Khodorkovsky & Lebedev Communications Center

Testimony Dates:

March 11

Bio:

Stanislav Zaitsev is a senior audit manager at KPMG's Moscow office. Prior to joining KPMG, Mr. Zaitsev worked at PricewaterhouseCoopers from 1996 to 2007, from 1996 to 1998 at Price Waterhouse and Co. before it merged with Coopers & Lybrand. He was a senior consultant, manager and, prior to leaving the company, senior manager.

Testimony Summary:

When questioned by the prosecution, Mr. Zaitsev briefly explained his work history at PwC. Then, he testified that from 1997 through 2002 he participated in audits of YUKOS and some of its subsidiaries - including on location - and also briefly worked on a YUKOS-related project sometime in 2004. Mr. Zaitsev testified that he worked as an auditor of Yuganskneftegaz from 1996 to 1999, then worked in the consolidation group. He also worked on some consulting projects, which included business trips to Samara.

He also participated on a consulting project in connection with Behles Petroleum, South Petroleum and Baltic Petroleum. Mr. Zaitsev testified that sometime in 1999 or 2000, he did not remember more specifically when, he was told that there was a consulting project which required some work to be done on the Isle of Man and in Switzerland. The work and procedures were specified in contract between PwC and each of the three companies. Mr. Zaitsev explained that he performed testing on a sampling of crude oil contracts. His responsibility was to examine these and to report whether he found any inconsistencies or wide divergences, including in crude oil pricing. Mr. Zaitsev testified that he met with the companies' representatives and learned information about these companies. He remembered that these companies purchased crude oil from YUKOS, then sold it to third parties. Crude oil traders made their profit from the margin. Mr. Zaitsev remembered that Behles, Baltic and South sold crude oil to well known companies, he did not remember the company names.

After less than 30 minutes of questioning, the prosecution motioned to read Mr. Zaitsev's interrogation transcripts. Mr. Shokhin told the court t was enough that, in his subjective opinion, he determined that contradictions in Mr. Zaitsev's testimony existed. According to Mr. Shokhin, there were contradictions between what Mr. Zaitsev said during the preliminary investigation and what he said in court. He deemed these contradictions to be "material." "The court must, regardless of what [the defense] thinks, examine all the evidence, because the investigator and the supervising prosecutor found the testimony to be material," Mr. Shokhin almost shouted. Prosecution's motion was granted.

Mr. Zaitsev's transcript included additional details about his work in connection with YUKOS and, particularly, his work with Behles, Baltic and South. Mr. Zaitsev was discussing his work on the Isle of Man. His task was to analyze the price formation policies under which these companies operated. Specifically, his task was to discover whether some of the counter-parties were purchasing crude oil at prices substantially different than those charged other counter-parties. Mr. Zaitsev was explaining that he was analyzing various discounts used and whether some of the counter-parties received additional and unusual types of discounts. According to Mr. Zaitsev, all pricing began with Brent quotes, as published by one of the crude oil reporting agencies. Mr. Zaitsev mentioned that, although certain transparency was lost once all of the discounts were added, PwC did not uncover any unusual variations in crude oil sales transactions that were sampled.

On cross-examination, Mr. Zaitsev testified that he began working on projects connected with Yuganskneftegaz when the company borrowed funds from the World Bank. Mr. Zaitsev testified that he worked on the Yuganskneftegaz audit team in 1997-1999. He remembered that he visited several sites during his audits, including production facilities. He observed a shareholders meeting, also, and, after Mr. Lebedev's prompting, assured the court that he attended "a real" shareholders meeting.

Mr. Zaitsev explained what happens during an audit. He described the initial strategy sessions and audit plan development at the Moscow office to the onsite visits to the sprawling enterprise that is Yuganskneftegaz. According to Mr. Zaitsev, all audit teams exchanged information, with everything ultimately being evaluated and combined back at the Moscow office.

Mr. Zaitsev testified that Yugansk produced and sold crude oil. He testified about various documents he examined to be sure of the aforementioned statement. These included crude oil balances, crude oil contracts, invoices, transfer acts and Transneft shipment confirmations, among others. Mr. Zaitsev testified that audit teams included tax specialists, who examined the company's tax statements.

Mr. Zaitsev testified that he never heard from anyone that in 1998-1999 Mr. Lebedev, or anyone else, embezzled the entire crude oil production of Yuganskneftegaz. Mr. Zaitsev explained that he could not understand how the term "embezzled" was being used, but, if he was to take the literal meaning, no one ever told him that anyone embezzled crude oil from Yugansk and, furthermore, during his work on Yuganskneftegaz he never uncovered any facts pointing to crude oil embezzlement. He told the court that he could not speak from a legal analysis point, but explained that he had a hard time imagining what crude oil embezzlement was.

Mr. Zaitsev testified that the auditors were aware that the production companies were selling all of their crude oil to YUKOS or YUKOS subsidiaries. Furthermore, the auditors were fully aware that a portion of crude oil was not exported but went to crude oil refineries to be processed into petroleum products. Mr. Zaitsev confirmed the auditors knew that revenues reflected in financial statements were a direct result of crude oil and petroleum products sales, all from the crude oil produced by the YUKOS production subsidiaries. Mr. Zaitsev testified that he was never asked by anyone to conceal any information related to audit.

Mr. Zaitsev did not remember all of the specifics of the work he did with South Petroleum, but he explained some of the general principles of what he was looking for when he was on the Isle of Man. Mr. Zaitsev testified that he did not find any unusual discounting or other suspicious arrangements. Mr. Zaitsev explained that when he told the investigator about the "loss of transparency," he only meant that for someone who was inexperienced in crude oil business, combination of discounts presented a challenge in analyzing which discounts were appropriate. As he stated earlier, Mr. Zaitsev did not uncover unusual trading or discounting in contracts with similar delivery terms and quantities.

Mr. Zaitsev testified, looking at the list of Baltic and South's ultimate owners, that none of the companies were familiar to him and that he did not associate any of the companies with YUKOS. Furthermore, Mr. Zaitsev testified that at not time during his work on YUKOS related matters he thought of Behles as connected with YUKOS, or being part of the YUKOS group of companies.

Mr. Zaitsev testified that he never uncovered any instances where YUKOS sold to crude oil to any of these companies with a discount more than 20% to that of published Urals quotes. He explained that the margins he saw were close to 5%, but certainly nothing as high as 20%.

Mr. Zaitsev went over the PwC project examining YUKOS export sales from the beginning of 1998 through middle of 1999. Mr. Zaitsev explained that he wasn't very familiar with that document, but confirmed that during his work he never uncovered any information to contradict anything that PwC included in the final draft. That information consistently showed that the price YUKOS was charging for its crude oil sales was consistently higher than that of its competitors and higher than the reported average on the Russian market.