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Oil tycoon 1994 deal comes back to haunt { November 7 2003 }

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1994 Deal Comes Back to Haunt Oil Tycoon in Russia
Indictment Revisits What Went Wrong In Privatization Era

By Peter Baker
Washington Post Foreign Service
Friday, November 7, 2003; Page A23

MOSCOW, Nov. 6 -- Few Russians paid much attention when the state offered part of a fertilizer company called Apatit for sale to private investors back in 1994. Few, that is, except the four bidders. According to authorities, they were all one and the same.

The idea, prosecutors allege, was to create a fake competition through front companies and then have three of the "rivals" back out, leaving only the low bidder to seize the prize at a bargain rate. The ruse worked, authorities say, and the winner then failed to put up the money it pledged and sold off the shares before the state could take them back.

Rigged auctions were common during the frenzied days when Russia sold off industrial assets following the collapse of the Soviet Union. But nine years later, Apatit has come back to haunt Russia's richest man. The obscure auction sits at the heart of the indictment of imprisoned oil tycoon Mikhail Khodorkovsky and has fed concerns among investors and reformers uncertain where the case could lead.

Hoping to reassure the Russian and international business communities, President Vladimir Putin has repeatedly insisted that the Khodorkovsky case is not about reopening the often-corrupt privatizations of the 1990s, because that would undermine Russia's booming economy. "That is why there will not be a deprivatization or a reexamination of the results of privatization," Putin told Italian journalists this week, "but everyone will have to learn to live according to the law."

But the Khodorkovsky prosecution does in fact reexamine the results of privatization, at least in this instance. Few independent analysts consider the Apatit auction a shining model of privatization, but they do view it as representative of an era of bandit capitalism when people such as Khodorkovsky manipulated the system and acquired great wealth at state expense.

"This is a very typical case," said Boris Kuznetsov, a prominent Moscow lawyer who is not involved in the Khodorkovsky matter. "Even if there were mistakes during this privatization, they are the same mistakes that were made during the privatizations of dozens if not hundreds of companies. I know many such companies, and nobody's looking at their cases now, because they're loyal to the authorities."

Prosecutors, who have also charged Khodorkovsky with massive tax evasion, have not explained why they consider Apatit different from many other questionable auctions. They turned down interview requests this week.

Vladimir Yudin, a pro-government lawmaker in the lower house of parliament who first asked prosecutors to investigate Apatit this year, has called it an especially egregious example of the thefts of the 1990s, likening it to "economic terrorism." He said he hoped it would lead to a review of many other controversial privatizations, despite Putin's comments to the contrary.

Another legislator, who supports prosecutors but not a broader review of privatization, said Khodorkovsky's actions stood out and deserved scrutiny. Vasily Teterin, deputy chairman of the State Duma's property committee, said in a statement that authorities need to "sort out all the lawlessness, as privatization resulted in the bankruptcy and destruction of not only individual businesses but also entire industries."

As outlined in documents detailing the charges against Khodorkovsky, the Apatit sale could be a case study for all that went wrong with Russia's much-criticized privatization, an operation over several years that probably represented the largest sell-off of state assets in history.

Apatit was, in the prosecutors' rendering, a tale of a manipulated auction, deceptive accounting, broken obligations, sham transactions and ignored court rulings. Khodorkovsky's team wound up with 20 percent of a major company for just $225,000, instead of the $283 million it agreed to pay.

Even Khodorkovsky's defenders do not say the sale of Apatit shares looks good when examined up close, although they maintain it fell within the law at the time. "No one's saying privatization legislation was perfect," Anton Drel, Khodorkovsky's attorney, said in an interview.

But Drel has what he considers a powerful defense witness -- Russia's prosecutor general, Vladimir Ustinov.

That's because the Apatit sale has already been extensively litigated in civil court, and after years of wrangling, Khodorkovsky's team finalized a settlement with the Russian Federal Property Fund last year in which it paid a penalty of $15.5 million. Not only did a court sign off on the settlement, so did Ustinov.

In an April 28 letter, Ustinov wrote that an investigation into the case determined that allegations of antitrust and tax law violations "were unfounded. Therefore, there is no reason for further actions by the Prosecutor General's Office."

Barely two months later, Ustinov's office reopened the probe and arrested Platon Lebedev, Khodorkovsky's partner and director of their holding company, Group Menatep. A spokeswoman for Ustinov explained the abrupt reversal by saying that investigators decided to make "additional checks" and concluded that crimes had been committed after all.

The "additional checks" were made even though the aggrieved party, the state property fund, no longer had any complaints. "The Russian Federal Property Fund does not have any claims against the Menatep financial group regarding the 20 percent share of the joint stock company Apatit," fund spokesman Vladimir Zelentsov said by telephone this week. "We expressed our position many times in July, and we have not changed it since then."

Khodorkovsky's camp said Ustinov's April letter effectively exposed the political nature of the subsequent prosecution. "After that, to talk about the rule of law is absolutely absurd," said Hugo Erikssen, spokesman for Khodorkovsky's oil company, YukosSibneft. "They say they're doing everything by the book. They are not."

At the time of the stock sale, Apatit was a state-owned company in the northern city of Murmansk and the largest Russian producer of apatite, or phosphate minerals. Four bidders showed up on July 1, 1994, for the investment tender for a 20 percent stake in the company, and the high offer of $1 billion was declared the winner.

But the winner and the two runners-up then declined to move forward with a purchase, according to prosecution documents, leaving the low bidder, a firm called Volna, which is controlled by Khodorkovsky's Menatep, to claim the shares with a bid of $283 million. The three other bidders, prosecutors said, were actually controlled by Menatep Bank as well and had their bid guarantees signed by Lebedev, all on the same day, June 27, 1994.

Under the terms of the auction, the winner paid only $225,000 to the state, essentially a down payment, but was obligated to invest $283 million in the company in two installments over the next year. Volna did not do so. When authorities pressed the matter, the indictment contends, Volna simply sold the Apatit stock to a series of other firms that prosecutors allege were still controlled by Menatep. In 1998, a Moscow court invalidated the auction, but since the Apatit shares had already been sold, the state could not reclaim them.

Eventually the state property fund negotiated the $15.5 million settlement, which the court approved and Volna paid on Christmas last year.

Drel, the lawyer who represents both Khodorkovsky and Lebedev, said prosecutors were wrong to assume the three bidders that dropped out were controlled by Menatep simply because the bank guaranteed their bids. "They went to Menatep. So what?" Drel said. "This bank gave guarantees and the others didn't."

He said Volna in the end could not put the required investment into Apatit because it was too burdensome. "The investment program at the time was terrible," he said. "If it had been fulfilled, the company [Volna] would have died."

The Khodorkovsky indictment also focuses on alleged fraud during another privatization, this one in 1995 when his team acquired 44 percent of a fertilizer research institute called NIUIF. According to authorities, the Menatep team in this case too sold off the shares to other shell companies under its control to avoid investment obligations and thwart a court order invalidating the auction.

The tax charges stem from personal and corporate actions. Prosecutors allege that Khodorkovsky, as an individual, sidestepped paying taxes in 1998 and 1999 by registering as a consultant while serving as chief executive of Yukos oil company. He then set up dummy consulting contracts to justify the registration, which allowed him to pay lower taxes than if he had been treated simply as a chief executive, according to authorities.

He also oversaw an elaborate scheme, they said, in which Yukos avoided paying hundreds of millions of dollars in taxes by selling oil to front companies at discount rates and then paying taxes with promissory notes instead of cash. And prosecutors accuse Khodorkovsky of embezzlement for transferring some assets to another so-called oligarch, Vladimir Gusinsky, a Putin foe who fled the country to avoid prosecution.

Drel said the tax charges against Khodorkovsky confuse crimes with legal strategies to minimize tax payments. Prosecutors are wrong in asserting that Yukos controlled the companies involved in the oil sales, he said. Drel and Yukos officials also say international auditing firms, including PricewaterhouseCoopers, have examined company books without finding illegal tax evasion.

As for Khodorkovsky's registration as a consultant even as he ran the oil company, Drel said: "That was the law at the time. It was allowed. Where's the crime?" The whole prosecution case, he said, seemed desperate. "I don't know what they'll invent tomorrow. It's all ridiculous."

2003 The Washington Post Company

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