The YUKOS Affair
On October 25, 2003, Khodorkovsky was arrested at gunpoint on trumped-up charges of tax evasion, fraud and embezzlement. His trial and legal treatment laid bare any claim by the Russian authorities that the country's judiciary is independent of political influence and can protect constitutional legal and human rights. On the numerous occasions in which an aspect of the YUKOS case was heard in courts outside Russia, not once was it concluded that the charges had any legal merit.
The "YUKOS Affair," as it was labeled by the media, refers not only to the arrest and conviction of Mikhail Khodorkovsky and other YUKOS employees but also to the dismantling of the company and expropriation of its key assets.
From 2000 to 2003, YUKOS Oil brought in revenues of approximately US $46.1 billion. Despite paying taxes at or above the industry average, and despite annual audits conducted by independent international firms and tax authorities, Russian tax officials charged YUKOS with widespread tax evasion and fraud for operations in 2000, 2001, 2002, and 2003.
Beginning in June 2003 and lasting until late 2004, YUKOS was hit with a succession of tax bills, the total burden amounting to a staggering $42.2 billion. The tax charges approached the company's total revenue even before expenses. In fact, the charges exceeded the company's revenue during 2001 and 2002.
Sale of Yuganskneftegaz
On December 19, 2004, YUKOS' main production unit, Yuganskneftegaz, was seized and auctioned off by the Russian government to pay for alleged tax arrears. The sale of Yuganskneftegaz marked a climax in the dispute between YUKOS and the Russian government. It shook investor confidence in Russia and served as a vivid illustration of the state of rule of law and the security of private property. New tax claims were threatened against the subsidiary to artificially lower the valuations at auction, therefore ensuring the sale of the asset would not be sufficient to settle all the claims against YUKOS.
This de-facto expropriation of Yuganskneftegaz was denounced by Andrei Illarionov, then senior economic advisor in the Kremlin, as the "scam of the year." Yuganskneftegaz was ultimately purchased by Rosneft, which acquired the company for £9.8 billion, far below its market valuation. The new tax claims against Yuganskneftegaz were quickly dropped and Rosneft and subsequently included Yuganskneftegaz in its IPO for listing on the London Stock Exchange at a value close to $60 billion.
The Trial
Khodorkovsky and Lebedev's trial began on June 16, 2004, and concluded on May 31, 2005. The proceedings lasted for almost a year and included numerous and repeated violations of Khodorkovsky and Lebedev's legal, civil, and human rights. Witnesses were intimidated, important evidence was excluded, and Khodorkovsky's and Lebedev's access to their own lawyers was severely limited, even prohibited at times. The violations that occurred during these trials resulted in numerous applications to the European Court of Human Rights.
On October 16, 2005, Khodorkovsky was found guilty and sentenced to 9 years imprisonment. He was then transferred to a penal colony in Siberia. On February 5, 2007, the Kremlin brought additional charges against him. These were originally brought by the Russian General Prosecutor's Office on the day of the conviction. This step was taken to ensure that he would not be released from prison in October 2007, when he would have been eligible for parole after serving half of his original sentence. On June 30, 2008, investigators brought new charges, which, with some amendments, repeated the charges of February 2007.
There were two central motives behind the Kremlin's campaign against Khodorkovsky: eliminating him as a political opponent, and eliminating YUKOS to increase the Kremlin's power and regional hegemony through Russia's natural resources. The new charges further advance these objectives, by ensuring that Khodorkovsky and Lebedev are not released on parole (despite being eligible having served half of their original sentences), that Khodorkovsky has no opportunity to play an active role in shaping Russia's political future, and by legitimizing the past state campaign to dismantle YUKOS and expropriate its assets.
A guilty verdict in the current trial of Khodorkovsky and Lebedev will send a damaging message to the Russian people, Russian businesses, foreign investors, and foreign governments, that the country is not ready to change. Russia's political and economic stability will remain in doubt. The release of Khodorkovsky and Lebedev will send the ultimate signal that Russia is changing. Anything less does not meet the demands of a nation that needs to bring itself out of political and economic crisis.
The trial of both men is now widely seen as the crucial test of President Medvedev's pledge to end "legal nihilism" in Russia.