The Yukos Affair

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Alexey Pichugin

The Yukos Affair

Alexey Pichugin has from the start been a pawn in Russian Federation President Vladimir Putin’s campaign to expropriate the assets of Yukos Oil Company and to punish that company’s leadership.

The anti-Yukos campaign, often referred to as the “Yukos Affair,” began in early 2003. According to testimony by Dr. Andrei Illiaronov, Chief Economic Advisor to President Putin from 2000 to 2005, sometime after February 2003, “a special unit was set up to fabricate evidence against Yukos.” The unit was comprised of 50 people within the Russian General Prosecutors’ Office and was dedicated to fabricating evidence against Yukos, its employees and leaders. Dr. Illiaronov testified that the mandate of this unit was to “launch the government attack [against Yukos] under the guise of ‘legitimate’ court proceedings.”

[Hulley Enterprises Ltd. v. The Russian Federation (18 July 2014), ¶¶ 141, 146.]

Pichugin’s Arrest: The Opening Salvo in the Yukos Affair

The arrest of Mr. Pichugin on June 19, 2003 marked the Kremlin’s opening salvo in the Yukos Affair. Mr. Pichugin was at the time at the time a manager in Yukos’s security department. He was charged with organizing the “murder” or “attempted murder” of multiple individuals, though there was no actual evidence linking him to any of the underlying incidents. Instead, the case was based on layered hearsay in which alleged perpetrators testified that they had heard from someone else that Mr. Pichugin was somehow behind the crimes.

Mr. Pichugin’s arrest was followed by the July 2, 2003 arrest of Yukos executive Platon Lebedev from his hospital bed. Mr. Lebedev was charged with financial crimes. On July 11, 2003, Russian authorities began the first of what would be a series of commando-style armed raids on Yukos facilities and at the homes of its employees. Those raids continued through the summer of 2003. On October 25, 2003, Yukos Chairman Mikhail Khodorkovsky was arrested by Russian Special Forces at gunpoint after his plane was forced to land at the Novosibirsk Airport in Siberia. Mr. Khodorkovsky was charged with financial crimes, and eventually with murder, based on the case against Mr. Pichugin. In January 2004, the next target was Yukos Deputy Chairman Leonid Nevzlin, charged with financial crimes. In July 2004 and again in July 2005, Mr. Nevzlin was also charged with “murder” and “attempted murder” based entirely on the case against Mr. Pichugin. The latter of these charges was returned while Mr. Nevzlin was in the United States at the invitation of Congress to testify about Russian abuses during the Yukos Affair.

Yukos: Its Origin and Evolution

Yukos itself was a creation by the Russian government, which in April 1993 had integrated several state-owned oil production, refining and distribution companies. As part of a wave of privatizations in the mid-1990s, a group led by Messrs. Khodorkovsky, Leonid Nevzlin, Lebedev and others, acquired a majority stake in what became the Yukos Oil Company.

In an effort to boost the company’s market value, Mr. Khodorkovsky and his group implemented several corporate governance reforms, focusing primarily on Western-style disclosure, independence of the board, and corporate governance. In 1999, the company switched to international accounting standards, adopted quarterly financial statement reporting practices by 2001, and had its 2002 annual report audited by PriceWaterhouseCoopers. Yukos became, in the words of one observer, the “flagship of civilized capitalism.”

Yukos’ Accomplishments and Accolades

By 2002, Yukos had become Russia’s largest private oil company, accounting for 18 percent of the country’s total output. International ratings agencies assigned the company good ratings and the company and its leadership won several prestigious awards, while Russia’s leading business daily Vedomosti, a joint publication by the Wall Street Journal and the Financial Times, named Mr. Khodorkovsky “Entrepreneur of the Year.”  As late as April 2003, even President Putin heaped praise on the company. A congratulatory statement to mark the 10th anniversary of the company’s founding released by President Putin’s press office included the following quote: “Competently employing modern scientific and technical achievements, Yukos is confidently moving on a trajectory of stable growth” and cited “high professionalism and responsibility of its employees.”

Yukos in the Crosshairs: Putin Perceives a Threat

Given such evidence of high regard, how did Yukos come into the crosshairs of President Vladimir Putin and the Russian government bureaucracy?

Some say it was the company’s transformation into a Western-style company that sealed its fate.
Hudson Institute fellow David Satter said: “The Russian bureaucracy depends on businessmen’s violations of the law, in particular tax avoidance, in order to facilitate a steady flow of bribes and to assure that they live in fear and so are amenable to political control. Khodorkovsky had broken with that system and his example had to be suppressed for the system to survive.”

Meanwhile Yukos leadership had also increasingly gotten involved in politics. Mr. Nevzlin served in the Federation Council, the upper house of the Russian parliament. He also became active financing two opposition parties in Russia, “The Union of Right Forces (SPS)” and “Yablonko.” Mr. Khodorkovsky, an outspoken critic of the Kremlin, had also become a major donor to Yablonko. He had also used his leadership position and growing clout to lobby against several pieces of legislation President Putin sought as tools to curtail power and profits of Russia’s major oil companies. This prompted Mr. Putin to complain to a group of lawmakers and activists in June of 2003: “Even softer issues cannot pass today, because those who are not interested in the passage of those initiatives block them. (…) And they do so efficiently.”

Messrs. Khodorkovsky and Nevzlin’s political activities defied President Putin, who when he took power in 2000 had publicly gathered Russia’s business leaders and warned them to say away from politics. Former Russian Prime Minister Mikhail Kasyanov has since testified that a conversation he had with President Putin “left him in no doubt” that “the criminal prosecution case of Yukos employees was started exactly because of the funding of political parties not sanctioned by Putin.” [Hulley, ¶¶ 769, 777.] Both Dr. Illiaronov, noted above, and Mr. Kasyanov testified in the Hulley case, which is the latest of a series of international arbitrations, each of which ended with a factual finding that the Yukos Affair was intended to and did result in the unlawful expropriation of Yukos from its shareholders.

In addition to the political challenge perceived by Russia’s president, Yukos management’s relationship with Western companies was viewed by President Putin as a threat to Russian power. Mr. Khodorkovsky even engaged in merger discussions with Western oil majors, a continuation of his effort to make Yukos operate like its Western competitors. Dr. Illiarnov testified that these negotiations were deemed a “national betrayal” by Mr. Putin. [Hulley, ¶ 142.]

Show Trials and the Expropriation of Yukos

Following the arrest of Mr. Pichugin – whom government officials had hoped to pressure into incriminating testimony against Yukos leadership notwithstanding Mr. Pichugin’s lack of substantive contact with those leaders – 2004 saw the beginning of a series of show trials based on questionable charges and with predetermined outcomes. At the same time, Yukos was broken up and pushed into bankruptcy, its assets expropriated to Russian state-owned companies under the control of Putin cronies.

Vendetta: The International Community Condemns Putin’s Assault on Yukos

The international community reached an extraordinary consensus regarding the political motivation of the Yukos Affair.

In November 2003, only weeks after the arrest of Mr. Khodorkovsky, the United States Congress adopted concurrent resolutions finding that the arrest of “prominent Russian business leaders who had supported the political opposition to President Putin are examples of selective application of the rule of law for political purposes,” and holding that the campaign did “not reflect the minimum standards of democratic governance and rule of law…” [S. Res. 85, Nov. 21, 2003, and H. Con. Res. 336, Nov. 21, 2003].

The Parliamentary Assembly for the Council of Europe (“PACE”), as well as individual national governments and courts, also expressed concern regarding the politically-motivated nature of Russian Federation’s activities against Yukos (and Mr. Pichugin). In 2004, PACE sent a Rapporteur to investigate the Yukos Affair. Based on the results of that investigation, and the Kremlin’s lack of response to PACE’s findings, that body has issued multiple resolutions between 2005 and 2015, each of which has called out the breakdown of the rule of law in the Russian Federation, including in Mr. Pichugin’s case.

The European Court of Human Rights has also issued multiple judgments – twice in Mr. Pichugin’s case –  concluding that the rights guaranteed by the European Convention of Human Rights were violated in the criminal trials of former Yukos managers and executives, including in the cases against Mr. Khodorkovsky, Mr. Lebedev and of Yukos itself.

[European Court of Human Rights, Case of Pichugin v. Russia, Application No. 38623/03, Judgment October 23, 2012, Final March 18, 2013, and European Court of Human Rights, Case of Pichugin v. Russia, Application No. 38958/07, Judgment, June 6, 2017]

The Russian Federation’s attempts to export its vendetta against Yukos via Mutual Legal Assistance Treaty (MLAT) and extradition requests have been universally met with rejection.

The Israeli Supreme Court examined the “evidence” submitted by the Russian Federation to support its extradition request for Mr. Nevzlin based on the Pichugin “murder” and “attempted murder” allegations. It concluded that: “[I]n the evidence that was produced there was not a single piece of direct evidence linking Nevzlin to involvement in those acts.”

Switzerland’s federal court likewise instructed the Swiss government not to comply with MLAT extradition requests for Messrs. Nevzlin, Khodorkovsky and Lebedev because occurrences in these cases “corroborate the suspicion that this criminal proceeding was orchestrated by the powers that be in order to subordinate the class of rich ‘oligarchs’ and do away with potential or sworn political opponents.”

British courts  also rejected extradition requests for Yukos leaders, citing President Putin’s announcements to “liquidate the Oligarch as a class,” as did courts in Cyprus, Lithuania and Liechtenstein when faced with requests to extradite various Yukos managers and employees.

[British Court Decisions: United Kingdom: Govt. of the Russian Federation v. Maruev and Chernysheva, Bow Street Magistrate’s Court, March 18, 2005 and United Kingdom: Govt. of the Russian Federation v. Temerko, Bow Street Magistrate’s Court, January 13, 2006]

International human rights organizations, such as Amnesty International, recognized Mr. Khodorkovsky as a “prisoner of conscience.” Other NGOs — including Freedom House, Human Rights Watch, the International League of Human Rights, the Lantos Foundation for Human Rights and Justice, and the Jacob Blaustein Institute for Human Rights and Justice — have also cited the Yukos Affair as an example of the political abuse of the Russian criminal justice system.

Putin Undeterred: The Conviction of Yukos Officials

The lack of evidence and international criticism did not prevent the Russian Federation from convicting and sentencing Messrs. Khodorkovsky, Lebedev, Nevzlin, and Pichugin to lengthy prison terms. In December 2003, after several years in prison, Mr. Khodorkovsky was granted a presidential pardon as part of President Putin’s attempt to boost his international image leading up to the Olympic Winter Games in Sochi. Mr. Lebedev was released from prison only weeks later.

Alexei Pichugin, however, remains in Russian prison.

“A Ruthless Campaign to Destroy Yukos…”

Multiple international arbitration panels have ruled that the Yukos Affair constituted an unlawful expropriation by the Kremlin of Yukos itself. This includes the landmark ruling in the Hulley case, a decision that involved twenty-one days of hearings, 4,000 pages of written argument and 8,000 pieces of documentation. It resulted in a record $50 billion in damages being awarded to Yukos shareholders. Not only did the Hulley panel determine that the Kremlin’s actions in the Yukos Affair were unlawful and directed at Yukos’s destruction, the tribunal also found that: “The treatment of Yukos senior executives, mid-level employees, in-house counsel, external lawyers and related entities … support Claimants’ central submission that the Russian authorities were conducting a ‘ruthless campaign to destroy Yukos, appropriate its assets and eliminate Mr. Khodorkovsky as a political opponent.’” [Hulley, ¶ 812.] It observed that “the record is replete with evidence of intimidation and harassment of Yukos personnel by the Russian authorities.” [Id.]

While Kremlin lawyers have appealed the Hulley decision, winning preliminary rounds of legal argument based on procedural issues, that litigation is ongoing and has not resulted in any determination that undermines or changes the powerful factual findings made by the tribunal, which are echoed in the similar findings of the Quasar de Valores SICAV S.A. et. al. v. The Russian Federation and RosInvestCo UK Ltd. v. Russian Federation cases.

And yet in spite of multiple court rulings, international condemnation and the release of Yukos executives initially charged with the same spurious crimes, Alexey Pichugin remains in prison.

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