Witness Testimony Summary: Mikhail Kasyanov
Testimony Dates:
Bio:
Mr. Kasyanov is the former Minister of Finance of the Russian Federation, Deputy Prime Minister of the Russian Federation and, from May 2000 through February 2004 was the Prime Minister of the Russian Federation.
Testimony Summary:
Mr. Klyuvgant explained that Messrs. Khodorkovsky and Lebedev were accused of leading an organized group of persons who stole 350 million tons of crude oil from YUKOS production subsidiaries during 6 years from 1998 to 2003 and asked whether a crime of this magnitude could have gone unnoticed by the government. Mr. Kasyanov told the court that the volume alleged to have been stolen was probably the entire volume of the crude oil YUKOS produced and YUKOS, which was one of the largest tax payers and whose production was closely tracked, sold crude oil and petroleum products domestically and internationally. "To talk about embezzlement of this magnitude?! My answer is - absolutely not! That's not possible!" Mr. Kasyanov replied.
Mr. Kasyanov testified that until 2003 he did not notice any substantial disagreements between the government, its representatives and Mr. Khodorkovsky. But in 2003 there was a moment when he began to realize that there existed tension. He remembered participating in a February 2003 meeting between President Putin and a group of business leaders, when a fight against corruption was part of the discussion. Mr. Khodorkovsky presented a report, describing a deal by Rosneft to purchase Severnaya Neft as having characteristics of a corrupt transaction. Mr. Kasyanov told the court that he was surprised by President Putin's reaction, who, in a very sharp tone, told Mr. Khodorkovsky that there were issues with privatization of "his" company. Mr. Kasyanov told the court that from that moment on he began to feel that there was pressure being exerted on business and that around that time he began to have disagreements with Mr. Putin.
When the tension between Messrs. Putin and Khodorkovsky became apparent after February 2003 and Mr. Lebedev was arrested in July of that year, Mr. Kasyanov attempted to get an explanation from Mr. Putin, as these events were having an adverse effect on the business community and foreign investments into Russia. Mr. Putin refused twice to discuss this issue, but finally told him that YUKOS was financing political parties - not only SPS and Yabloko, which Mr. Putin approved, but the KPRF, which Mr. Putin did not approve. Mr. Kasyanov explained that he declined to pursue the conversation any further - first, because he was surprised to find out that a perfectly legal activity of financing political parties required a secret approval from the President and, second, because the answer was given about a question on why Mr. Lebedev was arrested. Mr. Kasyanov testified that after this conversation he formed an opinion that Mr. Lebedev's arrest was politically motivated.
Mr. Kasyanov testified that after Mr. Khodorkovsky was arrested he approached Mr. Putin once more, but this time was told to "talk to the Office of the General Prosecutor, who knew what they were doing." He was able to get a briefing from Deputy General Prosecutor Birukov, who explained that the case against YUKOS and its management was being built on the practice of using companies in regions with preferential tax treatment to minimize taxes. Mr. Kasyanov explained that until December 2003 using companies in those regions was in compliance with the law, which further cemented his certainty that the process was politically motivated. Mr. Kasyanov testified that he publically announced his unhappiness with Messrs. Khodorkovsky and Lebedev's arrests, which was one of the reasons for the growing tension between Mr. Putin and him, finally leading to his dismissal as the Prime Minister.
Mr. Kasyanov testified that amongst the nine largest crude oil companies which produced over 90% of Russia's crude oil output, YUKOS and LUKOIL were the two largest both in terms of crude oil production and payments made into the federal budget. Mr. Kasyanov testified that YUKOS, aside from being the second largest then the largest crude oil producer, was not any different from any of its industry peers.
During the time period he was asked about - 1998 through 2003 - Mr. Kasyanov characterized all crude oil companies as having three common characteristics: being vertically integrated, practice of using transfer pricing and permitted by law use of zones with preferential tax treatment. Mr. Kasyanov added that this description applied to the aforementioned nine companies because he regularly met with those companies' CEOs.
Mr. Kasyanov described transfer pricing as normal price-forming mechanism within a vertically integrated holding, in the crude oil and other industries. He explained that this mechanism allows establishing an adequate price for delivery of crude oil for refining, with the final goal of having reasonable prices for the final product on the open market. According to Mr. Kasyanov, transfer pricing mechanism allowed to show the entire revenue volume and to provide the government with accurate information about the company's tax base for subsequent taxation. Mr. Kasyanov testified that the government received regular reports on the total amount of payments and comparison on payments by e companies within the crude oil industry. YUKOS tax payments per ton of crude oil produced were consistently in the middle or upper half of those amongst the largest crude oil companies, making YUKOS consistently one of the largest tax payers in Russia.
Asked about the government's oversight of the crude oil industry, particularly the tax and the export controls, Mr. Kasyanov explained that that the crude oil industry was overseen by the Economy Ministry, Fuel and Energy Ministry, Tax Ministry, Environment Ministry and others, with all compiling reports and statistics. Mr. Kasyanov testified that the federal budget was based in large part on expected tax payments by the crude oil companies, which resulted in his practically weekly reviews of the payments made into the federal accounts. He added that in 2001 and 2002 he met regularly with the heads of the crude oil companies to ensure that the government and the business arrived at a consensus on the extent of the proposed tax legislation.
Mr. Kasyanov testified that he knew then, as he knows now, that prices at which crude oil is sold in the regions are substantially lower than those on the European exchanges. According to Mr. Kasyanov, this information was available publically. Mr. Kasyanov told the court that this price difference was a "fact of life" and it was difficult to imagine crude oil being sold in Omsk for the same price it was sold in Rotterdam.
Mr. Kasyanov testified that it would have been unrealistic for crude oil companies, YUKOS included, to deliver crude oil to refineries at prices mirroring those in Europe. In fact, though these requests were never made through official channels, the government asked the crude oil companies to not raise crude oil and petroleum prices during the planting season, so that the farmers could afford to run their equipment. The companies heard the government's concerns and did not index prices with inflation and other factors. In addition, crude oil companies delivered crude oil and petroleum products to ministries and other government agencies, adjusting their prices for the Ministry of Defense, for example. Mr. Kasyanov testified that, in fact, a certain price control by the crude oil companies was part of political calculation and was encouraged by the government.
Mr. Kasyanov testified that Mr. Khodorkovsky was the CEO of YUKOS and represented the company in its interactions with the government. He confirmed that he never received any information about Mr. Khodorkovsky trying to hide his affiliation with YUKOS, including his position at the company. Mr. Kasyanov testified that when it came to the crude oil industry Mr. Khodorkovsky was by far the most active CEO and actually represented the industry during the negotiations about the new tax legislation. According to Mr. Kasyanov, he found Mr. Khodorkovsky to be the most astute CEO amongst the nine biggest crude oil companies, who acted as the leader of that team.
Mr. Kasyanov testified that he was never made aware of instances when YUKOS management and Mr. Khodorkovsky specifically, attempted to hide any information about the company. In fact, he remembered YUKOS being one of the first if not the first companies to publically disclose its financial information, which later became the norm for many large companies.
On cross-examination Mr. Kasyanov testified that he knew the general principle that YUKOS, like all other crude oil companies, utilized transfer pricing within the holding. Mr. Kasyanov explained that it took a while to change the minds of regional governors and members of the Duma about the way taxes should be collected. Prosecutor Smirnov asked whether the real reason for changing the law was the fact that big companies were registered in regions with preferential tax treatment and were evading taxes. Mr. Kasyanov testified that the prosecutor's version was simply not true. The tax legislation as it existed at the time allowed the regions to lower tax rates and to provide other incentives to crude oil companies, amongst others. According to Mr. Kasyanov, the practice fully complied with the laws as they were enacted at the time. The government thought that it was inappropriate for the regions to finance themselves through this type of arrangement and made a decision to change the system.
Mr. Kasyanov testified that economic advantages of vertical integration did not depend on where the crude oil or petroleum products were going to be sold. According to Mr. Kasyanov, in practice the price of oil inside and outside Russia was very different - one had only to go to Europe to see that the gasoline is at least twice as expensive as it is in Russia.