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                                                                                                Commentary

DRAFT July 7, 2005

Russian Oil Tycoon, Mikhail Khodorkovsky: Guilty of Fraud and Victim of Politics?

Russian tycoon Mikhail Khodorkovsky, the former head of Yukos Oil ("Yukos"), was convicted of charges including fraud and tax evasion and sentenced him to nine years in prison.


The former head of Yukos and once Russia's richest man, has already spent 583 days in jail, meaning he would serve about another 7 1/2 years in prison.

Also sentenced to nine years on the same charges was Khodorkovsky's business partner Platon Lebedev. A third defendant in the case, Andrei Krainov, was given a 5 1/2-year suspended sentence.


Supporters of Khodorkovsky have claimed that his trial was part of a Kremlin driven campaign to punish him for funding opposition political parties of Vladimir Putin. The sentence would keep him in prison well past the 2008 presidential elections and potentially during the 2012 elections as well should Khodorkovsky have any political aspirations.

The prosecution claims Yukos officials had illegally transferred more than $6 billion of crude oil revenues out of the country into companies registered in tax havens.

In the 1990s, Yukos established companies in domestic "offshore zones", (regions within Russia with low tax regimes). Yukos used these companies to lower its tax liabilities. The charges against Yukos are based on claims that its affiliates helped the company avoid taxes.

a Moscow court froze the remaining assets of Yukos, (2 production subsidiaries and 3 refineries),in response to a $5.6 billion lawsuit filed by the state-owned oil giant, Rosneft.

The suit claimed that Yukos had underpaid Yuganskneftegaz, formerly Yukos' biggest production subsidiary, for oil supplies from 1999-2003. On May 13, a Moscow court upheld this claim. Yuganskneftegaz was sold to Rosneft for $9.3 billion at an auction last December held to help bailiffs recover the $28 billion in back taxes for 2000-2003 that the authorities are claiming from Yukos.

The court ruling brings to $12.9 billion the outstanding claims against Yukos by Rosneft and Yuganskneftegaz. Yukos' ability to pay its bills is severely restricted by court orders issued last year freezing most of its cash accounts. Yukos has already filed suit aiming to annul the auction when Yuganskneftegaz was sold to Rosneft and to receive reimbursement for damages suffered as a result of the auction estimated at RUB 324 billion ($11.4 billion).

Yukos will be reorganized into two subdivisions,Yukos EP, dealing with exploration and production, and Yukos RM , responsible for refining and marketing.

much of what he is accused of was legal at the time, or at least not specifically barred by the legal and tax codes.

If a government is corrupt, its corporate management probably is too.

Because the privatization laws that were in place in the 1990s left much to be desired, companies that were bought in allegedly rigged auctions are now open to attack Mikhail Khodorkovsky bought Yukos, Russia’s second biggest oil company and the world’s fourth biggest, paying just $170 million for a majority share stake. With 11.4 billion barrels in oil reserves, Yukos is close in size to British Petroleum (about 12 billion barrels), which is worth some $180 billion. Khodorkovsky’s purchase of the company drew criticism, as the auction was held by Menatep bank, which he himself owned. Khodorkovsky is now Russia’s richest individual with a personal fortune of $8 billion.

Yukos Oil merged with Sibneft Oil. As a result of the $3 billion deal, the new giant, Yukos-Sibneft, became the world’s leading oil company in terms of proven oil reserves. Its assets of $35 billion make it the world’s fourth largest publicly, traded oil producer.

Yukos and some other Russian corporations now recognize that they must at least appear to be committed to good corporate governance in order to access foreign capital.

Yukos now portrays itself as adhering to world corporate governance standards and as having an independent and international board of directors. The company has developed its own code of corporate governance. To its credit, to eliminate dilution risks for its shareholders, the company decided that new share issues can go ahead only with the approval of shareholders who represent at least 75 percent plus one share. The new board of directors, elected at the annual shareholders meeting in June 2003, dismissed all but three members of the previous management team. Two-thirds of the board are representatives of the international finance and oil industries, leading Russian academics, or officials of federal or local government agencies, bringing a wide range of professional experience to Yukos. The chair of its corporate governance committee is an attorney from Washington, D.C.



2005 Nelson Chin.
To inquire about consulting or speaking engagements, e-mail: Nelson Chin

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Samples of Written Policies:

Conflicts of Interest v1
Conflicts of Interest v2
Conflicts of Interest v3

Audit Committee v1

Regulatory:

Sarbanes-Oxley Act of 2002

Final Arthur Andersen Alumni Letter

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