Courtroom Report: August 30, 2010
Morning Session.
The trial resumed with Mr. Lebedev returning to the topic of price formation within YUKOS. He reminded the court that Mr. Khodorkovsky, during his testimony, referred to a YUKOS company standard called "Order for organizing sale and transportation of crude oil" and the accompanying process diagram. The slide appeared on the courtroom's wall. Mr. Lebedev explained that each of the squares and circles was a mandatory step used by YUKOS to effectuate a crude oil sale. Mr. Lebedev told the court that, using the next set of slides, he will explain the steps involved when crude oil was being sold domestically and for export. Explaining domestic crude oil sale, Mr. Lebedev identified 14 steps, while export crude oil sale consisted of 27 individual steps. Mr. Lebedev discussed what operations were involved in each step, which department was responsible and what methodology was used to effectuate it. After explaining all of the details, Mr. Lebedev asked the court to note that YUKOS production subsidiaries were absolutely not involved in the processes he just described.
After a short recess, Mr. Lebedev continued. Showing the slide with which he left off on Friday, Mr. Lebedev told the court that around April-May of 1999 the crude oil prices began to rise very quickly. The rise in crude oil prices allowed YUKOS to start liquidating the effects of the "dead period." Consolidated profit for 1999 was over $1.2 billion USD, which allowed the company to pay dividend for that year, including to the Russian Federation, one of YUKOS minority shareholders.
Mr. Lebedev asked the court to note that the prosecution speculates quite a lot about the usage of intra-corporate or "transfer prices," used by YUKOS at different stages of the crude oil and petroleum products sales. Mr. Lebedev told the court that it was a commonly known fact that intra-company pricing was the outcome of the functioning of any vertically-integrated company, acting as a single production-technological complex. Mr. Lebedev explained that, depending on the risk level for each of the links within the vertically-integrated chain, different prices result for companies within the group as well as to third-party purchasers. This was a commonly known business fact and something that professors in economic schools knew and taught. Mr. Lebedev quoted from an article published in Rossiyskaya Gazeta by an economics professor and asked the court to look at a slide depicting the vertically-integrated chain and risk zones at each of the stages. Each of the bright red dots indicted a risk which YUKOS, as a vertically-integrated company, had to consider at each stage of crude oil and petroleum products sales.
Mr. Lebedev, explaining the minimal risks carried by the production subsidiaries, told the court that there was a simple business axiom - the owner of crude oil does not have revenue because he is the owner of crude oil. "The owner receives revenue only when he stops being the owner. Once you transferred property ownership rights, you no longer have any risks in connection with your property and now you get revenue. [But if you want to keep being the owner], the risks are yours and there's a simple question which needs to be answered - where to get the money for crude oil production, to pay for materials, salary and so on?" Mr. Lebedev explained the realities of the crude oil business and risk allocation. Mr. Lebedev provided an example: if Yuganskneftegaz retained crude oil ownership rights and transferred the crude oil into Transneft pipeline, it was responsible for paying the natural resources tax. The tax has to be paid every month - regardless of whether crude oil was sold or Yuganskneftegaz remained its owner. In 2003 that tax for the production subsidiary was $1.5 billion USD. That's over $100 million USD per month. If Yuganskneftegaz remained the owner - where was it supposed to get the money?
Mr. Lebedev continued to explain the various risks involved at each stage of the chain - when 70% of crude oil was being sent to refineries, when 30% was being exported, when some of that crude oil was reaching sea ports and being loaded onto tankers and so on. Mr. Lebedev began explaining that the prosecution failed to explain how production companies, if they were to remain the owners of crude oil, would obtain the money to sell crude oil for export on their own. "Our fabricated case does not contain a single contract between the production companies and Transneft....," Mr. Lebedev began, but was immediately interrupted by prosecutor Ibragimova. She demanded the court issue an on the record warning to Mr. Lebedev for using the phrase "fabricated case." Judge Danilkin remained silent and, after resuming, Mr. Lebedev repeated that there were no contracts between production companies and Transneft in "our fabricated case." Another demand for an on the record warning from prosecutor Ibragimova, and Judge Danilkin asked Mr. Lebedev to refrain from using this phrase.
"Your Honor! We object! Our line of defense consists of showing that the case against us was fabricated! If you decided beforehand that this line of defense has no merit, we will ask for your recusal!" Mr. Khodorkovsky was outraged. Judge Danilkin remained silent. For the rest of the day, Mr. Lebedev used "in our non-fabricated case, according to prosecutor Ibragimova's (or prosecution's) opinion." The first usage of this phrase, once Mr. Lebedev returned to his testimony, caused a round of laughter from the gallery. "He, who laughs last, laughs best!" prosecutor Ibragimova said quietly, while looking at the gallery. Mr. Lebedev continued and soon the prosecutor, without standing up, interrupted Mr. Lebedev and asked the judge whether he was doing this on purpose. Mr. Krasnov objected to constant interruptions, asking the court whether Mr. Lebedev will ever be allowed to continue.
Mr. Lebedev returned to the presentation, explaining how absurd was the government's assertion that YUKOS production subsidiaries could have sold their crude oil in Rotterdam. He told the court that one proof of the false assertion being made about production subsidiaries exporting own crude oil was the fact that the case file did not contain a single transaction passport. Mr. Lebedev noted that production companies would have violated criminal laws by shipping crude oil for export without a transaction passport.
Mr. Lebedev told the court that such inconsistencies were common, but what could one expect from the people who decided that the amount transferred into the Transneft pipeline system would be the same amount that reached Rotterdam. He explained that the so-called government experts Migal and Chernikov, when making their calculations, did not even bother to make allowances for actual losses during crude oil shipments through the pipeline.
Mr. Lebedev described the various routes by which crude oil was exported. He explained that YUKOS was not at liberty to choose where it wanted the crude oil it was exporting to be delivered. Mr. Lebedev noted that there wasn't even a pipeline that went to Rotterdam. There was only one way to deliver crude oil from the Russian Federation there - to a sea port and then by tanker.
Mr. Lebedev explained that managing a business was about risk management. Risk management at production subsidiaries, as he knew from working at YUKOS, involved them entering into General Agreements with YUKOS in 1996, pursuant to which YUKOS guaranteed to purchase all of the crude oil produced by production subsidiaries. Mr. Lebedev noted that this was entirely consistent with international practice. Mr. Lebedev referred at length to Mr. Haun's expert report where the latter discussed risk management strategies. Mr. Lebedev asked the court to note that, after crude oil was transferred into the Transneft pipeline, all risks were assumed by YUKOS-RM, which was highlighted in Mr. Haun's report, also.
Mr. Lebedev asked the court to note that in a contract between Tomskneft and ZAO YUKOS-M the latter pre-paid 90% of the total sum not later than 15 days from when the contract was dated. He explained that this was another way production company's risks were minimized - prepayment made possible financing of crude oil production, crude oil processing and crude oil transfer to Transneft. Mr. Lebedev reminded the court that Ms. Soboleva testified about ZAO YUKOS-M: the trader continued to exist, under the same name, within Rosneft. Meanwhile, the government alleges in the indictment that this company was "fictitious" and YUKOS was forced to pay the additional taxes for this "fictitious" company. Mr. Lebedev told the court that either the court should issue an on the record warning to the prosecution for continuing to call ZAO YUKOS-M "fictitious," or to question Mr. Bogdanchikov about spending Rosneft's funds to purchase a "sham" company from Mr. Rebgun. Mr. Lebedev reminded the court that Ms. Soboleva was surprised to learn the company she worked at for 10 years was considered a "sham." At the same time, she testified that the company did not face any tax claims from the authorities.
Mr. Lebedev went over terms contained in one of the crude oil contracts. He asked the court to note that pursuant to the contract's terms, after crude oil was transferred into the Transneft pipeline system, all risks passed on from the production company to the counter-party.