June 2004

The Khodorkovsky Trial

The trial of Mikhail Khodorkovsky--former CEO of the YUKOS oil company and Russia's richest man--is expected to begin shortly in Moscow. Part of a broader, year-long judicial assault by the Russian government on YUKOS, Russia's largest oil exporter, the Khodorkovsky case is certain to have repercussions far beyond the courtroom-foremost in its impact on Russia's politics and economy. Will the Khodorkovsky trial be conducted consistent with the rule of law and Russia's newly reformed criminal justice system--or will it degenerate into a show trial stage-managed by the Kremlin? What is the political agenda of those prosecuting the case? What will be the implications of the proceedings for foreign investment and financial markets in Russia? How will the "YUKOS affair" end for Khodorkovsky and his former company?  Experts on Russian affairs discussed these and other questions at a June 30 AEI conference.

Nikolas Gvosdev
Nixon Center

The reorganization of the Russian cabinet prior to the March election is an ideal starting point for examining the larger issues behind the Khodorkovsky trial. After 2000, the oligarchs who control the majority of Russian industry were preparing to work together with the Russian government toward the stated goal of doubling GDP within a decade.  But in the last four months, most of the oligarchs' advocates inside the Kremlin have been demoted or sidelined.  Most notable have been the departure of presidential chief of staff Aleksandr Voloshin and the dismissal of Mikhail Kasyanov from the post of prime minister.  The balance in Putin's government is shifting toward those who advocate greater state control over the economy.  In their view, natural resources are the patrimony of the Russian state.  Individuals and corporations may exploit and profit from the country's resources, but they may never own them.  A recent World Bank report arguing that excessive centralization of the economy around the oligarchs is stymieing modernization has only helped bolster their case.

Ian Hague
Firebird Management LLC

The oligarchs have had two notable effects on the Russian economy. First, they helped prevent a reversion to communism by concentrating wealth in the hands of a group of individuals who had a stake in the new system. Second, oligarchs often had no positive impact on the productivity of the industries they controlled.  Fortunes were made, but they were just as quickly stuffed into castles in Scotland, real estate in the south of France, and Swiss bank accounts.  Although the ownership of Russian industry may have changed hands, efficiency and productivity tended to stagnate under the oligarchs.

Three recent events have had a major impact on the Russian stock market: First was the arrest of Platon Lebedev, after which the market briefly dropped fifteen percent, then surged forward.

The second event-Khodorkovsky's arrest in the fall-prompted another drop in the market, however. The move was widely seen in Russia as politically motivated, but most Russians nonetheless felt that it was justified.

Recovering again, the Russian stock market reached historic highs in early April, having doubled its value in just two years. At this point the third event took place: the freezing of YUKOS's assets.  With YUKOS shareholders suddenly aware that they could suffer a complete loss on their investment, the market took a 25-percent hit.  In the months since, though, the stock has slowly recouped 8 to 9 percent of its worth. 

The Russian government clearly feels that the process of economic reform needs to be more centralized.  While Putin does not wish for a return to the statist Soviet past, his administration wants to have more control over the direction of the Russian economy.

There is also an increasing fear that the economy may suffer for its excessive reliance on the export of raw materials.  This reliance can suffocate other, less prosperous industries.  One need only look at the example of the Middle East's oil-states to see this.  The YUKOS affair thus might prove to be one step along the long road toward diversifying the Russian economy. 

Stephen F. Williams
Senior Circuit Judge, U.S. Court of Appeals for the D.C. Circuit

There are two primary legal issues in the Khodorkovsky trial: selective prosecution and the independence of the judiciary.  The government's own minister of trade and economic development, German Gref, has admitted that the prosecution of Mikhail Khodorkovsky was selective.  However, selective prosecution was a regular feature of the first 150 years of American jurisprudence, so it is less troubling than the question of an independent judiciary.

Historically, government distribution of geographic and housing assignments to judges has been a substantial impediment to the development of an independent judiciary.  In the YUKOS case, a judge was summarily removed when she rendered a pro-YUKOS decision.  No credible explanation was offered by the Russian government. 

President Putin recently remarked, "We do not intend to drive YUKOS out of business."  Leaving aside the question of whether the leader of any other democratic country could even conceive of making such a comment, Putin's statement was a clear indication of the Russian judiciary's subservience to the whims of the government's executive branch.  The attempt to convict Khodorkovsky is, by Putin's tacit admission, a united effort of the Russian government and the judiciary.

Randy Bregman
Salans

The fact of this trial (as independent from its process and execution) is not a step backward for the rule of law in Russia.  The Khodorkovsky trial may even help promote the rule of law in Russia by leveling the playing field for business. The question is: will procedural violations make the cure worse than the disease? 

It has only been thirteen years since the end of the state-directed Soviet judicial system.  Russian judges can still be bribed and tend to be very deferential to power, most notably to oligarchs who come under their jurisdiction.  Rulings tend to be as narrow or simplistic as possible.

The oligarch system was created by blatant lawlessness in the aftermath of the fall of the Soviet state.  For Russia to truly grow economically, the oligarchs must be weakened in order to develop a much broader business class.  The oligarchs have done little to strengthen or grow the industries they came to dominate in the chaotic early years of post-communist Russia.  By offering new models of ownership and business management, a large and commercially active middle class is a vital ingredient in an emerging Russian economy. 

Sanford Saunders
Greenberg Traurig LLP

The rule of law has been disregarded at every stage of the Khodorkovsky trial.  There have been huge restrictions on access to materials and communications with counsel.  Courts in Switzerland and Liechtenstein have refused to help the Russian government with its case because the evidence is so completely lacking.

It seems all but certain that Khodorkovsky is going to be convicted.  In any country with rule of law, this would not be a criminal case.  It would be settled in a civil court.  Contrary to the suggestion that the oligarchs did not change the businesses they acquired, YUKOS did change; its shareholders were making money.  That is why the Russian government wants to acquire YUKOS and sell it back.

Menatep is a privately held company, unlike the publicly traded YUKOS, but they both put their financial statements on the Internet. In Russia, this is not only legally unnecessary, it is unheard of.  YUKOS is also enormously generous to its employees, with its pension plan the largest act of private philanthropy in Russian history.

This summary was prepared by AEI intern Gilman Barndollar with AEI research associate Vance Serchuk.