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Russia Report: September 30, 2005


30 September 2005, Volume 5, Number 31
BUSINESS/POLITICS
STATE MONOPOLY GAZPROM TAKES OVER SIBNEFT
By Claire Bigg

State-controlled gas monopoly Gazprom clinched a $13.1 billion deal on 28 September to take over Sibneft, the Russian oil company controlled by billionaire Roman Abramovich. That deal, which is the biggest corporate takeover in Russian history, will give President Vladimir Putin's administration control over one-third of the country's crude oil output.

Under the deal, Gazprom will purchase 72.7 percent of Sibneft from its owner, Millhouse Capital, an investment company controlled by Roman Abramovich. Gazprom and Millhouse Capital released a statement on 28 September saying both sides have signed binding documents. Together with its previous 3-percent stake, Gazprom will now hold a 75.7-percent holding of Sibneft.

The deal means that Gazprom, the world's largest natural gas producer, is now able to pursue its main objective of becoming a global and diversified energy giant.

Eric Kraus, chief strategist at the Moscow-based investment house Sovlink, says buying Sibneft was vital for Gazprom following its unsuccessful attempt to take over state-owned oil producer Rosneft earlier this year.

"For Gazprom, it marks their emergence into a global energy major," Kraus said. "Gazprom had wanted to buy Rosneft, or to merge with Rosneft, but this did not happen. So this is, in some way, also a consolation prize for Gazprom, which wanted to have some oil."

The deal will put some 900,000 barrels per day in oil output into Gazprom's hands, making it Russia's fifth-largest producer behind Lukoil, TNK-BP, Rosneft, and Surgutneftegaz.

Chris Weafer, chief strategist at Alpha Bank, says the takeover will give the state direct control over about one-third of Russia's total oil output.

"This deal just increases the government's direct ownership in the oil sector, so that now government-controlled and owned companies are responsible for pumping about one-third of Russia's daily oil output," Weafer said. "If you include the state-friendly companies as well, then that gets up to more like 50 percent."

The agreement comes as no surprise. President Putin told a meeting of the G-8 group of industrialized countries earlier this year that negotiations were under way for a Gazprom takeover of Sibneft.

Weafer argued that the purchase of Sibneft will help the government fulfill its bid to boost popular support by channeling the windfall from oil and gas into social programs. The Kremlin, he adds, is also seeking to consolidate its role in world affairs by securing control of energy resources amid growing demands for oil and gas.

"The government basically sees the fact that it is already a big energy partner with Western countries and has the potential to become much bigger as replacing nuclear weapons as the reason why it can keep a seat at the top table of global politics and why it can have an important place in organizations such as the G-8," Weafer said.

Apart from being the biggest-ever corporate purchase in Russia, the takeover is also unprecedented since the state is paying market price to buy a firm it sold to Abramovich and his former business partner Boris Berezovskii for a mere $100 million a decade ago.

Experts actually say the 38-year-old Abramovich -- Russia's richest man, who gained world fame by buying the Chelsea soccer club two years ago -- could have sold Sibneft to a foreign firm for a much higher price. But since Mikhail Khodorkovskii's Yukos empire was dismantled and he was sentenced in May to nine years in prison for fraud and tax evasion, oligarchs have been keeping a low profile. His sentence was reduced on appeal to eight years.

Kraus says Abramovich, who is based in London, has since been eager to sell off his Russian assets despite being seen as one of the few oligarchs on relatively friendly terms with the Kremlin. Kraus has little doubt the Kremlin stood behind the Sibneft takeover.

"The Kremlin has probably instructed him to sell," Kraus said. "And they've offered him a reasonable exit price. Undoubtedly, as it has been pointed out, he could have got more money for it selling it to a foreign major. But Mr. Putin does not intend to have Russian strategic resources owned by foreign companies anymore."

Abramovich's exact share in Millhouse Capital is unclear, but analysts estimate that he will get between 75 and 85 percent of the $13.1 billion payout.

THE END OF LOANS-FOR-SHARES
By Brian Whitmore

Nearly a decade ago in a move that reshaped Russia's political landscape, the ailing and embattled Kremlin leader Boris Yeltsin sold off the crown jewels of the country's economy to a select group of oligarchs. Russian President Vladimir Putin is now ready to buy them back.

When the state-controlled natural gas monopoly Gazprom announced on 28 September that it was buying Roman Abramovich's oil giant Sibneft for $13.1 billion, analysts said the deal had at least as much to do with politics as with business and energy policy. "The group of individuals who control the country's energy resources will be the real political and economic powerbrokers" in Russia, political analyst Peter Lavelle wrote in a commentary for RIA-Novosti on 27 September.

Putin's government will now de facto control at least 30 percent of the country's crude oil production, tightening the Kremlin's grip on the energy sector and creating a state-run company that can compete with oil majors like ExxonMobil, BP, and Royal Dutch Shell. But just as importantly, the deal puts a key asset that can be used for political leverage and influence firmly in the hands of Putin's inner circle.

"The state is going to run the energy business in Russia for the foreseeable future," said Chris Weafer, head of strategy at Alfa Bank in Moscow, in remarks reported by mosnews.com.

Like the Kremlin's campaign against the Yukos oil company and its former CEO Mikhail Khodorkovskii, Gazprom's acquisition of Sibneft is part of an effort by Putin to reverse the political effects of the so-called "loans-for shares" auctions of 1995-96.

In those auctions, well-connected businessmen like Abramovich, Khodorkovskii, Boris Berezovskii, and Vladimir Potanin bought key state assets -- including major parts of the energy, telecommunications, and metallurgical sectors -- at bargain basement prices.

The Kremlin sold off 51 percent of its most productive Siberian oil operation, which would later become Sibneft, in 1996 for a meager $100 million -- a fraction of its value.

Defenders of the auctions said they would create a permanent capitalist class that would have a stake in market reforms.

The loans-for-shares auctions took place in the politically charged run-up to the 1996 presidential elections when a deeply unpopular Yeltsin was badly trailing Communist challenger Gennadii Zyuganov. Organized by Berezovskii, the oligarchs contributed generously to Yeltsin's campaign and used their media empires to guarantee the president positive coverage - and frighten the public with the specter of a return to totalitarianism.

But getting Yeltsin back into the Kremlin came with a price: with their vast wealth, the oligarchs became an independent source of political power in Russia and were able to wield vast influence over public policy.

Putin's rise to power following Yeltsin's surprise resignation on New Year's Eve in 1999 was widely believed to have been orchestrated by Berezovskii and other oligarchs who believed -- incorrectly as it turns out -- that they could control him and maintain their influence.

But as Putin consolidated his power, the former KGB colonel and FSB director began to marginalize the Yeltsin-era power brokers in favor of the so-called "siloviki" -- veterans of Russia's security services. To the oligarchs, Putin purportedly proposed a deal: you can keep your wealth and avoid prosecution for the shady privatizations of the 1990s if -- and only if -- you stay out of politics.

Berezovskii, who sold his stake in Sibneft to Abramovich for a reported $1.3 billion in December 2000, went into exile in London. Khodorkovskii stayed in Russia and tried to finance political opposition parties. He was arrested in October 2003 and later sentenced to eight years in prison for tax evasion and fraud. Others, including Potanin and Abramovich, decided to play ball.

"Abramovich's sale of Sibneft also ends one era and starts another," Lavelle wrote in RIA-Novosti on 28 September. "Russia's market economy started with a small group of 'oligarchs' amassing huge fortunes from the purchase...of state assets at knock-down prices. This trend was reversed when the Kremlin demanded, using any and all administrative means, the return of oil assets from Yukos and the re-introduction of state control over Russia's energy sectors. Now, the Kremlin is willing to buy out the oligarchs."

INTERVIEW
RFE/RL SPEAKS WITH EXPELLED KHODORKOVSKII LAWYER
On 23 September, Robert Amsterdam, the Canadian lawyer for former Yukos CEO Mikhail Khodorkovskii, was given just hours to leave Russia after authorities canceled his visa. The expulsion was the first in a string of official moves targeting Khodorkovskii's legal team that included threats of disbarment against his Russian lawyers. Amsterdam spoke about his expulsion and the entire case with RFE/RL Russian Service correspondent Irina Lagunina in Prague on 27 September.

RFE/RL: Could you briefly tell us the story of what happened to you? What happened to your visa?

Amsterdam: Well, essentially, at one in the morning on [22 September], five members of what I believe to be the FSB [Federal Security Service] came to my door, demanding to take me to the station. I refused to go, and they then demanded my visa and my passport. I provided that after some discussion. And they told me that the sponsor had decided that my trip was over and [that] they were going to expel me from the country and they would give me until the time of the 5 p.m. flight to London -- and [that] if I wasn't on the flight, I would be arrested.

RFE/RL: Who is the sponsor?

Amsterdam: Simply a consulting company. I don't want to name them. I don't want to get them into any more trouble than they are already in. I had a multi-entry, one-year visa that the Russian authorities canceled in one day.

RFE/RL: Are you going to take any action against this?

Amsterdam: Yes, I have Russian counsel working with us, and we are going to do whatever we can do so that I can continue to fulfill my functions in Russia.

RFE/RL: Do you have any functions left?

Amsterdam: Yes. The Khodorkovskii case is a political case. It is a case that is subject to massive propaganda from the Russian Federation. And part of what we have to do as his defenders is to defend his reputation. Russia still has a few media outlets that are willing to provide the truth to their readers or listeners, and it is important to inform them about what is happening to Mr. Khodorkovskii.

RFE/RL: Let's move to Mr. Khodorkovskii's case itself. How did you meet Khodorkovskii? How were you chosen to represent his interests?

Amsterdam: We met in Washington in 2003 through a mutual friend. He was interested in me because of work that I was doing in Latin America, actually, and it was news to him that I had a background in studying the Soviet era of Russia and I had in fact been a frequent traveler to Russia during those difficult years in the '70s. And he and I hit it off, I think is probably the best way of saying it. I very much respected his mind, his intellect, and his commitment to his principles, which included staying in Russia when many of those around him felt he was going to be arrested. You know, for some reason, he decided, he thought that I could provide something of use to him as well, I guess.

RFE/RL: When you started all this, you already had a feeling that he might be arrested, correct?

Amsterdam: Absolutely.

RFE/RL: Could you possibly foresee the outcome of this trial or case then?

Amsterdam: I don't think Russia is the same country today as it was in 2003. I don't think it was possible to foresee it. I think it is a testament to Khodorkovskii that the velocity of totalitarianism has increased so dramatically since his arrest. But we all, all of us who love Russia, have to understand that the power in the country has transformed the country almost overnight into something that is not recognizable compared to what it was barely 24 months ago.

RFE/RL: Let's take one part of the country and let's speak about the court system. The trial lasted two years. Was it the whole court system that changed, or was it this particular court that looked into Khodorkovskii's case?

Amsterdam: Let's be clear. The Russian criminal courts are problematic historically. The conviction rate in Russian courts is presently over 99 percent, particularly in cases where there are not juries, and [they are] notoriously subject to executive control -- let alone in political cases, where the control is absolutely intense. What we've seen in the Khodorkovskii case is such a complete breach of the rule of law that it is actually difficult for me to even call these courts. This is a show trial without the sophistication of the original show trials of the '20s and '30s. It is terribly sad to have even witnessed what we've seen, let alone the farce last week of a cassation appeal occurring within eight hours based on a trial record that was incomplete, based on using lawyers that stated they had not properly prepared the case, based on Mr. Khodorkovskii only stating that he had available to him the ability to review one of many episodes that he wanted to address. It was really a pathetic scene in that Moscow courtroom last week.

RFE/RL: Does it reflect the state of the whole court system?

Amsterdam: It certainly reflects very much the state of the criminal system. The use of the cage for prisoners demonstrates a tremendous need for Russia to establish the presumption of innocence. Even though that presumption is contained both in the new [Criminal Procedural Code] and the constitution, it does not exist in fact. Judges clearly see their role as to assist the prosecutors in obtaining a conviction.

RFE/RL: Is there a proper...adversarial process between the prosecutor and the defense?

Amsterdam: No, there isn't. The European Convention of Human Rights term would be "equality of arms," and there is absolutely none. The procuracy has a virtual handmaiden in the judges who work with them. The amount of control the prosecutor is given over the process is immense. In our case, many of our witnesses were not able to testify, while the witnesses for the procurator were being led by the procurator in a way that would be absolutely impossible in a court that was balanced.

RFE/RL: You referred several times to this trial as political. Is there a way, a mechanism, to separate politically motivated trials from strictly business fraud, financial fraud related to a case?

Amsterdam: It's really something that you have to understand is a process that has to be examined from its inception. In the Khodorkovskii case, it wasn't even begun as a criminal investigation. There was no complainant. Essentially it was begun as a propaganda campaign launched by instruments of the state against Khodorkovskii. A black PR campaign. And so from its very beginnings, it didn't even look like a criminal investigation.

RFE/RL: Can you be a little bit more specific please?

Amsterdam: Yes. There was a magazine called "Kompromat," which we believe was paid for by one of the state organs which was dedicated to the destruction of Khodorkovskii's reputation. It came out in April of 2003. I call it "The Law of the Table," which means that what happened, what we were told actually happened, was that in the FSB office there was a directive to get Khodorkovskii, so they took all of the old files, everything relating to Yukos over the last dozen years, put it on a table, and tried to find those files that they could artificially resuscitate. One of the key elements in political cases often is that they normally relate to charges or incidents that are very old. And clearly in our case all of these allegations were -- many of them -- nine or 10 years old. The very Apatit privatization that formed the basis of the charges ended up by the end of the trial having been lost by the procuracy simply on the basis of the statute of limitations.

RFE/RL: In your interviews you have pointed out several times that the Kremlin is afraid of Khodorkovskii. You...referred to the authorities putting riot police in front of the court building, in the street, and intimidating those who came to show their respect and support for Khodorkovskii. And you referred to it as "fear" from the Kremlin. But fear of what?

Amsterdam: Well, essentially, I think you see it in the establishment of [the pro-Kremlin youth movement] Nashi by the Kremlin, the fact that any possible political opposition, let alone someone such as Khodorkovskii who not only has principles but at some point had the money to support those principles. Any individual like that represents a threat. The entire concept under which Mr. Putin is operating is the vertical of power. Any distortion, any movement away from that vertical seems to be crushed. He's doing that with NGOs; [he has] consistently done it with respect to television and certain other media outlets. And Khodorkovskii and Yukos are a prime example of that.

RFE/RL: But I think that Khodorkovskii was mostly involved in building civil society, rather than really strong political parties.

Amsterdam: Yes, but you have to understand that to an individual trained in the KGB, civil society and movements toward a civil society are political acts.

RFE/RL: Let's move to another aspect of the same case. I think, to my mind, it is the most tragic aspect: Svetlana Bakhmina. Are you going to protect her? Are you going to somehow move this case?

Amsterdam: Listen, I don't represent Svetlana. We talk about Svetlana all the time in every capacity we can. She is the most tragic part of the case. She is an admitted hostage. The procuracy has admitted that she is a hostage of the Kremlin. They want the former general counsel back and they are using her as a pawn to get her back. It is a terrible situation.

RFE/RL: Can you describe the state of this case at the moment?

Amsterdam: Allegedly, the procuracy is ready to take it to trial. She has been incarcerated for over nine months. She is a young mother. She was arrested at five in the morning. She was interrogated for 12 hours. She collapsed. She was resuscitated and they put her into a cell. She spent many months not even being able to speak to her children. It is a case that defies the imagination. It is just incredible to me. For essentially at its worst, some sort of economic crime relating to some shares she may have endorsed.

RFE/RL: Why is this case not in court yet?

Amsterdam: I am not her lawyer and I can't tell you that.

RFE/RL: OK, but is it the inability of the authorities to present it in court or...?

Amsterdam: I could only speculate that what she is really there for is a hostage; and when you have a hostage there is not a tremendous amount of speed to be used to bring it to trial. Plus they know it is going to attract a tremendous amount of negative attention.

RFE/RL: You know what is going on with the other lawyers who defended Khodorkovskii...

Amsterdam: Absolutely.

RFE/RL: What is your assessment?

Amsterdam: Listen, they threw me out of the country on the very same day they decided to attack all of the lawyers in the case. And I fear that they are going to move very quickly against these lawyers. They have already attempted to disbar [Olga] Artyukhova, and now I believe they are going to try move against all of the other lawyers, I gather, except for Mr. [Genrikh] Padva.

RFE/RL: Do you think that the present system, including the bar association in Russia, will be a barrier to this attack from the government?

Amsterdam: Well, unfortunately, I don't think there can be a complete barrier because the law on advocates has been changed so that, for instance, in this case, the Moscow city bar is not the final arbiter on their conduct. What is frightening is the speed with which they are moving against these lawyers and the use by the procuracy of the "big lie" tactic to try to argue that lawyers who are defending their client are somehow acting in a manner not conforming to law when they attempt to serve the interests of justice.

RFE/RL: What is going to be your next step? Strasbourg?

Amsterdam: Well, I think Strasbourg is one step. Clearly, the impunity with which Mr. Putin and the Kremlin [are] operating has to be addressed by Western governments. So we can't wait for Strasbourg. We have to address the impunity and bring home to Western governments that this represents a clear danger for them and not just for Khodorkovskii.

RFE/RL: But there was an independent review of Meshchanskii court. There was a Strasbourg rapporteur.

Amsterdam: Yes.

RFE/RL: And there was a judgment of this court and the condemnation of the Council of Europe. And so what?

Amsterdam: Well, I think in any political process, I can't tell you more than to suggest that what is impressive is that the Council of Europe actually passed the report. Russia could not muster the votes to defeat the report. That was an amazing event. As is the fact that in Germany today, Germany which had been the most stalwart ally of Mr. Putin, there has been a tremendous shift, a tremendous political shift relative to the Schroeder policy toward Russia, among the electorate. How that may be reflected, I can't tell you. But I certainly believe there have been shifts and we just have to hope that that momentum continues.

RFE/RL: Once again, you referred to Khodorkovskii's case several times as a political case. Do you think that it will be recognized internationally as a political case and Khodorkovskii will be recognized as a political prisoner?

Amsterdam: He is recognized as a political prisoner within Russia. And I absolutely can tell you that the entire basis upon which the cassation court made their ruling, and the expulsion of myself and the attacks on the Khodorkovskii lawyers only served to confirm what we've been saying about this being a political case.

RFE/RL: Can you define a "political case," please?

Amsterdam: A case that has no basis in law, a case that is essentially developed on the basis that law is an instrument of the executive to be used against political opponents. And this is a standard practice in the old Soviet Union, and it has been used in modern Russia by Mr. Putin against other political opponents. I think the situation in this case, the use by the procuracy of the media, the propaganda campaign against Khodorkovskii that has been ongoing, the campaign against the lawyers that's beginning, including disbarment -- this is a frightening escalation of some of the worst features of that system.

RFE/RL: This escalation is supposed to lead to something...

Amsterdam: It leads to the suppression of the bar to some extent. And, again, the bar, to the extent that it is independent, in the minds of some people in the Kremlin seems to represent yet another threat. These are people that develop threats everywhere. It is being said more and more that the Kremlin is in need of these threats. They are in need of the populace being mobilized against people or individuals because of their [the Kremlin's] incompetence. The one thing they need to do is to ensure that the people don't realize that the real oligarchs are seven of the men closest to Mr. Putin who now control $250 billion in assets. That's why they've turned a lot of the television media into a new form of "Pravda," showing Mr. Putin for the first 10 minutes of each program.

POLITICAL CALENDAR
1 October: Date by which President Putin has ordered the government to submit its economic-development plans for the Far East, the North Caucasus, and Kaliningrad Oblast

1 October: U.S. businessman Gregory Olsen due to begin a trip to the International Space Station, flying aboard a Soyuz rocket from Baikonur, Kazakhstan

3 October: President Putin to open the Europalia festival, which is dedicated to Russia this year, in Brussels

4 October: President Putin to visit London for Russia-EU summit

9 October: State Duma by-election in single-mandate district in Rostov Oblast

23 October: Referendums to be held in Kamchatka Oblast and the Koryak Autonomous Okrug about the merger of the two federation subjects

23-26 October: Third anniversary of the Moscow theater hostage crisis

25 October: Second anniversary of former Yukos head Mikhail Khodorkovskii's arrest at an airport in Novosibirsk

1 November: Public Chamber expected to hold first session

1 November: Date by which President Putin has ordered the government to submit its proposals for limiting foreign-capital participation in the defense sector and strategic-resource development

1 November: Date by which President Putin has ordered the government to submit its proposals for judicial reform and combating crime, especially terrorism

27 November: Chechnya to hold legislative elections, according to President Putin on 21 August

1 December: Date by which President Putin has ordered the government to submit its plans for reducing traffic accidents, alcoholism, and drug addiction, as well as its proposals for improving health care

1 December: Date by which President Putin has ordered the government to submit its plan to increase state-sector wages by 50 percent within three years

4 December: Moscow city duma elections to be held

4 December: State Duma by-election to be held in single mandate district in Moscow

28 December: Federation Council will hold its last session in 2005

2006: Russia to host a G-8 summit in St. Petersburg

1 January 2006: Date by which all political parties must conform to law on political parties, which requires at least 50,000 members and branches in one-half of all federation subjects, or either reregister as public organizations or be dissolved.

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