Khodorkovsky & Lebedev Communications Center

Morning Session.

The trial resumed with Mr. Miroshnichenko informing Judge Danilkin that the defense had another witness they intended to question. Mr. Miroshnichenko informed the court that Mr. Igor Vasiliadis, the witness, worked at a YUKOS subsidiary during the time period in question.

With preliminary questions out of the way, Mr. Miroshnichenko began questioning Mr. Vasiliadis, explaining that some of the questions may seem a bit strange but were dictated by the proceedings. Mr. Vasiliadis began by explaining that his contacts with YUKOS began in 1996 when Gorod- Info, an IT services provider where he was Managing Director, was hired to develop the company's website, yukos.ru. In 2000, after working closely for about a year with Sibintek, Mr. Vasiliadis joined Sibintek as First Vice President. Mr. Vasiliadis explained that his responsibilities involved restructuring of 74 information technology sites within YUKOS. The focus of his work was improvement and maintenance of information gathering and monitoring in areas of crude oil production, refining, transportation, logistics and others. The goal was to be able to deliver most complete and objective information to YUKOS and its shareholders. When he joined Sibintek it had a staff of between 40 and 50, but in two years, when he left the company to head one of its subsidiaries, there were more than 2600 employees.

Mr. Vasiliadis explained that one of the key goals for Sibintek was to fix the shortcomings and to optimize the information flow within YUKOS, anything which could allow the company to eradicate theft and fraud within its subsidiaries. In addition, Sibintek implemented the electronic document system within YUKOS. According to Mr. Vasiliadis, Sibintek was actively involved in developing and implementing YUKOS corporate standards on information gathering, storage and reporting. Describing his personal awareness and knowledge, Mr. Vasiliadis explained that he and his staff had widest access to information. According to Mr. Vasiliadis, Mr. Khodorkovsky always insisted on the most objective, most current and, most importantly, most accurate information. Mr. Vasiliadis and his staff ensured all of the above.

Mr. Vasiliadis, answering Mr. Miroshnichenko's questions, explained that he knew Mr. Khodorkovsky, professionally, as the head of YUKOS. He explained that in addition to Mr. Khodorkovsky, YUKOS had people in charge of exploration/production and refining/marketing - Messrs. Beylin and Bychkov, respectively. He knew Mr. Lebedev, as well, as a YUKOS shareholder and the head of Group MENATEP.

Mr. Vasiliadis confirmed that no one doubted that Messrs. Beylin and Bychkov, heads of YUKOS-EP and YUKOS-RM, respectively, were real executives, in charge of the company's divisions. Mr. Vasiliadis, who brought a packet of documents with him, listed YUKOS production subsidiaries for the court, Yuganskneftegaz, Samaraneftegaz and Tomskneft at the top of the list.

Mr. Vasiliadis described for the court what he saw as some of the key aspects of YUKOS being a VIOGC. According to Mr. Vasiliadis, vertical integration meant only positive aspects for the company and each of its parts. Mr. Vasiliadis explained that vertical integration with a unified corporate center meant predictability for investors and no intra-company competition between the company's divisions. Vertical integration allowed YUKOS to optimize shareholders' profits, while minimizing risks for production subsidiaries.

Mr. Vasiliadis testified that he personally worked on development and improvement of company standards for YUKOS-EP and YUKOS-RM. Asked to explain what, if any impact, occurred after the three-prong management restructuring, Mr. Vasiliadis testified that the most obvious indicator of the positive impact was the increase in the crude oil production rate. According to Mr. Vasiliadis, centralized management of all divisions within the company allowed to hedge against the risk that production costs will not be covered for production companies.

Mr. Vasiliadis testified about implementation of various corporate standards. According to him, YUKOS was at the forefront of insuring corporate-wide compliance, both through a system of incentives and reprimands.

Mr. Miroshnichenko asked whether information on YUKOS revenue, profit, and crude oil production volume and sales was widely available. Mr. Vasiliadis explained that even now, given less than 10 minutes, he would be able to find this information online. Back then it was even more widely available.

According to Mr. Vasiliadis, YUKOS crude oil was transferred to Transneft. The crude oil was delivered to refineries, or was exported. Mr. Vasiliadis noted that Transneft assumed the risk once the crude oil was transferred into its pipelines.

Mr. Vasiliadis confirmed that various government agencies, including security services, monitored the company. According to Mr. Vasiliadis, internal and external monitoring as well as the technical advancements in monitoring measuring technologies meant that a "three liter glass jar could have been carried out, but nothing much bigger than that."

Mr. Vasiliadis was asked about intra-company pricing. According to him, intra-company pricing was one of the methods used to minimize the risk for crude oil production subsidiaries. He explained that production subsidiaries were guaranteed a payment based on a crude oil contract, regardless of the price situation on the market. Having secured a payment based on a contract price, crude oil companies did not have to concern themselves with all other costs - logistics, insurance, marketing and others. Mr. Vasiliadis testified that crude oil production companies were always "a number one priority" within the holding and he did not know of an instance when they did not receive payments pursuant to the contracts.

Mr. Vasiliadis testified that he never received any orders from Messrs. Khodorkovsky and Lebedev that he considered illegal. He explained that, despite being in the upper management, there were no informal relationships with YUKOS and everyone acted strictly in accordance with company standards. He was never pressured to act against his will and, as he put it, if he was deceived he hadn't realized it still.

The first interruption by prosecutor Lakhtin occurred when Mr. Miroshnichenko asked whether Mr. Vasiliadis knew anything about embezzlement of the entire crude oil production of YUKOS from 1998 through 2003. The prosecutor, as has become common, demanded that Mr. Miroshnichenko cite to the indictment, otherwise the witness was being disoriented and could only provide "a wrong answer." Prosecutor Lakhtin offered the court these options - to strike the question, to force Mr. Miroshnichenko "to ask correct questions" or to issue a warning to the defense attorney. Although Mr. Vasiliadis attempted to answer the question, Mr. Lakhtin continued to interrupt, arguing that Mr. Vasiliadis was testifying as an expert, then shouted that "no one accused Khodorkovsky and Lebedev of creating a vertically integrated company, but this is what he's been talking about for the last 40 minutes." Finally, Mr. Vasiliadis told the court that "he knew nothing - because it was impossible to steal all of the crude oil."

Before a short recess, Mr. Vasiliadis testified that he worked on developing various corporate standards, some of which he printed out and had with him. The first one he mentioned was on logistics in crude oil, petroleum products and petrochemicals. Once again, the courtroom heard from Mr. Lakhtin, who demanded for Mr. Vasiliadis to stop referring to a document that was not part of the case file. Mr. Vasiliadis, facing off with the prosecutor, told the court that he brought these to court on his own initiative, in order to support his testimony. Mr. Lakhtin was reminded that a witness may refer to documents during his testimony, as was allowed by the Criminal Procedure Code. Mr. Vasiliadis identified two more print outs he brought with him - "Policies for crude oil pricing and sales" and "Organization of crude oil trading and transportation."

After a short recess, defense motioned to have the court examine the three aforementioned YUKOS corporate standards. Mr. Lakhtin shouted an objection, but Mr. Miroshnichenko was handing the documents to Judge Danilkin, who placed the copies on his desk for examination.

Before Mr. Lebedev took over, Mr. Vasiliadis testified about the contents of the YUKOS server room. In extensive detail, Mr. Vasiliadis described the process put in place to ensure that no data loss occurred. A lengthy review of the server replacement process was presented to the court.

Mr. Lebedev began by quoting from the indictment, listing the quantities of the crude oil that was being alleged to have been embezzled. He asked Mr. Vasiliadis to try to explain to the court how, after he described the extensive system of controls, so much crude oil could have been embezzled at Transneft's measurement nodes. Mr. Lebedev asked Mr. Vasiliadis to assume that Mr. Khodorkovsky and he managed to lie to everyone and convinced someone to enter false information into the system - how could the crude oil not have made it into the Transneft pipeline. Mr. Vasiliadis was categorical in explaining that it was impossible to embezzle crude oil from the logistics chain. And, as far as the data entry, there was no one to convince to enter incorrect data - the process was fully automated. Mr. Vasiliadis explained about the dual control over the measurement equipment and reminded the court that the volume of crude oil was measured twice at the point of transfer - once by YUKOS and once by Transneft. YUKOS and Transneft's operators compared the data to ensure that no significant discrepancies were present. Mr. Vasiliadis, after another one of prosecutor's interruptions, told the court that it would not have been possible for someone at YUKOS to hide or misstate the data - it would have been uncovered immediately.

Mr. Vasiliadis testified that PwC auditors had all necessary access to obtain audit data. He testified that there were - as expected - minor discrepancies in crude oil being transferred to Transneft, but he described those as "insignificant," noting that PwC certainly knew of any such discrepancies being uncovered.

Mr. Lebedev asked Mr. Vasiliadis to explain, in general terms, what a measurement node was - since none of the prosecutors ever visited one. The prosecutors were no amused, Ms. Ibragimova telling the court that the prosecution could figure out on their own what was what and if they needed to visit anything. Mr. Vasiliadis testified that a measurement node was a hi-tech monitoring facility, with the personnel having access to equipment counters for measurement and auditing. Mr. Vasiliadis explained that this was not a place where anyone could come and go as they pleased. Defense had no more questions and Judge Danilkin called a short recess.

The trial resumed with prosecutor Lakhtin, after "warning" the witness that all questions will focus on circumstances relevant case, asking Mr. Vasiliadis about his motivation for coming to Khamovnicheskiy Court. Mr. Vasiliadis explained that he saw Mr. Khodorkovsky's request for former YUKOS employees to come forward, got in touch with the defense team - specifically Mr. Miroshnichenko - and, after meeting Mr. Miroshnichenko at a café to discuss what he knew, came to court. "Did you just talk at the café?" the prosecutor asked. The courtroom broke out in laughter. Mr. Vasiliadis assured the prosecutor that no alcohol was involved. Mr. Vasiliadis explained that he convinced Mr. Miroshnichenko that he had relevant information and his testimony should be heard in court. Prosecutor Lakhtin insisted that it was obvious Mr. Miroshnichenko trained Mr. Vasiliadis on what to say.

Mr. Lakhtin turned to convincing Mr. Vasiliadis that, because the latter did not read the indictment, he did not know "the mechanism of embezzlement that took place." Mr. Klyuvgant objected and demanded the court strike this type of questions - the fact of embezzlement wasn't established by any court. Mr. Lakhtin accused the defense attorney of being "illiterate" when it came to criminal law. Mr. Klyuvgant noted that of all the people Mr. Lakhtin should be the last one to talk about jurisprudential illiteracy. Judge Danilkin asked the defense attorney and the prosecutor to drop the discussion. "They usually work against the government's interests," Mr. Lakhtin ignored the court.

"What's the impact on your material interest in coming here?" prosecutor Lakhtin continued to pursue the earlier line of questions. "You mean I should have paid someone for being allowed to come here?" Mr. Vasiliadis asked in return, causing another round of laughter to break out.

Finally, the prosecutor turned to Mr. Vasiliadis's testimony. Mr. Vasiliadis explained that his work was not directed at analysis of the data being obtained from regular work processes, but to make sure that accurately reported data ended with appropriate departments within YUKOS. Mr. Vasiliadis testified that he knew about YUKOS US GAAP reports, knew that they were published in Russian and in English, and were widely disseminated - through YUKOS website and by other means. Mr. Lakhtin repeated several questions concerning Mr. Vasiliadis's analysis of the consolidated reporting, but Mr. Vasiliadis continued to explain that his job was too ensure that accurate and objective information was continuously available - analysis was other departments' responsibility.

Mr. Vasiliadis testified that he worked with crude oil purchase contracts and other agreements. He explained that the documents were drafted by the legal department, but adding them into the electronic documents system was his responsibility. Mr. Vasiliadis explained that these documents were not difficult to access.

Mr. Vasiliadis testified that he knew from personal experience that YUKOS invested funds into the production regions. He explained that he traveled often and spoke to people who praised YUKOS for turning the situation around. He explained that he saw it in such things as better standards of living, like brand new housing and cars. Prosecutor Lakhtin demanded to know the names of all persons Mr. Vasiliadis spoke with, then told Mr. Vasiliadis that his assessment was general at best, then explained that it was because Mr. Vasiliadis "could not remember the names of those driving expensive cars."

Mr. Lakhtin insisted on finding out who was responsible for the "substance of the information" which Mr. Vasiliadis maintained and made available. Mr. Vasiliadis explained that the information gathering was automated, with his responsibility being to ensure that it was available to those who needed it. Mr. Khodorkovsky approached the microphone, but before being able to utter a word, was shouted at by the prosecutor, who demanded for Mr. Khodorkovsky not to interrupt him. "I'm asking questions! Or is Khodorkovsky now asking questions?! As a prosecutor?!" Mr. Lakhtin shouted. Finally, Mr. Khodorkovsky asked the court to strike the repeating questions on who was responsible for the substance of information Mr. Vasiliadis monitored. "When he answered several times that it was an automated system, it means that the information is being sent into the system from a sensor. The sensor is responsible for that substance of the information," Mr. Khodorkovsky told the court.

Afternoon Session.

The trial resumed with Mr. Lakhtin continuing to question Mr. Vasiliadis. Mr. Vasiliadis testified that based on his observations the production companies had the first priority when it came to investment into improvements and modernization. Mr. Vasiliadis explained that in addition to improving work conditions, YUKOS developed various motivational programs for the employees.

Mr. Vasiliadis testified that YUKOS did not conceal crude oil sales prices and that the information was available on the YUKOS website. He explained that if one was to trace the entire logistics chain, one could see where the additional cost factors came from. Mr. Vasiliadis explained that YUKOS website disclosed information which was of interest to investors and financial analysts, but all information was available to YUKOS departments. Mr. Vasiliadis explained that intra-company pricing was one of the methods for optimization of functions within the company, and had no impact on the information of interest to the investors. In addition, as Mr. Vasiliadis pointed out, there were corporate secrets to consider. However, those who needed access to this information, including regulators, had access to it.

Mr. Lakhtin demanded to know why the shareholders were not informed about YUKOS production subsidiaries selling their crude oil to YUKOS "almost at cost." Mr. Khodorkovsky objected, asking the court to strike the question. He reminded the court that it was Mr. Lakhtin who objected to adding production companies' financial reports to the case file - although that reporting was publically available information. Now, he was using the fact that the information was not in the case file to mislead the witness. [Our readers may remember that the defense motioned on more than one occasion to add financial reports from all three former YUKOS production subsidiaries to the case file and to enter it into evidence. However, the prosecution objected on the grounds that this reporting could not establish the fact of embezzlement and, therefore, was irrelevant. -Eds.]

Mr. Lakhtin wanted to know why, if all of the information for financial reporting was disclosed and was correct, PwC recalled its auditor's reports and conclusions. Mr. Vasiliadis told the court that PwC should be asked why they decided to do what they did - the information he provided to PwC was objective and complete.

Mr. Lakhtin demanded to know why in 1999-2000, the production companies' shareholders were not paid dividends. Mr. Vasiliadis explained that he did not participate in any of the shareholders' meetings, noting that the prosecutor identified one of the most difficult time periods for the crude oil industry, in general. He explained that YUKOS, tightening its own belt, continued to finance the production subsidiaries.

Mr. Lebedev had some follow-up questions. Mr. Vasiliadis testified that he was familiar with the budgeting process within YUKOS, explaining that it was one of the key means for financial planning within the company. Next, Mr. Vasiliadis testified that it was accepted that there would be insignificant discrepancies between YUKOS and Transneft data on the crude oil volumes and he was responsible for analyzing why the discrepancies occurred. Mr. Vasiliadis reiterated that on the scale of total volumes the discrepancies that were discovered were truly insignificant and within the margin of error. "If we had a discrepancy of a couple hundred kilograms, it was a critical situation. Tons, specifically millions of tons - that was not possible," Mr. Vasiliadis assured the court. Mr. Lebedev, after another interruption by the prosecutor, informed Mr. Vasiliadis that Mr. Khodorkovsky and he were accused of embezzling more crude oil, by tens of million tons, than was actually produced. Mr. Vasiliadis testified that with the automated process, human monitoring and audits, it would have been impossible for volumes this size to go unnoticed.

Judge Danilkin asked a couple of follow-up questions of his own. First, he wanted to know who invited Mr. Vasiliadis to work at YUKOS. Mr. Vasiliadis testified that after his work on the company's website, he was offered to take a position as Sibintek's Vice-President, the offer being approved by Mr. Khodorkovsky. Next, Judge Danilkin asked Mr. Vasiliadis to explain why, although Mr. Vasiliadis testified that he worked at Sibintek through 2002, two of the three company standards he presented the court with were dated in 2003. Mr. Vasiliadis testified that when he left Sibintek, he took over as president of a wholly-owned Sibintek subsidiary and continued to work on YUKOS company standards, as a consultant.

Mr. Vasiliadis was free to leave.

Judge Danilkin informed the parties that Mr. Malahovsky wasn't transferred to SIZO, and he had no further information as to that situation. Also, Mr. Peter Zolotarev contacted the court explaining that he was available to come to testify next week - either Tuesday or Wednesday. After some discussion it was agreed that the court will ask Mr. Zolotarev to appear on Wednesday, August 11.

The trial will resume on Thursday, August 05, 09:30 Moscow Time.