, at least, hear the initial
testimony, but we know that he will participate if he possibly
can.
Let me, at this point, call upon you, gentlemen, in the
order that I have introduced you, for your opening statements.
Perhaps you can summarize in roughly a 10-minute period of
time. The Chair will not be that rigorous with time
restrictions. We're here for your information, not to restrict
the amount that you have to say--but let me just say, at the
outset, that your full statements will be made part of the
record in their completion.
Mr. Theede.
STATEMENT OF STEVEN THEEDE, CHIEF EXECUTIVE OFFICER, YUKOS OIL
COMPANY, MOSCOW, RUSSIA
Mr. Theede. Well, thank you very much, Mr. Chairman.
My name is Steve Theede, and I am chief executive officer
at Yukos Oil Company. And I do very much appreciate the
opportunity to be here today, so thank you for the invitation.
I will be brief, and have submitted a more full copy of--
and statement for the record.
There is much at stake in how the Yukos situation is
resolved: The supply and price of global oil, the safety and
welfare of Yukos employees and communities, the future of
economic development and rule of law within Russia, and the
relationship of the Russian Federation with the United States
and other nations.
The United States has a direct interest in the resolution
of the Yukos situation. Beyond the important political or
strategic concerns, there are the vital issues of global energy
and economic security. There are the rights of more than 60,000
individual and institutional investors, many of them Americans,
who express their faith in Yukos and their faith in Russia by
investing in the company and in the country.
Investors, whether they are American or not, must have
confidence that investments made in the international
marketplace will be protected and that the rule of law, not
politics or greed, will dictate the actions of government.
I've spent more than 30 years working in the international
oil and gas business, engaging successfully in different legal
and political systems around the world. And I moved to Moscow,
and I joined Yukos about 18 months ago because I believed that,
within the global oil business, no country had more potential
than Russia, and no company had more promise than Yukos.
In less than a decade, as a privatized company, Yukos had
become Russia's most stable and reliable oil producer and among
the most efficient and fastest growing producers in the world.
As an innovator, a taxpayer, and an employer, Yukos had become
the true Russian success story and Russia's most progressive,
transparent, and successful oil company.
Were there risks in the Russian business environment? Of
course there were. But less than 2 years ago, the risks seemed
more commercial than political. I heard and believed President
Putin's message of an independent judiciary, of private
ownership, of more protection for investors, of participation
by international companies to help tap Russia's vast reserves.
But those high expectations at the start only deepen the
feelings of disappointment and betrayal today. We've seen, Mr.
Chairman, a ruthless and unprecedented campaign by the Russian
Government against Yukos, carried out by way of dubious and
discriminatory taxes, illegal expropriation of property,
arrests, and individual intimidation. A modern, globally
respected company has been dismantled by a series of carefully
timed and politically motivated attacks by the Russian
Government. The market value of Yukos has plummeted from $40
billion to $2 billion in less than 6 months.
As a litmus test for future investors, the Yukos experience
certainly is not encouraging. The rules have clearly changed.
For reasons known only inside the Russian Government, it has--
seems to have reversed its commitment to privatization and
chosen instead to increase the role of the state. As a result,
the whims of those in power have replaced the guarantees of due
process, adherence to the rule of law, and protections for the
rights of shareholders and property owners.
Sitting here today, secure in the rule of law, it's hard to
imagine the human tragedy that is still unfolding in Russia
today. The former leadership of Yukos sits in a Russian jail.
Most troubling to me personally, many loyal and outstanding
Yukos employees, people whom I have worked side by side with
over the last year and a half, find themselves subject to
intimidation by the government and threats by its agents. I
fear for those good people and the uncertain future that they
face in a country that they love just as we love our own.
The economic tragedy continues to unfold. It represents the
dismantling of a potentially great oil company, and one of
Russia's largest taxpayers, through a systematic and deliberate
government campaign to bankrupt Yukos.
First, government officials instructed tax authorities to
make a tax case against Yukos. The tax claims are a contrivance
without merit or precedent. They are based on a selective and
retroactive application of Russian tax laws, and on fines and
penalties that are unconstitutional. They totaled the
incredible sum of $27\1/2\ billion.
I have a chart that I would like to submit that, in
essence, shows the total tax bill that has been assessed
against the company. And those are the red bars. That is the
total of taxes paid at--during the current years that they were
due, plus the additional penalties that have been assessed--
taxes and penalties that have been assessed against the company
as a result of this most recent attack. And that's compared to
the gross revenues of the company. Total gross revenues of the
company, which is shown in the blue chart.
And we're showing this just to give you an idea how
outlandish these tax claims are, because, consider, in 2002,
the total taxes, both invented and otherwise, along with fees,
fines, and penalties assessed against Yukos, totaled 111
percent of the company's gross revenue. There is no business or
economic logic that explains how a company can be assessed more
in taxes than it collects in revenue.
As their next step, the Russian court and bailiff sought to
collect the total amount, more than $27 billion, before our
legal appeals were even exhausted.
In addition, while demanding immediate payment, they
simultaneously froze all Yukos assets and bank accounts; in
effect, leaving the company unable to properly function.
The government's resolution to this contrived situation was
to declare that, because Yukos could not pay its fictitious
taxes, the bailiffs would have to seize Yuganskneftegaz, our
most valuable asset, which produces about a million barrels a
day, and sell it at auction to satisfy these tax charges.
Drained of cash and unable to sell assets, we were left with
limited means to invest in operations, pay salaries, meet
expenses, or pay taxes that we allegedly owned--owed.
The so-called auction was a sham in which Yuganskneftegaz,
which accounted for roughly 60 percent of our total production
capability, was sold for less than half its appraised value.
Not surprisingly, the buyer was an unheard-of company, created
just 2 days earlier and of no certain address, that sold its
prize almost immediately to Rosneft, a 100-percent completely
state-owned and controlled company whose new chairman also
continues in his position as a senior government official.
Despite the government's unsupportable claims, Yukos acted
in a responsible way. Even while challenging the tax claims
through all available legal, political, and diplomatic
channels, as a matter of good faith and as a signal of our
interest in finding a reasonable resolution, we began to pay
some of the taxes. But it quickly became clear that this was
not really about taxes, but, rather, an orchestrated effort to
wrest control of the company and its assets.
As the Moscow Times summarized it on January 14, 2005,
``State-controlled banks helped a state-controlled oil company
purchase a controlling stake in Yugans, which was being sold by
the state for tax debts owed to, and defined by, the state.''
The legality of these actions has apparently stirred debate
even within top ranks of the Russian Government. Just last
week, Andrei Illarionov, a long--a close and long-term economic
advisor to the Russian President said, Yuganskneftegaz should
be returned to Yukos. He said there are certain common human
commandments, such as, ``Thou shalt not steal.'' Not
surprisingly, by speaking truth to power, this once-influential
advisor has reportedly been stripped of many of his duties.
When Americans ask, ``Why should we care about this?'' I
could give you a number of reasons, but I'll focus on the
reasons that I know best, and that's energy. As the world's
largest oil consumer, clearly America's energy security and the
strength of its economy depend, in good measure, on the
stability and reliability of global oil supplies. Yukos had the
potential to add significantly to the stability of the supply
coming from Russia, making its dismantling an important
economic blow.
The numbers are quite impressive. Operating with the
efficiencies and incentives of a publicly traded company
utilizing world-class technology and expertise, the annual
production of Yukos grew by 300 percent from 2000 to 2003. At
the same time, Russia's overall production grew just 30
percent.
Before the government campaign began, in 2004, Yukos had
become the largest producer of crude oil in Russia and the
largest exporter of crude oil from Russia. Slightly less than
20 percent of all crude oil produced in Russia came from Yukos
and its subsidiaries.
The production growth is rapidly decelerating. Production
growth rate has now fallen 4 straight months in Russia. The
International Energy Agency cut its forecast of Russian oil
output growth this year to 3.8 percent, citing higher taxes and
a worsening regulatory climate. The treatment of Yukos and the
increasing state control of oil production, in general, are the
critical contributing factors. State control is increasing,
even as production growth is decreasing.
Just last week, the Russian Federation announced a ban on
United States and other foreign-owned companies from bidding
for new permits to develop several large oil fields. This will
further discourage needed investment capital and expertise.
Ronald Nash, Chief Strategist at Renaissance Capital, which
is a Moscow-based investment bank, called the ban a dramatic
step down the road of state intervention which Russia has been
following for some time. The ban could dissuade foreign
companies from investing in Russia.
The eyes of not just this body, today, but also the world
are on Russia as it attempts to gain full membership in the
global economic community. Russia may be tearing up its own
rule book, but it cannot be allowed to tear up the
international rule book.
Would-be investors might well be wary of doing business in
a country where international norms and the rule of law can be
so easily violated, and where property and shareholder rights
cannot be guaranteed. As long as that system exists, Yukos will
not be the last company to find its rights violated and its
assets seized by the Russian authorities.
I appreciate this chance to take part in the hearing today,
Mr. Chairman, and I also thank you for unanimous--thank the
committee for unanimously passing a strong resolution of
disapproval against the actions of the Russian Government. I
hope this strong show of resolve will inspire similar protests
by the full Senate, the House, the President, and Americans, in
and out of government.
Thank you very much.
[The prepared statement of Mr. Theede follows:]
Prepared Statement of Steven Theede, Chief Executive Officer, Yukos Oil
Company, Moscow, Russia
introduction
Yukos is one of the largest multinational oil companies in the
world. The company had a market capitalization of $40 billion before
the Russian Federation engaged in a ruthless and unprecedented campaign
of dubious and discriminatory taxes, illegal expropriation of property,
arrests and intimidations. The attack by the Russian Federation against
Yukos violates Russia's foreign investment laws, which provide for
international arbitration of investment disputes, as well as Russia's
obligations under its treaties and international law.
There is much at stake in how this situation is resolved: The
security, reliability and price of global oil supplies; the safety and
welfare of Yukos' employees and communities; the future of economic
development and rule of law within Russia; and the relationship of the
Russian Federation with the United States and other nations.
The United States has a direct interest in the resolution of the
Yukos situation. Beyond the important political or strategic concerns,
there are the vital issues of our nation's energy and economic
security. There are the rights of more than 60,000 individual and
institutional investors, many of them Americans, who expressed their
faith in Yukos by investing in the company.
Today, the market value of Yukos has plummeted from $40 billion to
$2 billion because of the Russian government's campaign of persecution
and intimidation against Yukos and its officials.
The Russian government has carried out a ruthless and unprecedented
campaign against Yukos by way of dubious and discriminatory taxes,
illegal expropriation of property, arrests and intimidation. For
reasons known only inside the Kremlin, Russia has decided to reverse
its commitment to privatization and chosen instead to increase the role
of the state. It has made an equally unfortunate choice to ignore the
Western-style reformist laws it passed over the past several years when
those laws conflict with the interests of the Kremlin. As a result,
there are no guarantees of due process, no adherence to the rule of
law, and no protections for the rights of shareholders or property
owners.
background
Following the collapse of the Soviet Union in the early 1990s, the
Russian Federation's oil industry consisted of hundreds of stand-alone
state-owned entities. The vast majority of these were inefficiently
run, unprofitable and overstaffed. They survived only through continued
state support. In 1993, the Russian government set out to restructure
the nation's oil and gas sector. Through privatization, the government
hoped to make the Russian oil and gas sector viable in a global market
and, above all, attract much needed direct foreign investment into the
country.
Yukos was founded by the Russian government on April 15, 1993
through the integration of state-owned producing, refining and
distribution entities. Although it had become a separate legal entity,
the newly created Yukos remained entirely state owned. It remained that
way until December 1995 when the Russian government sold its stake in
Yukos to a group of Russian investors. Thus, through a series of
tenders and auctions held in 1995 and 1996, Yukos essentially became
Russia's first fully privatized oil company.
russian success story
Despite the arrival of private investors, Yukos continued to
experience a sharp decline in production output and mounting salary
arrears, and faced the technical bankruptcy of its main production
unit, Yuganskneftegaz or YNG. Its debts to the Russian government had
grown to more than $3.5 billion. In May 1996, Mikhail Khordokovsky
stepped in as Chairman of Yukos' Executive Board, bringing with him a
dynamic, professional management team. The task of this team was clear:
Transform the company into a multinational enterprise managed in
accordance with the highest international standards of operational
efficiency, transparency and corporate governance. Over the next eight
years, Yukos was successfully transformed into a viable, vertically
integrated, transnational oil company competing with the biggest oil
industry players in the world.
The company repaid all debts owed to Russian federal and regional
governments, and increased its production capacity by reinvesting its
profits in drilling, capital construction and new oil field
development. Further, realizing that attaining Yukos' goal of becoming
a successful international energy player would require substantial
foreign investment, Yukos embarked on an ambitious program to transform
the company's corporate culture into that of a fully transparent,
Western-style corporation. For example, Yukos became the first Russian
company to switch to international accounting standards, and the first
Russian-based multinational to disclose its management and ownership
structure to the public.
The company's annual production output grew by 17 percent in 2001
and by 19 percent in 2002. By 2002, Yukos accounted for approximately
18 percent of Russia's total oil production, producing an average of
1.4 million barrels a day. Before the government launched its
deliberate campaign to destroy the company, Yukos and its subsidiaries
were the largest producers of crude oil in Russia and the largest
exporters of crude oil from Russia. Together they produced slightly
less than 20 percent of all the crude oil produced in Russia, and
refined and marketed slightly less than 20 percent of the refined
products in Russia. This made Yukos one of the largest oil and gas
companies in the world.
In December 2002, Standard & Poor's rated Yukos ``BB with stable
outlook,'' and in January 2003, Moody's Investor Service assigned the
company a rating of ``Ba2.'' At the time, these were the highest long-
term and foreign currency issuer ratings for any privately-held Russian
multinational. Khodorkovsky himself won the 2002 ``Entrepreneur of the
Year'' prize, awarded annually by Russia's leading business daily
Vedomosti, published jointly by the Financial Times and the Wall Street
Journal. The same year, the Russian government named Yukos the ``Best
Company for Compensation and Social Payments Programs,'' as well as for
the ``Implementation of Social Programs at Enterprises and
Organizations.'' By 2003, Yukos had signed major joint venture and
strategic affiance agreements with international companies such as
Total, Schlumberger, and Microsoft. In fact, the company's success was
so internationally celebrated that, in 2003, ExxonMobil expressed its
interest in acquiring between 40 and 50 percent of Yukos for an
estimated $25 billion--a transaction that would have been the single
largest direct foreign investment in Russian history.
Not surprisingly, since 1998, the value of Yukos' shares increased
more than tenfold, including a growth of 250 percent in 2001 alone. By
all accounts, Yukos was the signature success story of the new Russian
Federation. By October 2003, the market capitalization of Yukos'
worldwide stock was estimated at more than $30 billion. As late as
April 2004, Yukos' market capitalization was estimated at more than $40
billion. United States investors owned interests in Yukos that were
worth approximately $4 billion in October 2003, when the Russian
authorities began their persecution of Yukos' chief executive officer.
American investors (and investors from around the world) bought
their interest in Yukos in the good faith belief that their investment
would not be expropriated. Russia, recognizing the importance of the
rule of law to international investors, adopted the Russian Foreign
Investment Law which states in its preamble that it is, ``aimed at . .
. ensuring stable terms for operations of foreign investors and
compliance of the legal order of foreign investment with the standards
of the international law.''
A company that had been formed from the decaying remnants of the
Soviet era had become a standard bearer for the new, pro-foreign
investment Russian Federation. Within a mere eight months, however,
between April and December 2004, this transparent, globally-respected
multinational corporation, worth an estimated $40 billion, was
subjected to a series of carefully timed and politically motivated
attacks by the Russian government, ultimately forcing it to seek
bankruptcy protection in the United States on December 14, 2004.
khodorkovsky arrested
During 2002 and early 2003, Mikhail Khodorkovsky reportedly became
concerned the country's upcoming general election would result in a
two-thirds pro-government majority in the Russian Parliament
(``Duma''). He began to contribute openly to major opposition parties,
but reportedly refused requests to finance United Russia, the current
governing party. He became an outspoken critic of the alleged endemic
corruption in the Russian administration and advocated for progressive
legislative reforms. Due to his close ties with Western business and
political leaders, his words were resonating outside of Russia and his
reputation growing.
In mid-2003, an election year in Russia, the Kremlin reacted.
Platon Lebedev, Chairman of Menatep Limited, Yukos' largest
shareholder, was arrested in July 2003 on charges of fraud and tax
evasion, and Vasily Shakhanovsky, a member of Yukos' Management Board,
was charged with tax evasion. In July 2003, the Russian Government
raided Yukos' offices where it went through computer records for
approximately 17 hours. And on October 25, 2003, Mikhail Khordokovsky
was arrested at gunpoint by government agents and jailed on charges of
tax evasion, theft of state property, and fraud. He remains jailed to
this day. In addition, many loyal and outstanding Yukos employees have
found themselves subject to intimidation by the government and threats
by its agents. The Government continues to arrest Yukos' managers,
intimidate its employees through illegal searches of their homes
conducted by masked, armed forces, confiscate personal property of the
company and its officers, and jail or threaten other company employees
on trumped up criminal charges. In a recent example of this repugnant
methodology, Svetlana Bakhmina, a young Deputy General Counsel of Yukos
and the mother of two young children, was arrested late at night at her
home in Moscow on charges relating to her legal work at Yukos. She
remains incarcerated.
Despite the political activism of its largest individual
shareholder, however, Yukos itself was never involved in
Khordorkovsky's political activities. All his contributions to
opposition parties, for example, were made from his personal funds and
not from corporate accounts. Nevertheless, hand-in-hand with its
criminal investigations, the government also apparently perceived that
it had to move against Khordokovsky by targeting Yukos, the single most
concentrated source of his wealth. In December 2003, a few weeks after
Khordokovsky's arrest, the Ministry of Taxation conducted a perfunctory
two-week ``special'' audit of Yukos' books. In April 2004, the
government slapped a $3.4 billion audit report on Yukos, which it
claimed Yukos owed in respect of the 2000 fiscal year. The Russian
government's moves against Khordokovsky's wealth, through tax
assessments against Yukos, have been numerous since then, clearly
retaliatory and have involved the systematic repudiation of the rule of
law.
the tax assessments
Following the first assessment against Yukos, the government levied
additional tax assessments against Yukos and certain of its
subsidiaries. Including massive penalties, fines and interest, these
assessments eventually totaled approximately $27.5 billion. They were
based on government audits of Yukos' books, which had already been
audited by PricewaterhouseCoopers, formally audited and confirmed as
correct by Russian tax authorities, and made as transparent as possible
as part of the company's corporate philosophy. Further, in light of the
fact that Yukos was one of Russia's largest taxpayers, it was in
constant communication with the regional Russian tax authorities, which
had approved all of Yukos' previous filings following similar audits.
Yukos has always maintained that the company, like many other companies
in Russia, used legal and government-approved tax reduction provisions.
Allegations that Yukos had acted illegally could only be made under a
selective and retroactive reinterpretation of Russian tax law that
could not reasonably have been anticipated when the transactions took
place.
In addition, the amount of the taxes has been swelled by usurious
default interest, penalties, and fines. This exponential rate of
increase jeopardized Yukos' ability to conduct business and decimated
its net equity. In a blatant example, tax assessments for 2001 and 2002
have been in excess of 100 percent of Yukos' annual consolidated gross
revenue; for 2003 the assessments have been in excess of 80 percent of
Yukos' consolidated gross annual revenue. Indeed, the assessments
levied against Yukos for 2001 were in excess of four times the
consolidated gross industry average taxes; for 2002, in excess of 3\1/
2\ times the industry average; and for 2003, in excess of 2\1/2\ times
the industry average.
kremlin moves to bankrupt yukos
Despite the government's insupportable tax claims, Yukos acted in a
responsible manner. Even while challenging the tax claims through all
available legal, political and diplomatic channels, as a matter of good
faith and as a signal of our interest in finding a reasonable
resolution, Yukos began to pay some of the taxes. But it became clear
this was not really about taxes. It was about an illegal and
politically motivated campaign to expropriate valuable oil assets and
return them to the close control of the government. Having ignored any
number of settlement proposals by Yukos, or other reasonable proposals
to pay the entire amount of the tax assessments over time, the Russian
government instead intensified its collection efforts against Yukos by
utilizing the full apparatus of the state.
On April 15, 2004, the government obtained an injunction forbidding
the disposal, encumbrancing or other dealing with any of the assets of
the company. On June 30, 2004, a further freezing order forbade any
disposals of assets while at the same time requiring an additional tax
payment of more than $3.4 billion to be made within 5 working days on
pain of a penalty surcharge of 7 percent of the total debt ($241
million).
Because of the injunction and the freezing order, the company was
prohibited from making that additional tax payment. Its formal
application on July 2, 2004, that sufficient assets to meet the
liability should be released for that purpose was rejected. The
surcharge was duly applied. The government's ultimate resolution to
this contrived situation was to declare that because Yukos could not
pay its fictitious taxes, the bailiffs would have to seize
Yuganskneftegas, the company's most valuable asset, and sell it at
auction to satisfy the tax charges.
On August 31, 2004 the bank accounts of Yuganskneftegas were frozen
and on September 9, 2004, following a further additional tax assessment
of $2.7 billion, thirteen further freezing orders were imposed on
Yukos' bank accounts forbidding all transactions. As a result, the
company had no access to cash to reinvest in their operations, operate
their businesses, disburse company expenses, pay salaries to employees,
satisfy any amounts levied under the tax assessments, and most
importantly, pay current taxes. In essence, by forcing the company to
operate with no money, the Russian government left Yukos incapacitated
and unable to function.
Having rendered Yukos cash-flow insolvent, the Russian government
through its bailiffs conducted an auction of Yuganskneftegas on
December 19, 2004, allegedly to raise money to pay a portion of Yukos'
tax bill. In violation of a restraining order from a U.S. Bankruptcy
Court, the auction proceeded as scheduled, with the assets being sold
for half their appraised value. The buyer in this sham auction was an
unheard-of company of no certain address that sold its prize almost
immediately to Rosneft, a front for the Kremlin, whose chairman had led
the attack on Yukos in the first place.
By forcing down the value of YNG stock at the auction, the
subsequent set-off against Yukos' tax bill still left a significant tax
liability, potentially putting other assets in jeopardy. At the Russian
government's request, Dresdner Kleinwort Wasserstein valued the shares
of YNG in preparation for the auction. It gave a valuation of between
$15-$18 billion. Despite that valuation by an independent bank, the
Russian government set the auction to start at significantly under $9
billion, less than half the valued amount.
In recent comments, Andrei Illarionov, a close and long-term
economic adviser to the Russian president, said Yuganskneftegas should
be returned to Yukos. ``There are certain common human commandments,''
Mr. Illarionov said. ``Such as `thou shalt not steal.' '' Not
surprisingly, this once influential adviser has reportedly been
stripped of many of his duties following his comments.
The Kremlin's deliberate campaign against Yukos has serious
implications for the United States. Americans should be concerned about
a Russian government still willing to unleash its agents in a ruthless
campaign against companies or individuals. Likewise, we should be wary
of a retreat from democratic values in Russia and a seeming level of
instability, especially given Russia's strategic location and nuclear
capability.
As the world's largest oil consumer, America's energy security--and
by extension its economic security--depends on the stability and
reliability of global oil supplies. Yukos had made significant
investment in technology, equipment and talented staff, and was playing
a growing role in stabilizing world supplies.
Today, industry analysts note that the Russian government is
tightening its grip on the energy sector. Christopher Weafer, chief
strategist for Alfa Bank, said this move ``is not unexpected and is
part of the government's efforts to exercise greater control over the
energy sector.'' Just last week, the Russian Federation announced a ban
on U.S. and other foreign-owned companies from bidding for new permits
to develop several large oil fields. This action will further slow the
growth of Russian oil production by discouraging needed investment
capital and expertise.
Roland Nash, chief strategist for Renaissance Capital, a Moscow-
based investment bank, called the ban ``a dramatic step down the road
of state intervention, which Russia has been following for some time.''
Mr. Nash concluded: ``The ban could dissuade foreign companies from
investing in Russia.''
As the Wall Street Journal reported recently, slowing growth in
Russian oil production has helped drive up world oil prices. Production
has fallen for four straight months. The International Energy Agency
cut its forecast of Russian oil output growth this year to 3.8 percent,
citing higher taxes and a worsening regulatory climate. These
circumstances run counter to the energy and economic security of the
United States.
uncertain future
In July 1999 the Russian Federation adopted the Russian Foreign
Investment Law in order to attract and encourage foreign investment on
its territory. According to its preamble: ``This Federal Law determines
the basic guarantees of foreign investors' rights to the investments,
and to the income and profits obtained from such investments, and the
terms of business activities of foreign investors in the Russian
Federation.'' The legislation's preamble declares its purposes to be:
``Attracting foreign material and financial resources, advanced
engineering and technologies, managerial experience and efficient
application thereof in the economy of the Russian Federation, and
ensuring that the legal regime of foreign investments is in compliance
with the norms of international law and the international practice of
investment co-operation.''
The Yukos matter puts the eyes of the world squarely on the Russian
Federation to judge whether it is living up to that commitment. Yukos
is protected by the investment guarantees set forth in the Russian
Foreign Investment Law because foreign investors own at least 10
percent of Yukos' capital stock and because Yukos reinvests its income
and profits in oil production and related activities on the territory
of the Russian Federation.
By any measure, the Russian government tax claim is not in keeping
with international norms or even Russian law. It was imposed without
substantive due process by retroactive application of substantive law
that was different from what had been applied to Yukos in the past and
different from what was applied to other similar companies. It involved
an interpretation of law that could not reasonably have been
anticipated. It was also imposed without procedural due process
involving a fair opportunity to be heard, in many cases imposing taxes
for prior years in which the Russian government had previously said no
more tax was due.
This has resulted in a discriminatory taxation of Yukos as compared
to other oil and gas companies operating in Russia, many of which are
not foreign-owned corporations, and at $27.5 billion, it was so
grotesquely large that it equaled between 80 to 111 percent of Yukos'
U.S. GAAP consolidated gross revenues (before expenses are taken into
account) for the years 2001, 2002 and 2003, and about 70 percent in
2000.
The inequitable and illegal actions surrounding these extraordinary
tax claims substantially impaired Yukos' ability to pay its more than
$1.5 billion of debt to over 150 legitimate lenders and trade
creditors, and caused the value of Yukos' common stock, owned by over
60,000 shareholders, to plummet from over $40 billion to less than $2
billion.
These actions also focus attention on Russia as it attempts to gain
full membership in the global economic community. Would-be investors
might well be wary of doing business in a country where international
norms and the rule of law can be so easily violated, and where property
and shareholder rights cannot be guaranteed. The Kremlin may feel it
has license to tear up the Russian rule book, but international rules
are another matter. The rights of international investors can only be
protected in a legal system that is fair and unbiased, not one where
the Russian government picks winners and losers before it ever decides
to hear the case. As long as that system exists, Yukos will not be the
last company to find its rights violated and its assets seized by the
Kremlin.
The actions of the Russian government have bankrupted a company
that once seemed destined to serve as a model for Russia's economic
future. The European Union has condemned the actions against Yukos as a
politically motivated, coordinated attack by the Russian government
designed to regain control of strategic economic assets. The Senate
Foreign Relations Committee has also added its influential voice
through a resolution of disapproval which the Committee passed on a
unanimous vote.
Sadly, the Russian people will bear much of the burden as well. At
its peak, Yukos employed more than 100,000 people, paid billions of
dollars in taxes and invested generously in local communities. A
modern, globally-respected company has been dismantled by a series of
carefully timed and politically motivated attacks by the Russian
government. As a litmus test for future investors, adherence to the
rule of law and compliance with international norms, the Yukos
experience is not encouraging.
The Chairman. Thank you very much, Mr. Theede.
Mr. Osborne, would you proceed, please?
STATEMENT OF TIMOTHY OSBORNE, MEMBER, BOARD OF DIRECTORS, GROUP
MENATEP, UNITED KINGDOM
Mr. Osborne. Thank you, Chairman Lugar, for inviting me to
the hearing today. I've already submitted formal remarks, but
I'd like to offer a brief summary.
My name is Timothy Osborne. I have practiced as an attorney
in the United Kingdom for over 25 years, specializing in
international tax issues and corporate governance. I am a
member of the Independent Board of Directors of Group Menatep.
Group Menatep is a diversified international financial holding
company established in 1997 by Mikhail Khodorkovsky, Platon
Lebedev, and others.
I've experienced firsthand Russia's approach to the rule of
law and to property rights. Group Menatep, its founders, and
its main asset, Yukos Oil Company, have been the subject of a
coordinated and relentless onslaught by the Russian
authorities.
Group Menatep is the majority owner of Yukos Oil Company,
holding approximately 51 percent of the Yukos equity capital.
In addition, Group Menatep placed a separate 10 percent of the
Yukos shares in a trust, the Veterans Petroleum Trust, which
provides retirement benefits for Yukos workers in the remote
oil fields in Siberia.
I was appointed as one of the three members of the board,
in March 2004, to manage the company in keeping with Western
standards of corporate governance. More recently, I've been
primarily involved in trying to protect the company and its
assets.
The attacks on Group Menatep and its founders are an
integral part of an orchestrated and sustained campaign by the
Russian authorities, and need to be explained in the context of
what is happening in Russia.
The Council of Europe Parliamentary Assembly, known as
PACE, appointed Sabine Leutheusser-Schnarrenberger, a member of
the Bundestag, a former German Justice Minister, to examine the
nature of the cases launched by the Russian authorities against
Yukos and its former executives. Her report, which was based on
an extensive legal analysis of the facts surrounding the case,
was adopted by the plenary session of PACE on January 25 of
this year. The report found that the prosecutions went beyond
the mere pursuit of justice to include such elements as to
weaken an outspoken political opponent, intimidate other
wealthy individuals, and regain control of strategic economic
assets.
I would like, Mr. Chairman, that this report be entered
into the record.
The Chairman. It will be entered in full.
Mr. Osborne. Mr. Chairman, I'd like to summarize briefly
the attacks against Group Menatep that began in 2003.
The Russian authorities have used the pretext of unpaid
taxes to justify their attacks on Yukos and Group Menatep's
founders, despite the fact that they had all retained the
highest quality financial advisors. Prior to the assault
undertaken by the Russian authorities, Yukos has been widely
praised for its financial openness. It was audited by
PricewaterhouseCoopers according to U.S. GAAP standards.
Neither PricewaterhouseCoopers nor the Russian tax authorities
raised any questions of additional taxes when the books were
closed and taxes paid for the years in question. No suggestion
of tax evasion was made at any time until the current onslaught
began.
Rather than evading taxes, Yukos was the third-largest
payer of taxes in Russia during this period, and it paid taxes
at or above the industry average, amounting to billions of
dollars.
The attitude of the Russian authorities to Yukos changed
completely in the wake of their dispute with Mr. Khodorkovsky.
Suddenly, massive amounts became due, in some years amounting
to over 100 percent of the gross revenue of the company for
that year, as just explained by Mr. Theede.
Having improperly levied abusive taxes on Yukos, the
Russian authorities then froze Yukos assets, and, in August
2004, seized its subsidiary, Yuganskneftegaz. Yuganskneftegaz
had been valued by Western bankers appointed by the Russian
Government as worth between $15 and $18 billion.
Yuganskneftegaz represented 60 percent of Yukos oil production
and was, until its seizure, the core asset of the company.
By freezing assets and seizing Yuganskneftegaz, the Russian
authorities essentially assured Yukos' inability to pay the
disputed outstanding tax bills. They then proceeded to put
Yuganskneftegaz to auction, arranged to have a sole state-
controlled bidder, who bought Yuganskneftegaz for less than 50
percent of its true value.
However, it would be misleading to look at this solely as a
corporate matter. This case originates in politics. What began
as a vendetta brought by the Russian authorities against Mr.
Khodorkovsky and his colleagues has now expanded to include
intimidation and harassment of employees at all levels of
Yukos.
Two examples. The wife and children of one of Yukos'
outside counsel was recently detained at the airport in Moscow
for hours on alleged drug offenses. No drugs were found, no
charges were made, and, ultimately, they were let go. Another
example is the female employee in the Yukos legal department
who was arrested, leaving her young children unattended, and
has, in effect, been held hostage in custody to encourage the
return to Russia of her boss.
What is Group Menatep doing about this? Initially, we made
every possible good-faith effort to resolve the conflict in an
amicable and reasonable fashion. We retained former Canadian
Prime Minister Jean Chretien. He met with President Putin in
July 2004 and followed this with a number of telephone calls
and letters. President Putin committed to review proposals to
resolve the tax and other legal issues then outstanding.
Separately, Yukos, I understand, has made over 50 different
settlement approaches to the Russian Government. No response
has been received to any of these approaches.
Given the complete lack of response, we concluded, toward
the end of 2004, that the Russian Government's aim was the
expropriation of Yukos. We consider that any final hopes that
the Yukos affair could be settled reasonably and in a legal
fashion were crushed last December, when the government ordered
the sale at auction of Yukanskneftegaz, the core asset. As
mentioned above, the auction was little short of a farce.
On November the 2nd, Group Menatep delivered notification
to the Russian Federation requiring them to enter into the
discussions required under the 1994 Energy Charter Treaty. The
Russian Federation totally ignored this request. Consequently,
on February 9 of this year, at the end of the 3-month
standstill period, Group Menatep filed its notes of
arbitration, statement of claim against the Russian Federation
for the losses caused. The claim seeks compensation for
approximately $28 billion.
Our objective in doing this is to protect Group Menatep's
remaining assets, to seek compensation for the losses of all
Yukos shareholders, and demonstrate to the world that Yukos,
Group Menatep, and its founders have been the victims of an
illegal, politically motivated campaign designed to expropriate
and renationalize Yukos, with total disregard for the rights of
all shareholders, the rule of law, and generally accepted
principles of international law.
Mr. Chairman, let me just touch briefly on the impact of
the Russian Government's actions on the United States.
The United States has minority shareholders in Yukos,
including state pension funds, such as that of Ohio. They've
been directly and negatively impacted by the Russian
authorities' flagrant disregard for the rule of law and
individual property rights, with losses to United States
shareholders estimated in the billions of dollars.
The Yukos affair has broad implications for the global
investment community in which U.S. citizens are heavily
represented. Group Menatep and all international investors have
an interest in open and free markets where the investments are
protected by legal systems adhering to the rule of law.
The risk of loss should be based on market forces and
business performance, not on arbitrary governmental actions.
Moreover, as Mr. Theede has describe, the repercussions for the
U.S. energy security are serious. We now have a situation where
decisions are being made based on Russian foreign-policy
objectives and internal politics, not markets.
I'm not an expert on foreign policy, and would not presume
to make recommendations on United States policy toward Russia;
however, it is widely acknowledged by foreign-policy experts
that the attacks on Group Menatep, Yukos, and Menatep's
founders are selective and politically motivated. It's
increasingly clear, moreover, that this is a part of a
concerted effort to reclaim state control over a major element
of Russia's energy sector, for strategic reasons.
Since the collapse of the Soviet Union, the central goals
of the United States have been the promotion of democracy, the
rule of law, and free markets. All of these have been
threatened by what is taking place.
The upcoming summit meeting of Presidents Bush and Putin
will provide another opportunity for the United States to raise
these concerns, and we will be watching to see that the United
States is still trying to advance and protect these
commitments.
Given the current ominous trends in Russia, I note that
many experts have called into question Russia's accession to
the WTO, its participation in the Group of Eight, and, in
particular, the appropriateness of its hosting the G8 meeting
in 2006. These are a rules-based organization and a grouping of
the world's leading democracies, respectively. I wonder whether
the Russian Federation is currently a suitable candidate for
either.
Mr. Chairman, hearings such as these send an important
signal to the Kremlin that the United States is closely
watching its actions and is vitally concerned about the rule of
law, as well as property rights and human rights, in Russia.
I thank you for the opportunity to testify here today. Once
again, I'm grateful for the interest and attention this matter
is receiving.
[The prepared statement and related material of Mr. Osborne
follows:]
Prepared Statement of Timothy Osborne, Member, Board of Directors,
Group Menatep, United Kingdom
introduction
I wish to thank Chairman Lugar and Senator Biden for convening this
hearing today. The past 18 months has seen a veritable onslaught
against Group Menatep, its holdings and its shareholders by the
authorities in Russia, against the backdrop of an apparent retreat in
democratic development in Russia. I am grateful to you, Mr. Chairman
and Senator Biden, along with your colleagues in the Senate, for your
early recognition of the serious nature of these events in the
Resolutions that were introduced in the previous session of Congress.
My name is Tim Osborne and I am a member of the independent Board
of Directors of Group Menatep. My fellow Board members and I were
appointed in March 2004 to conduct the day to day operations for the
company following the detainment of Director Platon Lebedev in July
2003 and then the still-unexplained death of Mr. Stephen Curtis,
appointed as his successor, in a helicopter accident in the spring of
2004.
Group Menatep is a diversified financial holding company,
established in 1997 by Mikhail Khodorkovsky, Platon Lebedev and others,
and it owns strategic stakes in a number of Russian companies,
including YUKOS, as well as a number of financial portfolio investments
on stock markets in Russia and internationally. It is incorporated and
existing in accordance with the laws of Gibraltar. Group Menatep is the
majority owner of Yukos Oil Company, holding approximately 51 percent
of Yukos equity capital through wholly owned subsidiaries.
As a member of the Group Menatep Board of Directors, I am
responsible for stewardship of the company in keeping with recognized
standards of transparency and corporate governance and, more recently,
in protecting the company's remaining assets. I do not represent Yukos
Oil Company or the individuals mentioned above, however, the attacks on
Group Menatep holdings and its founders are an integral part of an
orchestrated and sustained campaign against the company by the Russian
authorities and therefore need to be explained in the context of what
is happening in Russia.
I hope at some stage there will be an opportunity for a hearing on
the nature of these charges and the conduct of the criminal cases
against these individuals. Foreign policy experts, government
officials, financial analysts, the defense attorneys and independent
human rights groups agree that the trials, like the charges against
Yukos, are politically motivated and that they have been riddled with
violations of due process and human rights. I will submit for the
record along with my written testimony some of their statements and
reports.
the attacks against group menatep
The Tax Issues
While some Russian companies' accounting practices may remain
insufficient for the standards of international investment markets,
Group Menatep adopted a different approach. It chose to hire top
quality financial professionals and auditors for its companies,
including Yukos, putting into place internal controls sufficient to
meet the highest standards of market economies. Prior to the assault
undertaken by the Russian authorities, Yukos had been widely praised
for its financial openness and the maintaining of its accounts in
accordance with Western accounting practices. While its competitors
included firms whose accounts remained less than transparent, it was
Yukos, the company that had opened its books to the world, which was
selected for prosecution. The fact that Yukos keeps open books meant
that it was audited by both outside accounting firms and the Russian
government, neither of which raised any issues of tax evasion when the
books were closed out and taxes paid for the relevant years.
The assessment by the Russian authorities that Yukos had paid all
of its taxes changed completely in the wake of the political dispute
between the Russian authorities and the leadership of Group Menatep.
Suddenly, massive amounts became due, in some years amounting to more
than 100 percent of the gross revenue of a company for that year. The
Russian authorities only raised tax evasion allegations after they had
already initiated their political crackdown on Group Menatep's
shareholders. The tax charges against Yukos both tracked, and followed
in parallel, the events in the trials of these executives. Thus, as the
trial against these executives heated up, the initial charge for US
$3.5 billion in back taxes quickly ballooned to over US $27 billion.
A few simple numbers provide the context for the absurdity of the
Russian authorities' assessments. Yukos has already paid $15 billion in
taxes for the period 2000 through 2003, on total gross income for that
period of $29 billion. Thus, the taxes paid amount to approximately 52
percent of gross income. Beyond that amount, the Russian authorities
allege that Yukos owes an additional US $27 billion for that period,
bringing Yukos' total tax liability for the period to over US $42
billion, or nearly 145 percent of the company's gross income. Let us
call a spade a spade. This is not taxation. This is confiscation.
The crux of the Russian government's allegation is that Yukos
evaded taxes through the illegal use of tax havens in the years 2000
through 2003. Beyond the fact that Yukos paid taxes at a level
equivalent to or in excess of, on a percentage basis, every one of its
competitors in the Russian energy business, there is a fundamental
problem with the Russian government's legal case against Yukos. The
fundamental problem is that the structures used by Yukos to limit its
taxes were lawful under Russian law at the time that Yukos employed
them. Russian authorities first had to change the tax law and then
apply these changes retroactively in order to even allege tax evasion.
Notably, Yukos competitors in the oil and gas field also employed these
same tax structures and yet no significant charges of tax evasion have
been brought against these companies.
One need not be a Russian legal expert to judge that the actions of
Russian authorities are improper. Not only is Russia imposing tax laws
retroactively, it is singling out and punishing one company for actions
that were industry norms.
The retroactive application of tax law and the selective
prosecution by Russian authorities of Yukos are two objective
indicators of the abusive nature of these cases. But there are many
other objective facts that show that the Russian tax assessments were
improper. Prior to the levy of any of these additional taxes against
Yukos, the company was already the third largest taxpayer in Russia.
Indeed, its tax-to-revenue ratio ranged between 30 to 32 percent during
that time and during this period, Yukos paid more in taxes during this
period than the industry average. In fact, if one was to add the amount
of taxes Yukos originally paid in these years to the amount of taxes
that the Russian government alleges that Yukos evaded, the Yukos tax
payments would represent 175 to 244 percent of the industry average.
These figures do not include the further fines, penalties or interest
that the Russian government has added to the tax bill. If such things
as fines, penalties and interest payments are included, the amount that
the Russian government has asked Yukos to pay represents approximately
267 to 402 percent (depending on the year) of the industry average for
taxes paid during this period.
Let us examine a single year of taxes assessed by the authorities--
2002. On November 1, 2004, the Tax Ministry assessed Yukos an
additional US $10 billion in back taxes and penalties for the year
2002. According to these new allegations Yukos was expected to pay a
total of US $7.9 billion in taxes for 2002. This US $7.9 billion does
not include penalties, fees and interest and therefore represents what
the Tax Ministry alleges Yukos should have paid in taxes in 2002. US
$7.9 billion represents 70 percent of the total revenues earned in 2002
and approximately 115 percent of the company's gross income for the
year. If penalties, fees and interest are included, the total tax bill
for 2002 represents 111 percent of total revenue earned by Yukos for
the year 2002 and 184 percent of gross income for the year.
The Russian tax authorities chose not to provide Yukos any
opportunity to address these charges prior to the issuance of tax
bills. Their demands for back taxes were immediately rubber stamped by
the Russia courts. There was absolutely no effort on the part of the
tax authorities and the courts to negotiate any schedule for repayment.
The behavior by the Russian authorities in this case demonstrates
how, when abused, the power to tax is indeed the power to destroy. To
provide you with just some of the highlights of the abuses:
On July 2, 2004, the Russian Tax Ministry issued a claim
against Yukos for US $3.3 billion in back taxes for the year
2001. This US $3.3 billion was in addition to a tax bill of US
$3.5 billion that the Russian Tax Ministry had issued the
previous December in connection with taxes for the year 2000.
On the same day, court bailiffs freeze Yukos bank accounts and
notify the company that it must pay a 2003 tax bill of US $3.4
billion within five days.
On September 3, 2004 the Tax Ministry presents Yukos with a
new US $4.1 billion tax bill for 2001 and announces that the
company has only one day to pay.
On September 8, 2004 Russian government officials begin to
collect on a Yukos tax bill from 2001, immediately confiscating
US $2.7 billion from Yukos bank accounts.
These disproportionate tax claims against Yukos have been
accompanied by the government's freezing of Yukos assets, making
payment impossible. These improper actions by Russian authorities were
then followed by the forced sale of Yuganskneftegas in December 2004 in
an auction in which a false veneer of formal process was used to cover
what was actually an illegal expropriation.
Russia's Illegal Expropriation of Yuganskneftegas
Having improperly levied abusive taxes on Group Menatep's main
holding, Yukos, Russian authorities then seized Yukos subsidiary
Yuganskneftegas in August 2004. Yuganskneftegas had been valued by
Western bankers as worth between US $15-$18 billion. It represents 60
percent of Yukos oil production and was, until its seizure, the heart
of the company. By seizing Yuganskneftegas, the Russian authorities
essentially assured Yukos' inability to pay any of the outstanding tax
bills. They then proceeded to put Yuganskneftegas to auction, arranged
to have a sole friendly bidder, and to have the company bought up by a
state-controlled firm.
In an attempt to preserve shareholder value in the face of these
improper actions by Russian authorities, Yukos declared bankruptcy in a
federal bankruptcy court in Houston on December 15, 2004, which under
traditional bankruptcy law rules would halt the auction. The Russian
authorities chose to proceed regardless, auctioning off Yuganskneftegas
on December 19, 2004, in violation of a December 16th Temporary
Restraining Order (``TRO'') issued by the United States Bankruptcy
Court for the Southern District of Texas.\1\ One Russian firm, Gazprom,
participated in the bidding despite the express prohibition of the same
by the TRO.
---------------------------------------------------------------------------
\1\ In Re Yukos Oil Company, Case No. 04-47742-H3-11 (S.D. Tex.,
December 16, 2004).
---------------------------------------------------------------------------
As noted above, Yuganskneftegas has been valued at between US $15-
$18 billion and yet the Russian government auctioned it off for only US
$9.4 billion. The winner of the auction for Yuganskneftegas was an
absolutely unknown company by the name of Baikal Finance Group. Baikal
Finance Group had no apparent means of financing the purchase. It was
obviously operating as a front company for the state-owned company
Rosneft in this sale. Some have speculated that the reason for the use
of the front company was an effort to shield Rosneft from any legal
liability stemming from, amongst other things, the fact that the
auction was in violation of the federal judge's stay order. What is
absolutely certain is that Baikal itself was not a legitimate bidder.
When research on the Baikal was conducted, nothing could be
discovered regarding who owned Baikal or where its financing had come
from. The company had no previous operations, no capital, and no known
shareholders. The only information available on the company was that it
shared an address with a tiny grocery store in the small Russian
provincial town of Tver. Three days after the auction, Baikal Finance
was ``sold'' to Rosneft, although public information as to who was paid
what for this $15 billion to $18 billion asset remains scanty. Press
accounts suggest that Rosneft received a loan of some $6 billion from a
consortium of Chinese banks which paid that sum to the Russian
government in order for Rosneft to ``buy'' Yuganskneftegas. The foreign
policy implications of this sale are underlined by the recent
disclosure that the Chinese helped fund Rosneft's acquisition of
Yugansneftegas.\2\ The Chinese banks were reportedly acting on behalf
of the Chinese and Russian governments. Following the acquisition,
Rosneft now controls 16 percent of Russia's total crude oil output.\3\
---------------------------------------------------------------------------
\2\ China Had Role in Yukos Split-Up, BBC News, February 2, 2005.
\3\ Putin Backs State Grab for Yukos, BBC News, December 23, 2004.
---------------------------------------------------------------------------
In summary, this was no auction in any normal sense, but an
extraordinarily unethical, illicit and cynical expropriation of private
sector assets by the Russian authorities. Group Menatep continues to
contest the illicit proceedings relating to the sale of
Yuganskneftegas, in Russia and in courts around the world. As Mr.
Theede discussed, Yukos is serving notice under the U.S. bankruptcy law
that the December 19 sale in contravention of the Bankruptcy Court's
order was illegal and that it will seek to recover from those involved
in the sale.
There has been widespread condemnation of the forced sale of
Yuganskneftegas, internationally and within Russia itself, including
explicit recognition of its political nature. Most telling is the
criticism of the sale from within the Russian government itself. Andrei
Illarinov, then the most senior economic adviser to Russian President
Vladimir Putin, described the sale as ``the swindle of the year.'' \4\
Shortly after he voiced his criticism of the sale, Illarinov was
stripped of most of his responsibilities.\5\ Even Russian Economic
Minister German Gref, a close associate of President Putin, referred to
the sale as ``unjustified.'' \6\ Criticism outside of Russia has also
been pointed. As summarized in one foreign press report: ``The Yugansk
auction was the culmination of a Kremlin campaign to crush Yukos'
politically ambitious principal owner, Mikhail Khodorkovsky, and seize
control of strategic sectors of the economy sold off in the chaotic
privatizations of the 1990s.'' \7\
---------------------------------------------------------------------------
\4\ Minister Hits Out at Yukos Sale, BBC News, January 11, 2005.
\5\ Id.
\6\ Id.
\7\ Richard Ayton and Andrew Hurst, State seizes Yukos' core oil
unit, The Age, December 24, 2004.
---------------------------------------------------------------------------
Actions Against Individuals
I have discussed at some length the corporate cases brought against
key assets of Group Menatep. However, it would be misleading to look at
this solely as a corporate matter. As I have suggested earlier, this
case originated in politics. The vendetta brought by the Russian
authorities against essentially every person involved with Group
Menatep has included a wide range of criminal proceedings that are,
like the tax charges, expressions of politics rather than law. For this
reason, I feel it is necessary to discuss the actions taken by the
Russian government against key individuals. While I do not represent
these individuals, I have followed their plights closely because they
are so intertwined with the fate of Group Menatep.
The most notorious of these is the prosecution of Mikhail
Khodorkovsky and Platon Lebedev. Khodorkovsky was until recently the
CEO of Yukos and Lebedev was director of Group Menatep. My
understanding is that all of the charges against Khodorkovsky and
Lebedev are what one would consider ``white collar'' crimes and that
there is no compelling state interest in their continued imprisonment
during their trials. Despite the fact that they pose no threat to
society and in spite of Lebedev's reported poor state of health, these
two men remain in a Russian prison.
I have tried to understand the charges against Khodorkovsky and
Lebedev but there appears to be little rhyme or reason to the
government's case. The case against these two focuses on the
privatisation of a fertilizer company by the name of Apatit. However,
this privatisation took place in 1994 and the allegations surrounding
this transaction would seem to be issues of contract law, not criminal
law. Nine years passed from the privatisation sale to the arrest of
Khodorkovsky and Lebedev. During those nine years, three separate civil
suits were concluded with regards to this privatisation, focusing on
breach of contract issues, with no criminal issues being raised. They
resulted in a signed settlement agreement between a Group Menatep
company, Volna, and the Russian Federal Property Fund that seemly
brought an end to what has now become referred to as the ``Apatit
affair.''
Remarkably, not only was the Russian government a signatory to the
settlement agreement, but the Prosecutor General Vladimir Ustinov, in a
letter to President Putin in April 2003, stated that there were no
legal reasons for initiating an investigation into the Apatit affair.
Throughout all three of these proceedings and the nine years that
passed from the time of the transaction and the arrest of Lebedev and
Khodorkovsky, no allegations of any criminal behavior were made against
these two. Furthermore, although the Russian Federation has since moved
to set aside the civil settlement, it has never returned the $16
million paid by Group Menatep as part of the settlement. I can only
imagine that no allegations of criminal behavior were made in the civil
proceedings because there was no evidence of any criminal behavior.
Khodorkovsky and Lebedev are the highest profile Yukos and Group
Menatep executives, but the Russian government has targeted many more
and has shown no sign of stopping in its persecution of anyone who is
willing to defend Yukos or Khodorkovsky and Lebedev. In fact, some are
being detained in an effort to build cases against Yukos and Menatep
executives. Alexei Pichugin, a retired FSB major, was the first target
in the Russian authorities' assault on Yukos. Pichugin worked in the
department of economic and financial security at Yukos during 1998. In
May 2003, Russian authorities used the disappearance of his close
friends, Sergei and Olga Gorin, as a pretext to grill Pichugin on
internal financial matters at Yukos. He was charged on June 26, 2003
with the double murder of the Gorins, and later in August 2003 with
three additional attempted murders (Victor Kolesov, Olga Kostina and
Evgeni Rybin) from 1998. The initial trial began in October 2004 but
ended in a mistrial in December. According to many observers, the jury
was dismissed after it became apparent to the court that they would not
return a guilty verdict. A second trial began in January of this year
with a new jury.
In Pichugin's trial, the authorities' entire case has rested on
testimony from a convicted serial murderer and child abuser, Igor
Korovnikov (``Korovnikov''). Korovnikov is currently serving a life
sentence in the FSB-run Lefortovo Detention Center for eight murders
committed between October 1998 and February 1999, and for the sexual
assault of five young girls. While little is known of the actual
testimony of Korovnikov because all of the proceedings have been held
in secret, it is important to note that Korovnikov was imprisoned at
the time some of these alleged crimes were committed and Korovnikov's
``evidence'' surfaced only after he was moved in 2003 by the
authorities from Ogenny Island, a penal colony for life-sentence
prisoners renowned for its harsh regime, to Lefortovo prison.
Beyond prosecutors putting on testimony from Koronikov which the
original jury evidently found insufficient, and the state's ending the
proceedings in order to avoid Pichugin's acquittal, outside experts
assessing the proceedings have found that the authorities violated
international human rights and due process standards in conduct of
Pichugin's trial. Russian authorities classified the case as top
secret, trying it in private. Portions of Pichugin's case files have
been classified by the government. Pichugin was denied opportunities
for confidential communication with his lawyers, and the judge in his
case once gave Pichugin's counsel just days to review 35 volumes of
documents. Pichugin's lawyers had limited access to his case files and
were forced to sign ``state secret'' nondisclosure agreements that
would give them a 10-year prison sentence should they disclose the
files.
The Parliamentary Assembly of the Council of Europe (``PACE'') has
resolved that the unjustified restrictions on public access to court
proceedings and the fact that, ``in particular, all proceedings against
Pichugin have been held in camera even though only a small portion of
the case file has been classified as secret'' are among the ``most
serious corroborated shortcomings'' of the Yukos related
prosecutions.\8\
---------------------------------------------------------------------------
\8\ Europe Parliamentary Assembly, Circumstances Surrounding the
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at
para. 8 (January 25, 2005) (Exhibit 2).
---------------------------------------------------------------------------
Notably, the Pichugin case is merely one, if egregious, example of
a pattern of abuses by Russian authorities, which have undertaken these
legal cases in a coordinated legal assault on people with ties to
Khodorkovsky and Yukos. These abuses include the arrests of Svetlana
Bakhmina and Elena Agronovskaya. Ms. Bakhmina worked in the Yukos legal
department. Ms. Agronovskaya was a Yukos outside counsel. Both were
expected to testify for the defense in the Khodorkovsky and Lebedev
trials. They also include the issuance of arrest warrants in January
2005 for other associates of Khodorkovsky and Lebedev, including
Mikhail Brudno (``Brudno''), Vladimir Dubov (``Dubow''), Alexander
Gorbachev, Vladislav Kartashov, Alexei Spirichev, and Irma Chernikova,
after Brudno and Dubov were invited to the U.S. to discuss the Yukos
affair with members of Congress.
Independent Judicial Review
Each time the allegations by the Russian Federation have come
before an independent court outside of Russia, the Court has found the
allegations were substantively deficient:
In August of 2003, Defendant Russian Federation secretly
submitted requests for mutual legal assistance to the Attorney
General of Switzerland requesting the seizure of business
documents related to, inter alia, Group Menatep, its
subsidiaries, Khodorkovsky, Lebedev, Yukos, and Yukos-related
trading companies. Subsequently in March 2004, Defendant
Russian Federation sought the freeze of numerous bank accounts
in Switzerland in the name of the same entities and
individuals, and the Swiss Attorney General froze accounts
holding approximately $4.9 billion dollars. On June 8, 2004,
the Swiss Federal Supreme Court directed the Swiss Attorney
General to release several of the accounts subject to orders
ripe for review and held that ``the [Russian] request and its
amendments do not contain any fact enabling determination, even
minimally, of the cause, nature and scope of such extensive
damages, which would be of a nature to justify the ordering of
the contested freeze.'' Pecunia Universal Ltd. v. The Office of
the Attorney General of Switzerland, No. 1A.86/2004/col at 6
(Tribunal Federal June 8, 2004). The Court went on to assess a
5,000 Swiss Franc penalty on the Swiss Attorney General. Id.
Prior to implementing the Swiss Supreme Court's ruling, the
Swiss Attorney General contacted Defendant Russian Federation
representatives and asked whether it had any additional
evidence to warrant the freeze of the accounts. Defendant
Russian Federation's representatives did not offer such
evidence and accounts containing approximately $4.7 billion
dollars were released.
In 2003, the Russian Federation also requested the Attorney
General of Liechtenstein seize records located in Liechtenstein
and relating to Khodorkovsky and Group Menatep's alleged
illegal activity. Menatep and Khodorkovsky objected and
Liechtenstein's highest court denied the request and held (i)
that there were no facts presented underlying the alleged
criminal offenses against Khodorkovsky and Lebedev, (ii) that
``the suspicion arises that the alleged tax offenses do not
even exist . . . and the other alleged crimes are mere
allegations without substance,'' and (iii) that the request by
the Russian government was a ``fishing expedition'' and to
grant the seizure request would amount to a violation of
International Law. Case No. 12 RS.2003.255-ON 25 at 6
(Furstliches Obergericht April 25, 2004).
Political and Economic Motivations for Legal Cases
One does not have to specialize in human rights issues to see that
in these cases Russian authorities are not abiding by international
standards relating to rule of law, but are instead approaching these
cases politically. These proceedings exhibit a ``Red Queen'' approach
to justice: ``verdict first--evidence later.'' These are not merely my
conclusions, they are shared by essentially every outside observer. As
the Parliamentary Assembly of the Council of Europe has recently found
following an extensive fact-finding by a senior Rapporteur,
The circumstances of the arrest and prosecution of leading
Yukos executives suggest that the interest of the State's
action in these cases goes beyond the mere pursuit of criminal
justice, to include such elements as to weaken an outspoken
political opponent, to intimidate other wealthy individuals and
to regain control of strategic economic assets.\9\
---------------------------------------------------------------------------
\9\ Europe Parliamentary Assembly, Circumstances Surrounding the
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at
para. 14 (January 25, 2005) (Appended hereto as Exhibit 2).
Similar conclusions were reached late last year by the U.S.-based
human rights organization, Freedom House. On December 20, 2004, Freedom
House downgraded Russia's status to ``Not Free,'' in its annual survey
of global freedom. Russia was the only country to register a negative
category change in 2004, moving from Partly Free to Not Free. In making
the designation, Freedom House Executive Director Jennifer Windsor
stated that ``Russia's step backwards into the `Not Free' category is
the culmination of a growing trend under President Vladimir Putin to
concentrate political authority, harass and intimidate the media, and
politicize the country's law-enforcement system.'' Freedom House
described the arrest of Khodorkovsky as the event that ``signaled the
increasing politicization of the legal system,'' and concluded that
``the arrests and investigations in 2003 of Mikhail Khodorkovsky, the
Yukos energy company, and the Menatep Group reinforced perceptions that
the rule of law is subordinated to political considerations and the
judiciary is not independent of the president and his inner circle.''
\10\
---------------------------------------------------------------------------
\10\ http://www.freedomhouse.org/research/freeworld/2004/
countryratings/russia.htm.
---------------------------------------------------------------------------
The abnormal nature of the arrest and prosecution of Khodorkovsky,
Lebedev and others affiliated with Yukos, as well as the treatment of
other business leaders not affiliated with Yukos which has been held in
violation of international law,\11\ reflect the Russian authorities'
political motivations in prosecuting the Yukos-related defendants. But
it is also worth looking at the processes of the trials themselves,
because they raise the question of whether the founders of Menatep are
in essence now political prisoners in Russia. As I appreciate it, the
U.S. government is required by the Congress to make such human rights
judgment on an annual basis, looking country-by-country. Last year,
while expressing concern about the political nature of these cases, the
U.S. State Department did not make a finding that Khodorokovsky,
Lebedev and Pichugin were political prisoners. However, the facts that
have emerged over the past twelve months, combined with what preceded
them, may provide a basis for the U.S. government to give further
consideration to that question.
---------------------------------------------------------------------------
\11\ See e.g., Gusinskiy v. Russia, Eur. Ct. H.R., April 29, 2004,
all European Court of Human Rights cases cited are available at http://
www.echr.coe.int.
---------------------------------------------------------------------------
Separately from the personal cases, there is the issue of the
handling of Yukos by Russian authorities, its tax cases, and the forced
auction of Yukos' most important energy subsidiary, Yuganskneftegas,
for a fraction of its actual value by Russian authorities to a shell
company. This shell company in turn sold the subsidiary back to a
state-owned enterprise, though there is no record that any payments
were actually made in the purchases. Thus, the Russian government
levied false taxes against Yukos, not lawfully due the government, as a
strategy to steal its prime assets. These proceedings, too, were a
sham, fundamentally unjust, and reflecting not just improper political
motivations, but improper commercial ones as well, as I will discuss
further later in this testimony.
The Question of Political Imprisonment
I wish to address here the question of the political imprisonment
of Khodorkovsky, Lebedev, and Pichugin as part of the vendetta engaged
in by Russian authorities against Group Menatep.
I understand that the State Department examines the existence of
political prisoners in its Annual Country Reports on Human Rights
Practices, usually without elaboration on the standard applied in
making judgments about the existence of political prisoners in a
country.\12\ I have been advised that in 1992, in response to
congessional concerns expressed about human rights conditions in
Turkey, Assistant Secretary of State for Legislative Affairs Janet
Mullins wrote a letter to the Chairman of the Subcommittee on Europe
and the Middle East of the Committee on Foreign Affairs explaining the
Department's review and opinion on the situation or existence of
political prisoners in Turkey. Ms. Mullins explained:
---------------------------------------------------------------------------
\12\ U.S. Department of State, Country Reports on Human Rights
Practices: China (2003), available at http://www.state.gov/g/drl/rls/
hrrpt/2003/27768.htm.
Our working definition of political prisoner is broadly
inclusive. To summarize, it includes persons who are
incarcerated without charges, or on charges for offenses
commonly held to be matters of belief or for membership in a
religious social, racial or national group. This definition
extends our concern to persons prosecuted even under ostensibly
internationally acceptable law when the charges are trumped up,
or trial unfair. Our definition includes those convicted of
politically motivated acts where the punishment is unduly harsh
because of the person's race, religion, nationality or social
group.\13\
---------------------------------------------------------------------------
\13\ 138 Cong. Rec. E2747 (September 22, 1992) (extension of
remarks of Hon. Lee H. Hamilton on Human Rights in Turkey).
I have been advised that the U.S. continues to apply this working
definition in assessing persons as foreign political prisoners.\14\
Under this working definition, the trumped-up charges against
Khodorkovsky, Lebedev and others affiliated with Yukos, the unfair
nature of their trials, the political motivation of the authorities in
the conduct of these cases, and the circumstances of their arrests,
detention and trials, would appear to provide grounds for an assessment
in the upcoming 2004 Report on Human Rights Practices in Russia that
Khodorkovsky, Lebedev, and Piguchin are being held as political
prisoners.
---------------------------------------------------------------------------
\14\ Telephone interview with Peter Su, Office of Legislative
Affairs, U.S. Department of State on January 27, 2005.
---------------------------------------------------------------------------
I understand that Congress may also request a report from the State
Department that addresses the specific situation of these individuals.
The more detailed criteria adopted by the Parliamentary Assembly of the
Council of Europe (PACE) for identifying political prisoners, discussed
below, may provide a useful analytical framework for U.S. government
officials and members of the Senate to consider the question of whether
these persons are political prisoners from the perspective of U.S. law.
PACE has adopted a series of objective criteria developed by a
group of experts to define ``political prisoners.'' \15\ According to
PACE:
---------------------------------------------------------------------------
\15\ Europe Parliamentary Assembly, Resolution 1359: Political
Prisoners in Azerbaijan (January 27, 2004).
---------------------------------------------------------------------------
A person deprived of his or her personal liberty is to be regarded
as a political prisoner:
If the detention has been imposed in violation of one of the
fundamental guarantees set out in the European Convention on
Human Rights and its Protocols (``ECHR''), in particular
freedom of thought, conscience and religion, freedom of
expression and information, freedom of assembly and
association;
If the detention has been imposed for purely political
reasons without connection to any offense;
If, for political motives, the length of the detention or
its conditions are clearly out of proportion to the offense the
person has been found guilty of or is suspected of;
If, for political motives, he or she is detained in a
discriminatory manner as compared to other persons; or,
If the detention is the result of proceedings which were
clearly unfair and this appears to be connected with political
motives of the authorities.\16\
---------------------------------------------------------------------------
\16\Europe Parliamentary Assembly, Committee on Legal Affairs and
Human Rights, Political Prisoners in Azerbaijan, Doc. No. 9826, App. 1
(June 6, 2003).
In the cases of Khodorkovsky, Lebedev and others affiliated with
Yukos and Group Menatep, all of whom are accused of non-political
crimes, e.g., tax evasion, the last three criteria are the most
strongly indicative of the status of these defendants as political
prisoners. Each of the criteria is discussed further below.
Detention Disproportionate to Offense Charged
Under the third criterion, Khodorkovsky, Lebedev and others
affiliated with Yukos and Group Menatep Limited should be held to be
political prisoners because the manner in which Khodorkovsky and
Lebedev were arrested, as well as their continued detention and
treatment, are disproportionate to the non-violent economic crimes with
which they are charged. Russia's prolonged arbitrary detention of these
individuals is a violation of international law, and, particularly with
respect to Khodorkovsky, has been declared by PACE as a corroborated
and serious shortcoming of the Russian proceedings.\17\
---------------------------------------------------------------------------
\17\ Europe Parliamentary Assembly, Circumstances Surrounding the
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at
para. 8 (January 25, 2005) (Appended hereto as Exhibit 2).
---------------------------------------------------------------------------
The European Court of Human Rights (``ECHR'') has described the
prohibition on arbitrary detention contained in the European Convention
of Human Rights to require release once detention ceases to be
reasonable, and has ruled that the judicial officer before whom the
arrested person appears must review the circumstances mitigating for or
against detention, to decide by reference to legal criteria whether
there are reasons to justify detention, and to order release if there
are no such reasons.\18\ Furthermore, according to the ECHR,
``continued detention can be justified in a given case only if there
are specific indications of a genuine requirement of public interest
which, notwithstanding the presumption of innocence, outweigh the rule
of respect for individual liberty laid down in Article 5 of the
Convention. . . .'' \19\ The same prohibition against arbitrary
detention is contained in the Universal Declaration of Human Rights
(``Universal Declaration'') \20\ and the International Covenant on
Civil and Political Rights (``ICCPR'') \21\ Even under Russian criminal
law, I understand, pretrial detention is supposed to be exceptional,
and is only sanctioned if it is impossible to find alternative means to
guarantee appearance at trial.\22\
---------------------------------------------------------------------------
\18\ Aquilina v. Malta, Eur. Ct. H.R., April 29, 1999, para. 47.
\19\ Kalashnikov v. Russia, Eur. Ct. H.R., July 15, 2002, para.
114; see also L.A. v. France, Eur. Ct. H.R., September 23, 1998, para.
102.
\20\ G.A. Res. 217A, U.N. Doc. A/810, at art. 9 (1948) (hereinafter
Universal Declaration).
\21\ International Covenant on Civil and Political Rights, 999
U.N.T.S. 171, at art. 9(1) (1967) (hereinafter ``ICCPR'').
\22\ Russian Code, Article 108 (``[t]aking into custody as a
measure of restriction shall be applied by the court towards the
suspect or the accused of committing crimes, for which the criminal
court envisages the punishment in the form of the deprivation of
freedom for a term of over two years, if it is impossible to apply a
different, milder measure of restriction.'' (emphasis added)).
---------------------------------------------------------------------------
In five hearings dealing with Lebedev's detention (July 3, August
28, October 28, and December 23, 2003, and June 23, 2004) and four
hearings respecting Khodorkovsky's detention (October 25 and December
23, 2003, and March 19 and June 23, 2004), the court determined, and
appellate courts upheld, that the defendants should continue to be
detained.
These determinations were defective because they failed to address
whether less extreme measures than detention could balance the
defendants' rights to pretrial release against the interests of the
judicial system as Russian, international, and U.S. law require.
Khodorkovsky and Lebedev have been charged only with economic crimes
and there has been no allegation of continuing crimes, yet they are
being treated as posing serious threats to society and have now been in
prison for 15 months and 19 months respectively.
Discrimination in Detention and Prosecution
Similarly, application of the second criterion suggests
Khodorkovsky and Lebedev are political prisoners. Independent observers
have described the Russian case against Yukos and its former executives
as ``a case of highly selective law enforcement,'' and have added that
the prosecutors and the courts are ``highly politicized.'' \23\ Based
on the investigation of its Rapporteur, PACE has resolved that these
defendants have been, ``in violation of the principle of equality
before the law--arbitrarily singled out by the authorities.'' \24\
---------------------------------------------------------------------------
\23\ Organization for Economic Cooperation and Development,
Economic Survey Russian Federation 2004, available at http://
www.oecd.org/document/62/0,2340,en_2649_201185_
32474302_1_1_1_1,00.html.
\24\ Europe Parliamentary Assembly, Circumstances Surrounding the
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at
para. 9 (January 25, 2005) (Appended hereto as Exhibit 2).
---------------------------------------------------------------------------
The crimes with which they are charged, to the extent that the
charges are even cognizable, relate to the privatization of state-owned
assets, tax evasion, and fraud. Khodorkovsky and Lebedev are being
prosecuted for these alleged offenses while other individuals who
engaged in similar alleged conduct have been left unscathed. As PACE
has noted, ``the allegedly abusive practices used by Yukos to minimize
taxes were also used by other oil and resource companies operating in
the Russian Federation which have not been subject to a similar tax
reassessment, or its forced execution, and whose leading executives
have not been criminally prosecuted.'' \25\
---------------------------------------------------------------------------
\25\ Id. at para. 10.
---------------------------------------------------------------------------
Unfair Proceedings
Lastly, application of the third criterion supports a finding that
Khodorkovsky, Lebedev, Pichugin and others affiliated with Yukos and
Group Menatep are political prisoners because the proceedings are
devoid of fairness and have not been held before an open, independent,
and impartial tribunal, with defendants enjoying unrestricted rights to
counsel.
The Universal Declaration provides, ``[e]veryone is entitled in
full equality to a fair and public hearing by an independent and
impartial tribunal, in the determination of his rights and obligations
and any criminal charge against him.'' \26\ It further provides,
``[e]veryone charged with a penal offence has the right to be presumed
innocent until proved guilty according to law in a public trial at
which he has had all the guarantees necessary for his defense.'' \27\
The ICCPR and the European Convention provide for the same rights.\28\
---------------------------------------------------------------------------
\26\ Universal Declaration, at Art. 10.
\27\ Universal Declaration, at Art. 11(1).
\28\ European Convention at Art. 6.
---------------------------------------------------------------------------
In the proceedings against Khodorkovsky and Lebedev, the Russian
authorities' restriction of public access to pre-trial proceedings,
interference with defense lawyers, and the manner in which evidence is
presented against the accused, have been declared by PACE as
corroborated and serious shortcomings of the Russian proceedings.\29\
---------------------------------------------------------------------------
\29\ Europe Parliamentary Assembly, Circumstances Surrounding the
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at
para. 8 (January 25, 2005) (Appended hereto as Exhibit 2).
---------------------------------------------------------------------------
Right to an Independent Tribunal
Most of the pre-trial detention hearings of the Yukos defendants
were held in the Basmanny Court in Moscow, whose judges are regarded by
many independent observers as taking instructions from the Kremlin.\30\
---------------------------------------------------------------------------
\30\ Anna Neistat (Director of the Moscow office of Human Rights
Watch), Russia: Yukos Trial Begins Amidst Rights Rollback (on the
trials of Mikhail Khodorkovsky and Platon Lebedev, ``if it's anything
like most trials in Russia it is unlikely to showcase the judiciary's
independence. More likely, defense arguments will be downplayed, most
of its motions overturned, and the outcome will have little to do with
the hearing and a lot with executive will''), available at,
http://www.hrw.org/english/docs/2004/06/16/russia8852.htm.
---------------------------------------------------------------------------
The U.S. State Department has found that the Russian judiciary is
``seriously impaired by a shortage of resources and corruption, and
still subject to influence from other branches of Government.'' \31\
There is substantial question over whether the courts will
independently hear the cases against Khodorkovsky, Lebedev and their
colleagues. The performance of the courts in the repeated denial of
bail for the defendants, the refusal to allow an independent medical
evaluation of Lebedev (who was in the hospital at the time of his
arrest and is believed to suffer from hepatitis and other illnesses),
and the fact that the same judge was assigned the Khodorkovsky and
Lebedev cases (which were initially separate trials), as well as other
facts, call into question the independence of the court that will try
these defendants.
---------------------------------------------------------------------------
\31\ U.S. Department of State, Country Reports on Human Rights
Practices: Russia at Introduction (February 25, 2004), available at
http://www.state.gov/g/drl/rls/hrrpt/2003/27861.htm.
---------------------------------------------------------------------------
Right to Open and Public Proceedings
PACE has declared the ``unjustified restrictions on the publicity
of certain court proceedings'' involving Khodorkovsky, Lebedev and
others affiliated with Yukos and Group Menatep as a serious violation
by Russian authorities of applicable human rights standards.\32\
---------------------------------------------------------------------------
\32\ Europe Parliamentary Assembly, Circumstances Surrounding the
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at
para. 8(vi) (January 25, 2005) (Appended hereto as Exhibit 2); but see
Lebedev v. Russia, Eur. Ct. H.R., Application No. 4493/04 (November 25,
2004).
---------------------------------------------------------------------------
As discussed above, the pretrial hearings against Khodorkovsky and
Lebedev took place in closed sessions of the Basmanny Court, and
sometimes even defense attorneys were excluded. Meanwhile, Pichugin's
entire trial has been held in camera and most of the evidence in the
case has been classified.
Denial of the Assistance of Counsel
Restrictions on the ability of the lawyers for Khodorkovsky,
Lebedev and others affiliated with Yukos and Group Menatep Limited to
meet with their clients, denial of access of Lebedev's lawyers to the
court room during a hearing, and the search and seizure of documents
from a lawyer's office have been declared by PACE as examples of
additional serious shortcomings in the proceedings against the
defendants.\33\
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\33\ Europe Parliamentary Assembly, Circumstances Surrounding the
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at
para. 8 (January 25, 2005) (Appended hereto as Exhibit 2).
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Attorneys for Yukos have had their offices searched and files
seized and, Svetlana Bakhmina, deputy general counsel of Yukos, has
been arrested. Just this month the British Law Society and the
International Bar Association called upon Russian authorities to
release Ms. Bakhmina.
Russian Motivations
As my testimony has now outlined, the tax charges against Yukos and
the criminal cases against Khodorkovsky and Lebedev brought by Russian
authorities are not about the pursuit of justice or the tracking down
of a corporate scofflaw. These actions of the Russian government are
about something quite different. They are means to an end, and that end
is the solidification of power by the persons currently in charge of
the Russian government through the elimination of economic and
political competition.
It is easier to see this when one focuses on what Group Menatep was
trying to accomplish in its approach to business. In a nutshell, it was
an approach in which the company treated its assets as belonging to its
shareholders, not to any government, individual, or grouping, including
management. Given this focus, Group Menatep had to be both transparent
and extremely competitive. Its major energy asset, Yukos, competed
directly against major state-owned energy companies, such as the oil
company Rosneft, the pipeline company Transneft, and the gas company
Gazprom. Yukos became an effective and aggressive competitor to state
owned companies, and was on its way to becoming a partner with non-
Russian oil firms. The vision of a substantial Western presence in the
Russian oil industry deeply disturbed the Russian government. In fact,
the actions against Khodorkovsky, Lebedev, and their associates
derailed the proposed acquisition of Sibneft by Yukos and scuttled the
purchase of a substantial block of Yukos stock by a major U.S. oil
company. In addition, Yukos' production and distribution decisions,
based on market forces, have often clashed with the dictates of the
Russian state as it attempts to control access to its energy resources
to curry international favor or to punish countries that had fallen
from grace with the current Russian authorities.
Because Yukos was focusing on meeting its obligations to its
international share-holders, regardless of their location, Yukos had a
number of serious disputes with the oil company Rosneft, the only
Russian domestic oil company wholly-owned by the Russian state. Yukos'
relations with Rosneft deteriorated significantly in 2002 and 2003, and
Rosneft appears to have played an important role in the initiation of
the persecution of the Yukos officials. As I have already mentioned, it
was Rosneft that ended up acquiring Yuganskneftegas when it absorbed
Baikal Finance Group, the front company that had purchased
Yuganskneftegas.
Yukos had also clashed with Transneft, the wholly state-owned
pipeline company responsible for the distribution of 93 percent of all
oil produced in Russia. The Russian government's control of Transneft
has enabled it to maintain control, through quotas and other
mechanisms, of oil distribution both domestically and internationally,
and to collect taxes and fees on oil production, transport and export.
The Russian government has used the distribution channels of oil and
gas as a strong foreign policy tool, particularly in its dealings with
its neighbors in the former Soviet Union and Eastern Bloc countries.
Ukraine gets most of its energy from Russia and the Russian government
provides discounted sales of oil and gas to the central Asian republics
as a means of maintaining influence in these countries. Therefore, when
Yukos challenged Transneft proposed plans for pipelines, it was in fact
challenging a vital aspect of Russian foreign policy. For example,
after the Russian authorities rejected a proposal for a pipeline to
Murmansk, intended to facilitate oil exports to the West, Khodorkovsky
announced his intent for Yukos to privately finance and construct the
line.
The most significant conflict between Transneft and Yukos had been
over the construction of pipelines to China and Japan. While Yukos had
been championing a proposed pipeline to China, Transneft had for many
years stated its intention to build a much longer pipeline from Eastern
Siberia to a Pacific export point to serve the Pacific Rim market. Both
China and Japan actively lobbied the Russian government over the
pipeline route and it appears that in the end, both countries got at
least a part of what they wanted. It was recently announced that the
pipeline will stretch to the Pacific, bypassing China. However,
Rosneft, using the assets of Yuganskneftegas, recently signed a long-
term oil supply agreement with the Chinese. The Japanese and Chinese
have returned the favors bestowed upon them by the Russian government
with pledges of financing for the development of Russia's energy
sector.
The largest company in Russia is the state controlled gas giant,
Gazprom. Gazprom has viewed Yukos as a threat to its gas monopoly and
also wants to break into the oil business. Yukos is perceived as a
threat to Gazprom because of its ability to produce gas cheaper than
Gazprom and also because Yukos was exploring the idea of building a
pipeline to the Arctic Ocean where its gas could be liquefied at a
terminal and exported to Europe. Such a project would place Yukos in
competition with Gazprom in the sale of gas to Europe and allow Yukos
to completely bypass Gazprom's pipelines.
While I have outlined above the economic and geopolitical
motivations of the Russian government in targeting Yukos, it is
important to note that just because the Russian government has been
successful in hobbling Yukos, this does not mean that the government is
finished in its quest to gain control of Russian oil fields and pipe-
lines. This is clearly seen in last week's declaration by the Russian
government that only companies that are majority owned by Russians will
be allowed to participate in tenders for oil and mineral rights. As the
state's control over the Russian oil industry grows, decisions in the
industry will become less and less about market forces and, instead,
will be increasingly driven by Russia's international policy
aspirations.
The Russian authorities have also been motivated to move against
Yukos in its attempt to silence political opponents of the current
regime. The Russian authorities considered Khodorkovsky, Lebedev and
their colleagues to be ideological and political opponents.
Khodorkovsky was seen as a potential future political threat to the
current government due to his economic support of liberal candidates
for the Duma and the Presidency. As chairman of Yukos, he engineered
reforms that brought transparency, corporate governance, Western
management and global investments. By contrast, the current
Administration favors increased state control of the economy and the
subordination of political and economic institutions to the will of the
executive. The arrest of Lebedev was seen as a warning to Khodorkovsky
to step down and/or flee Russia as had other persecuted oligarchs.
Instead of heeding this warning, Khodorkovsky continued to openly
criticize the Russian authorities and, despite many opportunities to do
so, refused to go into exile.
Prior to his arrest and incarceration, Khodorkovsky was an active
critic of Russia's current President and funded opposition parties,
including the Union of Rightist Forces (SPS) and Yabloko. In addition,
Khodorkovsky had many allies in the Duma and it was rumored that he was
in favor of limiting the power of the Russian presidency by moving the
country towards a parliamentary democracy.\34\ He was also widely
believed to have political aspirations himself, including the Russian
presidency. Khodorkovsky's role in opposition politics was expressly
cited in the U.S. State Department's 2003 Human Rights Report which
stated that ``[o]pposition parties, particularly those receiving
funding from some so-called oligarchs, were seriously hampered by the
investigation and arrest of Yukos President Mikhail Khodorkovsky, a
step widely believed to have been prompted, at least in part, by the
considerable financial support he provided to opposition groups.'' \35\
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\34\ Dr. Martha Brill Olcott, The Energy Dimension in Russian
Global Strategy, Vladimir Putin and the Geopolitics of Oil, The James
A. Baker III Institute for Public Policy, October 2004.
\35\ U.S. Department of State, Country Reports on Human Rights
Practices: Russia at Sec. 3 (February 25, 2004), available at http://
www.state.gov/g/drl/rls/hrrpt/2003/27861.htm.
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While it is hard to determine whether the Russian government has
gone after Lebedev and Khodorkovsky to get at the assets of Yukos, or
if the campaign against Yukos was an attempt to weaken Khodorkovsky,
the end result is that the government has used its ongoing
investigation of Yukos as leverage against Lebedev and Khodorkovsky in
their criminal proceedings. The tax case against Yukos has never been
about the reclamation of taxes, but instead has been a naked attempt to
destroy Group Menatep, its shareholders, and Yukos, thereby eliminating
a major source of support for Khodorkovsky and also renationalizing
strategic assets.
These cases are part of a continuing pattern of the consolidation
of power by the Kremlin. The Kremlin now controls the press, and to a
great degree, the Russian energy sector.
group menatep response
The Board of Group Menatep has made every possible good faith
effort to reach an amicable settlement with the Russian authorities. To
that end, we asked the former Prime Minister of Canada, Jean Chretien,
to act as an intermediary in opening discussions with the Russian
government. Prime Minister Chretien met with President Putin in the
Kremlin on July 5th of last year. Also present at the meeting was
Alexei Miller, president of Gazprom. Over lunch, the President agreed
that his government would review in good faith any proposals by Yukos
to resolve the tax and other legal issues then outstanding. Prime
Minister Chretien had numerous subsequent telephone conversations with
President Putin and wrote him several letters. More than 50 proposals
to resolve the outstanding claims against Yukos were sent, some of them
directly to President Putin's office. All of these efforts yielded no
response from the Russian government. After several months, we could
only conclude that the Government's campaign against the company had
nothing to do with legitimate tax collection or fair minded prosecution
of alleged financial crimes, and instead serves the Government's
political ends, which were, and remain, the expropriation of Yukos and
the destruction of Group Menatep and its shareholders.
Any hopes that the Yukos affair would be settled in a reasonable
and legal fashion were finally crushed last December, when the
Government ordered the sale of Yuganskneftegaz, Yukos' largest and most
valuable oil production arm, as detailed above. None of the money
realized by the sale will go to Yukos or its shareholders. Ostensibly
it will be used to repay the inflated tax arrears and arbitrary
penalties which the Russian Government imposed on Yukos to justify the
sale in the first place. Indeed, every effort to appeal the tax
assessments and other proceedings against Yukos in the Russian courts
has been summarily denied except one, when a brave judge did rule
against a particularly egregious government decision; in that one case,
the judge was quickly dismissed and his ruling overturned.
As a result, on February 9 of this year, Group Menatep proceeded to
file a claim against the Russian Federation under the terms of the 1994
Energy Charter Treaty. Group Menatep's claims are based on the Russian
Federation's failure to protect the company's investments in Russia,
and specifically the expropriation of Yuganskneftegaz. The claims seek
compensation of approximately US $28.3 billion. Under the terms of the
Treaty, breaches by the Russian Federation of its international
obligations entitle the Claimants to the payment of prompt, adequate
and effective compensation. Under Article 26 of the Energy Charter
Treaty, disputes can be referred to international arbitration if they
are not settled amicably between the disputing parties within 3 months
of a notification of claim. The Claimants delivered original
notifications to the Russian Federation on November 2, 2004. Since
then, the Russian Federation has totally ignored the notifications and
has failed to settle amicably the dispute.
Group Menatep will pursue the ECT claim and all other available
legal remedies in jurisdictions around the globe, using all means at
our disposal. Our objective is to protect the company's remaining
assets, seek compensation for the losses Group Menatep has incurred in
the Russian Federation and demonstrate to the world that Yukos, Group
Menatep and its shareholders have been the victims of an illegal,
politically motivated campaign by the Russian Government outside the
bounds of accepted international norms, behavior and custom.
impact on the u.s.
The detrimental impact of the ``Yukos affair'' has been widely
reported in the media, as have its repercussions for Russia's relations
with the West. Not only have U.S. shareholders--including public
pension funds--been directly and negatively impacted, but the actions
of the Russian authorities show a flagrant disregard for rule of law,
as the circumstances around the auction of Yuganskneftegas clearly
demonstrate. Along with my remarks, I am submitting for the record
today a handful of media reports on the Yuganskneftegaz auction that
refer to the ``farcical'' nature of the Russian authorities' conduct
(Financial Times, December 20, 2004). As a majority owner in Yukos,
Group Menatep has seen the value of its stake plummet.
In my role as a Director of Group Menatep, I have duties and
obligations to the company. Investors rely on the integrity of the
company itself and on its public filings with securities regulators.
But they also rely on the political and legal systems in the countries
in which such companies operate, for if rule of law is not followed and
property rights are not protected in a country, the whole international
system for attracting and protecting foreign investment breaks down.
The U.S. has been a leader in the development of this international
system, and has worked to bring Russia into it through economic
agreements designed to protect investors from such risks as
expropriation of their assets by state authorities. These include the
United States' Treaty with the Russian Federation Concerning the
Encouragement and Reciprocal Protection of Investment which expressly
is designed to protect American investors from such risks in Russia,
and which provides as follows in relevant part:
Investments shall not be expropriated or nationalized either
directly or indirectly through measures tantamount to
expropriation or nationalization (``expropriation'') except for
a public purpose; in a nondiscriminatory manner; upon payment
of prompt, adequate and effective compensation; and in
accordance with due process of law and the general principles
of [non-discriminatory] treatment. . . .\36\
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\36\ Treaty with the Russian Federation Concerning the
Encouragement and Reciprocal Protection of Investment, TIAS 11471, at
Art. III(1); Treaty Doc. 102-33 (June 17, 1992).
Despite Russia's signing this treaty in Washington on June 17,
1992, the treaty did not go before the Russian Duma for serious
consideration of its ratification under Russian law until 2003, and it
has yet to be ratified.
This treaty is clearly intended to protect U.S. investments in
Russia including securities of a Russian company held by U.S.
nationals. By our estimates, approximately 15 percent of Yukos' shares
are owned by U.S. nationals. Accordingly, regardless whether the Duma
has ratified the treaty, Russia's expropriation and nationalization of
Yukos would appear to constitute a failure by Russian authorities to
comply with the treaty obligation that Russian representatives
undertook in 1992.\37\ These actions have directly harmed U.S.
nationals whose interests were protected in theory by that treaty.
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\37\ I note that under article 18 of the Vienna Convention on the
Law of Treaties, May 23, 1969, 1155 U.N.T.S. 331, a State is obliged to
refrain from acts which would defeat the object and purpose of a treaty
it has signed pending ratification.
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I do not know whether the U.S. government is concerned about this
apparent violation by Russia of its duties to the U.S. under the
Bilateral Investment Treaty or the fact that Russia has failed to
ratify this treaty after nearly 15 years. While the issue of whether
private individuals have remedies available to them under the treaty
notwithstanding its ratification status in Russia is currently being
studied, it is clear that if the U.S. concludes that Russia is not
living up to its responsibilities under the Treaty, or that Russia is
not even taking seriously the practice of treaty making, it has a
number of remedies available to it. These could include deferring
decisions to grant Russia additional economic privileges, given its
apparent inability or unwillingness to abide by one of the most basic
provisions of a bilateral investment treaty--the prohibition on
expropriation without compensation.
Mr. Khodorkovsky was a leading proponent for Russia's integration
into world markets, and particularly for closer ties with the U.S. and
the West, another factor mentioned as a possible catalyst for his
arrest. This sends a chilling signal to Russia's business leaders and
discourages the sort of open and collaborative economic relationship
that would be of mutual benefit to the U.S. and Russia.
As Mr. Theede explained, energy security is another critical factor
in the ``Yukos affair.'' The Russian Government's desire to
renationalize energy assets held by Yukos was, in my personal view, an
important motivating factor for the attacks on Group Menatep. Whereas
under Mr. Khodorkovsky's leadership, Yukos was exploring new ways of
cooperating with the U.S., including the diversification of Russian
export markets through the construction of pipelines to supply both the
east and west coasts of the United States, we now have a situation
whereby these decisions will be made based on Russian foreign policy
objectives and internal politics, not markets. Indeed, just this past
week, the Russian Government announced that only majority owned Russian
oil firms will be allowed to bid on exploration contracts later this
year--an announcement rightly seen as extremely worrisome by major news
media and Western analysts alike.
u.s. reaction
As I have previously mentioned, I am not an expert in foreign
policy and would not presume to make recommendations on United States
policy towards Russia. However, it is widely acknowledged by such
experts that the attacks on Group Menatep and its leadership are
selective and politically motivated. It is increasingly clear,
moreover, that the ``Yukos affair'' is not a one-off occurrence, but
rather forms part of a concerted effort to reclaim state control over
Russia's energy sector for both strategic reasons and personal
enrichment. It may be that the United States government finds
expropriations, unfair arrests, prosecutions and trials, and
consolidation of key sectors in Russia's economy under state control to
have national security implications. It is obvious that U.S. interests
will continue to be dramatically affected until the Yukos ``affair'' is
resolved in a manner consistent with international standards and rule
of law.
A wide array of commentary points to the negative impact this
matter is having on capital flight out of Russia, foreign investment
into Russia and U.S.-Russia energy cooperation. U.S. minority
shareholders in Yukos have also lost a great deal of money, among them
public pension funds such as the State of Ohio.
Hearings such as these send an important signal to the Kremlin that
the U.S. is closely watching its actions and is vitally concerned about
rule of law, as well as property and human rights in Russia.
The upcoming Summit meeting of Presidents Bush and Putin will
provide another opportunity for the United States to raise these
concerns, and I would hope you will urge President Bush to send a
strong signal when he meets with President Putin next week.
Given the current ominous trends in Russia, I note that many
experts have called into question Russia's accession to the WTO, its
participation in the Group of Eight, and in particular its hosting of
the G8 meeting in 2006. As rules based organizations and a grouping of
the world's leading democracies respectively, my personal experience
has provided a stark example as to why the Russian Federation is not
currently a suitable candidate for either.
I thank you for the opportunity to testify here today, and once
again, am grateful for the interest and attention this matter is
receiving.
______
Report of the Council of Europe Parliamentary Assembly
The Circumstances Surrounding the Arrest and Prosecution of Leading
Yukos Executives
Doc 10368 Addendum, 24 January 2005
Addendum to Report: Committee on Legal Affairs and Human Rights.
Rapporteur: Mrs. Sabine Leutheusser-Schnarrenberger, Germany,
Liberal, Democratic and Reformers Group
a. introduction
1. Following the adoption of the report in the Committee for Legal
Affairs and Human Rights on 25 November 2004, a number of events have
prompted me to present the following additional information to the
Assembly.
b. reply of the federal tax service
i. Comparative tax burdens on Yukos and its competitors
2. On 5 January 2005, the Rapporteur received a reply to the
questions I had asked the head of the Federal Tax Service, Mr.
Serdyukov, following my visit to Moscow in September.
3. As regards the requested official figures on the comparative tax
burden for oil producing companies, the reply was evasive.
4. The question on Yukos' tax burden before and after the
reassessments was not answered because of the confidentiality of such
information; I was encouraged to obtain the information from the
taxpayer itself, i.e. from Yukos.
5. I had already received this information from Yukos' CEO Steven
Theede and the CFO, Bruce Misamore, during my visit to Moscow in
September. My question to the Federal Tax Service was intended to
cross-check the information provided by Yukos, in line with my quest
for utmost fairness and objectivity. I take it that if the information
provided by Yukos, which I published in the Explanatory Memorandum with
the proviso that confirmation by the Federal Tax Service was still
outstanding, were false, Mr. Serdyukov would have said so in his reply.
6. I must therefore assume that the total tax burden for Yukos,
including the retroactive reassessments, is indeed about triple that of
its Russian competitors and that the total tax burden for 2002 exceeds
Yukos' turnover for that year.
ii. Temporary reprieve for taxpayers threatened by financial
difficulties
7. The reply to my question regarding the legal possibility of
temporary reprieve for taxpayers threatened by financial difficulties
following tax reassessments is clear: The law does not allow for any
such reprieve if procedures for criminal tax evasion have been
instituted.
8. While the answer is quite clear, the categorical exclusion of
any payment facilities to avoid bankruptcy for the sole reason of the
opening of criminal proceedings raises legal issues concerning the
principles of proportionality and the presumption of innocence (Article
6 paragraph 2 of the ECHR).
iii. Treatment of other Russian oil companies having used the same tax
minimisation schemes
9. In reply to my question, whether other Russian oil companies,
and if so which ones, had been subjected to similar reassessments and
their executives criminally prosecuted, given that we had been told
that other oil and resource companies had used the same tax
minimisation schemes, I was given detailed legal explanations,
underpinned by copies of judgments of different Russian and CIS courts,
according to which agreements between local and regional authorities
granting individual taxpayers privileges with regard to federal taxes
are, legally, invalid.
10. The question of the legality, in tax law, of the tax
minimisation schemes used by Yukos, as well as many other resource
extraction companies between 2000 and 2002, was neither the subject of
my question, nor even of my report. The reply mentions some other
companies whose agreements with local authorities have been declared
unlawful, But the core of my question--whether Yukos' competitors and
their leading executives have been subjected to the same excessive
enforcement measures and even criminal prosecutions, has not been
addressed.
11. I must therefore conclude that Yukos and its leading executives
have indeed been ``arbitrarily singled out by the authorities,'' as it
is said in paragraph 9 of the draft resolution.
c. new developments and further information relating to ``the
circumstances surrounding the arrest and prosecution of leading yukos
executives''
i. Sale of Yugansneftegaz
12. What was still not certain at the time the Committee on Legal
Affairs and Human Rights adopted the report--i.e. that Yukos' principal
asset, its oil-producing subsidiary Yugansneftegaz, would be sold off
below market value to players closely linked to the Kremlin, has
meanwhile turned into actual fact: On 19 December 2004, ``Baikal
Finance Group,'' registered under an address in Twer in central Russia,
which houses a fast-food joint (``Cafe London''), a mobile phone shop
and the liquor Store ``Dionis,'' successfully bought Yugansneftegaz for
= 7 bn, i.e. less than half of the ``fair value'' estimated inter alia
by Dresdner Kleinwort Wasserstein at an auction in which other
potential bidders, including from abroad, were discreetly
``discouraged'' from participating. Reportedly, the detour via Baikal
Finance Group and Rosneft, the State-owned oil company to whom the
original buyers are said to have transferred Yugansneftegaz, had become
necessary after Gazprom and international banks supporting Gazprom's
expected bid had been discouraged from acting overtly as buyers by an
injunction pronounced by a Texan court a few days before the auction
pronounced at the request of Yukos. At the end of the day,
Yugansneftegaz has been effectively renationalised.
13. The auction and the proceedings leading up to it have been
widely criticised internationally, for example by the spokesperson of
the U.S. State Department, who highlighted the lack of transparency and
independence of the courts leading to a loss of confidence of foreign
investors, and by the Finnish Minister for Foreign Affairs, Erkki
Tuomioja, who said that the renationalisation of Yukos was not the
right way to promote foreign investment in Russia. Kremlin economic
advisor Illarionov and Economic Affairs Minister German Gref also
criticised the handling of the Yukos affair and the sell-off
Yuganskneftegaz, recalling that the State had proved to be an
``inefficient'' owner of key industrial assets. Mr. Illarionov was
reportedly recently demoted and lost his function as the Russian
``sherpa'' for the G8 economic summit process.
ii. European Court of Human Rights asking for explanations from the
Russian authorities
14. On 14 December 2004, the Court, which had granted the Yukos
case priority in July 2004, asked the Russian authorities for
explanation on six substantive points arising from the company's April
2004 application. The questions concern, inter alia, the fairness of
the hearings before the competent Russian courts, and issues related to
the deprivation of property (Article 1 of Protocol 1 ECHR), and to the
principle of nullum crimen, nulla poena sine lege (Article 7 of the
ECHR).
iii. New developments in the court proceedings--allegations of
increased pressures on lawyers and witnesses
15. On 12 January 2005, Mr. Khodorkovsky--who has rarely taken the
floor in the courtroom until now--made a statement bitterly accusing
the State organs of having destroyed the very riches that they say they
want him to return. Citing numerous procedural violations by the
prosecution tolerated by the court, he said that he lost all faith in
the authorities' objectivity. In the interest of the country, society
and the prosecution and courts themselves, he called for a truly
independent judiciary. Prosecutor Shokhin replied via Interfax that Mr.
Khodorkovsky, in order to avoid punishment, just tried to blacken those
who perform their duty.
16. On 14 January 2005, it was announced that new criminal charges
for money laundering (article 174 part 1 of the Russian Criminal Code,
i.e. legalisation of proceeds of crime) would be brought against Mr.
Khodorkovsky and Mr. Lebedev.
17. On 18 January 2005, Mr. Robert Amsterdam, international legal
counsel for Mr. Khodorkovsky and Mr. Lebedev, sent me a written
statement with fresh allegations of increased pressures on lawyers
working on the Yukos case and witnesses of the defense.
resolution 1418 (2004)
1. The Parliamentary Assembly, reaffirming its commitment to the
Rule of Law as one of the Council of Europe's core values, is concerned
by the shortcomings of the Judicial process in the Russian Federation
revealed by the cases of several former Yukos executives.
2. The rule of law requires the impartial and objective functioning
of the courts and of the prosecutors' offices, free from undue
influences from other branches of government and the strict respect of
procedural provisions guaranteeing the rights of the accused.
3. The Rule of Law includes the equality of all before the law,
regardless of wealth or power.
4. The right to a fair trial, as protected by Article 6 of the
European Convention on Human Rights (ECHR), includes the right to a
fair and public hearing by an independent and impartial tribunal
established by law, the presumption of innocence and adequate time and
facilities for the preparation of the defence. A fair trial requires
respect of the rights of the defence, the privileged lawyer-client
relationship and the equality of arms between defence and prosecution.
5. The public character of judicial proceedings, as guaranteed by
Article 6 of the ECHR, is an important element of a fair trial, in the
interests of the accused, but also of the public at large and its
confidence in the correct functioning of the judiciary.
6. The Assembly stresses the importance of the independence of the
judiciary and of the independent status of judges in particular and
regrets that legislative reforms introduced in the Russian Federation
in December 2001 and March 2002 have not protected judges better from
undue influence from the executive and have even made them more
vulnerable. Recent studies and highly publicised cases have shown that
the courts are still highly susceptible to undue influences. The
Assembly is particularly worried about new proposals to increase
further the influence of the President's administration over the
judges' qualification commission.
7. Facts pointing to serious procedural violations committed by
different law enforcement agencies against Mr. Khodorkovsky, Mr.
Lebedev and Mr. Pichugin, former leading Yukos executives, have been
corroborated during fact-finding visits whilst some allegations appear
to have been exaggerated by the defence team. On balance, the findings
put into question the fairness, impartiality and objectivity of the
authorities which appear to have acted excessively in disregard of
fundamental rights of the defence guaranteed by the Russian Criminal
Procedure Code and by the ECHR.
8. The most serious corroborated shortcomings include the
following:
i. Despite specific requests of the defence lawyers, tests
were not carried out in good time that could have established
whether or not Mr. Pichugin had been injected with psychotropic
drugs; Mr. Pichugin was also held in the ``Lefortovo'' prison
that is not subject to the usual controls of the Ministry of
Justice and remains under the direct authority of the Federal
Security Service (FSB), contrary to a specific commitment the
Russian Federation undertook when joining the Council of
Europe;
ii. Shortcomings in medical attention to Mr. Lebedev in
prison: In the face of serious concern about Mr. Lebedev's
deteriorating state of health, the prison authorities have so
far refused to allow an examination of Mr. Lebedev by
independent doctors, despite repeated requests;
iii. Delays in obtaining the prosecutor's permission have
prevented the lawyers from entering into contact with their
clients during a particularly critical time after their
arrests, making it more difficult for them to organise their
defence; a legislative reform abolishing the requirement of a
prior permission from the prosecutor's office for a lawyer to
visit his or her client in prison has not been applied in
practice, at least not in the cases of the former Yukos
executives;
iv. Denial of access of Mr. Lebedev's defence lawyers to the
courtroom during the hearing deciding on his pre-trial
detention;
v. Search and seizure of documents in the defence lawyers'
offices, summons of lawyers for questioning on their clients'
cases and alleged eavesdropping against defence lawyers: The
prosecution must not be allowed to circumvent the lawyer-client
privilege by a simple play on case file numbers, especially
when the cases are as closely related to one another as the
criminal cases against MM. Khodorkovsky, Lebedev and Pichugin
and the tax cases against Yukos and its subsidiaries;
vi. Unjustified restrictions on the publicity of certain
court proceedings: Members of the public have had extremely
limited access to certain hearings that were announced as
public whilst other hearings were or are being held in camera
in the first place. In particular, all proceedings against Mr.
Pichugin have been held in camera even though only a small
portion of the case file has been classified as secret; his
lawyers have been placed under strict instructions not to
discuss the proceedings in public, even the reasons of the
final judgment may be kept secret;
vii. Denial of bail (in particular regarding Mr.
Khodorkovsky): Mr. Khodorkovsky was placed in pre-trial
detention several months after Mr. Lebedev's arrest on very
similar grounds, an arrest that media reports interpreted as a
``warning'' to Mr. Khodorkovsky. Mr. Khodorkovsky's conduct
showed that there was no risk of absconding or of interfering
with evidence. After the completion of the pretrial
investigation, Mr. Khodorkovsky and Mr. Lebedev were kept in
custody which raises additional issues in light of the
judgments of the European Court of Human Rights in the cases of
Kalashnikov v. Russia and Letellier v. France. Also, following
a recent legislative reform, persons accused of nonviolent
``economic crimes,'' such as those allegedly committed by Mr.
Khodorkovsky, are generally not placed in pre-trial detention;
viii. Other unfair features of the trials against Mr.
Khodorkovsky, Mr. Lebedev and Mr. Pichugin: The court
systematically allows the prosecutor to read out the minutes of
the pre-trial interrogation of witnesses and to put pressure on
the witness in the courtroom to simply confirm those minutes.
This undermines the effectiveness of the right of the defence
to question witnesses of the prosecution, whose pre-trial
interrogation they are generally not able to attend. The
defence lawyers are also not allowed to exchange written notes
with the accused in the pre-trial detention centre and in the
courtroom. They can only exchange notes after the court has
first read them.
9. The Assembly notes that the circumstances surrounding the arrest
and prosecution of the leading Yukos executives strongly suggest that
they are a clear case of non-conformity with the Rule of Law and that
these executives were--in violation of the principle of equality before
the law--arbitrarily singled out by the authorities.
10. In particular, the allegedly abusive practices used by Yukos to
minimise taxes were also used by other oil and resource companies
operating in the Russian Federation which have not been subjected to a
similar tax reassessment, or its forced execution, and whose leading
executives have not been criminally prosecuted. Whilst the law was
changed in 2004 and the alleged ``loophole'' thus closed, the
incriminated acts date back to 2000 and retrospective prosecution
started in 2003.
11. Intimidating action by different law enforcement agencies
against Yukos and its business partners and other institutions linked
to Mr. Khodorkovsky and his associates and the careful preparation of
this action in terms of public relations, taken together, give a
picture of a coordinated attack by the State.
12. The criminal charges laid against persons who made use of the
possibilities offered by the law as it stood at the time of the
incriminated acts, following a retroactive change of the tax law,
raises serious issues pertaining to the principle of nullum crimen,
nulla poena sine lege laid down in Article 7 of the ECHR and also to
the right to the protection of property laid down in Article 1 of the
First Protocol to the ECHR.
13. The circumstances of the sale by auction of Yuganskneftegaz to
``Baikal Finance Group'' and the swift take-over of the latter by
State-owned Rosneft raises additional issues related to the protection
of property (ECHR First Protocol Article 1). This concerns both the
circumstances of the auction itself, leading to a price far below fair
market value, and the way Yukos was forced to sell off its principle
asset, by way of trumped-up tax reassessments leading to a total tax
burden far exceeding that of Yukos' competitors, and for 2002, even
exceeding Yukos' total revenue for that year.
14. In view of paragraphs 8-12 above, the Assembly considers that
the circumstances of the arrest and prosecution of leading Yukos
executives suggest that the interest of the State's action in these
cases goes beyond the mere pursuit of criminal justice, to include such
elements as to weaken an outspoken political opponent, to intimidate
other wealthy individuals and to regain control of strategic economic
assets.
15. The Assembly recognises the right, and even the duty, of the
law enforcement bodies to bring to justice the perpetrators of criminal
offences. It also recognises the legitimate right of the elected
political leadership to pursue its political objectives, including in
the economic sphere. However, it strongly objects to the use of law
enforcement procedures for such purposes. In this context, reference is
made to the judgment of 19 May 2004 of the European Court of Human
Rights in the Gusinskiy case in which the Court found that the
detention in remand of N-TV founder Gusinskiy violated Article S of the
ECHR because it had established that the applicant's prosecution had
been used to intimidate him into selling off his stake in N-TV to
Gazprom.
16. The Assembly therefore, in general terms,
i. Calls upon the Russian authorities to vigorously pursue
and implement reform of the legal and judicial system and of
law enforcement agencies with a view to strengthening the Rule
of Law and the protection of human rights and to continue co-
operating with the Council of Europe, in the framework of
ongoing programmes;
ii. Encourages the courts to assert their independence vis-a-
vis the executive authorities in assessing the guilt or
innocence of all accused persons, applying the law in
conformity with the European Convention on Human Rights;
iii. Invites the authorities in charge of pre-trial detention
centres to ensure that lawyers' access to their clients in
detention is no longer subjected to any conditions not
prescribed by law, notably to prior authorisation or
recommendation by the public prosecutor, and to provide the
conditions for the effective exercise of the defence rights of
the persons in their custody, including the respect of the
privileged relationship between lawyers and their clients;
iv. Urges the competent authorities to ensure that all pre-
trial detention centres, including Lefortovo isolation centre
in Moscow, be subject to supervision by the Ministry of
Justice, in line with earlier commitments by the Russian
Federation.
17. As regards more specifically the cases of the former leading
Yukos executives, the Assembly:
i. Requests the executive, authorities of the Russian
Federation to guarantee the full independence of the judicial
proceedings against leading Yukos executives from any attempt
to influence them and to take measures to stop any such
attempt;
ii. Requests the public prosecutors to carry out their work
in these proceedings in a professional, impartial and objective
manner, respecting the letter and the spirit of the procedural
protections for the accused laid down in the Russian Criminal
Procedure Code and the European Convention on Human Rights and
the principles set out in Recommendation (2000)19 of the
Committee of Ministers on the role of public prosecution in the
criminal justice system;
iii. Calls upon the courts to ensure effective public access
to the hearings in the proceedings against the leading Yukos
executives;
iv. Urges the competent authorities to ensure in particular
that only those parts of the trial against Mr. Pichugin remain
closed to public scrutiny which are directly linked to
information for which there is a legitimate need for secrecy,
taking account the importance attached to the principle of open
court hearings by the European Convention on Human Rights;
v. Urges the competent authorities to allow immediately an
independent medical assessment of Mr. Lebedev's state of
health.
recommendation 1692 (2005)
1. The Parliamentary Assembly, referring to its Resolution 1418
(2005), recommends that the Committee of Ministers in general terms:
i. Continue offering to the Russian Federation the Council of
Europe's co-operation in preparing and implementing reforms of
the legal and judicial system and of law enforcement agencies,
aimed in particular at further strengthening the effective
independence and transparency of the courts and of their
proceedings, particularly as regards the distribution of cases
among judges of a given court (principle of the judge
determined by law);
ii. Evaluate the extent to which progress has been achieved
under past and current assistance and co-operation programmes
carried out in these fields of judicial reform, and to inform
the Assembly of the results of this evaluation and of any
adaptations that may turn out to be necessary in order to
achieve better results;
iii. Urge the Russian Federation to ensure that all pre-trial
detention centres, including Lefortovo isolation centre in
Moscow, be submitted to supervision by the Ministry of Justice,
in line with earlier commitments and be open to visits by
representatives of the Parliamentary Assembly as requested.
2. Concerning more specifically the cases of the leading Yukos
executives, the Parliamentary Assembly recommends that the Committee of
Ministers:
i. Remind the Russian authorities of the importance it
attaches to the principle of open court hearings and ask them
to ensure that exceptions to this principle in the Pichugin
case are limited to the strict minimum, in accordance with
Article 6 Sec. 1 of the European Convention on Human Rights;
ii. Remind the Russian authorities of the importance it
attaches to the principle that detention on remand shall be an
exceptional measure and ensure that this principle is also
applied in the case of Mr. Khodorkovsky;
iii. Urge the Russian authorities to immediately allow an
independent medical assessment of Mr. Lebedev's state of
health.
The Chairman. Thank you very much, Mr. Osborne. We
appreciate the testimony of both of you gentlemen.
We've been joined by the distinguished ranking member of
the committee, Senator Biden. Do you have an initial word of
greeting to----
Senator Biden. Just a welcome. I apologize for not being
here, and I'll withhold an opening statement. I'm anxious for
us to move on.
Thank you, gentlemen.
The Chairman. Very well. We'll proceed with a round of
questions. We'll start at 8 minutes, and I'll commence the
questioning.
Many have suggested taking a long view of Yukos. The
privatization of assets moving from the time of the Soviet
Union to a time of private ownership brought about some
successes. And Yukos was clearly one of these. But many critics
have said the disbursal of the shares of stock was unusual and,
in some cases, led to certain persons or groups accumulating
great wealth. And, however they may have obtained it, some
cynics point out that some of the wealth may have been
accumulated in strange ways, but, in the event that it was,
those who were managing the wealth ought to presume to stay in
business, as opposed to politics. These cynics have argued that
if you've decided to take what might be thought as ill-gotten
gains, however well developed subsequently, into the political
arena, you could expect consequences.
Such has been a rationalization for the fate of the
chairman of Yukos, for example. But, as you pointed out, Mr.
Osborne, this has now proceeded down through the rank and file
of the company, not simply the leadership, whatever may have
been the political struggle of that variety. And it's led other
observers of Russia to point out that even though we have, as a
country--that is, the United States--from the time that Bob
Strauss went to Russia as an Ambassador--advocated the rule of
law, banking reform, proper titling of property, all sorts of
procedures that would make Russia, in quotes, ``a normal
country'' for investment by Europeans. The Europeans are close
by, but obviously they have an interest in the United States.
This advice has been taken rather haltingly, in bits and
pieces, and not without a great deal of development, even to
the present.
Now, in the past, some have pointed out, Russia suffered
because of this. The amount of investment going into Russia was
substantially less, for example, than that going into China.
And Russians have complained to some of us on this committee,
and others, that they have been unfairly dealt with. Our
response was often that the rules of the game made such
investment much more precarious. Some people in the energy
business decided to take those risks, because the opportunities
were enormous and the long-term situation might have been
different. But, nevertheless, the amount of investment was
always somewhat deficient.
Now, for the moment, Russia, unlike during the times of
Boris Yeltsin, for example, is flush with cash, in terms of its
overall budget. The leverage for advice seems to have
diminished very substantially. As a matter of fact, many
Russians in the government resent any critiques. They perhaps
resent the fact that we're reviewing this situation today. They
might argue that this is Russian business; as a matter of fact,
they don't need our help, they don't need our investment. And,
in fact, steps have been taken in Russia recently to forestall
investment by other countries, indicating hostility, as a
matter of fact, to that sort of intervention.
Now, it's in this context that we have this hearing. I want
to get some idea, leaving aside Russian interests that might
have been involved, were there United States stockholders who
lost money? Were there people from other countries who lost
money? In other words, what has been the impact, in your
judgment, either one of you, upon our country, upon other
countries, leaving aside whether this is good business for
Russia? In my opening statement, I have opined that I don't
think it's very good business for Russia. It's rather
shortsighted, to say the least. These good times come and go.
But, at the same time, leaving aside that editorial comment,
what are the implications for our business or for the world
economy?
Mr. Osborne. Mr. Chairman, if I could make a couple of
comments first, I'll let Mr. Theede talk about the numbers,
because I think he's got them much more at his fingertips than
I have. But I think, on the accusations about the acquisition
of Yukos, I don't think that, although there's resentment,
there's ever been an accusation that anything illegal was done
on the acquisition of Yukos by Mr. Khodorkovsky and his
colleagues at the time. They acted in accordance with the law
of the time. And I think, in any country, you can look back,
and laws develop. I think, also----
Senator Biden. Generous.
Mr. Osborne [continuing]. I think that there are also, if
there was resentment and the feeling that that was acquired
cheaply, that there are legitimate ways that governments use to
rectify those matters. In the UK, there was a view that Mrs.
Thatcher had sold off some of the state assets rather cheaply
and we had windfall taxes. People complained about them, but
they seemed to resolve the situation. This has just turned into
a vendetta against Mr. Khodorkovsky and the others.
And, you know, they forget that also what Mr. Khodorkovsky
was doing was developing a very open Western-style-run company,
which was very profitable. And that was really the resentment.
Mr. Theede. Well, I could add a couple of things to that. I
think, first of all, I have been very impressed with what Mr.
Khodorkovsky and his colleagues did, in terms of improving the
performance of the company that they did buy at the time of
privatization. And, through the process of improvement, they
not only focused on efficiency of production and all the
fundamental things, but they also focused on corporate
governance and transparency, and really, in many ways, became a
poster-child, I think, for Russia, in terms of corporate reform
and becoming a model of what is possible; and, as part that,
also encouraged a number of Western investors to invest in
Yukos.
The Chairman. Just on that point, Mr. Theede, is there any
supposition that President Putin recognizes this? In other
words, one accusation is that President Putin is a governance-
type, comes from a KGB background. He's a bureaucrat, not an
economist, not a venture capitalist. I ask this, because
obviously a very severe judgment has been made to invade this
entire process, one that appeared to be wealth-producing, all
for other reasons.
Mr. Theede. Yes. Well, I've refrained from personalizing
the actions against the----
The Chairman. Yes.
Mr. Theede [continuing]. Company over the last year, but I
will say that approximately 20 percent of the company today is
owned by Western investors, and about half of those, or 10
percent of the company, owned by Americans. The attack on the
company seems to have taken place without regard to those
international investors.
The Chairman. I thank you.
Senator Biden.
Senator Biden. Thank you.
Gentlemen, let me follow up on that point. And you've
answered my question. Twenty percent of Yukos is owned by
foreign investors. Is that correct? Is that what you said?
Mr. Theede. Twenty percent of the company is owned by ADR
holders, yes.
Senator Biden. Okay. I mean, engage in conjecture for me.
You may have done this before I came in. If you did, I'll
withhold, and I'll move to something else. What do you think
the motivation for the action was? Was it the fact that there
was this transparent company growing here, and that was a
threat? Or what do you think the motive was?
Mr. Theede. My personal opinion is, there is just no
question that it's politically motivated.
Senator Biden. But a lot of things are politically
motivated. It could be politically motivated, in the sense that
they did not want to have a Western-style corporation emerging
that is transparent. It may be politically motivated because
they viewed Khodorkovsky as a direct threat to Putin's
political security.
Mr. Theede. I believe it had its--has its roots in the fact
that Mr. Khodorkovsky posed an opposition threat and an
alternative point of view of Russia's future.
Senator Biden. I guess what I'm trying to say is that it's
an important distinction. There is, understandably, all kinds
of conjecture as to why and what individual or multiple reasons
prompted this action. And if one is--as I understood the
Chairman--a growing resentment of Western investment, period,
``We don't need anybody's help,'' a sort of a xenophobic
feeling about Russian resources and assets, that's one thing.
If it is a political vendetta--put it another way, assume that
Yukos had been a political ally of Putin. I expect, from your
answer, that you think this would not have happened,
notwithstanding the fact it had all these other markings of a
progressive, open, Western-style corporate governance.
Mr. Theede. That is correct, Senator Biden. I believe it
has its roots in political differences of opinion.
Senator Biden. Gotcha.
Mr. Theede. And my observation has been that--I think that
the government has been quite concerned about the impact that
their actions against Yukos are having, in terms of investment
climate for Russia. And----
Senator Biden. That was my next question. Talk to me more
about that. There has still been much less than the investment
in China, and much less than the investment in Turkey, for
example. But there's still been--what was it, $10 billion or
thereabouts, invested? Would that be on track as to what would
have occurred, in your view, anyway? Or do you think, had this
action not been taken by Putin, that there would have been
significantly more activity and investment?
Mr. Theede. Well, I--that's getting a bit out of my area.
But I would answer your question in this way. Having worked in
international companies for 32 years, and knowing how
corporations, in general, make investment decisions, all
companies assign certain political and economic risks to their
investment opportunities. And, to a large extent, those risks
are based on--are related to country risk.
Senator Biden. Right.
Mr. Theede. And my view is that international investors
have most likely increased the country risk associated with
investing in Russia as a result of the Yukos situation.
Senator Biden. Mr. Osborne, do you want to comment on that?
Mr. Osborne. Yes. Could I go back to your previous
question----
Senator Biden. Surely.
Mr. Osborne [continuing]. About why the confrontation with
Mr. Khodorkovsky? I think it's rooted in Yukos' success. I
think the fact that Yukos was a significantly more profitable,
more efficient company than the state-owned comparisons, the
fact that Mr. Khodorkovsky was not backward in pointing that
out. He was confrontational. He believed that there was a
democracy occurring and that he was entitled to support
opposition parties. But I think, at the end, the root of the
problems was his success.
Senator Biden. Well, again--this may be a distinction
without a difference--what I'm trying to get at here is that it
tells us one thing about Putin and his leadership and where he
wants to take the country. If the motivation was the
comparative success and failure--state-run company, corporate
Western-style-run company, one failing, one succeeding, or one
succeeding much more than the other--that's one thing. Assume
that he had decided that the way to deal with Putin was not to
be outspoken. Assume that he more accurately read the situation
and said that, ``There is no democracy like I think''--like he
thought there may have been. And assume he had decided to do
what would not be unknown in any country, that his best
interest was to align himself with Mr. Putin. Is it your
assertion that the success of the company still would have led
to its being undermined by Putin?
Mr. Osborne. I think that it's my belief, that there was a
decision that they wanted to take back into state ownership
large parts of the energy sector. And what got Yukos to being
first choice was its success----
Senator Biden. Gotcha.
Mr. Osborne [continuing]. And the fact that it was entering
into active discussions with Western petroleum companies to
come in and joint-venture with it.
Senator Biden. I see. Last question--Mr. Chairman, my time
is--I only have a minute left--to either of you. Is there any
indication that Putin understands, comprehends, or is worried
about the future investment prospects that he needs, in terms
of the Russian economy, to attract dollars or euros, and that
he is in any way reaching out to cherry-pick by making
assurances, private assurances, or to court such investment in
either the oil sector or any other sector? Is there any
evidence of that?
Mr. Osborne. Not as far as I can see. I haven't seen any.
Mr. Theede. Well, I think that I have seen some of that. I
think that there have been a number of comments made by Kremlin
officials trying to characterize the Yukos situation as being
Yukos-specific. And once the Yukos situation is finally
resolved, whatever that might look like, then Russia will go
back to--on track, on plan. And, of course, my position is--has
consistently been that if the systems are in place that allow
this to happen to Yukos, then it can certainly happen again in
the future.
Senator Biden. Thank you very much.
The Chairman. Thank you, Senator Biden.
Senator Sununu.
Senator Sununu. Mr. Theede, I think you mentioned the
number of 60,000 investors, and an answer to Senator Biden's
question indicated that 20 percent of the company is foreign-
owned. How many investors, roughly, does that translate to? How
many foreign investors are there in the company?
Mr. Theede. Basically, that's the 60,000. The balance----
Senator Sununu. And that includes individuals and
institutions?
Mr. Theede. Yes, it does.
Senator Sununu. But a pretty significant number.
Mr. Theede. Yes
Senator Sununu. It's not in the dozens, it's in the
thousands.
Mr. Theede. Yes.
Senator Sununu. And, Mr. Osborne, could you describe a
little bit--or try to characterize a little bit more
specifically the reaction of foreign capital markets to the
confiscation? Have we seen a fall in the share prices of other
ADRs? Have there been increases in interest rates or risk
premiums associated with investments in Russia? Has there been
any attempt to try to characterize the reaction of the capital
markets?
Mr. Osborne. That's not a subject that I feel particularly
competent to talk about, but I think there has certainly been a
flight of capital out of Russia. I think the government's own
statistics show that there's been multibillion dollars of
capital leaving Russia. And, I think that the only energy-
sector investments that have been made from abroad into Russia
have been made with state-owned enterprises, with presumably
fairly well-regulated agreements before they've gone in there.
So I'm conscious that I haven't answered your question, but
I don't have that information. I can obtain it and make sure
it's put on the record.
Senator Sununu. Anything you want to add, Mr. Theede?
Mr. Theede. Well, I'm--as Mr. Osborne said, I don't have
the facts at my fingertips, but I think if you look at the
performance of the Russian stock index for 2004, compared to
international indices, it has not performed as well. And, to a
large extent, that's due to Yukos' share price plunging from
$16 to less than a dollar, and Yukos had been a significant
part of the--of that exchange--measures.
Senator Sununu. I think it's clear that the members of this
committee condemn this kind of private property confiscation.
You've heard the chairman talk about the importance of the rule
of law. You know, democracy is not just a question of having a
vote or an election, but it consists of having institutions
that apply the law equally, judicial institutions that are--
that have integrity. All of those things are important, are
supported by the members of this committee. But aside from
our--or condemning the action or speaking out against this, or
trying to characterize the negative outcome, what other
appropriate response would you like to see from the
international community?
Mr. Theede. Well, I--for me, it's fairly simple. I think
that there should be an expectation that Russia lives up to its
international commitments and it follows the law.
Senator Sununu. That's an expectation, though. I mean, I'm
looking for specific--sort of, a recommendation or a course of
action that you think would lead to that outcome. For example,
WTO is obviously something of great interest to the Russian
Federation. I think some people might argue that accession to
the WTO might provide a mechanism through which great incentive
is created for applying the law appropriately for establishing
and maintaining these institutions. Other people might argue
effectively the opposite: No; participation in WTO, because of
its value, should not be granted until there's a more
consistent track record. Do you have an opinion?
Mr. Osborne. I think you've accurately set out the
alternative views. And, I think, what one's got to do is
balance that with history and see where--what Russia has done
with other similar organizations. And, in particular, look at
the way it's treated the decisions of the European Court of
Human Rights, where it's ignored them; and, therefore, one
might conclude that it would accede to the WTO based on
promises, going forward, and then not feel obliged by them. So
I think my view--and I am totally unqualified to express the
view--is that they--one should be sure that they have reached
the level playing field before they are allowed on to play.
Senator Sununu. Given your personal experience, which does
qualify you to express your view, and probably does make your
view fairly well informed--given your personal experience with
this situation and the--your sort of personal experience with
the actions and statements of Mr. Putin, what do you think he
will respond to most effectively, or most directly, in this
situation? And, I mean, for example--and this may not be the
only answer--the President is meeting--President Bush is
meeting with President Putin later this month, I believe, on
the 24th. Do you think this is an issue that can be dealt with
effectively on a personal level, or do you think that the
European community or WTO or a wider circle of global actors
needs to be brought into play?
Mr. Osborne. Well, I'm sure that if President Bush was to
let it be known to President Putin that he thought that this
sort of behavior was reprehensible, then that would go a very
long way. If that can be coupled with similar comments from
other world leaders in the G8, then that's got to strengthen
the message. And the impression that I have--and it's a
personal impression--is that President Putin wants to be seen
on that level playing field with the other world leaders, and
they've got to explain to him what it takes to get there.
Senator Sununu. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Sununu.
Senator Obama.
Senator Obama. Thank you, Mr. Chairman. I'll be very brief.
I just want to pick up on Senator Sununu's line of
questioning, and just get some impression, in terms of what the
U.S. Government's role in sorting this through has been, and
whether you think that there are additional steps that the U.S.
Government, whether at the consular level or through other
mechanisms, should have been doing, that has not happened.
Because, obviously, although we're disturbed by what's--the
story that's been described, at a certain point our task is to
see what kind of impact we can have on U.S. foreign policy over
the long term.
So, I'm wondering how has our government responded, and
what steps you think we might have taken differently, or
additional steps we need to take in the future.
Mr. Osborne. I'm very conscious of not being a citizen and
it being wrong for me to express views of--like this. And--but,
I think, my view is that all of the Western leaders and the
Western governments have got to emphasize the importance of the
rule of law, and that that is fundamental, and the short-term
gains about oil or energy or anything else must come secondary
to getting the rule of law applied in all countries, including
Russia.
Mr. Theede. Well, in answer to the first part of your
question, there's been really tremendous cooperation and
support and, I think, open channels of communication with
United States Government officials at a number of levels, from
the Embassy in Moscow to Washington and so forth. And, you
know, I've been very pleased with the concern that's been
shown.
In the end, that has not, I don't think, had an impact on
the outcome of the situation to date, but certainly there has
been a very strong interest in what Yukos' future might hold
and what's happening to Yukos.
My personal experience, having worked in Russia for a
relatively short period of time, a year and a half, is--and I
found out this--I learned this the hard way--is that standard--
I want to--I'll call it diplomatic, but we use it in business,
too--but standard diplomatic language doesn't always make its
point in Russian culture. And I found that, for me to be
effective, I had to have a strong position, and I had to state
it clearly, and I had to--and that was whether I was agreeing
with an individual I was working with, or whether I was
disagreeing. But, either way, they respected the fact that I
had a strong position and I was clearly outlining that
position.
Senator Obama. Okay.
Thank you, Mr. Chairman. That's really the only question I
had.
The Chairman. Well, thank you very much, Senator Obama.
Let me just initiate a final question or two by saying that
your point, Mr. Theede, is, you found, as a businessman in
Russia in the last 18 months, the need to state a strong
position. And let me just say, I think we have tried, in our
questions, to be probing and philosophical and to find the
nuances of this. In my own judgment, in this particular case, I
believe the President of Russia, President Putin, made a
monumental blunder. It was a blunder, not only in terms of
breach to the rule of law, but, if you were simply to look at
it in economic terms, in substituting an inefficient state-run
corporation for something that was doing very well, and had
international backing. It's a loser any way you look at it.
Now, you can say, well, President Putin knew what he was
doing. He saw a rival out there, and he was going to suppress
that rivalry, taking a look at the maintenance of his regime as
the important aspect. So perhaps, in that line of thinking, he
would say, ``I've been successful. I have my rival in jail.
He's bottled up. And it ought to be a lesson for anybody else
who happens to think about this.''
Now, you know, as we recite all this, I'm reminded of a
meeting of a number of Members of the Senate and the House, not
long ago, talking about this subject. And one of the Members
said, ``Now, I don't want to be considered isolationist and
nativist and what have you. We're all international. But why do
we care about Russia? What difference does it make?'' In other
words, this Member, not just to play the devil's advocate, was
saying that if President Putin wants to get into a squabble and
jail his opponents and go for inefficiencies and downgrade the
Russian state--after all, Russia has the economy about the size
of Belgium, that's what we're looking at here, and it may
diminish lower than Belgium by the time they're finished--why
should we care?
Now, some of us, on the other hand--and I'm one of these,
admittedly--would say, well, we do care about Russia, for a
good number of reasons. We've cared about Russia for a long
time, about the people of the country, about its culture, about
its future, about its relationship with us. This can be a
remarkable situation, of relationship and friendship, and we
ought to work at this. And some of us would say, in fact, most
of the work is occurring just at that level, with the two
Presidents, President Putin and President Bush.
Now, how do we enrich the fabric of this discussion? Most
of our other international relationships have many, many other
players, people like yourself, in business, people in all sorts
of cultural realms, lots of students. Now, we have a good bit
of this, but it's diminished over the course of time.
In our hearing with Secretary Rice, yesterday, I mentioned
the Freedom Support Act budget. It's to diminish by about 13
percent, and that's not the first time it's diminished. There
was an enthusiasm at the beginning, as '91 and '92 came and so
forth, and that's diminished a whole lot.
Well, there are the farm groups going through Russia, quite
apart from the cultural groups. Some of this still occurs, but
much less than it should. And, reciprocally, our visa problems
pose a lot of difficulty for Russians--not just visas for
students, but also for others--so that the intersection there,
in our war against terrorism, what have you, has had its toll.
And we have to examine those things.
I very much appreciate both of you being very forthcoming
about the business aspects of this. You have been reticent to
speculate into the political realm, to take the position that
President Bush might or might not take when he meets in
Bratislava with the Russian President. But my own view is that
there is, at even the level of President Putin and the Foreign
Minister and the Defense Minister and people with whom some of
us have had some contact, a real desire for better outcomes. I
think it's very important that we keep pressing that
possibility, even, as you say, sometimes making strong
statements, making our position well known. It would be a
mistake to be ambiguous in this case, in my judgment, if you
care about Russia and about the relationship. I have said to my
congressional colleagues, ``If you don't care, then, as a
matter of fact, you just let things run.'' And they will run
badly, not just for Russians, but for others who are in the
periphery of the Russian state and for others with whom they
come in contact. And that, I think, will be ultimately tragic--
if we are not observant, if we are indifferent.
Let me ask if either of you have any final thoughts. And if
not, we'll press on with our next panel. Do you have a final
summary, Mr. Theede or Mr. Osborne?
Mr. Theede. No, sir; I have nothing to add from what's been
said.
The Chairman. Thank you.
Mr. Osborne. I think just to take up the points that were
made by your colleagues about: What can the world do? I really
think that one thing it can do is make a condition of access to
the WTO the cessation of these politically motivated attacks.
Whether they will or not, I don't know. But that's my only
final thought.
Thank you very much.
The Chairman. Well, I think you make a very good point. I
think some skeptics would say that, given the course of
affairs, Russia is so far from WTO membership. It's not really
clear it's heavily motivated to want to be in the WTO if, in
fact, current activities are an indicator. But perhaps there is
leverage here. We've asked you what are the levers? Some
Russians tell me, ``This is not a lever, this is simply
patronizing, on your point. You believe in the WTO. And, in a
way, it might be interesting for us, but it is hardly
essential.'' Perhaps President Bush will discover that
President Putin has much more interest in the WTO and issues of
that ilk than has been apparent. And, if so, then perhaps we
will have more to talk about.
Well, we thank both of you for your testimony.
The Chair would like to call now a distinguished panel that
would include Dr. Anders Aslund, the Director of Russian and
Eurasian Program of the Carnegie Endowment, Mr. Bruce Jackson,
President of the Project on Transitional Democracies, Mr.
Stephen Nix, Regional Program Director for Eurasia, and the
Honorable Nelson Ledsky, Regional Program Director for Eurasia,
at the National Democratic Institute.
Welcome, gentlemen. We very much appreciate your coming to
the hearing this morning.
And let me say at the outset, as I mentioned with our
previous witnesses, your statements will be published in full
in the record. You need not ask for that to occur. And to the
extent that you are able to summarize those statements, that
would be appreciated.
I'll ask you to testify in the order that I introduced you.
That would be, first of all, Dr. Aslund, then Mr. Jackson, then
Mr. Nix, and, finally, Mr. Ledsky.
Dr. Aslund.
STATEMENT OF DR. ANDERS ASLUND, DIRECTOR, RUSSIAN AND EURASIAN
PROGRAM, CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE,
WASHINGTON, DC
Dr. Aslund. Mr. Chairman, thank you very much. I would like
to thank you for this opportunity to speak on an important
topic.
Russia is something that I care very much about. I've
studied Russia for more than 30 years. And I don't think that
the developments that we have seen in Russia, particularly in
the last year or so, have been very fortunate.
But my major argument is that Mr. Putin has chosen
authoritarianism. This choice of his is not strengthening, but
weakening the Russian state. And, therefore, there is, as you
mentioned at the beginning, unfortunately less that the United
States today can do together with Russia.
During his first 4-year term, President Putin was highly
successful. The country enjoyed political and economic
stability and great economic growth. He did also carry out
reforms on a broad front--judiciary reform and tax reform, but
also many others. He succeeded in his policymaking, because he
balanced two groups--on the one hand, the old oligarchs from
the Yeltsin era; on the other hand, his KGB people from St.
Petersburg--but left a small group of liberals with inordinate
influence as arbiters.
He managed enigmatically to be everything to all voters,
and, indeed, was elected President with 71 percent of the votes
cast in an election that was deemed free, but not fair, by the
OSCE. But after that we have seen that since he consolidated
power, he has done what he really wanted to do. And the choice
is not very encouraging. I think that we should focus upon four
major policy failures in the year past. They reflect the
inadequacy of the new system that President Putin has built so
meticulously.
The first policy failure, indeed, was the Yukos affair. The
arrest of Mikhail Khodorkovsky meant that Mr. Putin eliminated
the oligarchs as a political force. That meant that only a
small group of KGB officers really sat on top of state power in
Russia and at the same time, as we have heard, the lawless
confiscation of Yukos rendered his excellent tax reform and the
substantial judicial reform little but jokes.
The second scandal was the hostage drama at the school in
Beslan in Northern Ossetia. The scandal was that the government
didn't do anything. In the end, on the third day, it was the
locals who stormed the school, and the result was, of course, a
maximum blood bath. This was simply state distortion. Russians
accept a lot, but not that the state does nothing.
The third big policy mistake was the massive intervention--
by Mr. Putin personally--in the Ukrainian Presidential
election. There he proved himself poorly informed,
antidemocratic, anti-Western, and ineffective. You can say that
in one stroke he managed to unite the United States and the
European Union, which is quite an achievement, but he did so
against himself, and he left much of his prior realist foreign
policy in tatters.
A fourth big policy drama has been the recent reform of the
social benefits, which has simply been bungled, which makes it
look like an action directed against the poor in the midst of
Russia's oil boom.
All these four policy mistakes illustrate the systemic
shortfalls of President Putin's new regime.
First of all, Mr. Putin is too jealous of power to share it
with anybody, even with his Prime Minister. This leads to an
excessive centralization of power which has virtually paralyzed
his government.
Second, President Putin is now increasingly representing
only a narrow circle of KGB officers from St. Petersburg. You
can't manage a country for long with such a narrow power base.
And, naturally, his personal popularity is now falling fast.
Third, by strangling independent information, President
Putin allows himself to be increasingly disinformed by his own
bureaucracy.
Fourth, checks and balances have been minimized, which
means that the quality of decisionmaking gets worse, as we saw
in the social benefit reform.
And, fifth, as his regime has changed, so has its
interests. The dominant interest now is of the small circle of
KGB officers who sit on the top of the state administration and
on top of the state enterprises. This is the most antireformist
interest that you can imagine. Therefore, there are no reforms
coming forward.
So my point here is that Putin's rule is not only
authoritarian, but it's dysfunctional. It is too rigid and too
centralized to handle crises, and crises always happen. Rather
than addressing any of these problems, President Putin just
stubbornly continues further in the same direction of further
centralization.
My suggestion here, without developing it further, is that
such a regime can hardly be very stable.
What does this then mean for United States/Russia
relationship?
First of all, no illusion can be harbored any longer about
shared values between the United States and Russia. President
Putin does not believe in freedom and democracy, which he has
well shown, contrary to prior statements of his.
Second, the consequences of these differences in values are
most evident in the newly independent states in Eurasia. We are
likely to see more standoffs, as we have just seen in Ukraine,
where President Putin supports authoritarian rulers, while the
United States, of course, must stand on the side of democracy.
Third, much of the bilateral talks between the United
States and Russia have been devoted to development of Russian
energy. As we have just heard, of course, all these policy
changes in the last year or so, around the Yukos affair, hamper
that.
Fourth, as you mentioned in your introductory words,
Russia's redeeming feature in recent years has been that it has
been seen as a firm and capable ally of the United States in
the war on international terrorism and on nonproliferation.
Alas, major terrorist acts in Russia, both in Moscow and North
Caucasus, suggest that Russia might not be very effective in
doing so, even at home.
So, let me conclude, Mr. Chairman. It should be emphasized
that the United States and Russia still have common interests
in the nonproliferation of arms of mass destruction and many
regional conflicts around the world, and they should be further
pursued. But, I think that it's time to talk to Russia with a
firm public voice.
We have to see, as the final point, that President Putin's
unfortunate choice of an authoritarian regime has reduced both
the efficacy of a Russian state and the shared interests of the
United States and Russia.
Thank you, Mr. Chairman.
[The prepared statement of Dr. Aslund follows:]
Prepared Statement of Anders Aslund, Director, Russian and Eurasian
Program, Carnegie Endowment for International Peace, Washington, DC
Mr. Chairman, I would like to thank you for this opportunity to
speak on the important topic of the retreat of democracy in Russia.
Russia in the 1990s was not a full democracy, but it was a much freer
society than Russia today, while its economy has developed very
positively since then. The retreat of democracy in Russia is nothing
that has been forced upon President Vladimir Putin but an intentional
result of his. Therefore, I shall discuss how his regime has evolved.
In particular, I shall focus on major events of the last year and what
they tell us about the nature of Mr. Putin's regime. Finally, I shall
discuss the potential impact of the changes in Russia on the future of
the U.S.-Russia relationship.
The Evolution of President Putin's Regime
Overtly, Russia's President Vladimir Putin appears to have
undergone a remarkable transformation between his first and second
term. By and large, he was highly successful during his first term. The
country enjoyed political and economic stability, and the economy grew
by a solid annual average of 6.5 percent. The country carried out
reforms on a broad front.
It appeared as if President Putin was steered by four major aims:
1. Political control;
2. High economic growth of 7-8 percent a year attained
through market economic reforms;
3. Rule of law through judicial reform; and
4. Realist foreign policy enhancing Russia's international
standing at little cost. During his first term, President Putin
was highly successful in achieving these goals.
Yet, the black marks were by no means absent. Putin had risen to
power on a ruthless war in Chechnya, and his first term saw ever worse
terrorist attacks, against which his government stood helpless. Another
negative was a steady reduction of democratic freedom of rights.
Independent media were reined in or taken over. Frequent regional
elections were increasingly tampered with. State power was ever more
centralized to the President.
There was an obvious contradiction between President Putin's first
goal of political control and his other objectives, but his
concentration of political power was so gradual that the contradiction
was not all too striking. In fact, policymaking from 2000 till 2003 was
conditioned on a balance of power between the Yeltsin-era big
businessmen and Putin's rising friends from the KGB in St. Petersburg.
As a result, a small group of liberal reformers, such as Minister of
Economy German Gref and Minister of Finance Alexei Kudrin, tended to
exert inordinate influence, although they had no independent power
base. An avid reader of opinion polls, President Putin tried
enigmatically to be everything to all voters. The outcome was an
excellent and comprehensive reform wave, improving the economy and the
judicial system. In particular, a new tax code was adopted, introducing
a flat personal income tax of 13 percent, and the new Land Code
sanctified private ownership of land.
Thanks to his many policy successes, President Putin became
genuinely very popular. He exploited his attainments to reinforce his
personal power, and in the parliamentary elections in December 2003 his
United Russia party won a majority of two-thirds of the seats.
President Putin won the Presidential elections in March 2004 with no
less than 71 percent of the votes cast in elections that were deemed
free but not fair by the Organization for Security and Cooperation in
Europe (OSCE). After having been a bit of everything to everybody, he
had now consolidated his power to do what he really wanted to do.
Four Monumental Failures
The last year has seen four monumental policy failures by the Putin
regime. They reflect the inadequacy of the new system President Putin
has built so meticulously. The first big policy failure was the Yukos
affair. On October 25, 2003, Mikhail Khodorkovsky, the richest man in
Russia and Chief Executive Officer of Yukos Oil Company, was arrested.
The motives of his arrest appear to have been two. First, President
Putin wanted to further enhance his political control, by arresting the
richest oligarch. Second, various interests around Mr. Putin aspired to
seize Yukos assets. The immediate effect was that Mr. Putin's political
system changed. The balance between oligarchs and KGB officers ceased
instantly, because the other oligarchs heeded the warning and largely
withdrew from political activities. Rather than being the arbiter
between two powerful groups and thus representing the population at
large, Putin instantly became the representative only of a small group
of KGB officers from St. Petersburg, minimizing his power base.
Yukos appears to have utilized loopholes in the tax legislation,
but biased tax authorities and courts have levied an incredible total
of $28 billion in additional taxes and penalties on the company,
forcing it into bankruptcy. Thus, Russia's progressive tax reform has
been rendered a joke. The judiciary has delivered the judgments that
the Kremlin has required, effectively jeopardizing also the substantial
judiciary reform. The Yukos affair has been long and sordid. At each
turn, the worst possible option has been chosen by the authorities. In
the end, President Putin has let Yukos be confiscated through arbitrary
taxation and kangaroo courts. Characteristically, Mr. Putin has not
made any concession whatsoever at any stage.
The second scandal was the hostage drama in Beslan. On September 1,
2004, a group of terrorists seized a school in Beslan in Northern
Ossetia in Russian Northern Caucasus. Russia's foremost special forces
were sent to Beslan, but they were given neither ammunition nor body
armor, battle plans or operative command. At no time was the school
cordoned off. The Chairman of the Federal Security Service (FSB) and
the Minister of Interior arrived in Beslan soon after the siege
started, but they just hid, doing nothing in public. The two regional
governors concerned refused to go there and did nothing. In fact,
nobody from the government did anything. Putin and his government just
ignored the Beslan crisis apart from minimizing news coverage, and the
rare official statements were just gross lies. On the third day, local
Ossetians had had it. They stormed the school themselves with their own
guns and killed several special troops in the process. No less than 330
hostages were killed.
It is difficult to imagine a worse government performance. Law
enforcement failed the population. It possessed no relevant
intelligence. Policemen accepted bribes to let the terrorists through.
Mr. Putin, however, has refused to accept any criticism of law
enforcement. He sacked none of the culprits, only the editor in chief
of the private newspaper Izvestiya because of his accurate reporting.
He has done nothing against the rampant corruption and incompetence of
the FSB, his alma mater. To reconsider his failed Chechnya policy does
not appear to be in question. Rather than giving governors more
authority, he immediately demanded to appoint them. Instead of seeking
a cure, he persists in aggravating his policies that contributed to the
problem in the first place, showing inordinate stubbornness.
The third big policy mistake in the last year was the Russian
involvement in the Ukrainian presidential elections. According to
information that I have received from the Yushchenko campaign,
President Putin promised Russian enterprise financing of no less than
$300 million for Prime Minister Viktor Yanukovich's campaign. Russian
TV, widely viewed in Ukraine, campaigned for Yanukovich and slandered
the democratic candidate Viktor Yushchenko. Dozens of Russian political
advisors descended on Ukraine, campaigning for Yanukovich. In the last
month of the election campaign, President Putin himself went twice to
Ukraine to campaign for Yanukovich. President Putin's preference for
Yanukovich is rather odd. Yanukovich had served two prison sentences
for violent crimes. He represented the largest oligarchic clan in
Ukraine, while Mr. Putin had been combating the oligarchs in Russia. It
was Yushchenko who had allowed Russian companies to buy big assets in
Ukraine, while Yanukovich had opposed such purchases. Mr. Putin's
choice only made sense as an action against democracy and against the
West.
In Ukraine, Mr. Putin proved himself, poorly informed, anti-
democratic, anti-Western and ineffective. In one stroke, he managed to
unite the United States and the European Union, but against himself,
leaving much of his realist foreign policy in tatters. Strangely, it
does not appear as if the Kremlin has learned anything from its
spectacular failure in Ukraine. It appears as if the conclusion drawn
is that Moscow should have acted earlier and even more heavy-handedly.
On the one hand, this is depressing from an intellectual point of view,
and it means that anti-Americanism is likely to increase in the
Kremlin. On the other hand, it is rather reassuring, because it means
that Moscow will be as ineffective stemming democratization in other
countries in Eurasia. Russia's policy is too inadequate to pose any
serious threat of neo-imperialism in the region, even if Putin's regime
certainly has proven its bad intentions in Ukraine.
A fourth big policy drama has been the recent reform of the social
benefits. Russia has a multitude of old social benefits that are
primarily targeted on the privileged, and many of the benefits on the
books are never paid out. It would make sense to sort this system out,
to target benefits on those in true need, while unjustified benefits
that could never be afforded were taken off the books. However,
everything was done wrongly. The reform was presented as the
monetization of benefits in kind, while many were just abolished. Full
compensation was promised for the actual benefits in kind, but it
appears that only about one-third of them were actually compensated
for. Proper calculations were not undertaken, and the federal and
regional governments did not agree on who should pay for what. Although
the benefit reforms affected about 40 million people, they were not
properly explained. To add insult to injury, the 35,000 highest
officials, including Mr. Putin, had their salaries quintupled at the
same time, and none of their very substantial benefits in kind was
taken away. The social benefit reform seemed outright anti-poor, and
this occurred in the midst of Russia's oil boom and a huge budget
surplus. This was just politically inept, and spontaneous popular
protests against the reform and Putin himself erupted throughout the
country. They have been spearheaded by pensioners and are still
continuing.
The Nature of Putin's Current Regime
There are many other policy mistakes to record, but the reason why
I have discussed these four policy mistakes in such detail is that they
are probably the biggest and show that they are not accidental but
systemic. Therefore, there are reasons to believe that they will be
repeated. Alas, President Putin's very success in his consolidation of
power may lead to his future fall. He was so fortunate during his first
term because he recognized the limitations to his power. Now, he seems
to think himself free of constraints, but no politician is that lucky.
He has not only changed policies, but the very structure of the Russian
government.
First of all, Mr. Putin is too jealous of power to delegate. In the
last year, President Putin has unwisely concentrated far more power in
his hands than he can manage. He has replaced his strong chief of staff
and prime minister he had during his first term with men famous for
never making any decisions. One reason for this extreme
overcentralization is that Mr. Putin does not trust anybody. Rather
than creating a strong vertical command, he has paralyzed his own
government because, although he is a micromanager, Putin takes his time
and is not very decisive. In effect, he has transformed himself from a
strategic policymaker, tilting the balance at the conclusion of a
decision, to a fireman running around fighting with all bush fires. A
critical shortcoming of this rigid centralized system is its inability
to handle crises, as was so obvious in the Beslan school hostage drama,
but crises are common in Russia.
Second, by playing KGB officers and oligarchs against one another,
Putin managed to represent the whole people and be everything to
everybody. Now, he is increasingly representing only a narrow circle of
KGB officers from St. Petersburg. The Russian elite is overwhelmingly
against Mr. Putin, but they dare not oppose him openly as yet.
President Putin could have won in free and fair elections, but he chose
not to. As a result, his legitimacy depends on little but his personal
popularity, which is falling fast. According to the Russian Public
Opinion Foundation, 65 percent would have voted for Mr. Putin in
presidential elections in March last year. Ten months later this number
had fallen to 42 percent, that is, a drop of over one-third in ten
months.
Third, by strangling independent information, President Putin
allows himself to be increasingly disinformed by his own bureaucracy.
Being a true secret policeman, Mr. Putin is preoccupied with secrecy,
and he seems to rely more on intelligence from his old circle of KGB
men from St. Petersburg than on real information.
Fourth, checks and balances have been minimized. By depriving the
parliament, the council of ministers and the regional governors of much
of their power, President Putin has emptied the formal institutions of
any real content. Instead, he is busy setting up informal advisory
institutions, such as the State Council and the Public Chamber, which
are of little or no consequence. Ironically, the last Russian leader to
do so was Mikhail Gorbachev from the summer of 1988. Therefore, no
institution can lend legitimacy to Mr. Putin if he starts faltering. He
could have won a free and fair election in March 2004, but he chose not
to, so he does not enjoy that legitimacy either.
Fifth, as the regime has changed, so have its interests. The
dominant interest is that of Mr. Putin's KGB friends, who dominate the
state administration and now also the big state enterprises. The state
administration and the remaining large state enterprises should be
focuses of reform, but reforms cannot go against their ruling
interests, and nobody expects any further significant reforms. Even
during Putin's first term, the share of public expenditure devoted to
state administration, law enforcement and military have steadily
increased at the expense of social expenditures.
Sixth, politicians in power usually ration their public statements
to be able to maintain a fair degree of deniability. President Putin,
however, evidently does not want anybody to speak for him but acts as
the only authoritative spokesman of his government. This leads to his
overexposure, the decline of his enigma, and his dwindling authority,
since his words are not always substantiated by actions. Again, the
thought goes to Mikhail Gorbachev, who made ever more frequent and long
television speeches toward the end of his reign.
Seventh, many political leaders manage to maintain their
credibility and authority by blaming top aides and sacking them
repeatedly. For instance, Belarus' President Alexander Lukashenko is a
master in that art. So far, however, Mr. Putin has been very reluctant
to undertake personnel changes, and he has missed repeated occasions to
sack obvious culprits, notably in the Beslan hostage drama. Obviously,
this is a means that he has at his disposal, but strikingly he has not
even demoted any of his many KGB loyalists from St. Petersburg as yet.
Admittedly, the Putin regime has skillfully manipulated elite,
media and civil society, but you can only manipulate that much before
you lose credibility and authority, and that threshold has probably
been crossed during the protests against the social benefit reform this
January. The point is that Mr. Putin's rule is not only authoritarian
but dysfunctional. It is too rigid and centralized to handle crises,
which always occur. Rather than addressing any actual problem, Putin
just pursues his personal authoritarian agenda further. This
centralized police state appears to be interested in little but its own
economic and political power. It is difficult to escape the impression
that Putin is more concerned about pampering his KGB men than fighting
terrorism. Since liberal economic reforms harm their interests, they
have been abandoned. This regime can hardly be very stable, and our
future study should be devoted to how this regime is likely to crumble.
Russia's problem today is not the economy, which is doing very well
with a growth of 7 percent last year. The standard of living is rising
even faster. But we have just seen a popular revolution in neighboring
Ukraine, although that economy grew by 12.4 percent last year, and real
incomes almost twice as fast. Most regime changes in post-communist
countries, democratic or not, are driven by popular discontent with
corruption. For a long time, in Russia such concerns have been directed
against the oligarchs, but it is now all too obvious that the oligarchs
no longer dominate Russia, whereas Putin's KGB men do. At the same
time, opinion polls are showing that popular demands for freedom and
democracy are on the rise again. In the Ukrainian Orange Revolution,
the two dominant demands were for democracy and freedom, and Ukraine
was reminiscent of Russia with its mild authoritarianism.
Potential Impact on the Future of the U.S.-Russia Relationship
Russia's regime has changed significantly in the course of the last
five years. Under President Boris Yeltsin, it was a somewhat flawed
democracy, but it was still a rather free society. This is no longer
the case. Naturally, such a change must have consequences for the U.S.-
Russia relationship.
First, no illusion can persist any longer about any shared values
between the United States and Russia beyond those of certain realism in
foreign policy. Even publicly, the Kremlin is abandoning its talk about
the oxymoron ``managed democracy,'' instead talking more accurately
about mild authoritarianism. The repeated policy disasters in the last
year show that Russia has not benefited, but suffered, from this rising
authoritarianism.
Second, the consequences of the differences in values are most
evident in the newly-independent states in Eurasia. Today, most of
these countries are considered not free or authoritarian by the
authoritative Freedom House. The natural American attitude is of course
to support democracy, but, as events in Ukraine have shown so well,
President Putin's natural policy is to stand up for the old
authoritarian rulers against democracy. As people in other countries in
the region are about to rise against their dictators, this conflict
between Russia and the United States is likely to be repeated. The
United States must stand firmly on the side of democracy.
Third, for years, much of bilateral talks between the United States
and Russia have been devoted to development of Russian energy.
Unfortunately, little has come of these many talks, and the recent
developments in Russia have seriously limited the future opportunities.
The reinforced state oil pipeline monopoly in Russia means that private
pipelines are no longer an option. In particular, that has seriously
delayed the construction of an oil pipeline to Murmansk, which could
have supplied the United States with Russian oil. A recent decision to
prohibit companies that are not predominantly Russian-owned to bid for
licenses for new deposits of Russian resources has further limited the
possibilities for American companies in Russia. The Yukos affair shows
how much the legal and tax climate has been aggravated even for Russian
energy companies.
Fourth, Russia's redeeming feature in recent years has been that it
has been seen as a firm and capable ally of the United States in the
war on international terrorism. Alas, repeated major terrorist acts in
Russia, both in Moscow and North Caucasus, suggest that Russia is not
very effective in this task even at home.
The overall conclusion is that President Putin's unfortunate choice
to build a mildly authoritarian regime has reduced both the efficacy of
the Russian state and the shared interests of the United States and
Russia. This testimony has focused on the problems arising from
Russia's domestic change, but this does not mean that the United States
should turn its back on Russia. After all, Mr. Putin's authoritarianism
is relatively mild by international comparison, and its international
threat appears limited. The United States and Russia still have common
interests in the non-proliferation of arms of mass destruction and many
regional conflicts around the world. The United States has an interest
in strengthening the modern and progressive forces in Russia through
further exchanges of people and trade. Notably, Russia's accession to
the WTO should be welcomed as a progressive step.
The Chairman. Thank you very much, Dr. Aslund.
Mr. Jackson.
STATEMENT OF BRUCE P. JACKSON, PRESIDENT, PROJECT ON
TRANSITIONAL DEMOCRACIES, WASHINGTON, DC
Mr. Jackson. Thank you, Mr. Chairman.
Perhaps I could just focus my summary on the interpretation
of what has gone on in Russia, what it means to its neighbors,
and what it means to us, since, I think, there is no
disagreement about the facts of the case. Judging from your
opening statement, the facts are well known.
Beginning with Mikhail Khodorkovsky's arrest in 2003, it
was a watershed event in democracy in Russia, where Putin moved
from the concept of a managed democracy to something more
sinister, and marked the beginning of a profound crackdown, a
comprehensive crackdown, against all the foundations of
democracy in Russia, not simply Yukos.
We know now, from looking at the Orange Revolution in
Ukraine and the Rose Revolution in Georgia, that there are six
preconditions for democratic change: An effective civic
society, independent political parties, an opposition in
parliament, the beginnings of a business community, an
independent media, and some control over the military and
security system by civilians.
It seems to me that what President Putin evidently decided
was to destroy these foundations of democracy in Russia, and to
discourage their development in countries around Russia. And
that is precisely what has occurred.
In May 2004, Putin attacked the NGO sector and accused them
of being foreign agents, effectively silencing the NGO sector.
Human Rights Watch reports that opposition parties have either
been decimated or eliminated altogether beginning from the
elections in December 2003. United Russia now controls two-
thirds of the Duma, so all legislation that Mr. Putin wants
goes through, including constitutional change, which allowed
the elimination of the regional governors.
The destruction of Yukos speaks for itself. This is
precisely what Mr. Putin wished to accomplish, and largely,
many of us think, because he viewed Mr. Khodorkovsky as a
political rival to him in the 2008 elections, which I think was
likely, at the time.
All television and radio stations are now under state
control. And most ominously, the rise of the KGB as the
political class in Russia. Russian sociologists estimate that
70 percent of all Russian officials--regional officials are KGB
agents, and that the KGB has increased their presence in the
Russian bureaucracy by 300 percent since the time of Mr.
Gorbachev. This is why, in the aggregate, the Freedom House has
downgraded Russia to the ``Not Free'' status, where it now sits
with Belarus, North Korea, and Saudi Arabia.
Thus, I do not think it is accurate to say that democracy
is in retreat in Russia. Democracy has been assassinated in
Russia. And it was deliberate.
Now, my second point is, as Andrei Sakharov wrote, ``A
country that does not respect the rights of its own people will
not respect the rights of its neighbors.'' So it's not simply
an undemocratic regime in Russia; it's an antidemocratic Russia
abroad. And what are the consequences and the manifestations of
an anti-democratic state in Eurasia?
I think it is interesting to look at the doctrinal writings
in Russia right now by one Mr. Pavlovsky, who is quite close to
Mr. Putin. He says, ``One should be aware that, at least, until
the end of President Putin's tenure, and probably until the end
of the Presidency of his successors, Russian foreign-policy
priority will be to turn Russia into a 21st century world
power.'' This is all about power.
And, basically, the growing view is, to achieve this
status, Russia must be undemocratic at home in order to
consolidate the power of the state, and it must be
antidemocratic abroad in order to block the entry of political
competitors--such as the NATO, the European Union--into the
states around Russia. And this is what justifies their actions.
They have actually formally introduced the concept of
preemptive counterrevolution; where democracy looks like it may
flourish or there's proclivities, that they will intervene.
And if we look through their conduct in nearby states, just
to tick off a few--since you are well aware of their actions in
Georgia, I won't draw on that at length--but the attempt to
eliminate the OSCE monitoring of the borders between the North
Caucasus and the South Caucasus--the only explanation is to
allow military and paramilitary intervention in the affairs of
a weaker democratic state.
And since, in Moldova, as you know, since the 2003--Russia
has been sponsoring a criminal enterprise in Transdnistria,
which is basically one of the largest arms exporters in
Eurasia, despite the fact that it has--doesn't even have a
border with Moldova.
In Ukraine, their intervention there was profound. Analysts
like Dr. Aslund have estimated that in excess of $300 million
was spent to basically rig the outcome in favor of Mr.
Yanukovich and possible--and many Western diplomats in Kiev
believe that the assassination attempts that were repeatedly
directed against President Yushchenko originated from Russia,
certainly from criminal interests in Russia, and quite possibly
intelligence interests.
Turning, finally, to their policy toward Belarus, this is a
regime that sponsors the dictatorship in Belarus. Again, in
their own words, ``Russia will clearly distinguish between
certain characteristics of a political regime in a neighboring
country and its observance of allied commitments. Belarus is a
model ally.'' This is their conclusion. Frankly, that the last
dictatorship in Europe is the closest ally of the Putin
government, if this fact were not a tragedy, it would be
laughable. But this is essentially what we're dealing with.
It seems to me that the argument that we--our partnership
with Russia is bearing fruit does not stand any scrutiny. They
are not supporting us in weapons--in an effort to limit the
proliferation of arms, nor are they cooperating in any manner
in the war on terror. In fact, Putin flew, personally, to
Kazakhstan to tell President Nazarbayev to pull his troops out
of Iraq. And if this is a partner in the war on terror, I'm--I
just don't understand the term any longer.
Now, it seems to me, turning to the implications of: What
can we expect from a regime like this?--it seems to me that
there's six quick conclusions.
One, Russia will actively contest the growth of democratic
governments along its western border with Europe, throughout
the Black Sea and Caucasus region, and in Central Asia. As part
of blocking the movement of democracy, they will block the
resolution of frozen conflicts. So we cannot expect any
movement there.
Second, Russia will obstruct the development of effective
multilateral institutions and their operations, not limited to
the OSCE, also NATO's Partnership for Peace, and I would expect
this year you'll see them try to restrict funds from United
Nations peacekeepers in the region. Russian will increasingly
engage in paramilitary and criminal activities beyond its
borders.
But President Putin's goal of a 21st century empire will
inevitably cause him to seize, extort, or otherwise secure the
oil and gas reserves of the Caspian and Central Asia as a
source of state funds. This is not limited to Yukos. They're
talking about the entire strategic--what they call the
strategic resources of the state. They want it all.
Fifth, it seems to me that the policies of Russia and the
conduct of President Putin are growing increasingly eccentric.
References to ``castrating journalists'' is sort of a humorous
aside, it's not the characteristics of a democratic leader. So
we are not dealing with a benevolent autocracy; we are dealing
with a violent and vulgar ``thuggery.''
And, sixth, this plan, as you observed in your remarks,
sir, cannot possibly work. It will ultimately take the Russian
people to financial and political destruction. And the second
fall of Russian power could be far more catastrophic to world
politics than the fall of the Soviet Union in 1989. So we have
a serious challenge to policy, as to: How do we manage them and
get them to turn back from this dangerous path that they've
embarked upon?
It seems to me--and this has come up in earlier testimony,
and I think Dr. Aslund again covered it--there are four things
we have to do.
The exemption that President Putin seems to enjoy from
public criticism simply must end. If we can criticize Saudi
Arabia and Egypt for undemocratic activities, we can certainly
call what's happening in Russia by its true name. And among
other names, Mikhail Khodorkovsky is a political prisoner.
That's all--that's just, flat and simple, what it is.
Second, we must move to suspend Russian access to these
privileged institutions of the West which they are trying to
undermine at the same time. Not only WTO. The G7, Jackson-Vanik
should stay in place, and, across the board, access to the
institutions of the West must be limited until behavior
conforms with standards.
Third, we need to talk--engage our European allies, who
have firsthand experience with Russian power and know exactly
what they are seeing. We have to coordinate with them, much in
the way, under your leadership, we've tried to begin to
coordinate a policy on Belarus. There has to be a common policy
toward the failure of democracy in Russia, and that can only be
worked out with our European allies.
And, finally, Natan Sharansky talks about the concept of
moral clarity. I think that that is closely related to the
concept of strategic clarity. We simply must tell Mr. Putin
directly what is unacceptable behavior and where the red lines
are. Crossing borders into Ukraine to steal the Kerch channel,
insisting that Georgia sign a framework agreement limiting
their sovereignty in perpetuity, those things have to be ruled
out of bounds, and we have to be clear and up front about that.
I think that the time to begin that is obviously next
Thursday, in Bratislava. And President Bush really--we are all
looking for Mr. Bush to draw the red lines at that summit,
which is critical.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Jackson follows:]
Prepared Statement of Bruce P. Jackson, President, Project on
Transitional Democracies, Washington, DC
Mr. Chairman, Members of the Committee, thank you for the
opportunity to testify before you on the rapid deterioration of
democracy in Russia over the past 24 months, the cause of this
deterioration, and the significant dangers Russian policy now poses for
the United States, its European allies and friends, and for the future
prospects of democracy in the Euro-Atlantic. I would like to discuss
three major questions:
(1) What are the necessary institutional requirements for a
successor state of the former Soviet Union to succeed in a
transition to democracy? And how have these institutions, which
would be essential for a democratizing Russia, fared in
President Putin's Russia?
(2) What policy is President Putin pursuing towards democracy
in Russia and towards the prospect of positive democratic
change in Russia's neighbors?
(3) Has Russia become hostile to both the democratic values
and the institutions of the West? And, if so, what should be
done about it?
i
In retrospect, we now recognize that the arrest of Mikhail
Khodorkovsky on October 25, 2003 by heavily armed, special forces
troops was the watershed event in the deterioration of democracy in
Russia. Prior to this arrest, the soft suppression of democratic forces
appeared to some as a manifestation of Moscow's historic political
insecurity and an understandable effort to ``manage'' democracy and
ameliorate the excesses of, and societal stress from, the Yeltsin era.
Subsequent to October 2003, it became apparent that what President
Putin had undertaken was a comprehensive crackdown on each and every
perceived rival to state power and the re-imposition of the traditional
Russian state, autocratic at home and imperial abroad.
However, if we focus only on the animus President Putin has towards
Mr. Khodorkovksy and the resultant ``show trials'' of Yukos executives,
we risk missing the breadth of the crackdown on democratic forces and
risk failing to see the logic of authoritarian and possibly even
dictatorial power behind the events in Russia over the past two years.
Let me contrast the situation in Russia with the positive
developments in Georgia during the Rose Revolution in November 2003 and
in Ukraine during the Orange Revolution of December 2004. Democratic
leaders in CIS countries and outside analysts have paid considerable
attention to the attributes of Georgian and Ukrainian society that
allowed their respective transitions to peacefully sweep away
autocratic regimes despite their total control of the hard power of the
security services and military forces.\1\
---------------------------------------------------------------------------
\1\ See Dr. Irma Krasovskaya, ``The Georgian and Ukrainian
Revolutions: Implications for Central Eurasia (Belarus)'' presented at
the Nixon Center Seminar, chaired by Dr. Zeyno Baran, January 26, 2005
(forthcoming.)
---------------------------------------------------------------------------
While the encouragement of Western democracies and the prospect of
membership in such important institutions as the European Union and
NATO have been important factors in the thinking of reformers in CIS
countries, the preconditions of democratic change in the former Soviet
Union appear to be:
(1) An extensive civic society comprised of multiple NGO's
where pluralism can develop;
(2) Independent political parties which can contest
elections;
(3) An opposition bloc in Parliament which can offer
alternative policies and serve as a training ground for future
governance;
(4) The beginnings of a business community which can
financially support an opposition as a counterweight to the
regime's use of government resources and corrupt business
allies;
(5) An independent media with the capability to distribute
printed materials and with access to at least one independent
television station; and
(6) Civilian control of the military and security services
adequate to ensure that armed force will not be used to
suppress civil dissent.
Regrettably, Mr. Putin and the former KGB officers who surround
him, the so-called ``Siloviki,'' conducted an analysis of the
preconditions of democratic change, similar to the one I have just
outlined, but reached a radically different conclusion. Rather than
support and encourage these positive developments in post-conflict and
post-Soviet states, President Putin evidently resolved to destroy the
foundations of democracy in Russia and actively to discourage their
development in countries neighboring Russia and beyond. And this is
precisely what he has done.
(1) In May 2004, Putin formalized the attack on the civil sector in
his state-of-the-nation address by accusing NGO's of working for
foreign interests and against the interests of Russia and its citizens.
Coupled with the conviction of academics Igor Sutyagin and Valentin
Danilov on fabricated charges of espionage, the NGO sector in Russia
has been effectively silenced.\2\
---------------------------------------------------------------------------
\2\ See among others the reporting of Masha Lipman, Carnegie
Endowment for International Peace, Moscow.
---------------------------------------------------------------------------
(2) Human Rights Watch reports that ``opposition parties have been
either decimated or eliminated altogether, partially as a result of the
deeply flawed elections of December 2003.'' \3\
---------------------------------------------------------------------------
\3\ See Human Rights Watch, Russia Country Summary, January 2005.
---------------------------------------------------------------------------
(3) By 2004, United Russia, Putin's party in the Duma, controlled
two-thirds of all seats and enough votes to enact legislation of any
kind and to change the constitution to suit the President. On December
12, 2004, Putin was thus able to sign into law a bill ending the
election of regional governors and giving the President the right to
appoint Governors, thereby eliminating the possibility of any
parliamentary or regional opposition.
(4) The destruction of Yukos and the seizure of its assets marked
the beginning of the destruction of the business class, but do not
fully convey the scale of renationalization. The Kremlin has made no
secret that Russia claims all oil and gas reserves in the former Soviet
Union as well as ownership of the pipelines which transit the territory
of the former Soviet Union. The outflow of investment from Russia over
the past year and a half confirms that the business base which could
support alternative political views inside Russia is shrinking rapidly.
The elimination of a politically active business community was
precisely what President Putin intended to bring about by the arrest
and subsequent show trial of Mikhail Khodorkovsky.
(5) Of all the areas where the Russian Government has suppressed
the possibility of democracy, it has been most comprehensive and
ruthless in its attack on independent media. All significant television
and radio stations are now under state control. The editor-in-chief of
Izvestia was fired for attempting to cover the tragic terrorist attack
on the school children of Beslan, and two journalists attempting to
travel to Beslan appear to have been drugged by security services. The
state of journalism in Russia is so precarious that Amnesty
International has just reported that security services are targeting
independent journalists for harassment, disappearances and killing.\4\
It should surprise no one that the distinguished Committee to Protect
Journalists lists Russia as one of the World's Worst Places To Be a
Journalist in its annual survey.\5\
---------------------------------------------------------------------------
\4\ Amnesty International Press Release, ``Russian Federation:
Human Rights Group Threatened By Security Forces,'' January 20, 2005.
\5\ The Committee to Protect Journalists, Annual Survey of the
World's Worst Places To Be a Journalist, May 2, 2004.
---------------------------------------------------------------------------
(6) Among the most alarming of recent developments, however, is the
return of the KGB to power in the Presidential Administration.
According to Olga Kryshtanovskaya, a leading Russian sociologist,
former KGB officers are regaining power at every level of government
and now account for 70 percent of regional government leaders. Other
analysts state that the number of former secret police in Putin's
government is 300 percent greater than the number in the Gorbachev
government. In this situation, there is a high probability that
military and security services would be used to suppress civil dissent
and, indeed, are already being used to this effect.
As a consequence of the systematic suppression of the basic
foundations of a democratic society, on December 20, 2004, Freedom
House downgraded Russia to the category of ``Not Free'' which Russia
now shares with Belarus, North Korea and Saudi Arabia, among other
undemocratic regimes.\6\ Indeed, the majority of informed opinion on
both sides of the Atlantic had reached that same conclusion much
earlier and I have included their collective assessment as an annex to
this testimony.\7\ What I wish to add today to the near-unanimous view
that Russia has become an autocratic state is my belief that the
destruction of democracy in Russia was a premeditated and calculated
act of state power, ordered by President Putin, and executed by a class
of KGB-trained officials assembled for this purpose.
---------------------------------------------------------------------------
\6\ Freedom House, ``Russia Downgraded to Not Free,'' December 20,
2004.
\7\ An Open Letter to the Heads of State and Government of NATO and
the European Union, September 23, 2004.
---------------------------------------------------------------------------
If the conditions which supported democratic change and reform in
Georgia and Ukraine are any guide, President Putin has orchestrated a
sustained and methodical campaign to eliminate not only democratic
forces in civil and political life, but also the possibility of such
forces arising again in the future. I do not think that it is accurate
to say that democracy is in retreat in Russia. Democracy has been
assassinated in Russia.
ii
Nobel Peace Prize Laureate Andrei Sakharov wrote, ``A country that
does not respect the rights of its own people will not respect the
rights of its neighbors,'' and this is an admonition to hold in mind
when assessing the overall direction of Putin's policies.\8\ Rather
than simply label Russia as an autocracy or as a borderline
dictatorship, it is probably more accurate and useful for this
Committee to regard Russia as an ``anti-democratic state'' locked in
what its leadership imagines is a competition with the West for control
of the ``post-Soviet space.'' \9\
---------------------------------------------------------------------------
\8\ Quoted in Natan Sharansky, ``The Case for Democracy: The Power
of Freedom to Overcome Tyranny and Terror'' Public Affairs, 2004, pg.
3.
\9\ Vladimir Socor, ``Kremlin Redefining Policy in `Post-Soviet
Space,' '' Jamestown Foundation, February 8, 2005.
---------------------------------------------------------------------------
President Putin's initial argument for ``managed democracy'' rested
on his belief that the sometimes unpredictable quality of liberal
democracy could weaken the security of the Russian state unless it were
subject to a substantial degree of state control. Whether or not he
actually believed this, he quickly advanced to a more militant
conviction that independent political parties, NGO's and journalists,
by questioning the wisdom of his policy towards Chechnya, were
effectively allies of terrorism. It is a short walk from the
authoritarian view that domestic freedom must be curtailed in wartime
to the dictatorial conclusion that all opposition and dissent is
treasonous. By 2004, President Putin had arrived at the dictatorial
conclusion.
Despite the fact that Moscow has killed upwards of 100,000 Chechens
in the last decade and is estimated to be ``disappearing''
approximately 400 Chechen civilians annually, curiously, the war on
terror does not figure prominently in Russian doctrinal statements. To
the contrary, the casualties in the North Caucasus seem to be regarded
as a cost associated with a larger strategic objective. As Kremlin
consultant Gleb Pavlovsky explained on February 3, 2005, ``One should
be aware that, at least until the end of President Putin's tenure and
probably until the end of the presidency of his immediate successors,
Russia's foreign policy priority will be to turn Russia into a 21st
century world power.'' \10\
---------------------------------------------------------------------------
\10\ Socor, op. cit.
---------------------------------------------------------------------------
To put it bluntly, the growing view in Putin's inner circle is that
in order to regain the status of a world power in the 21st century,
Russia must be undemocratic at home (in order to consolidate the power
of the state) and it must be anti-democratic in its ``near abroad'' (in
order to block the entry of perceived political competitors, such as
the European Union or NATO, invited into post-Soviet space by new
democracies). The war on terror is not central to this calculation and
is little more than something to discuss with credulous Americans from
time to time.
Again, the statements of Gleb Pavlovsky confirm understandable
suspicions about Russian intentions. Shortly after the election of
Victor Yushchenko as President of Ukraine, Pavlovsky urged the Kremlin
to adopt a policy of ``pre-emptive counter-revolution'' towards any
neighbor of Russia which manifested politically dangerous democratic
proclivities.\11\ Another of the so-called ``polit-technologists''
Sergei Markov, who also advises President Putin, has called for the
formation of a Russian organization to counter the National Endowment
for Democracy, whose purpose would be to prevent European and American
NGO's from reaching democratic movements anywhere in the Commonwealth
of Independent States, in other words in post-Soviet space. (There is,
of course, not the slightest reference to countering militant
fundamentalism or Islamic terrorist cells in any of this.)
---------------------------------------------------------------------------
\11\ Dr. Ivan Krastev, Center for Liberal Studies, Sofia, Bulgaria.
(Interview with author.)
---------------------------------------------------------------------------
With this framework, it might be useful to review the recent
interventions of Russia in the internal affairs of its neighbors:
Since the Rose Revolution in Georgia in late 2003, the Government
of President Misha Saakashvili has been under constant pressure and
occasional threat from Russia. In August 2004, Russia blocked the
reinforcement of the OSCE peace-keeping mission to South Ossetia to
facilitate its movement of military equipment and criminal traffic
through the Roki tunnel into the zone of conflict. In that same month,
Russian-backed South Ossetian paramilitary forces began to distribute
AK-47's widely among the South Ossetian populace, adding to the danger
of inter-ethnic conflict. In return for this type of Russian
``protection,'' the OSCE estimates that the ``government'' of South
Ossetia sends $50m per year to the mafia-KGB bosses in St. Petersburg.
In December 2004 Russia vetoed the continuation of the OSCE-led
border monitoring operation which polices the mountain passes along
Georgia's borders with Ingushetiya, Chechnya and Dagestan in the North
Caucasus. Most observers believe the removal of international monitors
is intended to allow Russia complete freedom to conduct military and
paramilitary operations inside Georgia under the pretext of chasing
terrorists. Russia has continued to hand out Russian passports to
secessionists in Abhazia and South Ossetia, and, despite its multiple
international commitments to withdraw its military forces from Soviet-
era bases in Georgia, continues to occupy and reinforce these bases. In
a word, Putin's policy towards Georgia is indistinguishable from the
19th century policies of Czarist Russia towards the easily intimidated
states of the South Caucasus.
In Moldova, since December 2003 when the Russian negotiators
proposed in the infamous Kozak Memorandum to legalize the permanent
stationing of Russian troops in Transdnistria, Russia has worked
tirelessly to exacerbate tensions between Transdnistria and Chisinau
and to prevent the demilitarization of Transdnistria. As a result,
Russia has been able to keep Moldovan leadership sufficiently weak,
divided, and corrupt so as to be incapable of enacting the reforms
necessary for democratization. Transdnistria remains exclusively a
criminal enterprise under Moscow's protection and the largest export
hub of illicit arms traffic in the Black Sea region. And remember,
Russia shares no border with Moldova, a fact which adds to the imperial
character of Russian intervention.
In Ukraine, the massive scale of Russian interference and President
Putin's personal involvement in the recent fraudulent presidential
elections is well-known. Most analysts believe that the Kremlin spent
in excess of $300m and countless hours of state television time in the
attempt to rig the election for Victor Yanukovich. What may be less
well known to this Committee is that explosives used in the botched
assassination attempt on Victor Yushchenko and the dioxin poison that
almost succeeded in killing him both almost certainly came from Russia.
Western diplomats and numerous Ukrainian officials in Kiev say
privately that the investigation into these repeated assassination
attempts is expected to lead to Russian organized crime and,
ultimately, will be traced to Russian intelligence services. There is
mounting evidence that the murder of political opposition figures in
neighboring countries is seen by some factions of the Russian security
services, such as the GRU, as being a legitimate tool of statecraft, as
it was in the dark years of the Soviet Union.
With regard to Belarus, President Putin's government has been an
accomplice with Alexander Lukashenko in the construction and
maintenance of what has been often called ``the last dictatorship in
Europe.'' This unholy alliance has brutalized and impoverished the
people of Belarus and is distinguished only by the degree of Russian
cynicism which motivated it. Here again, I cannot improve on the words
of Putin-advisor Gleb Pavlovsky:
We are totally satisfied with the level of our relations with
Belarus. Russia will clearly distinguish between certain
characteristics of a political regime in a neighboring country
and its observance of allied commitments. Belarus is a model
ally.\12\
---------------------------------------------------------------------------
\12\ Socor. op. cit.
Think about this for a moment. The last dictatorship in Europe is
the closest ally of the Putin Government. If this fact were not a
tragedy, it would be laughable.
These are only illustrations of the growing belligerence of
Russia's near abroad policy. A more comprehensive treatment would
include the threatening manner the Kremlin uses in discussions with the
Baltic states on commercial transit and Russian-speaking minorities;
the seizure of the waterway (the Kerch Channel) connecting the Black
Sea and the Sea of Azov from Ukraine; the demands on concessionary
energy rights from Kazakhstan; not to mention the extermination of
100,000 Chechens. There is little doubt that President Putin believes
that 19th century mercantilism and militarism are appropriate tactics
for a 21st century Russian leader.
In all fairness, there are some U.S. Government officials who
believe that, although Russia's internal conditions are disappointing
even deplorable, the benefits of a U.S.-Russian partnership in the war
on terror, energy export issues, and the effort to counter the
proliferation of weapons outweigh these concerns. This is at least an
argument for the case advanced by Russian apologists. Unfortunately,
there is no evidence that Russia is helping with the war on terror, the
world energy supply, or on weapons proliferation beyond what the
Russian government would do anyway in its own national interest.
Indeed, the evidence available points to the opposite conclusion.
Not only is President Putin deliberately working to create weak and
vulnerable states on Russia's borders which will serve as a breeding
ground for future criminals and terrorists, he is actively trying to
undermine American interests in building a democratic Iraq. In January
2005, President Putin visited President Nazarbayev in Kazakhstan and
ordered him to pull the Kazak troops out of Iraq. When President
Nazarbayev refused, Putin cut short his visit and returned to Moscow.
Promises to increase Russian energy production and exports remain
unmet. Russia's most capable and modern energy company was re-
nationalized and its resources taken over by some of its least
efficient producers. Russia not only refuses to support Western anti-
proliferation efforts in Iran, but it has been and continues to be a
critical foreign supplier to Tehran's weapons programs.
In 2004, Russia blocked a NATO naval mission which would have
provided surveillance in the Black Sea of weapons traffic and potential
terrorist attack. I have already outlined the Kremlin's campaign to
push OSCE peacekeepers and border monitors out of the former Soviet
space, which will soon be followed by efforts to curtail U.N. missions
in places such as Abkhazia. The overall effect of our ``partnership''
with Russia appears to have rendered the citizens of a dozen
independent countries more vulnerable to terrorism and organized crime,
while allowing the Russian military to remain the largest source of
proliferated arms in the world. This hardly seems fair value for the
compromise of American principles which this partnership obviously
entails.
iii
Given the reversal of democratic trends in Moscow and the
appearance of a threatening Russia in Eurasian politics, what are the
implications for U.S. foreign policy? It seems to me that we are forced
to six conclusions:
(1) Russia will actively contest the growth of democratic
governments along its Western border with Europe, throughout the Black
Sea and Caucasus region, and in Central Asia. President Putin intends
to block the resolution of the frozen conflicts from Transdnistria to
South Ossetia to Nagorno-Karabakh and to maintain the Soviet-era
military bases which serve as occupying forces and prolong these
conflicts. The instability this policy will cause in the governments
throughout the post-Soviet space will be a long-term threat to the
interests of Europe and the United States in stabilizing and
democratizing this region.
(2) Russia will obstruct the development of effective multi-lateral
institutions and their operations, such as the OSCE and NATO
Partnership for Peace, anywhere in what Putin perceives as Russia's
historical sphere of influence, thereby isolating Russia's neighbors
from the structures of international dialogue, conflict resolution, and
cooperation.
(3) Russia will increasingly engage in paramilitary and criminal
activities beyond its borders, both as an instrument of state policy
and as a function of simple greed. Thus, the United States should
expect the persistence of arms traffic to embargoed states and the
irresponsible proliferation of small arms (as in South Ossetia) as well
as a higher incidence of both politically and criminally motivated
bombings and murders (as in the recent car bombing in Gori, Georgia and
the repeated attempts on Victor Yushchenko's life).
(4) President Putin's goal of a 21st century empire will inevitably
cause him to seize, extort or otherwise secure the oil and gas reserves
of the Caspian and Central Asia as a source of funds for state power.
Indeed, the seizure of Yukos and the network of pipelines were the
first two steps in a larger plan to control the resources of Central
Asia. Setting aside the negative impact these developments will have on
world energy prices, our allies in Europe will become increasingly
dependent on an oil monopoly controlled by the Russian security
services for its growing energy needs. Without doubt, this oil and gas
will come with a political price.
(5) The policies of Russia and the conduct of President Putin are
growing increasingly eccentric and seem to be motivated more by an
angry romanticism, than by a rational calculation of national interest.
Mr. Putin's insistence in an interview with Russia journalists at the
time that there were no casualties in the slaughter in the Nord-Ost
Theater is revealing. Mr. Putin was only conscious of casualties among
the Russian security services; the lives of civilians did not figure in
his calculus. As everyone knows, the unpredictable and uncalculated use
of power in international politics is highly dangerous. In a word, we
are not dealing with a benevolent autocracy; we are now dealing with a
violent and vulgar ``thuggery.''
(6) And, finally, President Putin's plan cannot possibly work. Both
strategically and economically, Russia cannot support itself as a world
power and cannot feed its people with an economy run by the Kremlin.
Thus, if these trends are not reversed, Mr. Putin will bring about the
second collapse of Moscow which may well be far more dangerous and
violent than the collapse of the Soviet empire in 1989. It was
precisely this outcome, the return to empire and the resultant
collapse, that U.S. policy has been trying to avert since the fall of
the Berlin Wall. As Secretary of State Condoleezza Rice advised
presciently some years ago, a critical challenge for U.S. policy will
be ``to manage the decline of Soviet power.'' So far, we are not
meeting this challenge.
It seems to me that there are four policy steps that the United
States should take in response to the threat posed by an anti-
democratic Russia. First, we have to end the exemption from public
criticism that President Putin's administration seems to enjoy. There
has been almost no testimony on this critical issue before this
Committee by senior Administration officials for the last two years.
This silence is not in our interests and conveys a false impression of
permissiveness to the Kremlin. If Saudi Arabia and Egypt are no longer
immune from legitimate criticism of their undemocratic practices, so
too must Russian practices be subject to public censure by U.S.
policymakers.
Second, as Senator John McCain has called for, the United States
must end the policy of advancing access to the inner councils of
democratic institutions (the G7, NATO, and the White House) as long as
Mr. Putin continues to abuse human and political rights at home and
attempts to undermine democratic institutions abroad. If the conduct of
Mr. Putin is free from penalty, he will undoubtedly continue to pursue
policies counter to the interests of the community of democracies.
Third, the United States should work with our partners in NATO and
the European Union to develop common strategies to deal with the death
of democracy inside Russia and with its imperial interventions abroad.
The recent enlargements of the EU and NATO added many European
countries with first-hand knowledge of what it means to be an object of
Russia's predatory policies. For Czechs, Slovaks, Poles, Balts and
others, Russian imperialism is not an abstraction. We can and must
expend the political capital to develop a common Western approach that
promotes democracy inside and alongside the Russian Federation.
Finally, Natan Sharansky reminds us that ``moral clarity'' is the
essential quality of a successful democracy in its foreign policy. As a
nation, we have been far from morally clear about the political
prisoners in Russia and the human rights abuses throughout the North
Caucasus, to name two of the most egregious examples.
Closely related to the lack of moral clarity is the absence of
``strategic clarity.'' We simply have not informed Russia where the
``red lines'' are in their treatment of vulnerable new democracies and
what the consequences are for Russia in pushing beyond what used to be
called ``the rules of the game.'' This Committee can play a very
significant role in urging the Administration and communicating
directly to Moscow, quite specifically, that the continuation of the
arrests, seizures, murders and threats I have described will result in
the suspension of commerce with and access to the United States.
A stern and public rebuke to Mr. Putin may cause Russia to rethink
the self-destructive path on which it has embarked and serve to protect
the long-term democratic prospects and future prosperity of Russia and
its neighbors. It would also send a message of hope to embattled
democrats inside Russia and the beleaguered democracies on its borders.
Let us hope that President Bush delivers this message to Mr. Putin next
week in Bratislava.
Thank you, Mr. Chairman.
______
An Open Letter to the Heads of State and Government of NATO and the
European Union, September 23, 2004
As citizens of the Euro-Atlantic community of democracies, we wish
to express our sympathy and solidarity with the people of the Russian
Federation in their struggle against terrorism. The mass murderers who
seized School No. 1 in Beslan committed a heinous act of terrorism for
which there can be no rationale or excuse. While other mass murderers
have killed children and unarmed civilians, the calculated targeting of
so many innocent children is an unprecedented act of barbarism that
violates the values and norms of our community and which all civilized
nations must condemn.
At the same time, we are deeply concerned that these tragic events
are being used to further undermine democracy in Russia. Russia's
democratic institutions have always been weak and fragile. Since
becoming President in January 2000, Vladimir Putin has made them even
weaker. He has systematically undercut the freedom and independence of
the press, destroyed the checks and balances in the Russian federal
system, arbitrarily imprisoned both real and imagined political rivals,
removed legitimate candidates from electoral ballots, harassed and
arrested NGO leaders, and weakened Russia's political parties. In the
wake of the horrific crime in Beslan, President Putin has announced
plans to further centralize power and to push through measures that
will take Russia a step closer to authoritarian regime.
We are also worried about the deteriorating conduct of Russia in
its foreign relations. President Putin's foreign policy is increasingly
marked by a threatening attitude towards Russia's neighbors and
Europe's energy security, the return of rhetoric of militarism and
empire, and by a refusal to comply with Russia's international treaty
obligations. In all aspects of Russian political life, the instruments
of state power appear to be being rebuilt and the dominance of the
security services to grow. We believe that this conduct cannot be
accepted as the foundation of a true partnership between Russia and the
democracies of NATO and the European Union.
These moves are only the latest evidence that the present Russian
leadership is breaking away from the core democratic values of the
Euro-Atlantic community. All too often in the past, the West has
remained silent and restrained its criticism in the belief that
President Putin's steps in the wrong direction were temporary and the
hope that Russia would soon return to a democratic and pro-Western
path. Western leaders continue to embrace President Putin in the face
of growing evidence that the country is moving in the wrong direction
and that his strategy for fighting terrorism is producing less and less
freedom. We firmly believe dictatorship will not and cannot be the
answer to Russia's problems and the very real threats it faces.
The leaders of the West must recognize that our current strategy
towards Russia is failing. Our policies have failed to contribute to
the democratic Russia we wished for and the people of this great
country deserve after all the suffering they have endured. It is time
for us to rethink how and to what extent we engage with Putin's Russia
and to put ourselves unambiguously on the side of democratic forces in
Russia. At this critical time in history when the West is pushing for
democratic change around the world, including in the broader Middle
East, it is imperative that we do not look the other way in assessing
Moscow's behaviour or create a double standard for democracy in the
countries which lie to Europe's East. We must speak the truth about
what is happening in Russia. We owe it to the victims of Beslan and the
tens of thousands of Russian democrats who are still fighting to
preserve democracy and human freedom in their country.
russia statement participants
Mr. Urban Ahlin, Swedish Foreign Relations Committee, Sweden
The Honorable Giuliano Amato, Former Prime Minister, Italy
Dr. Uzi Arad, Institute for Policy and Strategy, Israel
Mr. Timothy Garton Ash, Writer, United Kingdom
Dr. Anders Aslund, Carnegie Endowment for International Peace, United
States
Dr. Ronald D. Asmus, The German Marshall Fund of the United States
Mr. Rafael L. Bardaji, Spain
Mr. Arnold Beichman
Mr. Jeff Bergner
The Honorable Carl Bildt, Former Prime Minister, Sweden
Mr. Max Boot
Ms. Ellen Bork
Mr. Pascal Bruckner, Writer, France
Mr. Mark Brzezinski, McGuire Woods LLC, United States
Mr. Reinhard Buetikofer, Chairman, Green Party, Germany
Sir Michael Butler, Former British Permanent Representative to the
European Community, United Kingdom
The Honorable Martin Butora, Former Ambassador, Slovakia
Mr. Daniele Capezzone, Italy
The Honorable Per Carlsen Danish Institute of International Affairs
Ms. Gunilla Carlsson, Member of the European Parliament, Sweden
The Honorable Massimo D'Alema, Former Prime Minister, Italy
The Honorable Pavol Demes, Former Foreign Minister, Slovakia
Mr. Larry Diamond
Mr. Tom Donnelly
Mr. Nicholas Eberstadt
The Honorable Uffe Ellemann-Jensen, Former Foreign Minister, Denmark
Mr. Francois Fukayama
Mr. Jeffrey Gedmin
Mr. Andre Glucksmann, Writer, France
Dr. Phil Gordon, Brookings Institution, United States
The Honorable Istvan Gyarmati, Ambassador, Turkey
Mr. Pierre Hassner, Center for International Studies and Research,
France
The Honorable Vaclav Havel, Former President Czech Republic
Dr. Francois Heisbourg, Fondation pour la Recherche Strategique, France
The Honorable Richard C. Holbrooke, Former Ambassador to the United
Nations, United States
Mr. Bruce Jackson, Project on Transitional Democracies, United States
Mr. Donald Kagan
Mr. Robert Kagan, Carnegie Endowment, United States
Ms. Glenys Kinnock, Member of European Parliament, United Kingdom
Mr. Bernard Kouchner
Dr. Ivan Krastev, Center for Liberal Strategies, Bulgaria
Mr. William Kristol
The Honorable Girts Valdis Kristovskis, Former Minister of Defense of
Latvia
Prof. Dr. Ludger Kuehnhardt, University of Bonn, Germany
The Honorable Mart Laar, Former Prime Minister, Estonia
Mr. Michael McFaul
The Honorable Vytautas Landsbergis, Former Head of State, Lithuania
Dr. Stephen Larrabee, RAND Cooperation, United States
Mr. Mark Leonard, The Foreign Policy Center, United Kingdom
Mr. Tod Lindberg
Mr. Tom Malinowski, Human Rights Watch, United States
Mr. Will Marshall, Progressive Policy Institute, United States
Dr. Margarita Mathiopoulos, University of Potsdam, Germany
The Honorable John McCain, Senator, United States
Dr. Michael McFaul, Hoover Insitute, United States
Mr. Matteo Mecacci, Italy
Mr. Michael Mertes, Former Chief of Staff, Chancellor Helmut Kohl,
Germany
The Honorable Ilir Meta, Former Prime Minister, Albania
Mr. Richard Morningstar
Mr. Joshua Muravchik
Gen. Klaus Naumann (ret.), Former Chairman NATO Military Committee,
Germany
Mr. Dietmar Nietan, Member of Parliament, Germany
Mr. Jim O'Brien, Former Presidential Envoy to The Balkans, United
States
Mr. Martin Peretz
Dr. Friedbert Pflueger, Member of Parliament, Germany
Ms. Danielle Pletka
Mr. Florentino Portero, Spain
Ms. Samantha Ravich
The Honorable Alex Rondos, Former Ambassador, Greece
The Honorable Jim Rosapepe, Former U.S. Ambassador to Romania
Dr. Jacques Rupnik, Center for International Studies and Research,
France
Mr. Eberhard Sandschneider
Mr. Gary Schmitt
Mr. Stephen Sestanovich
Mr. Radek Sikorski
Mr. Martin Simecka, Editor, Slovakia
Dr. Gary Smith, American Academy in Berlin, Germany
Mr. Abraham Sofaer
Mr. Gary Titley, Member of European Parliament, United Kingdom
The Honorable Sasha Vondra, Former Deputy Foreign Minister, Czech
Republic (?)
Ms. Celeste Wallander, Center for Strategic and International Studies,
United States
Ms. Ruth Wedgwood
Dr. Richard Weitz, Institute for Foreign Policy Analysis, United States
Mr. Kenneth Weinstein
The Chairman. Thank you very much, Mr. Jackson.
Mr. Nix.
STATEMENT OF STEPHEN NIX, REGIONAL PROGRAM DIRECTOR FOR
EURASIA, INTERNATIONAL REPUBLICAN INSTITUTE, WASHINGTON, DC
Mr. Nix. First of all, thank you, Mr. Chairman, for this
opportunity to appear before you today. I will try to be brief
on a very important and lengthy topic.
Mr. Chairman, the Russian Federation today is a country in
which the rights of citizens to participate in government
through free and fair elections, independent media, and civic
activism are being severely curtailed. As my esteemed
colleagues here have noted, the list of democratic rollbacks
implemented by the Putin administration is as long as it is
egregious: Complete control over national media, ongoing
attempts to control the course and results of elections by
changing the electoral system, the arbitrary arrest and
prosecution of business leaders and the triumph of state-run
monopolies over the rule of law, and the absence of checks and
balances within the decisionmaking process. Mr. Putin has
periodically introduced terms in which to couch these alarming
trends: Dictatorship of the law, managed democracy. My friends
and colleagues in Russia, however, are now using a new term to
describe these events: Bureaucratic dictatorship.
The watershed event of Russia's creeping authoritarianism
was the election of December 2003, when Russian prodemocratic
parties failed to garner sufficient support to remain a faction
in the Russian National Parliament. The fourth invocation of
the Russian State Duma, with 360 out of 450 seats occupied by
Unified Russia, is, therefore, now dominated by a single
progovernment party. With no national parliamentary presence
and no real access to mass media, prodemocratic parties have
fallen into a crisis of identity at the national level, marked
by a lack of leadership, organization, and consistent ideology.
Mr. Chairman, if the prodemocratic forces are absorbed in a
crisis of identity, the Russian public is engulfed in a crisis
of faith in the political party system. A nationwide poll
conducted by the Levada Center last month indicated that nearly
50 percent of the population feel that political parties play
either absolutely no role, or just a very minor one, in the
daily life of Russia. Only 7.2 percent feel that political
parties play a major role. In contrast, nearly 50 percent of
those polled believe that the FSB plays either an important, or
a very important, role. I think you'll agree with me, Mr.
Chairman, that these statistics are very alarming.
The Kremlin, meanwhile, has moved further to undermine the
crippled national opposition movement. With only a shadow of an
opposition, the Duma has devolved into little more than a
rubber stamp for legislation. With the help of a loyal state
Duma, the Kremlin has taken steps to eliminate single-mandate
districts, increase the threshold required to enter Parliament
from 5 percent to 7 percent, and to outlaw the formation of
electoral blocs in future national parliamentary elections.
This divide-and-conquer approach, Mr. Chairman, is intended
solely to force democratic parties to campaign against one
another for pro-reform votes. By splitting the vote this way,
the Kremlin all but guarantees that the democratic opposition
will once again be shut out of Parliament.
In order to stifle grassroots democratic movements, the
Kremlin has moved to prohibit the creation of regional
political parties and the emergence of new parties by
artificially inflating registration requirements, raising
obligatory party membership, and applying direct pressure on
party members. On January 31, Russia's Ministry of Justice
again delayed the registration of a new democratic party, Novye
Pravye, or ``New Right,'' saying that it needs more time to
review the case.
Despite all of these things, Mr. Chairman, the political
pendulum is not swinging in only one direction in Russia.
Russia's first year of a return to a single-party state has
also proved to be a year of setbacks for the Putin
administration. The economy is faltering, Russia's strong-arm
tactics in the ``near abroad,'' as has been noted previously,
have failed, and Putin's ``vertical of power'' has proved
unable to protect Russian citizens from acts of terrorism.
Recent public-opinion data shows falling approval numbers for
the Prime Minister, his government, and even President Putin
himself.
We are now witnessing as Russians take to the streets
throughout the country to protest social reforms. On January
29, thousands of St. Petersburg citizens marched against
Kremlin policies, including pensioners, World War II veterans,
and students.
Mr. Chairman, these actions by the Russian people are
heartening to me, as it proves what I believed all along, that
apathy is not, in fact, endemic in the Russian population, and
that the Russian public does not--does believe that the
government must be accountable to the people. Russia remains,
despite the setbacks, fertile ground for democracy. And I make
this assertion based, not only on dramatic images of street
protests and public demonstrations, but on more subtle ongoing
developments.
The truth is, a lot is happening at the regional level.
During regional legislative elections over the last year,
regional opposition parties have doubled and even tripled the
support the national party received in the 2003 national
elections. Many have accomplished this with little support from
national leadership or, indeed, international assistance. In
fact, regional opposition parties have been able to accomplish
what the national parties could not; namely, form coalitions
and work together.
At the same time, civil activists and political leaders at
the regional level are coming together to counteract what they
rightfully see as the skewed monopoly progovernment forces have
on public discourse.
Mr. Chairman, the Russian Federation today is a country at
critical crossroads. Despite the results of the 2003 elections,
despite the crisis of Russia's democratic opposition, despite
the Russian public's lack of faith in political party
processes, and despite the Putin administration's concerted
efforts to achieve an absolute grip on power, Russian democracy
is not a lost cause. Russian citizens have been bombarded with
Mr. Putin's attempts to discredit democratic ideals and
movements, including the government and media. And yet, the
Levada poll, I cited earlier, indicates that at least 10
percent of Russians are still willing to vote for a democratic
party; enough to enter the state Duma, even if the Kremlin's
attempts to raise the threshold does succeed.
The United States, and the international community as a
whole, must provide whatever support we can to these defenders
of Russian democracy in the regions. Without them, Russia's
future is bleak.
We must support Russia's democratic community in their
efforts to unite behind common goals and ideals. Only by
building real, effective coalitions with like-minded partners
can the democratic movements provide a viable alternative to
the proponents of the Kremlin status quo. This process has
already begun, to a certain extent, as evidenced by the
electoral gains that I mentioned earlier.
We must also engage and encourage young people to be
involved in representative government as civil-society
activists, candidates, or party members. The talent and
idealism of Russia's youth cannot be allowed to waste away.
Initiatives as simple as community service projects can help to
underscore the ways in which a participatory democracy can
address the concerns of Russia's young people.
Finally, we must engage Russia's leadership in such a way
that it recognizes the dangerous line it is walking. President
Putin must come to understand that his authoritarian policies
are bad for Russia and are leading to a systemic crisis in
every sector--economic development, foreign policy, and civil
society. Only by opening up Russia to a range of opinions and
healthy debate will Russia truly thrive. The current climate of
oppression will lead only to stagnation.
Mr. Chairman, we, in the United States, applauded in the
early 1990s, as the Russian people threw off the yoke of
oppression, and watched with hope as they began to create a
society dedicated to democracy, a free and open economy, and
adherence to the rule of law. And we, in the United States,
have watched with profound sadness as these hard-fought
achievements and sacrifices have been cast aside by an
increasingly authoritarian regime. This is not a government
that the Russian people deserve. This is not a government that
the Russian people should tolerate.
I say this because I firmly believe that our friends, the
Russian people, are capable of creating a democracy that offers
them the stability, the prosperity, and the freedom that they
so richly deserve.
Again, thank you, Mr. Chairman, for this opportunity.
[The prepared statement of Mr. Nix follows:]
Prepared Statement of Stephen Nix, Regional Program Director for
Eurasia, International Republican Institute, Washington, DC
Mr. Chairman, first of all, thank you for the opportunity to
testify here before you today. I would like to request that my
statement be submitted to the record. This hearing is in itself
testimony to the crucial importance of the issue of deepening
authoritarian tendencies in the Russian Federation.
The Russian Federation today is a country in which the rights of
citizens to participate in government through free and fair elections,
independent media, and civic activism are being severely curtailed. As
my esteemed colleagues here have noted, the list of democratic
rollbacks implemented by the Putin Administration is as long as it is
egregious: The complete control over national media outlets by the
state; on-going attempts to control the course and results of elections
by changing the electoral system; the arbitrary arrest and prosecution
of business leaders and the triumph of state-run monopolies over rule
of law; and the absence of checks and balances within the decision-
making process. Mr. Putin has periodically introduced terms in which to
couch these alarming trends--``dictatorship of the law,'' and ``managed
democracy.'' My friends and colleagues in Russia, however, are now
using a new term: Bureaucratic dictatorship.
The watershed event of Russia's creeping authoritarianism was the
election of December 2003, when Russian pro-democratic parties failed
to garner sufficient support to remain a faction in the Russian
national parliament. The fourth invocation of the Russian State Duma,
with 360 of 450 seats occupied by Unified Russia, is therefore now
dominated by a single, pro-government party. With no national
parliamentary presence and no real access to mass media, pro-democratic
parties have fallen into a crisis of identity at the national level,
marked by a lack of leadership, organization, and consistent ideology.
If the pro-democratic forces are absorbed in a crisis of identity,
the Russian public is engulfed in a crisis of faith in the political
party system. A nationwide poll conducted by the Levada Center late
last month indicated that nearly 50 percent of the population feel that
political parties play either absolutely no role, or just a very minor
one, in the life of Russia. Only 7.2 percent feel that the political
parties play a major role. In contrast, nearly 50 percent of those
polled believed that the FSB, the KGB successor, plays either an
important or very important role. I think you will agree that these
statistics are extremely troubling.
The Kremlin, meanwhile, has moved to further undermine the crippled
national opposition movement. With only a shadow of an opposition, the
Duma has devolved into little more than a rubber stamp for initiatives
put forward by the Kremlin to strengthen its almost absolute grip on
power. With the help of a blindly loyal State Duma, the Kremlin has
eliminated single mandate districts, increased the threshold required
to enter parliament from 5 percent to 7 percent, and outlawed the
formation of electoral blocs in future national parliamentary
elections. This ``divide and conquer'' approach is intended to force
democratic parties to campaign against each other for pro-reform votes.
By splitting the vote in this way, the Kremlin all but guarantees that
the democratic opposition will once again be shut out of parliament. In
order to survive, these parties have no choice but to merge into a
single organization, a task which is fraught with political, legal, and
bureaucratic challenges.
In order to stifle grassroots democratic movements, the Kremlin has
moved to prohibit the creation of regional political parties and the
emergence of new parties by artificially inflating registration
requirements, raising obligatory party membership, and applying direct
pressure on party members. Just last Monday (January 31), Russia's
Ministry of Justice, violating the spirit, if not the letter, of the
law, again delayed the registration of a new democratic party--Novye
Pravye, or the New Right,\1\ saying that it needs more time to review
their case.
---------------------------------------------------------------------------
\1\ Novye Pravye submitted registration papers on November 22,
2004. According to the law on political parties (June 21, 2001), their
registration must be decided on within one month. The party believes
that the law gives the government one month to review the case and come
up with either a positive or a negative answer. However, a loophole in
the law allows the government to drag its heels on the process
indefinitely. Point 4 of Article 15 states that the government has one
month to make a decision ``upon verification of correspondence of
documents, necessary for registration . . ., to the requirements of the
federal law.'' The government can claim that it is still ``verifying
documents'' and win the case in court on a technicality.
---------------------------------------------------------------------------
Despite the foregoing, Mr. Chairman, the political pendulum is not
swinging in only one direction. Russia's first year of a return to a
single party state has also proved to be a year of unequivocal setbacks
for the Putin Administration. The economy is faltering, Russia's
strong-arm tactics in its ``near abroad'' have failed, and Putin's
``vertical of power'' has proved unable to protect Russian citizens
from heinous acts of terrorism. Recent public opinion data shows
falling approval numbers for the Prime Minister, his Government, and
even President Putin himself.
We are now witnessing as Russians take to the streets throughout
the country to protest what they feel to be the Kremlin's failure to
fulfill basic social responsibilities to the public. On February 6,
2,000 people in Petrozavodsk took part in a protest to demonstrate
against Kremlin-initiated reform of pension benefits. On the same day,
a number of youth groups, including Youth SPS, Youth Yabloko, and
``Iduschie bez Putina'' (``Walking Without Putin''), organized a
protest in Moscow against the presidential appointment of governors and
the strengthened ``vertical of power.''
On January 29, thousands in St. Petersburg marched against Kremlin
policies, including pensioners, World War II veterans, and students.
The protest was organized by the ``St. Petersburg Civic Resistance''
movement, which consists of opposition parties, movements, and NGOs,
including Yabloko, KPRF, Social Democrats, League of Women Voters,
Committee of Soldiers' Mothers, St. Petersburg Democratic Assembly, and
Walking Without Putin.
On January 29, Yabloko organized a protest in more than 30 cities
and regions throughout Russia to protest against benefits legislation
and the actions of Unified Russia, who voted for benefit monetization
legislation, housing reform, auto insurance reform, the abolition of
gubernatorial elections, and changes to the military draft law.
Families of the Beslan school hostage victims have blocked a
central highway in the region in an attempt to voice their frustration
with the Administration's response to the horrific tragedy that took
place there last September 1.
The response of the Putin Administration to these protests has been
remarkable only in its complete failure to adequately address the
concerns being aired by citizens. The Beslan families have been rebuked
by a key Kremlin aide for their attempts to demand accountability from
regional leadership. The Kremlin has also attempted to wholly discredit
the massive protest movement against pension reforms by labeling
organizers as provocateurs and radical opportunists. Organizers were
targeted for arrest, especially young people. However, some
participants have alleged that elderly pensioners were arrested, and
even beaten. Not until after the voice of the people became
overwhelming did the government respond, if only to point fingers an
promise half-hearted revision of the reforms.
Mr. Chairman, these actions by the Russian people are heartening to
me, as it proves what I have believed all along--that apathy is not, in
fact, endemic in the Russian population, and that the Russian public
does believe that the government must be accountable to its people.
Russia remains fertile ground for democracy. I make this assertion
based not only on dramatic images of street protests and public
demonstrations, but on more subtle, ongoing developments.
The truth is that while Putin rushes to eliminate democratic voices
at the national level, democracy shows signs of re-invigoration at the
regional level. During regional legislative elections over the last
year, regional opposition parties have doubled and even tripled the
support the national party received in 2003. Many have accomplished
this with little support from national leadership, or indeed,
international assistance.
In fact, regional opposition parties have been able to accomplish
what the national leadership could not last year; namely, form
coalitions with other like-minded parties and candidates to present a
unified opposition choice on the ballot. A united bloc of Yabloko and
SPS received 8 percent in elections for the Arkhangelsk Oblast regional
legislature. During elections in Kurgan, SPS received 10.4 percent. In
the Republic of Ingushetiya (which borders Chechnya), Yabloko reached
10.8 percent. And most recently in Taimyr, Yabloko cooperated with the
Party of Life to take 22 percent of the vote.
At the same time, civil activists and political leaders at the
regional level are coming together to counteract what they rightfully
see as the skewed monopoly pro-government forces have on public
discourse. Hundreds of thousands of human rights and political party
activists continue their work in the regions regardless of pressure
applied on them by the FSB and the Kremlin. IRI has worked with a
number of these activists and the organizations they represent. Using
innovative means to reach out to the public, they communicate their
messages through forums, press releases, internet sites, newsletters,
rallies, and even leaflet campaigns. They are fighting to make sure
that dissenting voices, no matter how small, are heard.
On December 12, Russia's Constitution Day, more than 1,200
representatives of Russian civic groups, political parties, and media
from all over the country came to Moscow to take part in the ``All-
Russia Civic Forum.'' These advocates of democracy came to say ``no''
to Kremlin policies and to develop a democratic agenda for their
country. The Civil Resistance movement in St. Petersburg brought
together opposition parties, movements, and civic groups to stand up
for media freedoms, picketing local television stations to protest
censorship on TV, and allow the voice of democratic Russia to be heard.
Mr. Chairman, the Russian Federation today is a country at a
critical crossroads. Despite the results of the 2003 elections, despite
the crisis of Russia's democratic opposition, despite the Russian
public's lack of faith in political party processes, and despite the
Putin Administration's concerted efforts to achieve an absolute grip on
power, Russian democracy is not a lost cause. Russian citizens have
been bombarded with Mr. Putin's attempts to discredit democratic ideals
and movements through any means available, including the government and
the media. And yet, the Levada poll I cited earlier also indicates that
10 percent of Russians are still willing to vote for a democratic
party--enough to enter the State Duma even if the Kremlin's attempt to
raise the threshold succeeds.
I firmly believe that the real strength and indeed, the future of
pro-democracy forces lies in the regions and among Russia's younger
generations, who must not, and will not, tolerate a return to
dictatorship.
The United States, and the international community as a whole, must
provide whatever support we can to these defenders of Russian
democracy. Without them, Russia's future is bleak.
I believe that we must act now to help Russians re-establish their
faith in a democratic system. We must work to assist democratic
political parties to regain legitimacy in the eyes of their
constituents by focusing on their development at the grassroots level.
Targeting promising activists, civil organizations, and political
movements at the local level, we can provide training and support to
help them more effectively represent the needs of their communities. In
addition, we can assist these activists in crafting messages and
platforms that demonstrate to their constituents that someone is paying
attention to their interests.
We must support Russia's democratic community in their efforts to
unite behind common goals and ideals. Only by building real, effective
coalitions with like-minded partners can the democratic movement
provide a viable alternative to proponents of the Kremlin status quo,
or supporters of nationalist radicals. This process has already begun,
to a certain extent, as evidenced by electoral gains made by democratic
coalitions in the regions I mentioned earlier. Although Russia's
democratic opposition parties may not have a clear national party head,
national leadership can benefit from the momentum growing at the
regional level and learn from the successful examples of their
colleagues in the regions. Initiatives like Committee 2008, a group of
pro-democracy advocates and leaders who are working together to find
common ground for a diverse group of political parties, civil society
organizations, and individual activists, are an important step towards
this goal.
We must also encourage young people to re-engage in representative
government as civil society activists, candidates, or party members.
The talent and idealism of Russia's youth cannot be allowed to waste
away to apathy and disenfranchisement. Initiatives as simple as
community service projects can help to underscore the ways in which
participatory democracy can address the concerns of Russia's young
people much more effectively than radical nationalism, or rote
acceptance of pro-government ideology.
Finally, we must engage Russia's leadership in such a way that it
recognizes the dangerous line it is walking. President Putin must come
to understand that his authoritarian policies are bad for Russia, and
are leading to a systemic crisis in every sector--economic development,
foreign policy, and civil society. Only by opening up Russia to a range
of opinions and healthy debate will Russia truly thrive. The current
climate of oppression will lead only to stagnation.
We in the United States applauded in the early 1990's as the
Russian people threw off the yoke of oppression, and watched with hope
as they began to create a society dedicated to the ideals of democracy,
a free and open economy, and adherence to the rule of law. And we in
the United States have watched with profound sadness as these hard-
fought achievements and sacrifices have been cast aside by an
increasingly authoritarian regime. This is not a government that the
Russian people deserve. This is not a government that the Russian
people should tolerate. I say this because I firmly believe that our
friends, the Russian people, are capable of creating a democracy that
offers them the stability, the prosperity, and the freedom they so
richly deserve.
Thank you.
The Chairman. Well, thank you very much, Mr. Nix, for your
testimony.
I apologize for my abrupt departure for a few minutes, but
I would simply indicate, because I think this will be of
interest to all of you, that I was on the telephone with
Ambassador John Negroponte. He has been nominated to be our
Director of National Intelligence. We congratulate him. He
assures me, as he has assured all of you, that he will go back
to Iraq. He will work through the formation of the government
that is currently in process there, and, much as he tried to do
with his work with the United Nations as he underwent the
confirmation process for Ambassador to Iraq, he will do a
similar role for our country now during another transition
period.
Let me ask now for you, Mr. Ledsky, to give your testimony.
We appreciate your coming.
STATEMENT OF HON. NELSON LEDSKY, REGIONAL PROGRAM DIRECTOR FOR
EURASIA, NATIONAL DEMOCRATIC INSTITUTE, WASHINGTON, DC
Ambassador Ledsky. Thanks, Senator Lugar.
I don't want to repeat what my colleagues have said. Each
has made a--what I think--a very excellent presentation of the
problems in Russia, and there is no point in going over them
again.
I want to start off by thanking you, Senator Lugar and
Senator Sarbanes, for the work you've done on democratic
development over the years all around Europe and the world.
It's been my pleasure to work with both of you--for more than
20 years now, I know what role each of you has played in the
furtherance of democratic development in the Ukraine and
Georgia, and, I think, it wholly appropriate that the committee
turn its attention now to Russia. This is a country which,
frankly, deserves to be at the top of everybody's list. It has
not been at the top of any of our lists over the last 4 or 5
years.
I speak today as the Director of the National Democratic
Institute's programs in the former Soviet Union. I share with
my colleague, Steve Nix, the difficult task of being an
operating nongovernmental organization in Russia. So we speak
as people who are on the ground, who are facing the
difficulties day by day that have befallen Russian citizens,
Russian political parties, Russian civic society. And it's in
that sense that I would like to be heard.
We've prepared a statement, and you can read it, but I'd
just like to emphasize two or three points.
First, we've had an office in Moscow since 1992, and we've
been operating with whatever political parties want to talk to
us and work with us over the course of the last 13 years. And,
literally, we have trained and worked and consulted and talked
to thousands of people in Russia. And it is these people who
want us there, who need us there, who are not giving up the
struggle, even as the current situation is as described by
Anders and Bruce.
Second, we have been working with civil society in Russia.
We've been seeking, since the mid '90s, to work with a series
of organizations that can monitor elections effectively. And
within the last 3 or 4 years, we've brought together a
coalition of groups into what is called the VOICE coalition,
``Golos'' in Russian. This group monitored the 2003-2004
elections, issued a report, had a press conference, explained
the deficiencies of that electoral process, received absolutely
no publicity in the Russian press, and very limited publicity
in the United States. But they did outline the very specific
failures that occurred in the elections of December 2003 and
March 2004. And it is from those failed elections that a Duma
has been installed which represents only a single group, that
decisions have been taken to stop the election of governors in
the regions, to re-alter the judiciary so that there is less
rule of law today than there was 2 years ago, or 5 years ago.
So the trend is all downward, and it's been particularly
downward in the last year or two, since those elections of 2003
and 2004.
I would like to point out one thing in particular that
Bruce mentioned, and that is the attack that the Russians have
made at the Organization of Security and Cooperation in Europe,
the Russian assault on that organization's ability to do
monitoring around the former Soviet Union and in Europe. The
Russians want to put the emphasis on economic factors, move it
away from human rights and the rule of law and monitoring.
So the Russian attitude, over the last year, has not only
grown worse at home, it has grown worse in its effect on
overseas activities.
I think it's also important to say, rather flatly, that the
democratic gains that were made in the early '90s have all but
been erased. The trend is clearly in the wrong direction. But
there are, as Steve points out, not only pockets of
independence and liberalism in the country, but areas of the
country where NDI and IRI have tried to work, where there
clearly are organizations that are beginning to grow. And, I
think, it's that very growth which the Kremlin is now
attacking, by eliminating the possibility of elections and free
expression in the regions.
So--both Bruce and Steve and I--want to keep working in the
regions. It's become increasingly difficult given the
application of what the Russians call law to actually operate
outside Moscow and to build groups outside Moscow. It's
difficult to bring people from the regions outside of Moscow,
because the name of each individual trained or consulted must
be reported to the Russian police. And if we buy a railroad
ticket or a lunch for somebody, that must be declared as income
by that individual. So people are naturally frightened from
coming to see us or being seen by us.
There are two very hopeful signs, which I want to
highlight.
The first is that, last December a Civic Congress was
organized in Moscow, and it brought together 1,500 political
and civic activists who asserted their determination to promote
peaceful political reform. It sought to foster cooperation
between the liberal reform parties that have been in existence
in Russia for the last 10 years and to bring civic
organizations of all kind together into a united congress. And
they set forth an agenda for the future, and they set in motion
an organization which will continue to meet in Moscow and in
the regions over the course of the next 2 or 3 years. And we
believe that that congress, and efforts which has begun earlier
this year, need to be supported and encouraged and helped.
Second, the civic organization, VOICE, which we have helped
found, has now some 23 chapters across Russia. They are seeking
to grow, with the help of USMD, to some 40 or 45 organizations
across the country so that they will be in a position to
monitor whatever elections are allowed in the future, including
the parliamentary elections of 2007 and the Presidential
elections of 2008. We believe that that organization must be
encouraged, strengthened, and supported.
I end by simply saying that international engagement with
Russia is important and must be maintained. We need your help.
We need the support of the Congress. We need the support of
every individual Senator and Representative if we are to be
effective in Russia, to convince the Russians that they are
moving in the wrong direction and that what lies ahead, if they
move in the current direction, are all the dangers that Bruce
has outlined. There is another path, we want to work with the
Russians along that path, we want to help support democratic
development. I would urge you to help support organizations
like mine and the hundreds of other nongovernmental
organizations that are trying to function in Russia today.
[The prepared statement of Ambassador Ledsky follows:]
Prepared Statement of Nelson Ledsky, Regional Program Director for
Eurasia, National Democratic Institute, Washington, DC
On behalf of the National Democratic Institute (NDI), I would like
to thank the Committee for this opportunity to discuss the current
political situation in Russia. I would especially like to recognize and
thank Senators Lugar and Biden for their leadership and support for
promoting democracy worldwide.
NDI has followed democratic development and civil society in Russia
since the early 1990s. The Institute has maintained a field office in
Moscow since 1992, from which it has provided assistance to a broad
spectrum of political parties that exist in Russia. NDI had sought to
help these parties strengthen their structures and assist them in
advocating for their priorities at both the federal and local level.
NDI has provided training and consulted with thousands of individuals
on long term party organization. Our objective has not been to promote
a particular ideology or electoral outcome, but to support development
of a genuine multiparty system that allows for divergent viewpoints.
The same objective holds true for our activities with civil society
groups. Here we have sought to assist the organizational development of
nonpartisan groups that can monitor the conduct of elections and
promote popular political participation at the national and local
levels. We have been able to assist these groups over the past decade,
and since 1999 have supported the efforts of a cross-regional
association of civic groups called The Voice Association for the
Defense of Voters' Rights (VOICE). VOICE, or Golos in Russian, has
become Russia's leading nonpartisan election monitoring organization.
It has 23 affiliates with programs covering two-thirds of the country's
population.
The political environment in Russia has grown progressively more
difficult over the past two years, particularly since the December 2003
parliamentary elections and the March 2004 presidential election. Both
contests failed to meet Russia's commitment as an OSCE member. The
VOICE Association identified widespread vote tabulation irregularities
and uncovered numerous accounts of voter coercion. VOICE noted that:
Municipal workers were ordered to vote, sometimes for one particular
candidate; members of the military were told to report the time they
voted; students were threatened with losing housing if they did not
vote; and voter lists were being manipulated to ensure a high turnout.
VOICE documented an unexplainable decrease in the voter rolls of two
million individuals between December 7, 2003 and March 14, 2004. All
possible avenues, from media, to security services, to electoral
commissions, appear to have been used to ensure a large margin of
victory for the incumbent president, and a large voter turnout figure.
As a consequence of these elections, United Russia and other pro-
government parties now hold a two-thirds majority in the State Duma,
while two of the reform-oriented parties, Yabloko and the Union of
Right Forces (SPS), have lost all their representation in the
legislature. With little access to the media, constant attacks by the
national news channels, and their financial support significantly
affected by the government's investigation of their primary supporters,
these parties are now clearly disadvantaged in the Russian political
environment.
As 2004 drew to a close, the Russian administration successfully
eliminated elections for regional governors, consolidated its control
over the judiciary by putting high court appointments under Kremlin
control, increased the legal hurdles faced by non-Kremlin-aligned
political parties attempting to take part in upcoming elections, and
limited the rights of citizens to hold mass demonstrations.
Through various pieces of legislation, the Russian government has
also made it increasingly more difficult for international NGOs to
provide support to their Russian partners. Since last year, NDI has
faced ongoing investigations by both regional and national Russian
authorities.
Russia is also presently taking forceful initiatives to undercut
the contributions of the OSCE to help promote democratic processes in
Russia and in other countries in the Commonwealth of Independent States
(CIS), by charging that there is an overemphasis on the so-called
``human dimension'' of the OSCE, which concentrates on human rights and
democracy, and by accusing unjustly the OSCE's Office for Democratic
Institutions and Human Rights (ODIHR) of politically biased assessments
of elections in Russia and the CIS. Russia's criticisms and threats to
pull back from the OSCE and its institutions jeopardize international
election monitoring, as well as the role of international assistance
organizations and the activities of domestic democratic reformers.
The democratic gains that characterized Russian politics in the
1990s have largely been overturned, and there are no guarantees that
current trends will be reversed any time soon. The parliamentary and
presidential elections scheduled for 2007 and 2008 could provide
opportunities for greater political engagement by civic and political
groups. It is equally possible, however, that the 2007 and 2008
elections will be scripted to ensure a continuity or even amplification
of current tendencies. The challenge for parties and civic
organizations, therefore, is to rebuild and reconnect at local,
regional and national levels and to take advantage of any political
openings.
There are clearly pockets of independence in Russia. Last December,
The Civic Congress, a meeting of 1,500 political and civic activists
publicly asserted their determination to promote peaceful political
reform. It sought to foster cooperation among political parties, civic
groups and members of the media and business communities as a
counterweight to anti-democratic trends. The Congress was remarkable in
the Russian context because it brought together diverse groups that had
not previously associated with one another. Also, it appeared to be a
rejection of the resignation and complacency that have gripped many
democratic reformers over the past several years. The Congress released
a declaration on proposed joint actions and established leadership
bodies to oversee its follow-on activities.
In addition, organizations like The VOICE Association have grown
steadily in size and coverage, providing a counterweight to those who
may seek to manipulate the electoral process. The Association is hoping
to expand its local branches from 23 to 40 in time to observe upcoming
local elections as well as the 2007 and 2008 national elections.
VOICE's growing presence year-round would give them a unique
perspective, and their ability to remain involved in the electoral
process between elections provides small but potentially significant
opportunities to engage citizens in the political process and help
deter electoral misconduct.
International engagement in the furtherance of Russian democracy
remains critically important. Russian democrats depend upon assistance
and require the continued attention of world opinion makers. The
international community should concentrate its support on those seeking
to build democratic institutions and processes in Russia and should
counter initiatives that make it more difficult for organizations like
NDI, the OSCE and others to provide assistance. NDI remains optimistic
about the prospects over the long run for Russian democracy and intends
to remain committed to this cause.
The Chairman. Thank you very much, Mr. Ledsky.
Indeed, there is strong support for the Democratic
Institute and the Republican Institute, not only in Russia, but
all over the world, as you pursue, with their umbrella agency,
the National Endowment for Democracy, some remarkable goals.
I want to call now on Senator Sarbanes to commence the
questioning.
Senator Sarbanes. Well, Mr. Chairman, thank you very much.
And I apologize, because I'm going to have to leave very
quickly for another hearing. But I did want to come and hear
this panel, and I want to thank all of the members of the panel
for their very helpful contributions.
I particularly want to note the contributions that
Ambassador Ledsky has made over the years, first in the
government and then in his service with the National Democratic
Institute. He's made a significant difference in many policy
areas, and I just want to underscore that here this morning.
Ambassador Ledsky. Thank you.
Senator Sarbanes. I want to put one question to the panel,
to which I hope each of you will respond.
The first time Mr. Bush met with Mr. Putin, he said, ``I
looked the man in the eye. I was able to get a sense of his
soul.'' I think you recall that comment. Now, he's meeting with
President Putin in Bratislava 1 week from today. I'd be
interested in knowing which items you think the President
should have on his agenda to present to Putin. What should he
say to Putin?
In fact, as you answer the question, imagine that we were
to take the transcript of what you say and send it down to
those who are preparing the President for the trip, and say,
``At this hearing, we asked these four experts which issues
they thought you should raise, and here's a suggested set of
talking points for your meeting with President Putin.''
Mr. Nix, why don't we start with you, and we'll just go
right across the panel?
Mr. Nix. Yes, Senator; thank you.
Well, I'll tell you what the International Republican
Institute would propose to the President of the United States
in the course of this meeting, and that is--we've already
prepared a letter, a draft letter, for President Bush, which we
hope that our colleagues at the National Democratic Institute
will sign, as well as the president of the National Endowment
for Democracy. In essence, what we would ask in this letter,
sir, is that the President repeat his desire, and the United
States desire, for Russia to reaffirm commitments to democratic
principles such as we have listed: The rule of law, free and
fair elections, a market economy, all of the things that have
been discussed here today. And in addition to those principles,
what we would ask the Russian Government, and what we think
that the President of the United States might ask, is that
Russia work with the United States to help two newly-emerging
democracies--that is, Georgia and Ukraine. And, we think, it's
very important that Russia be involved. And we think that
Russia could play a pivotal role in helping these newly
developed democracies if they work with the United States in
doing so.
Ambassador Ledsky. I have nothing to add to what Steve has
suggested. It is true that the nongovernmental organization
community is preparing a letter for the President, and we all
hope to endorse it.
Dr. Aslund. Thank you, Mr. Sarbanes, for the question.
Since nobody has quoted President Bush's last major
statement on President Putin, I thought I should quote it, from
the 27th of September, 2003. ``I admire President Putin's
vision of building democracy and freedom and the rule of law in
Russia.'' That is what should be clearly and firmly denied.
Such a statement should not be left on the record. I think that
President Bush has a moral right of publicly revoking that
statement when he meets President Putin.
I think that the most important thing is to speak clearly
and loudly, as both Stephen Nix and Nelson Ledsky suggested
here, continue engaging in the practical issues. Of course, the
United States and Russia have common interests that should be
pursued, as we have discussed, but the United States cannot
stay quiet when Russia is violating its legal commitment to
various international conventions that it has ratified.
Thank you.
Mr. Jackson. Thank you, sir, for letting me--giving me
enough time to try to think of what I'm going to say to your
question. [Laughter.]
I'm diplomatically challenged, at the best of times, and
this is such an easy target to go after some statements which,
I think, we all regret, you know, as Americans, to basically
countenance or basically say that we do not see what's
happening in Russia.
I think there are three points that one would make to
President Bush. There has been a profound and negative change
in the conditions in Russia, in terms of democracy, but there
has been no detectable change in United States policy toward
Russia. That seems to be a disconnect that I would also--would
hope that this committee would look into in the course of this
year.
The second point is, moral clarity, which figured
prominently in the inaugural speech, is not something you do in
private conversations; it's something you do in public, and
when the whole world is watching. The whole world will be
watching Bratislava. And, I think, Anders is absolutely right,
we need to loudly say what we stand for as a nation.
And the third point is, every single NGO has downgraded
Russia over the last year and a half. They are now among the
worst places, and the most dangerous places, in the world to be
a journalist. How come there has been no downgrade by the
governments of the Western world in this same period, when
every part of civic society is reporting this?
So those would be the three questions I would pose to the
White House.
Senator Sarbanes. Yeah. Could I sharpen the question just a
moment? But what should President Bush, in a more specific way,
push President Putin to do? What is it, exactly, we want Putin
to do? I mean, how do you transpose respect for the rule of law
into specifics, given what Russia has done? What changes did
the Russians make that they should reverse, whether by law or
by practice?
Mr. Jackson. Could I take a shot, sir?
I think President Putin deeply--about the only thing he
does value is reputation and status. This achievement of great
power status is key to who he is. And, I think, you basically
can say, ``We will not endorse that.'' You can begin by having
the President say, ``We're not going to this celebration in
May,'' of the, sort of, Stalinist legacy of Russia. You could
say, ``There isn't going to be a G8 Summit in Moscow next year,
under these conditions. And we are going to basically limit
your access into the democratic institutions of the world while
you continue to maintain this antidemocratic conduct.''
Senator Sarbanes. Anyone else want to add to that?
Mr. Nix. I would encourage the rollback of some of the
recently pronounced, and some enacted, constitutional reforms
and legal reforms, such as the appointment of governors, as
opposed to their direct election, and also this change to a
total partyless system, which is designed to root out any
opposition that remains in the Duma, a number of legal changes
that relate to electoral processes that could be rolled back to
show, and to demonstrate, support for true multiparty
competitive system.
Senator Sarbanes. What about the courts? What could they do
to move to an independent judiciary?
Mr. Nix. I'm an attorney, sir, and I would be happy to try
to answer that question, because I've worked in the area of
rule of law, as well.
It's a tremendous challenge. If you talk to people in the
rayon level and the oblast level, there is no independent
judiciary, there is no enforcement of contracts. In fact, I
noted recently that Boris Nemtsov, a very active Union of Right
Forces party leader, has been appointed an advisor to newly
elected President Kuchma of Ukraine. And the reason for that--
I'm sorry--Victor Yushchenko--newly elected President
Yushchenko of Ukraine--and the basic reason for that
appointment is that there are a number of Russian businesses
that now want to invest in Ukraine, because they see a newly
elected democratic government that will respect the rule of
law, and they see an independent court system, or, at least,
the possibility and the prospect of one, that will enforce
contracts. So you see this move, that Russian businessmen now
actually view Ukraine as a better investment than their own
country. And, I think, the root problem is that the President
has to undertake some reforms within the courts of general
jurisdiction in Russia to enhance the independence of the
judiciary. It has to come from the executive branch.
Senator Sarbanes. Thank you very much, Mr. Chairman. I
appreciate your courtesy.
The Chairman. Well, thank you very much, Senator Sarbanes.
Dr. Aslund, you may have some information about this issue,
and this is why I raise the question with you. In July 2004,
Paul Khlebnikov, editor of Forbes Russia, was shot and killed
outside his apartment. The Russian Government has pledged to
fully investigate the murder, and suspects are reportedly in
custody. The United States has offered assistance, but, to
date, our help has not been accepted. Can you bring us up to
date on the status of this investigation? What are the
implications on United States/Russian relations arising from
this?
Dr. Aslund. I knew Paul Khlebnikov, and he was, of course,
a very knowledgeable journalist. In particular, he knew a lot
about Russian business, since he was composing this list of the
100 richest people in Russia. By composing such a list,
probably he knew so much about various business deeds that the
suspicions can go in any direction.
What the authorities are now suggesting is that he was
murdered because of a book that he wrote about--``Conversations
with a Barbarian,'' which is about a conversation with one of
the Chechen terrorists, and if I remember rightly, there were
three Chechens who are in custody accused of his murder. For an
outsider, it's impossible to know. Threads can draw in very
different directions. And, of course, we do not have the
highest regard for the Russian law enforcement system in these
cases.
Thank you.
The Chairman. What is likely to occur with regard to this
case? Will it finally just simply pass away without further
action, or is there likely to be some resolution, in whatever
the Russian legal system may be?
Dr. Aslund. We can see, in similar cases, if we take the
murder of Galina Starovoitova, long time has passed, certain
people accused and, indeed, arrested; albeit, to my knowledge,
no judgment has been passed. The judgments are often passed
several years after the event, or don't really take place. So
it's very much in limbo, or somebody else might know more.
The Chairman. During the panel, mention has been made about
Georgia and Ukraine. Let me take up the Georgian situation for
a moment.
The end of the OSCE monitoring--that is, Europeans on the
border of Georgia, noting comings and goings--terminated at the
beginning of the year. You've suggested that this is not by
coincidence. The Russians really did not like that monitoring
to proceed.
Now, during a visit that I had with President Saakashvili
of Georgia recently, the point that he made through me to our
government was to press the importance for the United States to
visit with Europeans about coming back to the border, and that
this, in fact, is in the interest of Georgia, but also in the
interest of Russia.
There are allegations from time to time of so-called
Chechen terrorists coming across the Georgian border into the
Pankisi Gorge. There is ambiguity as to what Russian
responsibilities are, in terms of chasing and capturing them or
so forth. But certainly, there is on the part of the Georgians,
the feeling that clearly the Pankisi Gorge is inside territory
of Georgia and that this would be a violation of the
sovereignty of the country. That ambiguity continues, and the
need to sort things out is important. So that is a major point.
A second one, and perhaps even more profound, is a general
fear on the part of Georgians, not just the President of the
country, that Russia is suggesting that Abkhazia ought to be an
independent state, that a vital part of the territory of
Georgia ought to become an independent state. This is of
interest to Russia, as a foreign-policy problem. The beginnings
of negotiations between Russia and Georgia about this have not
been fruitful, and many do not expect they will be, so long as
there is a general feeling of a potential split-off of parts of
the territory of the country.
Now, under those circumstances, the Georgians, of
necessity, look to us--that is, the United States. They hope
Europeans might be involved, particularly in the case of the
monitoring. They suspect that Europeans should be involved,
because of Georgia's interest in NATO, and its interest
ultimately in the EU. Admittedly that is a stretch, in terms of
the requirements of the EU and the very small economy that
Georgia has now and the large leaps that would be required to
come into this. Can any of you on the panel offer, at least,
some thoughts about whether these are your perceptions, in
terms of their requests of us, and, likewise, the nature of our
response? How vigorous should the United States be with regard
to the monitoring of the borders of the country and the fact
that Abkhazia and South Ossetia--another issue that continues
in abeyance there--are parts of Georgia, and that the
territorial integrity of Georgia as a fledgling democracy are
important to us? Does anyone have a comment on that issue?
Yes, Mr. Jackson.
Ambassador Ledsky. I have several----
The Chairman. Mr. Ledsky.
Ambassador Ledsky [continuing]. Comments. And Bruce does,
too, I'm sure.
First of all, I think the United States has a very
important stake in the success of the Georgian Government and
the success of the experiment that is now going on in Tbilisi.
It's very much in the interest of the United States that that
effort succeed and that that government be successful in
reforming the state and putting it on a viable basis.
I think there are three or four major problems that
government has. The first is one you haven't mentioned, and
that is the continued presence of Russian troops on Georgian
soil.
The Chairman. The bases.
Ambassador Ledsky. The bases. The Russian bases in Georgia.
And I do think, here, the Georgian Government has received, and
should continue to receive, support from the United States in
this area.
The second is the question of South Ossetia. I think that
and the Abkhazia situation are somewhat different. But, I
think, the idea of a U.N. force or a multilateral force of some
kind on those two borders is very important, and we--I see no
reason why the U.S. Government shouldn't support that kind of
idea.
The Chairman. Mr. Jackson.
Mr. Jackson. I completely agree with what Mr. Ledsky has
laid out, but let me add a couple of other factors.
One, I go the Pankisi Gorge every--virtually every time I
visit Georgia, and there are no Chechen terrorists. I mean,
there is a significant social problem up there, but this is a
pretense, the notion that there are Chechens attacking Russia
from Pankisi. It's just flat not true.
It seems to me we have to look at this in context. The
reason that there is increasing pressure from the Kremlin on
this new government is because of its democratic image. This
was the source of the Rose Revolution, this was a Presidency
that had succeeded in unifying the country, first in Ajaria,
and it tabled a peace plan, a very progressive peace plan, for
South Ossetia. This was threatening. So Russia wants to keep
them on the defensive, either undermining the democracy in
Georgia or subordinating it to Moscow's geostrategic interests.
They did this in three manners:
In August, they blocked the OSCE from expanding its
presence in South Ossetia and to keep the rocky tunnel, a
transshipment point, open to essentially military and
paramilitary goods.
Second, they refused to withdraw their bases and are now
gridlocking that and forcing--trying to force Georgia to limit
its rights by--they say that their Istanbul commitments to
withdraw no longer pertain, and they are asking onerous
provisions to continue discussions.
And, finally, they want the international peacekeepers out,
to leave them a free hand, and they want, not only in the
border monitoring, but they also want Russia to say, in all
peacekeeping operations, Russia will be the only referee, that
the international community won't be allowed to be present.
So this is a pattern of activity, and Pankisi Gorge is only
a pretext.
The Chairman. Well, let me just follow along this idea.
When I visited in Ukraine in August, authorities of the
government with whom I visited made the point--informally, but
very firmly--that there would be no Rose Revolution in Ukraine
as their elections approached. They had noticed what had
occurred in Georgia, and it did not meet their approval. And as
chapter and verse of this, they pointed out that, in fact, the
mayoral election in Ukraine had been firmly dealt with earlier
in the year. By ``firmly dealt with,'' they meant that it
included international observers being thrown down the stairs
of the city hall and other violent activities, such as
suppression of the ballots and the declaration that the
government candidate was the winner. So, at least, the
authorities were indicating that the stage of democracy in
Ukraine was fairly well contained in this vivid incident, and
that they would not countenance the type of public
demonstrations and other activities that characterized the Rose
Revolution in Georgia.
Now, that was August. This is now February, not too long
after. But I also, at that time, visited with the Presidential
candidate of the opposition. He is now the President of the
country. He was a dashing figure, 50 years of age, looked like
he was 35, from Hollywood vintage. But he already was
commenting that he thought his automobiles were being run off
the road by various authority figures. Obviously, his messages
were being suppressed on television in Ukraine, except for
Channel 5. And, therefore, there were already difficulties.
This was long before the poisoning occurred and other
situations that were vividly to change his life and the life of
the country.
Now, I mention all this because, you know, we're about to
come up to an election in Moldova, which has not been widely
commented on by the world, as a whole, but is of great interest
to each of you gentlemen, as close observers of the situation.
What can we anticipate in Moldova? And what, for instance,
are the organizations that you represent, Mr. Nix and Mr.
Ledsky, planning to do in Moldova? Do you know of other
activities that will illuminate that situation for everyone?
Would you start, Mr. Nix?
Mr. Nix. Yes; thank you, Senator.
Yes; both IRI and NDI maintain a presence in Moldova, and
we've been working very, very hard with--again, with all the
parties, including the Communist Party, which is, as you know,
in control of both the executive and legislative branches of
that country.
In terms of the election, the elections have been troubled
in the past, but certainly the threat of fraud at the level
that we knew was a certainty in Ukraine doesn't appear to exist
in Moldova. Again, we think that there are going to be problems
with the count and with the election administration at a
certain level, but not nearly the level that we knew would take
place in Ukraine. We do not, therefore, have funding for the
large numbers of international observers that you saw when you
traveled to Ukraine.
And, in terms of the outcome, it's difficult to assess.
There is a united opposition. Again, they face some of the same
problems that Russian political parties face and Ukrainian
political parties face; that is, no access to media whatsoever,
and oppression from the government, and the use of
administrative resources to further the aims and goals of the
party in power.
In terms of an actual result, I mean, our polls show that
the opposition will do fairly well in this election. Whether
they will do well enough to achieve a majority in parliament
remains to be seen.
That would be my take on Moldova.
The Chairman. Mr. Ledsky.
Ambassador Ledsky. We have been working together with the
International Republican Institute in Moldova for about 2 years
now. We have cooperated, we've been working with the same
parties, including the Communist Party, including the
government party. Our representative in Kishinev had a meeting
only 2 weeks ago, I think, with the President of the Republic,
President Voronin, and we discussed very carefully the problems
that were arising with respect to the elections.
Those elections are on March 6th. We have not only worked
with all of the lists that are running in the election, but we
have come to work now, over the last few months, with a
monitoring--domestic monitoring organization, which is being
funded by the Europeans and by the Eurasia Foundation. And, we
think, there will be a decent and effective monitoring
operation at the Moldovan elections. We'll be doing a parallel
vote tabulation, as we did in the Ukraine and as we did in
Georgia.
So I don't know what the results of this election will be,
but I, myself, agree with Steve that the level of fraud and
mismanagement will be sufficiently--well, it will be down from
the last election.
The Chairman. Yes, Mr. Jackson.
Mr. Jackson. Could I just add to that? I think, clearly,
the Orange Revolution in Ukraine unsettled or caught Moscow off
balance so that they did not prepare the kind of political
intervention in Moldova. It is, however, true that consultants
paid by the Kremlin came down--the same people that were
arranging Yanukovych's election appeared in Moldova in
September and October. They set up meetings in Moscow in
November, and with Kuchma. And then after their defeat, in
December, they don't appear to have renewed their activity in
Moldova. It will take them some time to regroup. But they have
been able to take polling places that would have been open to
international scrutiny and move them into Transdnistria, so
there will be a certain amount of votes coming in from
Transdnistria that we can't see.
The Chairman. Those will be beyond observation.
Mr. Jackson. I don't see how you get anybody in there.
The Chairman. Well, let me follow through with the broader
point that each of you have made in various ways. The Rose
Revolution certainly was unexpected. The Orange Revolution may
have been expected, in a way. There certainly was some
sophisticated organization by persons in Ukraine who were
prepared to protest, as they did, although the degree of
support, the longevity of all that, maybe, could not have been
predicted, nor the circumstances that were involved in that.
But clearly--and you stated this at the beginning, Mr.
Jackson--the Russian situation presently is one of wishing to
block resolution of frozen conflicts elsewhere, or to place,
under the penumbra of Russia, surrounding situations where
there appear to be conflicts or elections or opportunities of
this sort. That has not worked in the case of Georgia, thus
far, although you've all noted now that there are still
Russians in military bases. Abkhazia and South Ossetia,
undecided; foreign observers at the border, vanished.
Our President, as he visited with President Putin, and in
his Inaugural Address, has made some very strong statements
with regard to democracy and the universality of these
principles. He does so, obviously, with humanitarian concern
for each of the individual persons, sacred persons, in the
affected countries, but also, in terms of the interests of our
country, that we are safer if other countries have democracies
and if there is this dialog with other democracies. That is a
prominent part of foreign policy that he sees for this country,
the ethics of what we are doing.
In Russia, some reforms that were meant to have a more
efficient social-service economy have not been administered
very well, if they were something that should have been in play
to begin with; namely, the cash payments, as opposed to
payments-in-kind, as people rode buses or received other
services. The idea is that this will be rationalized now, and
some order brought out of the chaos at a time when Russia was
cash poor and did not have the ability to deal with these
situations.
Some would say that Russia still is cash poor outside of
Moscow and St. Petersburg and some other places. And this is a
part of the problem of administering the new social programs.
They would say that it's not surprising that the elderly or
pensioners or so forth would rise up and say, ``We liked the
old system, as a matter of fact. We wanted to catch the bus and
we don't want to pay the bus fare. We want to move ahead as we
used to. So it's all right for you social economists to have
rationalized how all this is going to work, but it doesn't
really work very well for us.''
Thus, the unthinkable has been occurring, and that is,
demonstrations, larger and larger groups of people bobbing up
in various parts of the country. President Putin, perhaps
surprised by this, has sent out persons to try to help fix the
situation, but these do not appear to have been very adept
people. There just is not a social administration in Russia
that handles these things very well, quite apart from maybe
formulating the policy to begin with in a Duma that was not
very democratically based, in which the dialog was perhaps
somewhat truncated by the nature of the elections that you have
talked about.
Now, some have also commented, ``Not to worry. Regardless
of whether there are some elderly people out there in the
streets demonstrating, and their problems may be fixed, or not,
this is not the Rose Revolution, this is not the Orange
Revolution, and it is not the forerunner of any revolution.''
On the other hand, others have suggested that the inspiration
of Georgia and Ukraine could take hold with some people in
Russia who wonder why they might not have a great deal more
freedom, as is being enjoyed in the periphery. And some then,
darkly, have suggested, before you get into wishing what you
think ought to occur here, it's not really at all clear what
would be the successor regime to this situation. Are the
forerunners for democracy, the potential for institution-
building aspects, at hand, that could bring a change?
This is blue-sky thinking, way down the trail, but I
mention in the same breath that many dismissed the Rose
Revolution, dismissed the potential for the Orange Revolution.
Maybe some feel that, after all, given the way the world works,
the Rose Revolution might be ultimately suppressed by Russia,
and we might see a different turn. Likewise, Ukraine may have a
heady moment now, but, after all, they live in a dangerous
neighborhood.
Which way are things going to turn? Are they going to move
more toward the Rose/Orange direction or toward the suppression
of dissent, with a penumbra over the whole situation?
Yes; Dr. Aslund.
Dr. Aslund. Thank you, Senator.
I very much think like you about this question. First, on
the social-benefit reform. It was as bungled as it could be.
Part of the benefits were supposed to be taken away because
they had never been paid out. They were just taken off the
books. But it was called monetization. Then the calculations
were wrongly done. Probably only one-third of the actual
benefits were compensated for. The federal government pushed
this to the regional governors, who didn't want to pay.
Therefore, it was ever more complicated. Just in case, it was
not explained to the population, and 35,000 top officials in
Russia, including President Putin, at the same time got a
quintupling of their salaries, and they kept all their benefits
in kind. So this was just a massive affront to the population.
So the poor are losing the benefits, when the country is
booming. And----
The Chairman. Well, that's a very good statement--I'm going
to stop you for a moment--that the poor saw two-thirds of their
benefits vanish in this so-called reform of monetization, but
35,000 officials in Russia, including President Putin, saw
their salaries quintuple, did you say, at this same juncture?
Dr. Aslund. Yeah. And, indeed, you don't even get away with
it with a--in a mildly authoritarian state. So these protests
were clearly spontaneous, and they were massive, and they were
outside of the main centers. This reminds me very much of what
happened in Poland in August 1980, when solidarity was founded.
And we saw how that ended.
So, indeed, I think that this shows that President Putin's
power has passed the peak. You can't make four such big
mistakes in one year without suffering. And, I think, that what
this shows is really how dysfunctional this mild authoritarian
rule is. But we also see that it's not organizations that pick
it up, but it's spontaneous protests, which make this more
difficult to predict. Therefore, it doesn't quite look like the
Orange Revolution where Our Ukraine had one-quarter of the
seats in Parliament since the last parliamentary elections.
So I would say that this was the beginning of the end, and
we are already seeing more liberalism right now in the Russian
media, simply because the safety valve needs to be used, or
because the Kremlin can't control it quite as much as we
thought.
Thank you.
The Chairman. Mr. Jackson.
Mr. Jackson. I completely agree with your point, that the--
we don't quite understand how big the Orange and Rose
Revolutions were in Eurasia. I think they were--those twin
events were the most important geopolitical change in Eurasia
certainly since the fall of the Berlin Wall, and we're still
seeing the aftereffects. It's not just in Belarus and Moldova,
where their effects are obvious, but throughout Central Asia,
all the way to China. The concept of this democratic change is
changing the way people think about the world. And, frankly,
the words of President Bush, in his inaugural, were part of
that message, that freedom and democracy were possibilities,
where I don't think they were viewed as such before.
But for the people and the youth of these countries, these
are messages of freedom and hope, but for the regimes in
Moscow, in Minsk, and in Turkmenistan, this was tantamount to a
declaration of war. This threatens, you know, their privileged
positions, their monopoly of state power, their monopoly of
resources, and they view it as such.
Democratic change is profoundly threatening to these
oligarchies and elites and security services who basically
persist by their monopolization of power. This means sharing
power. I think it is not a structural question, though: Will
it--will these--Kiev and Tbilisi succeed or will they fail? I
think that is deeply to be affected by people here--yourself,
sir, your committee--funding IRI and NDI to give them the
resources to support democracy. This is a competition.
The Chairman. Mr. Jackson, just on that point--these are
sort of strong words--if the speech that the President gave out
around the steps is a declaration of war, as perceived by the
regime in Turkmenistan, for example, or Belarus, do you suppose
President Bush saw that in what he had to say? In other words,
he is now proceeding to visit with President Putin. He has
declared, really, what our ethos is, in pretty strong terms. It
is awfully difficult to square how you find the words, say, of
2 years ago, the evaluation of President Putin, with this
today, especially if it strikes President Putin as strongly as
you're suggesting. Might President Putin conclude that, in
general, our President is talking about eternal verities, that
there is a timeframe in which all good things happen--in other
words, that this is not necessarily a current or urgent
problem, but rather, one down the trail that we all hope will
occur? What is your judgment as to the reaction out there to
these words, on the part of President Putin, quite apart from
the authorities in Turkmenistan?
Mr. Jackson. I think what the President was talking about
in the inaugural is nothing more than basic American values,
``This is what our country believes. This is what our allies
believe. This is what we mean when we talk about democracy.
This is a community of shared values.'' And, I think, the
President correctly and eloquently summarized those values.
There is a claim, I think, all Americans share that democracy
is universal, that all peoples should have equal access to
those freedoms, and that's the central foundation belief--
political belief of the West. I think it is very uncomfortable
for regimes that basically are reactionary in nature and that
much prefer the policies of the 19th century, the militarism
and mercantilism and unchecked nationalism that characterized
that century. We do not stand for that. And I--it is only
disappointing that Putin and others find themselves so distant
from those values. And, frankly, that's their problem, not our
problem.
The Chairman. Mr. Nix, do you have a comment about this?
Mr. Nix. Senator, I'd like to address your comments about
the effects of the Orange and Rose----
The Chairman. Yes.
Mr. Nix [continuing]. Revolutions. And I'd like to make two
points. First of all, it no doubt had a profound effect on
democratic movements, not only in Russia, but the rest of the
former Soviet Union. Political parties, opposition movements,
are reinvigorated. They see that it could happen. And so, that
has given them a sense--as has been noted previously, a sense
of hope and confidence that it could be.
Conversely, it's had another effect, in terms of the
governments of those countries--again, not just in Russia, but
in Central Asia, Belarus, and other countries where IRI and NDI
work. The governments in those countries have acted very
swiftly, in terms of disrupting the political parties'
operations, trying to disrupt and prevent IRI from--NDI--from
providing technical assistance and training. In a very short
time, operationally, we have felt the brunt of these government
crackdowns, as have the political parties that we work with.
So it's had a tremendously positive effect on these
political party movements. At the same time, it has made it
much more difficult for these political parties to operate, and
has made it increasingly difficult for IRI and NDI to continue
to provide the type of assistance that we do.
And I'd like to sum up by connecting up to your opening
statement, sir, when you noted the proposed cutbacks in FSA
funding. I firmly believe that this is not the time to cut
back. This is the time to accelerate and to expand on our
support to these democratic movements. The time is right, based
not only on the Georgian and Ukrainian experience, but other
things that we see out in the regions that should be supported.
The Chairman. Mr. Ledsky.
Ambassador Ledsky. I have just a small footnote. How Mr.
Putin, and how the other autocrats around the former Soviet
Union, view the President's statement, I don't know. I suspect
they think it is pure rhetoric and it doesn't have to be paid
much attention to. I hope they're wrong, if that is their
judgment.
My own feeling is that we won't know, exactly, and we won't
be able to have much direct effect on their behavior--that is,
the autocrats' behavior. What is critically important--and I go
back to the point I made earlier--is that the experiment in
democracy, which the Georgians and the Ukrainians have now
undertaken, succeeds and that American assistance to those
governments is critical at this juncture--that is, 2005.
We have already seen in Georgia that the USAID mission of
the United States Embassy looks upon organizations like ours as
already having achieved its objective, and that there is now
the chance to move to some other country or some other project.
Because the Georgian revolution is complete, democracy has been
established, organizations such as ours are no longer needed.
That is the most tragic mistake that could be made by the U.S.
Government and U.S. agencies in 2005.
And I would urge you to, whatever you do to the Freedom
Support Act, in terms of percentages, that sufficient money be
devoted to Georgia and the Ukraine, because the examples of
those two countries are what the President Putins of the world
will be looking at, not the declarations by politicians or
bureaucrats, like myself.
The Chairman. Well, I think that's very sound advice. And
let me just say, I was pleased that, in the request for the
supplemental appropriation bill, the President has asked for
$60 million for Ukraine. Now, as a part of that effort, really
over and above outside altogether of our situation, the
Millennium Challenge group in Georgia is impressive, and it
would appear that this may be an avenue for some support, but
it's very modest, given the amounts of money that are involved
in Millennium Challenge all together. But the fact is that
Georgia is working those problems quickly and successfully.
But I just pick up your general point. There has been a
tendency on the part of the Congress, maybe even society as a
whole--hopefully, never NDI and IRI--to finish off an election
and move on.
Ambassador Ledsky. Right.
The Chairman. Many of us feel that this was a tendency in
Latin America, during the 1980s, during which a great number of
you and Members of the Congress were involved in El Salvador,
Guatemala, Honduras and Nicaragua. Many of these governments
have continued to do well, although some are having their
problems. This committee has found, throughout Latin America, a
good number of precarious situations and a relative paucity of
interest.
It is so important right now to make certain that, in
Georgia and Ukraine, just to name the two that you have
mentioned, these are success stories. That may require a
commitment on our part that has not yet been rationalized,
perhaps, as fully and programmatically as needed. That is one
purpose of our hearing today; to bring these thoughts to the
fore, as a memo to all of us, including during our visits with
our administration.
There is more work to be done. Today we have talked about
Yukos as a case that is important. This panel has a broad
interest in the relationship with Russia. I think that it has
been important to illuminate it, and hopefully we may do so
again.
I thank each one of you for your contributions, your
testimony, and your forthcoming responses.
The hearing is adjourned.
[Whereupon, at 12:10 p.m., the hearing was adjourned.]
----------
Additional Material Received for the Record
Prepared Statement Received From Mikhail Khodorkovsky
1. I regret profoundly that my personal political position and
public activity have served as an excuse for the illegal expropriation
of property from all YUKOS shareholders, organized by a group of
corrupt officials and businessmen working in their own interest.
2. I have never belonged to any party. However, I always believed
and continue to believe that it is my right as an individual and
citizen to support various political forces financially no matter what
the current government may feel about them.
3. In supporting various political forces, I did everything
possible to promote the establishment and strengthening of system-
forming institutions within the Russian state and of civil society in
Russia.
4. Over the course of the seven years that my colleagues and I
managed the YUKOS companies, we achieved a state of total transparency
of the corporation and openness in its business dealings. In protecting
shareholder rights, we tried to keep corrupt bureaucrats from meddling
in YUKOS affairs. This made the corrupt bureaucracy decide to wreak
vengeance on me, my partners and colleagues.
5. I frequently spoke out in public--at the State Duma, at sessions
of the cabinet of the Russian Federation, at meetings of business
people with the president of Russia--in favor of legislation that would
completely and precisely spell out the rules for the formation of the
business milieu in Russia, including the mutual obligations of state
and business. I felt and still feel that the bureaucracy must be
stripped of its right to interpret laws arbitrarily and of its ability
to substitute decisions by officials for legislation.
I spoke out, in particular, for a stable and transparent tax
system, as well as for equality of access for all oil producers to the
state-owned main pipelines and for the construction of a private
infrastructure for transporting energy, which would have substantially
intensified and improved the energy and fuel sector of Russia.
6. I gave lectures to many audiences in Russia and abroad on the
need for the democratic development of the Russian Federation, on the
prospects for free-market reforms and the development of an open
economy in my country, and on the social responsibility of business. I
also wrote articles on the paths of development for my country in
numerous authoritative Russian and foreign publications.
7. I had expected my public activity to lead to pressure on myself,
but I did not imagine that the pressure would turn into the total
destruction and plunder of YUKOS and the illegal persecution of
numerous shareholders and staff, as well as their relatives, even young
children.
8. Despite the fact that I no longer have major holdings, I
continue to support--to the extent of my abilities from my prison
cell--various social, human rights and charitable initiatives, both
through Open Russia, the NGO I founded, and in other ways. I maintain
that there is a need for a real separation of powers in Russia, the
creation of an effective system for protecting human rights, and the
guarantee of independent mass media in my country. I intend to support
Russian science, culture, and the right of Russians to freedom of
religion.
My fellow countrymen strive for freedom and they deserve it. The
liberal economic reforms of the 1990s were not always well-considered
and they turned out to be excessively painful for millions of Russians.
But the reforms have not turned my people away from the desire to live
in a free and just society where social harmony prevails. Today, in my
restricted circumstances, and in the future, I firmly intend to fight
for freedom and justice in Russia together with my nation, a nation of
which I am an inalienable part.
______
Response From Steven Theede to Questions Submitted by Senator Chuck
Hagel
Question 1. Could you describe the Yukos Oil presence in the United
States? Does Yukos Oil have offices in the United States? Number of
U.S. Shareholders? Status of share trading in the United States?
[Note.--An answer to this question was not available at the time of
printing.]
Question 2. Could you provide an overview of the charges before Mr.
Khodorkovsky? Are these individual charges or charges against the
company of Yukos? With the actions taken against Mr. Khodorkovsky and
Yukos, are there laws that have been alleged to have been broken by the
Russian government or Russian court system relative to this case?
Answer. Counsel for Mikhail Khodorkovsky and Platon Lebedev have
prepared the following brief statement and explanation regarding the
substantive criminal charges filed against these two businessmen and
the primary defenses to the charges and the procedural due process
violations of Russian law that have occurred throughout the trial. On
behalf of our clients, counsel thanks the Senate Foreign Relations
Committee for the opportunity to submit this summary into the hearing
record. It is impossible to address every pertinent detail that
demonstrates why the charges are devoid of merit and rather represent a
manipulation of the Russian criminal justice system to further the
ulterior motives, both political and economic, of those in the Russian
government. In addition, we outline the procedural violations that have
occurred during the trial in order to further demonstrate why any
conviction Messrs. Khodorkovsky and Lebedev should be given no
currency.
As a threshold matter, the Committee should understand that all of
the legal defects and due process violations described below are based
upon the application of Russian law, either as established in the
Russian Constitution and the substantive and procedural Criminal Codes
or under International laws expressly adopted by and incorporated into
Russian law. The defense does not seek to exonerate Messrs.
Khodorkovsky and Lebedev by changing the applicable law, but rather by
attempting to secure the application of existing Russian law pursuant
to the Rule of Law.
The assessment that these cases are political in origin has now
been made by every independent court or government body to review this
matter. In January 2005, the Council of Europe endorsed the findings of
its Human Rights Rapporteur, Sabine Leutheusser-Schnarrenberger, who
summarized her assessment that these prosecutions were based on
politics, not criminal justice, with the following sentence:
I have come to my own conclusion, namely that the presence of
an interest of the State that exceeds its normal interest in
criminal justice being done and includes such elements as: to
weaken an outspoken political opponent, to intimidate other
wealthy individuals, and to regain control over ``strategic''
economic assets--can hardly be denied.\1\
---------------------------------------------------------------------------
\1\ Europe Parliamentary Assembly, Committee on Legal Affairs and
Human Rights, Circumstances Surrounding the Arrest and Prosecution of
Leading Yukos Executives, Doc. No. 10368, Explanatory Memorandum at
para. 57 (November 29, 2004 (text adopted by Parliamentary assembly on
January 25, 2005) (Appended hereto as Exhibit 1).
On Friday, March 15, 2005, the Bow Street Magistrates' Court in
London ruled that two former executives of Yukos should not be
extradited to Russia on the basis that the prosecution of Mr.
Khodorkovsky was politically motivated and that no one associated with
him or Yukos could receive a fair trial in Moscow. Between the
Government of the Russian Federation v. Dmitry Maruyev and Natalia
Chernysheva. In 2004, Courts in Liechtenstein and Switzerland have
rejected Russia's requests for international legal assistance in their
purported criminal investigations and prosecutions of Messrs.
Khodorkovsky and Lebedev. Liechtenstein Superior Court for Civil Cases
No. 12 RS. 2003.255; Pecunia Universal Ltd. v. The Office of the
Attorney General of Switzerland, Federal Supreme Court of Switzerland,
1A.86/2004, Decree of June 8, 2004.
i. analysis of the criminal charges alleged against messrs.
khodorkovsky and lebedev
The Procuracy's case against Messrs. Khodorkovsky and Lebedev is
rooted in what is, at best, a baseless mischaracterization and, at
worst, a calculated lie: That these men are not business leaders, but
kingpins of organized crime characterized in the allegations as the
``Group.'' In other words, the Procuracy alleges that Group Menatep
Limited (``GML'') and other corporate structures are not legitimate
business entities, but components of a criminal enterprise.\2\
---------------------------------------------------------------------------
\2\ For ease of reference, the term Group Menatep will be used
herein to include various corporate entities that existed at different
times relevant to the Procuracy's allegations in which Defendants were
associated, i.e., shareholders, officers and directors at, including,
but not limited to, Bank ``Menatep,'' ZAO ``Rosprom,'' OAO NK
``Yukos,'' and GML).
---------------------------------------------------------------------------
The Procuracy's motive for alleging the putative crimes were
committed by an organized group in order to secure a procedural and
political advantage:
Imputing to and Holding Defendants Criminally Liable for the
Alleged Acts of Others in the So Called ``Organized Group'';
Extending the Statute of Limitations Periods for the Charged
Offenses;
Materially Increasing Penalties and Tightening Security
Measures Such as Imposition of the Pre-Trial Detention; and
Providing a Pretext for the Violation of the Defendants'
Fundamental Human Rights.
Furthermore, the allegation allows the Procuracy to stigmatize
these men and the companies they built, thereby destroying their
reputation and establishing a thin veneer of legitimacy to a
politically and economically-motivated prosecution.
The Procuracy alleges that Messrs. Khodorkovsky and Lebedev, their
coshareholders and partners in Group Menatep, along with unidentified
others, conspired and acted as an organized group to commit these
crimes, and created Group Menatep as a vehicle to coordinate a network
of ``false corporations'' to carry out and conceal the unlawful
objectives of the organized group. The Procuracy fails to demonstrate
scienter--criminal intent--in support of its contention that Group
Menatep and its various holdings were structured for the purpose of
conducting criminal activities. The Procuracy does not do so because it
cannot; Messrs. Khodorkovsky and Lebedev and Group Menatep were
associated for the lawful purpose of engaging in legitimate business
activities.
The Procuracy's effort to cast Group Menatep as a criminal
organization is not credible in view of the extraordinary efforts of
Messrs. Khodorkovsky and Lebedev to introduce transparency and accepted
Western business practices to the Russia's often murky business world.
In particular, GML has subjected itself, and the enterprises in which
it has interests, to heightened standards of transparency and corporate
governance, and has undergone rigorous audits by respected accounting
firms such as Ernst & Young (GML) and PricewaterhouseCoopers (PWC)
(Yukos). In addition, although not a public company, in 2002 and 2003
GML publicly disclosed its audited financial statements, including on
its website--www.groupmenatep.com. These actions refute their
designation as a group of criminal racketeers. Criminals do not publish
their structure or finances on the internet.
Analysis of the law concerning organized criminal groups
demonstrates its inapplicability here. The commentary to the Russian
Criminal Code defines an organized group as ``comprise[d] of two or
more individuals who have joined efforts in order to commit one or
several crimes. This variety of complicity is characterized by
professionalism and stability.'' Complicity refers to the agreement by
the members of the organized group to engage in one or more criminal
acts prior to their actually taking steps to implement any criminal
objective. The stability component requires the existence of
``permanent ties between the member of the organized group and [choice]
of particular methods of activity involved in the preparation and
perpetration of their crimes. Stability of an organized group,
therefore, requires prior agreement and a degree of organization.''
This definition of ``organized group'' simply does not comport with
the true facts here. First and foremost, the Procuracy makes no
credible allegation, let alone offers any evidence, of scienter--
criminal intent--or criminal agreement to support an assertion of
complicity. That several persons or corporations, conduct business
together does not, without more, make them criminal co-conspirators.
For example, GML is a legal entity organized for the lawful purposes of
overseeing the business interests of its various holdings. The
Procuracy's mere assertion that entities with connections to Group
Menatep ranging from merely holding accounts at Bank Menatep to having
been founded by Bank Menatep employees does not provide any basis for
allegations of criminal complicity, i.e., there is no basis for the
leap from the existence of a banker-client relationship to the
allegation of criminal collusion.
Here, however, the Procuracy alleges that virtually anyone
associated with Group Menatep as far back as 1990, whether or not named
as a defendant, are members of the organized group. More is required to
criminalize these legally formed corporate entities and those persons
associated with them. The Procuracy cannot simply provide a list of
persons and entities and, without more, transform their legitimate
association for the lawful purpose of conducting business into a
criminal organized group. The Liechtenstein Court cited this particular
flaw in the Russian criminal allegations as part of its basis for
denying Russia's request for mutual assistance. Both the Liechtenstein
Superior Court and the Swiss Supreme Court found that the Russians had
failed to identify a discernable link between the lawfully organized
entities and the alleged illegal conduct. Stripped of this omnibus
allegation, the substantive deficiencies of the charges in the
individual episodes become even more apparent.
Episode I--Khodorkovsky and Lebedev committed no crimes in connection
with the privatization of Apatit \3\
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\3\ In addition to the allegation of fraud in regard to
privatization of Apatit, the Procuracy filed fraud charges in
connection with the privatization of the Research Institute for
Fertilizers and Insecto-Fungicides (``RIFIF'') in 1995. The issues with
respect to RIFIF largely mirror those of Apatit's privatization,
discussed in Episode I, infra, and in the interest of brevity are not
addressed here.
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The Procuracy has alleged three forms of fraudulent conduct in
connection with the 1994 acquisition of 20 percent of the stock in a
Russian company named Apatit: (1) defendants conspired to create shell
companies secretly controlled by Bank Menatep to bid on the shares,
including the winner, Volna; (2) at the time it bid, defendants had no
intention of complying with the terms of the bid, specifically an
Investment Plan for the infusion of capital into the company; and (3)
defendants submitted false documents to the Murmansk Region Property
Fund as part of the bidding process. There is no legal or factual basis
for the Procuracy's leveling these criminal fraud charges. Under the
Russian Criminal Code (and United States criminal law), a fraud
conviction requires establishing a specific intent to defraud--
scienter, malicious intent, or mens rea--at the time of the initial
act. Here there is no, and can be no, evidence of any requisite
malicious intent on the part of Messrs. Khodorkovsky and Lebedev. The
evidence is to the contrary, all material information related to Bank
Menatep's role in supporting bidders in the privatization tender was
fully disclosed to the Russian government during the bidding process.
Furthermore, Volna, through Bank Menatep, invested significant capital
into Apatit, thus, substantially performed its obligations under the
Stock Purchase Agreement and eliminating any possible finding of
contemporaneous intent not to comply with the Investment Plan. Finally,
the alleged conduct did not result in any harm to Apatit and so cannot
support any fraud charges. As the prosecution's own witnesses testified
during the trial, at the time of the tender Apatit was on the verge of
bankruptcy, but as a direct result of Volna and Bank Menatep's infusion
of capital and introduction of enhanced management, e.g., proposed
revisions to the Investment Plan, and the implementation of revised
payment practices and marketing and sales structures, Apatit became,
and remains, a prosperous company.
Episode II--Misappropriation of corporate opportunities
The Russian Authorities allege that between 1995-2002, Messrs.
Khodorkovsky and Lebedev breached their fiduciary duty to Apatit by
selling concentrate (``Apatit product'') at reduced prices through
transactions wherein ``shell'' entities under their control, purchased
Apatit product at reduced prices (e.g., $40 per ton), resold it at
higher market prices (e.g., $63.50 per ton), and retained the price
differential. To reach this fanciful position, the Procuracy disregards
fundamental economic propositions, business realities, and the facts.
What the Procuracy casts as criminal conduct is the commonly used
business practice of downstream sales. The realities of the early years
of privatization provide needed context here. After privatization,
Apatit lost the benefit of the government's trading and distribution
infrastructure as well as the government's financing and credit-backed
sales. The newly privatized Apatit, as with the rest of Russian
industry, lacked cash for the supplies and salaries necessary to
continue production. As a result, it was forced to barter its product
at a discounted price in exchange for needed inventory. One of the
first changes implemented by the new shareholders was, through the
infusion of capital, the termination of swap sales and the creation of
a trading structure whereby Apatit sold its product to a distribution
company at a profit. The downstream structure--approved by its Board of
Directors, including a representative of the Russian Government allowed
Apatit to stabilize cash flow, develop meaningful budgets, guarantee
sales, effectively plan production volumes, minimize and optimize its
tax liabilities, and avoid the risks and additional costs with respect
to the downstream sales. In the short term, it allowed the company to
avoid involuntary bankruptcy proceedings and, thus, was essential to
Apatit's survival and expansion and in the best interests of its
shareholders.
Episode III--Yukos tax minimization structures complied with corporate
tax laws
The Procuracy has alleged that defendants caused Yukos to
systematically evade taxes through the use of ``affiliated entities''
registered in the restricted access jurisdiction of Lesnoy,
Nizhneturinsky District, Sverdlovsk Region (``Lesnoy''). Such
restricted access jurisdictions, carried over from the Soviet-era, were
remade into legislatively created internal tax havens known as ZATOs.
These special administrative territories were governed by federal law,
pursuant to which all taxes collected within a ZATO's territory were
retained for its own budget. ZATO's were authorized to provide tax
benefits, principally reductions of effective rates, within its region
at its own budgetary expense. The entities receiving these tax
benefits, in turn, were required to transfer to a percentage of their
tax savings to extra-budgetary funds of the ZATO. The ZATO's
(``ZATOs'') came to be viewed as a ``loophole'' in the tax system, and
``loopholes'' by definition are legal and utilizing one is definitely
not criminal.
It is beyond dispute that during the period covered toy the
criminal charges, these were lawful vehicles for tax minimization, and
the conduct the Procuracy challenges cannot constitute a criminal, or
even civil, tax violation. These operating companies were legal
entities, which complied with the applicable requirements, and their
presence in ZATOs was a lawful, and for the ZATO's, a beneficial tax
practice.
The Procuracy alleges the illegal plan allegedly occurred in two
phases; first the ``affiliated entities'' prepaid their tax obligations
with promissory notes as opposed to cash, and, after overpaying and
improperly negotiating tax reductions with the ZATOs, secured tax
refunds without having paid on the original notes. In connection with
phase one, the Procuracy alleges that, for the tax years 1999 and 2000,
Khodorkovsky and Lebedev caused Yukos to register four ``affiliated
entities'' in a ZATO to secure illegal tax reductions. The Procuracy
claims that this scheme resulted in an underpayment of taxes of
$601,814,702.19 by these entities which then also illegally received
cash refunds causing the Federal budget losses totaling RUR
407,120,540.28 ($14,084,782.92).
The Procuracy's case fails for the following reasons:
The ZATO registered entities qualified for tax benefits
negotiated with the finance administration in Lesnoy. Each of
the entities served as a trading company that provided
downstream services to Yukos by marketing and reselling crude
oil to third party purchasers or arranging for the crude oil to
be processed into refined petroleum products. The ZATO-
registered entities' tax payments and subsequent claims for tax
deductions were disclosed and audited. The Federal Tax
Authorities conducted regular audits for compliance with the
requirements of the ZATO law and, other than the calculation of
certain specific payments, never challenged the structure.
The use of promissory notes was a legal and accepted
business practice. Prior to January 1, 1999, it was permissible
to make tax payments in non-monetary form. In fact, payment
with promissory notes was a widely used business practice in
the years prior to 1999 until the Russian Duma changed the law.
Despite this change, the tax authorities continued to accept
tax payments in non-monetary form until the end of 1999. During
the trial the defense presented, or attempted to present the
testimony and reports of several Russian experts regarding the
legality of the payment of taxes with promissory notes during
this period, as well as a letter from the Russian Tax Ministry
grandfathering the right to use promissory notes for the year
2000.
The ZATOs received payments on the promissory notes with
interest. During the trial at least one representative of a
ZATO testified how the local administration received payment
and utilized the funds from the promissory notes. The defense
also submitted a letter from the Lesnoy Finance Ministry
identifying numerous tax payers who utilized promissory notes
and the receipt of the applicable payments.
There is no proof of specific intent, i.e., that the
defendants violated the tax laws ``willfully.'' Messrs.
Khodorkovsky and Lebedev are not accountants or tax lawyers and
the government offers no evidence that they developed the tax
strategy at issue. To the contrary, the tax strategy Yukos
utilized was implemented in good faith and in reliance upon the
advice of counsel and accounting experts, generated after the
full disclosure of all pertinent facts. This reasonable, good
faith reliance defeats the requisite element of intent to
violate the law.
Episode IV--Alleged personal criminal tax evasion
The Procuracy also has leveled charges of personal tax evasion
against Khodorkovsky and Lebedev, alleging that they unlawfully evaded
taxes by submitting false tax declarations claiming certain income as
private entrepreneurial revenues rather than as salary. Once again, the
Procuracy distorts the facts in order to transform what was no more
than the use of a lawful, permissible and widely employed tax
minimization regime into criminal tax evasion. At the time, Russian law
provided that a private entrepreneur could elect to make a fixed
advance tax payment in exchange for a license, which constituted full
satisfaction of taxes on earnings derived from the licensed,
entrepreneurial services. Such licenses encouraged entrepreneurship by
providing incentives in the form of a simplified and fixed advance tax
payment for individuals engaged in providing services as independent
contractors.
Following then existing law, Messrs. Khodorkovsky and Lebedev
applied to and were approved by their local taxing authority for
licensing as private entrepreneurs. Both men paid their annual fee for
such license status, and in all other respects acted in compliance with
the law, and were in good standing as private entrepreneurs.
Episode V--Yukos funds were legally invested in Media Most Corporation
The Procuracy alleges that Mr. Khodorkovsky engaged in a scheme to
funnel money from Yukos Oil Company to Vladimir Gusinsky and in doing
so caused the ``organized group, illegally and gratuitously [to]
remove[] and put into the hands of V.A. Gusinsky'' monies belonging to
Yukos and its shareholders, therefore committing a crime of
misappropriation under Article 160(3)(a) and (b). The Procuracy's
allegations against Mr. Khodorkovsky focus on two series of
transactions which occurred between 1999 and 2000 involving the
purchase of certain commercial paper issued by Media Most. These
transactions were neither illegal nor gratuitous and were fully
disclosed and approved by Yukos' Board of Directors.
By that time, Media Most was the dominant private media outlet in
Russia, and an increasingly vocal critic of the government
administration. The Procuracy retaliated with a series of raids of
Media Most's headquarters followed by Mr. Gusinsky's arrest on charges
of fraud and embezzlement and the company's forced bankruptcy. The
European Court of Human Rights (``ECHR'') last year held the Russian
government, inter alia, had used the criminal justice system not to
enforce the law but to further its economic priorities. Case of
Gusinskiy v. Russia, App. No. 70276/01 (Eur. Ct. H.R. May 19, 2004). It
concluded that the Russian government's attack on Media Most and Mr.
Gusinsky constituted extortion, with the criminal justice system
implementing the scheme.
The first set of transactions involve three loans by Yukos to Media
Most whereby Yukos agreed to loan RUR 635,450,000 and received as a
collateral four promissory notes from Media Most with a nominal value
of $25 million. By April 28, 2000, Yukos had redeemed the notes and
received in excess of their full nominal value. Yukos then reinvested
the full amount in four promissory notes, issued by MetaMedia, a Media
Most related entity, with a nominal value of $25 million. Despite the
2000 events which led Media Most into a forced bankruptcy proceedings,
Yukos managed to recover the full value of its investments by April 19,
2002.
Similarly, the second set of transactions involve a purchase of
Most-Bank promissory notes by two entities, ``Grace'' and ``Mitra,''
for RUR 1,014,434,620 and also were commercially reasonable at the
time. Subsequently, as a result of the Government's persecution of Mr.
Gusinsky and his businesses, the notes were written off. Yukos reported
the write off on its consolidated financial statements for 2000 and
2001 as prepared by PricewaterhouseCoopers pursuant to generally
accepted accounting practices (``GAAP''). To the extent that Yukos
shareholders suffered any loss, it was the result of the Procuracy's
attack on Media Most and Mr. Gusinsky and not because of any illegal
conduct by Mr. Khodorkovsky.
ii. violations of due process in the prosecution of messrs.
khodorkovsky and lebedev
Much has been written about the due process abuses committed by the
Russian Procuracy during the investigation and prior to the trial,
e.g., the illegal search of defense counsel and the improper pretrial
detention of Messrs. Khodorkovsky and Lebedev and the litany of
violations will not be repeated here. Predictably, the due process
abuses did not end with the commencement of the trial. The trial is
replete with instances where the court violated the criminal procedure
code. Moreover, the Procuracy and the defense have not been treated
equally by the court. For example, the defense has been provided with
less time to present their case and the overwhelming majority of
defendants' motions and requests to court are denied. The court
repeatedly has made thinly-reasoned decisions that simply parroted the
Procuracy's self-serving and unsubstantiated assertions and completely
ignored the Procuracy's violations of Russian law and the defense's
arguments. \4\
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\4\ Id.
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Specifically, the Court, both upon the request of the Procuracy and
sua sponte, has interfered with defense counsel and the manner in which
evidence is present against the accused, have all been declared by PACE
as corroborated and serious shortcomings of the Russian proceedings.\5\
The list of other violations include:
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\5\ Europe Parliamentary Assembly, Circumstances Surrounding the
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at
para. * (January 25, 2005).
Impermissible introduction of evidence by the Procuracy:
Evidence obtained through illegal searches and seizure,
and
Unauthenticated documents;
Defendants denied the opportunity to introduce exculpatory
evidence, including key expert reports;
Restriction on scope of direct questions of defense
witnesses and of defense cross examination of prosecution
witnesses;
Defendants denied requests to subpoena prosecution key
expert witnesses;
Harassment and improper influencing of witnesses:
Continued investigation and interrogation of trial
witnesses;
Threats of searches, arrests and prosecution;
Improper questioning during trial concerning witnesses'
personal life and work unrelated to the case;
The Court's making motions on behalf of the Procuracy;
The Court questioning witnesses on behalf of the Procuracy;
Denial of effective assistance of counsel in the form of:
Interference with access;
Interference with confidential communications;
Harassment of defense counsel;
Failure to disclose exculpatory evidence.
conclusion
The above is a mere thumbnail sketch of the total perversion of the
Russian criminal justice system in the Khodorkovsky/Yukos Affair. It
requires far greater detail to demonstrate all of the complexities and
nuances of the abuses that have occurred during the past 18 months.
Counsel is available to provide additional information for use in
further investigation of the matter.
Question 3. International energy policy is important to the Senate
Foreign Relations Committee and in particular to the Subcommittee on
International Economic Policy, which I chair. Please elaborate on the
role that Yukos played in the overall energy market. What was the
international market for Yukos? Did Yukos, for example, play a
significant role in oil supplies to some of the large energy buyers
such as the Europe Union or China. Was Yukos a supplier of U.S.
resources?
[Note.--An answer to this question was not available at the time of
printing.]