Khodorkovsky & Lebedev Communications Center

Morning Session.

The trial resumed almost half an hour late, with everyone waiting for the prosecution to appear in the courtroom. Mr. Krasnov told the court that the prosecution was trying everyone's patience by being constantly late. At the same time, Mr. Krasnov noted, it's the prosecution who complains about delaying tactics on the defense's part. Judge Danilkin told the prosecutors to pay attention to the schedule and to behave accordingly.

The prosecution called Mr. Vladimir Kudasov, former director of YUKOS-Moscow's directory of internal operations and former deputy to Mr. Leonovich, head of YUKOS Treasury Department. Mr. Kudasov testified that as Mr. Leonovich's deputy he was responsible for foreign currency transfer control and supervised investment of temporarily available funds.

Mr. Lakhtin asked what a "company budget" was. Mr. Kudasov explained the budget contained forecasted expenditures and other information. Moving on, Mr. Kudasov testified that he reported to Mr. Leonovich as well as to Mr. Khodorkovsky.

Mr. Lakhtin asked questions about "operational companies" - crude oil traders. Mr. Kudasov was explaining that these companies had service agreements with YUKOS-FBC and YUKOS-Moscow, with the former providing bookkeeping and accounting services. Mr. Lakhtin asked about directors of various companies. Mr. Kudasov remembered some names, including Messrs. Malahovsky, Valdes-Garcia and Ms. Soboleva. Messrs. Shakhnovsky, Beylin and Bychkov's names came up as well in a general response to a question about YUKOS personnel.

Ms. Kovalihina took over from her colleague. Her questions focused on the technical aspects of intra- and extra-company payments, as well as questions of intra-company financing. Mr. Kudasov testified that Yuganskneftegaz, Samaraneftegaz, Tomskneft, as well as refineries, were some of the subsidiaries with which he was involved in questions of intra-company financing. According to Mr. Kudasov, although promissory noted were used for this purpose, his goal was to decrease the number of the notes being used. To do that, Mr. Kudasov proposed using finance loans, converting them to promissory notes only after substantial accumulation.

Mr. Kovalihina, lost in the cheat-sheets, asked Mr. Kudasov to explain what a "company budget was." Judge Danilkin pointed out that the witness already answered this. Ms. Kovalihina, shuffling the paper slivers, asked why revenues from sales of crude oil were counted in the budget. Mr. Kudasov did not understand what the prosecutor was asking.

Ms. Kovalihina asked about Ratibor, Ratmir and Jupiter XXIV. Mr. Kudasov replied that he was familiar with these companies and all were serviced by YUKOS-Moscow. Mr. Kudasov knew Ms. Gareeva. No follow-up question followed.

Mr. Lakhtin asked if Mr. Kudasov knew Mr. Kraynov. Mr. Kudasov knew the name from the newspapers.

In the ensuing silence Judge Danilkin began looking over the gallery and did not find it amusing that some members of the audience were whispering and chuckling. He told one of the bailiffs to escort the worst of the offenders out. Meanwhile, Mr. Lakhtin asked for a five minute break.

Five minutes later Judge Danilkin re-entered the courtroom. Mr. Shokhin and Ms. Ibragimova were at their places, so was the witness. Mr. Lakhtin and Ms. Kovalihina were missing, as was Mr. Krasnov. Judge Danilkin inquired if the prosecution needed more time, but Ms. Ibragimova, breaking off from whispering with Mr. Shokhin, told the court that they did not... and went back to whispering with Mr. Shokhin. A silent pause ensued. A low rumble was building in the gallery. Mr. Shokhin rose and, looking at the defense table, told the court that Mr. Krasnov "evaporated from the courtroom - talk about courtroom decorum." Mr. Rivkin assured Mr. Shokhin that Mr. Krasnov's client was well aware of the fact. "Shouldn't this be something to discuss with the court?! No?" Mr. Shokhin sought to score points, all the while forgetting that his colleagues, who were questioning the witness, were missing from the courtroom, still. Judge Danilkin told everyone to calm down and called another break.

Ten minutes more had passed before the missing prosecutorial duo reentered the courtroom. As the hearing resumed, Judge Danilkin did not comment on the extended break.

Mr. Lakhtin wanted to know who was responsible for making dividend payments. Mr. Kudasov testified that supervision of dividend payments was his responsibility. He was the one who tracked all related operations and received summaries from the companies. Mr. Lakhtin asked if Mr. Kudasov knew a Mr. Maslyukov. Mr. Kudasov testified that Mr. Maslyukov worked with him on dividends and was also supervised directly by Mr. Leonovich.

Mr. Lakhtin used this opportunity to motion for the reading of Mr. Kudasov's interrogation transcripts. According to Mr. Lakhtin, Mr. Kudasov failed to provide details on Messrs. Leonovich and Maslyukov's involvement in dividend payments. Citing everything from the Russian Constitution to the European Convention on Human Rights, Mr. Lakhtin requested the court's permission to read all transcripts from Volume 165. [All six transcripts in this volume were of interrogations which took place in May and June 2008, for the "mother case" #18/41-03. -Eds.] Judge Danilkin granted Mr. Lakhtin's motion, thus allowing the prosecution to read transcripts after a half-hearted effort at questioning their witness, lasting a little more than 30 minutes.

Mr. Kudasov took a seat next to Mr. Lakhtin, the latter starting to read from May 16, 2008, interrogation transcript. This transcript contained Mr. Kudasov's explanations on technical aspects of implementing payment transactions for various companies being supported by YUKOS-Moscow. Mr. Kudasov explained using the "Bank-Client" system to implement payments.

May 21 interrogation: Mr. Kudasov explained his responsibilities as Mr. Leonovich's deputy - particularly concerning budget implementation. Question on what a "company budget" was elicited a chuckle from the gallery. During interrogation Mr. Kudasov explained that Mr. Misamore would approve a document, which would contain, in spreadsheet form, budgets for YUKOS-Moscow, YUKOS-RM and YUKOS-EP. Then it was income and expenses, with revenues coming from Russian and export sales of crude oil and petroleum products. Expenses were made up of transportation, customs, taxes and other smaller expenses. Budget was approved monthly. Mr. Kudasov was responsible for ensuring that there were no overruns in expense payments.

May 27 interrogation: Investigator Iogan was curious to find out why Mr. Khodorkovsky sent an e-mail with directions to Messrs. Leonovich and Kudasov to approve a change to a budget assuming there was a properly drafted business plan by Mr. Mendyuk, member of the management team. Mr. Kudasov explained to Mr. Iogan that he followed Mr. Khodorkovsky's instructions because at the time Mr. Khodorkovsky was the chief executive of YUKOS-Moscow, as well as the YUKOS board member.

Mr. Kudasov went on to explain what was meant by "operational companies" - crude oil traders. Mr. Kudasov explained that these companies purchased crude oil from YUKOS production subsidiaries. These companies were consolidated with YUKOS and were managed by the treasury.

Afternoon Session.

May 29 interrogation: Mr. Kudasov was explaining that funds from crude oil sales were managed according to budgets of YUKOS-Moscow, YUKOS-EP and YUKOS-RM. Mr. Kudasov explained that this arrangement allowed for effective allocation of funds. Mr. Iogan sought to fins out if crude oil traders - Fargoil, Ratibor, and Ratmir - were "affiliated" with YUKOS. Mr. Kudasov explained that under Russian accounting standards these companies could not be considered as being "affiliated." However, under US GAAP they were consolidated with YUKOS, meaning YUKOS was the ultimate beneficiary of these companies' profits.

May 30 interrogation: Mr. Kudasov explained the process involved in Fargoil paying dividends to its parent company, based in a foreign jurisdiction. Mr. Kudasov was explaining that Fargoil's parent was also consolidated with YUKOS. Investigator Iogan was curios to find out what the money was being spent on. Mr. Kudasov explained that these dividends were used to purchase assets like Mazeikiu Nafta and Transpetrol, or for investment.

June 17 interrogation: Investigator Iogan continued to question Mr. Kudasov on operating procedures in his department. Mr. Kudasov was explaining how funds were being moved within the company. Once more, Mr. Iogan was asking why funds were transferred to foreign jurisdictions by means on dividend payments. Mr. Kudasov, once again, explained that if YUKOS, as a Russian company, could not purchase Eurobonds and had to use one of its foreign subsidiaries for this purpose.

After Mr. Lakhtin finished the last transcript, Mr. Kudasov affirmed the testimony. The prosecution remained silent and, after a drawn out pause, Judge Danilkin inquired if they had any other questions for their witness. Prosecution did not.

Mr. Khodorkovsky asked the court to escort the witness out so that he could lodge an objection. Mr. Khodorkovsky told the court that he saw in prosecution's reading of Mr. Kudasov's interrogation a type of "procedural fraud." He explained that, in addition to reading transcripts of interrogations conducted after the charges were filed, prosecution was using Mr. Kudasov's testimony which was based on examination of documents not found in the case file. According to Mr. Khodorkovsky, out of approximately 20 documents that investigator Iogan showed to Mr. Kudasov, the defense only managed to find one in the case file, so far. This, Mr. Khodorkovsky insisted, prevented the defense from examining the documents themselves, as well as procedural steps that led to the documents being in possession of investigators.

The court did not respond to Mr. Khodorkovsky's objections and asked the bailiffs to bring the witness back to the courtroom.

Mr. Khodorkovsky asked Mr. Kudasov to explain what the latter mean when discussing "potential problems with transfer pricing." Mr. Kudasov explained that crude oil prices never varied more than 20% from what they were in Khanty-Mansiysk region, but there was talk of going beyond 20%. However, he did not remember what time period was being discussed and what government agencies, besides tax regulators, would have made an issue if the variation indeed increased. Furthermore, Mr. Kudasov believed that, even with a discount, the price paid covered crude oil production costs.

Mr. Khodorkovsky asked Mr. Kudasov to explain his comment that a company was not affiliated under Russian standards but was consolidated under US GAAP. What standards Mr. Kudasov discussing - monopoly, tax, contract. Mr. Kudasov, using Fargoil as an example, explained that YUKOS was not Fargoil's shareholder and he did not know the chain that lead from Fargoil to YUKOS. But Fargoil was consolidated.

Mr. Khodorkovsky asked if any company within YUKOS' consolidation perimeter paid dividends to someone outside that perimeter. Mr. Kudasov testified that the only company to do that was YUKOS. [Dividend payments to shareholders. -Eds.] Discussing dividend payments from domestic crude oil traders to non-resident shareholders, Mr. Kudasov testified that he was not aware of any instances when dividends paid out simply disappeared from the YUKOS perimeter.

Mr. Kudasov explained the various procedures that were in place to ensure that no fraud could be committed with securities purchased by non-resident YUKOS subsidiaries. These included weekly reports to Mr. Misamore, as well as to YUKOS accounting department.

Mr. Kudasov discussed payment procedures for crude oil purchase transactions. He explained that a payment order always contained reference to a contract. Next, Mr. Kudasov discussed expenditures YUKOS made from 2000 to 2003. He remembered that YUKOS received a syndicated loan from a group of foreign banks, but he did not remember the exact amount. However, he remembered that YUKOS made regular loan payments. Another major expenditure happened in connection with YUKOS/Sibneft merger, specifically the purchase of 20% of Sibneft's shares. In addition, YUKOS made an open tender for up to 10% of its shares.

Mr. Khodorkovsky asked if Mr. Kudasov followed a specific set of procedures before payments were made. Mr. Kudasov explained that the company had a strictly regimented procedure on payment authorizations, implemented by the company's management. Mr. Kudasov testified that no payments or funds transfers were made unless authorizations from specifically authorized persons accompanied payment or transfer documents.

"Do you know anything about the existence of any organized crime group in the YUKOS oil company?" Mikhail Khodorkovsky came to his last question for today. "I have no such information," Mr. Kudasov replied.

Mr. Khodorkovsky asked the court to postpone the rest of Mr. Kudasov's cross-examination until Thursday, explaining that the defense needed to study his interrogation transcripts. Despite Mr. Lakhtin's objections, Judge Danilkin acquiesced to Mr. Khodorkovsky's request.

The trial will resume on Thursday, March 18, 10:00 Moscow Time.