Khodorkovsky & Lebedev Communications Center

On Monday, Mr. Krasnov told the court that there was a witness present outside the courtroom that the defense wanted to question. According to Mr. Krasnov, the witness was expected to testify on matters relevant to the charges. Mr. Aleksey Pryanishnikov entered the courtroom. Mr. Pryanishnikov testified that from 1999 until 2003 he worked at Nefteenergobank, first as a leading legal specialist, then as Chief Legal Officer. Beginning in 1999, with YUKOS acquiring a stake in the bank, it came under the company's control. Other major stake holders in the bank included VNK, Tomskneft, Strezhevoy Administration and Tomskenergo.

Mr. Pryanishnikov explained that when he joined the bank in 1999, he saw that Tomskneft had some issues. The company had tax arrears, its bank accounts continued to get arrested. At the same time, the salaries had to be paid because Tomskneft was the forming center for the mono-city of Strezhevoy. It was obvious that Tomskneft's financial situation was unstable - a trillion ruble tax arrear could not be a sign of stability. Mr. Pryanishnikov explained that the trillion rubles were accumulated prior to YUKOS purchasing a majority stake in VNK.

Mr. Pryanishnikov told the court that he clearly remembered the line between the "bad" and "good" situation at Tomskneft. Beginning in 2000, Tomskneft's bank accounts stopped being arrested; its tax liabilities were resolved. He told the court that the relationship between the bank and Tomskneft became a normal banking relationship. Mr. Pryanishnikov explained that YUKOS made a decision to establish a treasury base for Tomskneft at the bank, tasking the bank, amongst others, with supervising Tomskneft's budget compliance.

Mr. Pryanishnikov discussed the small business support fund, established in 2000 and funded by YUKOS. While at the bank, Mr. Pryanishnikov was servicing the bank accounts which YUKOS established to fund small business loans. He explained that he was on the loan approval committee. During his time on the committee, the bank disbursed several million dollars worth of loans.

Mr. Krasnov asked Mr. Pryanishnikov how the spending by YUKOS on the various non-essential projects, like social projects and small business loans, squared away with what the Mr. Pryanishnikov knew about the charges. Mr. Pryanishnikov told the court that anyone with even a basic knowledge of economics would understand that when a company had all of its products stolen and did not receive any revenue, it would not have had the money for itself, much less for any charity or social projects. In his opinion, these activities were incompatible.

In the afternoon, Pavel Anisimov, former General Manager of Samaraneftegaz and Vice-President of YUKOS-EP, took the witness stand. Mr. Anisimov described what he meant by YUKOS being a vertically integrated company. He explained functions of YUKOS-Moscow, YUKOS-EP and YUKOS-RM. The first one made all strategic decisions for the holding. The second one included the three main production companies. The last company was in charge of refining and selling crude oil and petroleum products.

Mr. Anisimov explained that his responsibilities were to ensure correct functioning of the company - crude oil production, preparation and shipment through Transneft. Mr. Anisimov noted that his responsibilities never included crude oil or petroleum products sales; these were not part of the functions authorized by the power of attorney. Mr. Anisimov confirmed that when he signed various contracts it was according to the authority delegated to him by YUKOS-EP. Mr. Anisimov testified that by the time he put his signature on any contract the document was vetted by YUKOS-EP.

Mr. Anisimov explained that crude oil always sold for more than it cost to produce. In addition, the budget always contained a small but consistent level of profitability. Capital investment funds were provided by YUKOS, particularly in later years, when these became very significant. Asked to confirm it, Mr. Anisimov repeated that Samaraneftegaz always received more for the crude oil than the production cost. He did not remember an instance when Samaraneftegaz was not paid for the oil that was produced. The budget listed YUKOS-RM as providing the payments for operational expenses, such as crude oil production, while YUKOS-EP was listed as the source of capital investment funding.

Mr. Anisimov reiterated that Samaraneftegaz never sold its crude oil on an open market, except for insignificant - ten thousand tons a month or so - volumes sold locally. He explained that the crude oil was transferred to Transneft at any of the four measuring nodes in the Samaraneftegaz's crude oil production region. The process was continuous and involved the signing of transfer and acceptance acts by representatives of both Samaraneftegaz and Transneft. Asked if Samaraneftegaz could halt the transfer and store the crude oil, Mr. Anisimov explained that Samaraneftegaz had capacity to store not more than 2 days worth of crude oil production.

Mr. Anisimov told the court that, despite Samaraneftegaz undergoing regular audits by regional and federal tax authorities, the government slapped the company with back taxes. He told the court that he knew of no production company which sold its crude oil for Rotterdam prices. He explained that quotas, shipping and other costs played a major role in the price difference. None of the expenses related to crude oil shipment, insurance and other expenses were paid by Samaraneftegaz. This information was publicized and was widely available to the shareholders, investors and the government.

On Tuesday, the court heard testimony from three witnesses, one of whom, Mr. Leonid Filimonov, was a former President and General Manager of VNK, then Vice-President of YUKOS-EP.

Mr. Filimonov explained the crude oil production process from extraction to the transfer into the Transneft pipeline. He explained about the equipment used to measure the volume of the crude oil being transferred to Transneft, adding, using Achinskiy Refinery as an example, that refineries had similar measurement systems on their end of the pipeline. Mr. Filimonov testified that in 1997 and 1998 Tomskneft was not getting enough funds to cover production costs. After 1998 the revenues increased and all production costs were covered.

Mr. Filimonov testified that at one point VNK acted as the executive company for Tomskneft. He testified that YUKOS-EP became the executive for Tomskneft after 1998. There were no differences between the management structures of Tomskneft when comparing management under VNK and under YUKOS-EP.

"You know, I forgot that this company existed... until about a month and a half ago when they reminded me during an interrogation. I remember that VNK purchased Achinskiy shares from this company. I have no idea where those shares came from, but we needed them to control the refinery," Mr. Filimonov told the court when asked if he knew a company called Birkenholz. Mr. Filimonov was asked about where he was interrogated about Birkenholz.

"This has nothing to do with the case! May be he should ask me if I was interrogated?! I would not tell him anyway! And, surely they warned this person about criminal liability if they questioned him as a witness," Mr. Lakhtin was out of his chair, yelling. Judge Danilkin did not strike the question, but Mr. Filimonov looked obviously reluctant to discuss anything else about his recent interrogation and told the court that the prosecutor was right - he signed a non-disclosure agreement, which could make him criminally liable.

Mr. Filimonov testified that he never heard of any instances where annual production worth of crude oil disappeared. He confirmed that Messrs. Khodorkovsky and Lebedev never attempted to buy him off or to trade on his reputation.

Mr. Filimonov explained that the volume of crude oil production at all three YUKOS production subsidiaries was increasing continuously. As far as Tomskneft, the crude oil production increased to as high as 15 million tons in 2004, from the 1998 production rate of about 10 million tons. Mr. Lebedev asked whether it was possible for Tomskneft to produce 30 million tons of crude oil in 1999. Mr. Filimonov testified that it was impossible. Mr. Lebedev commented that Mr. Khodorkovsky and he were accused of embezzling 30 million tons of crude oil from Tomskneft in 1999.

Prosecutor Lakhtin objected, demanding that Mr. Lebedev stop questioning the witness as a specialist. According to the prosecutor, the witness did not know the indictment and could not know the substance of the charges, while Mr. Lebedev was asking misleading questions in a selective fashion. "The witness does not understand the question!" Mr. Lakhtin shouted.

Mr. Filimonov confirmed that Tomskneft's Board of Directors, which he chaired until 2000, knew all of the financial and production figures for the company. There could not have been 30 million tons produced during 1999, or in any other year.

Mr. Khodorkovsky quoted from pages 41 and 42 of the indictment where the government stated that Messrs. Khodorkovsky and Lebedev embezzled almost 30 million tons of crude oil from Tomskneft.

Mr. Lakhtin asked why Mr. Filimonov was told to consider another position within YUKOS, then began speculating that it was obvious Mr. Khodorkovsky did not like something about Mr. Filimonov. Mr. Filimonov did not know what to answer, but Mr. Lakhtin was not willing to let this topic go. "So when this guy who practically never worked in the crude oil industry, an accidental person in this area," Mr. Lakhtin directed insults at Mr. Khodorkovsky. Judge Danilkin, whose warnings the prosecutor was ignoring, issued an on the record warning, telling his secretary to enter it to the trial transcript.

Mr. Lakhtin began asking Mr. Filimonov about "Khodorkovsky's previous life." "So he comes to Tomsk and tells you that he's the new owner. You just believed him that he legitimately purchased the company?" Mr. Lakhtin asked. Mr. Filimonov replied that he understood that YUKOS won the VNK auction tender. "You have no idea how that auction was being conducted! But we know!" Mr. Lakhtin decided to start testifying. Judge Danilkin told the prosecutor to stop with the testimony and to return to questions. Mr. Lakhtin promised that he was returning to questions. "So here arrive Khodorkovsky's team members and [Mr. Khodorkovsky] himself, not yet an accused or a defendant. Regretfully!" the courtroom heard Mr. Lakhtin make a statement. Judge Danilkin called a 5 minute recess, telling the prosecutor to come up with some questions.

The cross-examination continued to deteriorate into arguing matches between prosecutor Lakhtin and Mr. Filimonov. Mr. Lakhtin was attempting to convince Mr. Filimonov that Tomskneft really suffered after YUKOS took over the company. According to the prosecutor, YUKOS did not follow the common principles followed by other vertically integrated companies. The fact that Mr. Filimonov thought otherwise, testifying that YUKOS brought an improvement in production, seemed to frustrate the prosecutor further. Mr. Lakhtin told the Mr. Filimonov that this wasn't what the case was about, but Mr. Filimonov told the prosecutor that he was getting tired of arguing. He knew that YUKOS invested in the regions where it was operating.

"So you did not analyze the price situation? Or you could care less? Or just don't want to remember?" Mr. Lakhtin accused Mr. Filimonov of not caring about what happened at Tomskneft, after taking over for Mr. Smirnov. "What do you mean ‘care less'? I had my responsibilities!" Mr. Filimonov shouted at the prosecutor. "I care, also! That's the reason I'm sitting here!" prosecutor Lakhtin shouted back.

Mr. Lakhtin insisted that the witness should have remembered about Mr. Shakhnovsky issuing the power of attorney to Mr. Burganov, who signed all of the contracts. "How should I know about that? If the contracts were signed behind a corner, how would I know this information?" Mr. Filimonov cracked. "I like this answer! I like it a lot! And we know behind which corner Burganov signed these contracts!" Mr. Lakhtin almost shouted. Judge Danilkin cautioned the prosecutor that he was looking at a second warning.

On Wednesday, the trial resumed with Judge Danilkin informing the parties that all of the witnesses summoned to appear this morning failed to appear. The court mailed summonses, but did not know whether they reached their destination. He had no further information about these witnesses. In the afternoon, the court would inform the parties that more witnesses failed to appear, with only Mr. Peter Zolotarev contacting the court to explain that he could not appear because "he was busy."

Mr. Dyatlev turned to presenting documentary evidence, with the first document being a tax audit of OOO Business Oil, conducted in July of 2001. Mr. Dyatlev noted that the court previously examined tax obligations by some of the YUKOS operating companies. Business Oil was one of those companies and the court could verify that Business Oil was consolidated with YUKOS, as reflected in a list of consolidated companies, created by PwC. [Located in Volume 1 of the case materials, this and other tax audits were used by the government during the first trial against Messrs. Khodorkovsky and Lebedev. As our readers remember, back then these types of documents were used to support the charges of tax evasion. Now, the government included these documents in the case where it argues that all of the crude oil was being embezzled and laundered, using companies like Business Oil. -Eds.] As Mr. Dyatlev continued reading, he noted that the inspector was referring to sections of the tax audit and its attachments, which were not to be found in the case file. Mr. Dyatlev told the court that this was very important, because the inspector was drawing conclusions which could not be verified due to the missing sections and documents, but was cut short by Judge Danilkin, who told him to save it for the closing arguments. [The audit appears in the case materials in the same form it appeared in the case materials of the first trial of Messrs. Khodorkovsky and Lebedev. -Eds.]

For the rest of the day Mr. Dyatlev presented the repeat tax audit of YUKOS for 2001. As Mr. Dyatlev continued to read from the tax audit, Mr. Lebedev interrupted and asked the defense attorney whether he read the preceding passage correctly. Mr. Dyatlev re-read the passage - tax inspectors wrote that Trust and Investment Bank (DIB) was affiliated with YUKOS, because it owned 61.48% of the oil company. "Your Honor, someone stole our company from us," Mr. Lebedev exclaimed, laughing, after Mr. Dyatlev re-read the passage. Mr. Dyatlev read an excerpt where tax inspectors were calculating the total volume of crude oil Ratmir sent to various refineries for refining. After reading the total provided, as well as the monthly breakdown, Mr. Dyatlev apologized in advance for the commentary and told the court that there was no way these numbers added up. [Tax inspectors provided a total volume of 1 427 665.7 tons. The monthly volumes used to calculate that sum were: 1 174 162.8, 1 428 516.4, 1 384 534 and 4 165 tons of oil. We will leave it to our readers to compare their math skills with those of the federal tax inspectors. -Eds.]

On Thursday, Judge Danilkin denied two of defense's motions, as well as the prosecution's motion to summon for additional questioning Ms. Lysova and Messrs. Gerashchenko, Haun, Kosciusko-Morizet, Anisimov and Muravlenko.

Mr. Aleksey Garanov, who worked in YUKOS Legal Department from 1997 through April 2003, took the witness stand. Mr. Dyatlev explained that Mr. Garanov participated in various litigations, including the one on the validity of the YUKOS/Yuganskneftegaz General Agreement.

Mr. Garanov testified that he participated often in litigation involving crude oil purchase agreements. On one occasion, when a subsidiary of Sibneft filed a lawsuit against YUKOS, he was sent to Tyumen to work on that lawsuit. While there, his superiors told him that there was a need for someone to participate in the appellate proceeding concerning the YUKOS/Yuganskneftegaz General Agreement. Mr. Garanov explained that YUKOS had to develop strategies for preventing arrest of the crude oil. One strategy involved signing of General Agreements by YUKOS and its production subsidiaries.

Mr. Garanov briefly explained that the regional prosecutor contested the general agreement. The case wound its way from trial through cassation to appeal. The prosecutor's complaint was dismissed. The same events were mirrored in claims brought to invalidate General Agreements with Samaraneftegaz and Tomskneft. Prosecution lost those cases, as well.

One of the arguments used by the prosecutor was that the General Agreement violated Section 170 of the Civil Code - it was fictitious and all transactions made pursuant to that agreement were fictitious, as well. The documents presented by YUKOS were intended to support the very opposite assertion, and the Federal Arbitration Court agreed. Mr. Garanov testified that it was a commonly known fact that Yuganskneftegaz, Samaraneftegaz and Tomskneft were YUKOS subsidiaries.

Mr. Garanov testified that YUKOS was a vertically integrated company, headed by YUKOS-Moscow. YUKOS-EP managed the production arm of the company and YUKOS-RM the refining and marketing. Mr. Garanov testified that this was the only management structure of YUKOS he knew of during the period from 1998 through the time he left and he never heard anyone mention any parallel management structures.

In the afternoon, when defense objected after prosecutor asked for the third time how Mr. Aleksanyan influenced the hiring of Mr. Garanov, prosecutor Lakhtin shot back by telling the court that Mr. Aleksanyan was a member of an organized criminal group in this case, "while in case #18/41-03 there are many unidentified organized group members," and looked pointedly at the witness.

The key exchange of the afternoon occurred after Mr. Lakhtin began to question Mr. Garanov on whether the latter "realized what the substance of a vertically integrated company was." The prosecutor kept pressing the point that Mr. Garanov failed to present to the Federal Arbitration court an explanation on what a vertically integrated company was. Mr. Garanov attempted to explain that as a respondent in a case his side was concerned with countering the prosecutor's arguments - not lecturing the judge on topics which were not argued in the complaint.

Mr. Khodorkovsky approached the microphone and asked that the court strike prosecutor's questions concerning whether Mr. Garanov informed the court if Yuganskneftegaz acted as an independent legal entity inside a vertical holding. "Lakhtin does not understand the basic principles of the Civil Code, which, in the context of a discussion between him and a jurist, makes the conversation simply worthless," Mr. Khodorkovsky told the court. "Discussions about an independent legal entity inside a vertical holding...," Mr. Khodorkovsky continued, but was interrupted by the prosecutor. "I'd ask not to be interrupted! Khodorkovsky is lying! The same Khodorkovsky who concealed from Russian courts that Yuganskneftegaz was part of a vertically integrated company!" Mr. Lakhtin shouted at Mr. Khodorkovsky. "Your Honor, I apologize, but I think he lost his mind! I concealed from the Prosecutor for the Khanty-Mansiysk Autonomous Region that Yuganskneftegaz was part of YUKOS, a vertically integrated oil company created by the President's order?! Did he really loose his mind?!" Mr. Khodorkovsky shot back.

Mr. Garanov confirmed that he knew of three bodies which acted to express a company's will - Shareholders' Meeting, Board of Directors and the Executive. Mr. Khodorkovsky asked whether Mr. Garanov perceived any conflict that, on the one hand, Yuganskneftegaz and other production subsidiaries were independent legal entities, while on the other hand they were part of the YUKOS vertical holding, YUKOS-EP was their executive and YUKOS was their majority then only shareholder and appointed the companies' Board of Directors. Mr. Garanov testified that what Mr. Khodorkovsky described was allowed explicitly by the law, so there was no conflict.

The trial will resume on Monday, August 02, 10:00 Moscow Time.