Russian Oil Tycoon Convicted of Fraud and Tax Evasion

MARGARET WARNER:

The trial was Russia's ongoing soap opera for nearly a year. The defendants: Forty-one-year-old Mikhail Khodorkovsky, former head of Yukos Oil and once Russia's richest man; and his business partner.

The charges:

Tax evasion, fraud, embezzlement, and more. Judges in this Moscow courthouse spent 12 days reading the voluminous guilty verdict out loud, amidst demonstrations outside from both sides. Today, his critics carried placards that read, "Khodorkovsky, go to jail." The former tycoon's supporters chanted, "Not guilty. Not guilty."

Khodorkovsky was one of Russia's so-called oligarchs, private businessmen who picked up newly privatized state assets at bargain prices after the 1991 breakup of the Soviet Union. Khodorkovsky spent $300 million to buy hundreds of oil wells.

Within a few years, his major company, Yukos Oil, was pumping one-fifth of Russia's crude, and carried a market value of $40 billion. Khodorkovsky amassed a personal fortune of some $15 billion.

He began to dabble in politics too. He financed opposition candidates, and began criticizing President Putin's government. There was speculation that he might even run for office someday. In October 2003, Russian Special Forces launched a raid on the tarmac of a Siberian Airport, and seized the oil tycoon at gunpoint.

After raiding the Yukos offices, Russian authorities leveled seven charges against him and business partner Platon Lebedev, including illegally acquiring state assets through rigged auctions, and using tax shelters to hide company profits and evade billions in taxes. From behind bars, Khodorkovsky denied it all.

But last December, with the billionaire still in jail, the Russian government sold off Yukos's prime asset to a state-controlled entity to pay back taxes. The trial has drawn international attention.

On a recent visit to Moscow, Secretary of State Condoleezza Rice said the trial's outcome would affect how the world viewed Russia's political and investment future. Two weeks ago, State Department spokesman Richard Boucher issued these blunt words.

RICHARD BOUCHER:

The conduct of the Khodorkovsky-Yukos affair has eroded Russia's reputation and eroded confidence in Russian legal and judicial institutions.

MARGARET WARNER:

But President Putin has consistently maintained that it's a simple tax evasion case against a corrupt business and its owner, and nothing else. In an interview last year, Putin said, "It is wrong to cast the criminal side of this case as political."

Khodorkovsky's attorneys charged the prosecution was political, a vendetta orchestrated by the Kremlin against a man who was becoming too powerful for its liking. Sanford Saunders is part of the defense team.

SANFORD SAUNDERS:

It is both politically motivated and economically motivated. What Khodorkovsky was achieving was a type of independence and strength within Russia that the country has never experienced before.

He had used his financial success to build companies that were not beholden, or apparently he didn't think were beholden, to the government, and he wasn't beholden to the government.

MARGARET WARNER:

This morning, President Bush said the entire affair raises questions about Russia's commitment to the rule of law.

PRESIDENT GEORGE W. BUSH:

I expressed my concerns about the case to President Putin because, as I explained to him, here you're innocent until proven guilty, and it appeared to us, or at least people in my administration, that it looked like he had been adjudged guilty prior to having a fair trial.

In other words, he was put in prison and then was tried. I think what will be interesting — and so we've expressed our concerns about the system.

MARGARET WARNER:

While Khodorkovsky and his lawyers decide whether and how to appeal his nine-year sentence, prosecutors say they're preparing additional charges against him, including money laundering.

MARGARET WARNER:

And to explore the meaning of and the likely fallout from today's Khodorkovsky verdict, we go to Donald Jensen, director of communications at Radio Free Europe/Radio Liberty.

He's previously served as a former political officer at the U.S. Embassy in Moscow; he's also written extensively on Russian politics. And Charles Movit, a longtime economic analyst of Russia and Eastern Europe. He's currently research director for Emerging Europe at Global Insight, an analysis and forecasting firm based in Reston, Virginia.

And, welcome to you both. Don Jensen, this trial was seen as terribly political. What's the political significance of the trial in today's verdict?

DONALD JENSEN:

Indeed it's a political drama above all else. It has a lot of political consequences. First, it is vastly popular, the verdict, with Putin's constituency. The average Russian, poor Russian, sees Khodorkovsky as one of the villains of the 90s, which not only robbed the state but impoverished them.

And I think this decision — and all polls would confirm it — is going to be widely popular. Second, as your film clip said, this eliminates, I think, for the foreseeable future, a possible rival to Putin as well. And third, I think it's political —

MARGARET WARNER:

Let me just interrupt. So Putin took him seriously as a potential political rival?

DONALD JENSEN:

I believe among the many motivations of many of the leaders in the Kremlin, one of those was, and I think probably with Putin, President Putin, was that he was a possible leader.

I think you have to keep in mind that 20 years ago Yeltsin was also banished into the wilderness by Gorbachev. And the parallels and Yeltsin's eventual comeback are something I'm sure many people in the Kremlin thought a lot about.

MARGARET WARNER:

Now, how is this trial and this verdict, how is it being viewed this business circles, both inside Russia and beyond?

CHARLES MOVIT:

I don't think anyone in the business community either inside Russia or abroad was surprised by the verdict. There was some hope that the sentence would be lighter, as a signal that President Putin's recent overtures to the business community were very serious, and were not just one more wave of promises to businessmen as had been made in the past.

MARGARET WARNER:

But do they see it as a signal to them?

CHARLES MOVIT:

They would see it, if the verdict had been lighter, they might have seen it as a signal, I think they would have seen it as a signal that the government was very serious about improving relations with investors. But they see it instead as a confirmation of the manipulability of the court system, which is a primary problem for investors in Russia.

MARGARET WARNER:

Don Jensen, did the Russian prosecutors have a good case against Khodorkovsky?

DONALD JENSEN:

I haven't read every minutia of evidence —

MARGARET WARNER:

No, but —

DONALD JENSEN:

— but I'm sure they did. I think it's important to keep in mind that with these kind of oligarchs — big businessmen — the question is not almost what the charges were, because they could are been gotten on numerous things.

And you saw after a few months, waves and waves of back tax assessments on the tax police rating and other allegations raised. These businessmen like Khodorkovsky, they made their fortunes not because they were great businessmen but because they made it through connections with the state, and that involved cutting corners.

MARGARET WARNER:

So, what you're saying is they did have a good case against him, but he had a defense, what, selective defense?

DONALD JENSEN:

They had a good reason to charge him undoubtedly with a variety of misdeeds in the past. That's not to cast support to the judicial process, which was highly biased and not partial — and very partial to the state.

The problem is that, not what he was charged with, but why Khodorkovsky. And that could have involved numerous charges, as well as discussion of why other oligarchs, and there are many out there, were not charged and Khodorkovsky was.

MARGARET WARNER:

Would you agree that in the business climate that existed, business and political climate in the early '90s when all these assets were privatized, that Khodorkovsky's actions weren't unusual?

CHARLES MOVIT:

Absolutely not. No, it was a pattern that was repeated by most of the people that are identified as oligarchs now in order to amass assets formerly owned by the state for very low prices.

It was clearly the fact that he was chosen at the point he was chosen among so many others that indicated that the fact that law was not being applied equally across the board. However, in terms of seeking back taxes, what has concerned the business community in Russia is that there are a number of outstanding claims, very large outstanding claims against other Russian enterprises for back taxes, and the tax authorities have been extremely aggressive.

And if you look at the stock market, the Russian stock market over the course of the trial and the investigation, it was up and down, up and down, as investors tried to convince themselves that this was merely political and could not affect them.

And on the other hand, it also became evident that at many points that the tax authorities were going beyond what the Kremlin itself would have wanted to see, particularly for public relations and international relations at that point. So that became a concern.

MARGARET WARNER:

Do other oligarchs of Khodorkovsky's sort of ilk and era feel they have something to fear, and do they?

DONALD JENSEN:

I think that, many do, and in fact they do. I think the key is often the closeness to the Kremlin. And what's happened under the Putin years so far is not difficult to oligarchs, or oligarchy as a monopolistic capitalism has been routed, in fact, — it hasn't – and arguably the state is more monopolistic today than under the Yeltsin period.

It's just that certain oligarchs are targeted, others are not, and other friends of the government are enriched by their proximity and control over money and big business, and others are not.

If I could add a point to your previous question, however, which is to say that Mikhail Khodorkovsky, like many of these other entrepreneurs, let's call them, has reinvented himself continually over the past 20 years. The film clip mentioned oil, but before that he was in banking, and before that he was a young Communist leader who profited on his insider training to profit that way.

MARGARET WARNER:

And in his later years before being arrested he patterned himself or portrayed himself as a champion of the political opposition.

DONALD JENSEN:

Exactly. Exactly. And as a champion of building a civil society, and strengthening the humane face of Russian business. Now while that may be the case in the last few years, certainly his career earlier raises a lot of questions, and is I think to a significant extent unsavory.

MARGARET WARNER:

So Mr. Movit, I won't ask you about the businesses you advise. But in the international investment community, are they saying to themselves, if you want to do business in Russia you have to play ball with the Kremlin?

CHARLES MOVIT:

Well, I think that's always been an understanding. The problem is when you make an investment anywhere, you're looking for an acceptable rate of return; when the degree of uncertainty is greater, you look for a higher return as a risk premium.

To the extent that events like this make the environment more uncertain in terms of the application of law, the ability to turn to the courts for an equitable solution, the uncertainty is greater, so that when you weigh investments in Russia with investments elsewhere, it affects that choice —

MARGARET WARNER:

So, for instance, do you think it's already happened — I mean, this trial has been going on for a year, he's been under arrest for eighteen months — I notice capital flight is supposedly up over the past year, money leaving Russia. And investment in the oil sector is down. Do you think that's attributable in whole or in part to this whole trial?

CHARLES MOVIT:

I think in part, yes. And, as you say, that's already happened. People were looking for a signal that the climate is going to change. That signal can still come; this isn't the end of things. The proof is in the pudding, and this was on the negative side.

But there can be indications on the positive side. And on the 25th of April President Putin made his state of the federation address and made very overt overtures to businessmen that he was going to change the tax laws.

He talked about the self serving bureaucracy, about the tax authorities having terrorized business, and gave his cabinet a deadline of Nov. 1 to introduce legislation that would help to reduce the uncertainties that these generate.

MARGARET WARNER:

But you say that in fact that hasn't had any measurable effect, you said earlier they've been out filing other back tax claims against other companies.

CHARLES MOVIT:

That's gone before really, and that was part of what the president was — Putin was referring to.

MARGARET WARNER:

What's your assessment, Don Jensen, if you're sitting where Putin is sitting, and, you know, you heard Condoleezza Rice, we heard the president say essentially Russia is already paying a price, and after today will pay a price in the international community. But from where he sits, has he paid too high a price? Or is the calculation worth it to him?

DONALD JENSEN:

I think from where he sits, I'll give a two-part answer, one, I think he certainly feels the price is worth it. But second, I think it would be a mistake to think that this has been a centrally orchestrated political phenomenon that's gone over, almost two years with — according to some kind of operatic thought.

There are a lot of people involved in this process, a lot of people in the bureaucracy, including and as well as Khodorkovsky's own business rivals, have something to gain from Khodorkovsky being behind bars, either financial or politically.

And I think if the Kremlin was in tight control over events, this would have been wrapped up long ago, but the fact that it has not I think tells us something central about political and power in Russia, which is that power is money and money is power, and property rights are very weak. And there are a lot of people who stand to gain from Khodorkovsky being behind bars no matter what the charges.

MARGARET WARNER:

All right, Don Jensen, Charles Movit, thank you both.