Corpwatch.org
May 10, 2005
Yukos Kingpin on Trial
By Lucy Komisar
Lucy Komisar is an investigative journalist writing a book on the global impact of offshore banking and corporate secrecy.

In mid-May a Moscow court will issue a verdict in the trial of Mikhail Khodorkovsky, the figure behind Yukos Oil, who was once known as Russia's richest man. Khodorkovsky, who a few years ago was worth more than $15 billion, is on trial for fraud and tax evasion, much of it made possible through the use of offshore shell companies.

Khodorkovsky has been in prison since 2003, when he was charged with embezzlement and for rigging a privatization auction of the petrochemical company, Apatit. Some critics argue that Khodorkovsky is being held up as a symbol of Russia's ruling class of exorbitantly wealthy businessmen, and that his trial is politically motivated. Senator John McCain - in a recent statement before the Senate - likened the charges against the young oligarch to the overthrow of a government saying, "a creeping coup against the forces of democracy and market capitalism in Russia is threatening the foundation of the U.S.-Russia relationship.”

But Western corporations and, by extension, the Western media may in fact be equally motivated to obscure the facts and make Khodorkovsky into a capitalist martyr.

Born in 1963, Khodorkovsky is an attractive man who favors aviator glasses. He went to university in Moscow and received an advanced degree in chemistry. Politically active at university, he was the deputy secretary for Young Communists League of Moscow’s Frunze district. He was named head of the local technology business center under perestroika and turned a profit by reselling computers. He then used the cash he made to provide financial services to the first Russian entrepreneurs -- organized crime groups. The service changed rubles into dollars and transferred them abroad via offshore accounts.

With accumulated profits, in 1988, he set up Bank Menatep (named after the Russian acronym for Frunze's “Inter-Branch Centre for Scientific and Technological Programs”), which prospered under the patronage of Russian entrepreneurs and politicians.

Khodorkovsky hit the big time with President Boris Yeltsin’s loans-for-shares program, through which, it turned out, state assets were looted at rigged auctions for knock-down prices in exchange for “loans” the government would never repay.

Essential to his frauds was the use of offshore shell companies, artificial fronts set up in tax havens that offer corporate and bank secrecy, no or low taxes, and protection from international law enforcement or minority shareholders seeking to trace the money. While there are about 70 tax havens around the world, Khodorkovsky’s favorites included Switzerland, Gibraltar, Panama, and the Isle of Man, a British crown colony.

Apatit and Avisma

For example, in 1994, Khodorkovsky and his friends bought a 20 percent stake of Apatit, a Russian state-owned company worth $1.4 billion at the time, for a mere $225,000 and a promise to invest $283 million. When the company was put on the auction block, Khodorkovsky arranged for four of his shell companies to be the only qualified bidders in position to buy it. But after winning the bid, the investors failed to inject any money into the company and ignored a subsequent court order to return the shares. Instead they sold the stake to Menatep, which transferred it to offshore shell companies.

Company managers set up a transfer pricing scheme, selling Apatit products at low prices to their shell companies, which sold them on the world market for much more. Meanwhile, taxes and dividends were paid on the low figure. At Khodorkovsky's trial, prosecutors said this defrauded the company and shareholders of more than $200 million and the country of millions in taxes.

In 1995, Khodorkovsky was responsible for a similar scheme involving Avisma, a titanium company. Again, Menatep Bank owned the winning offshore company. Menatep then set up a transfer pricing network, meaning they used an offshore company to “buy” Avisma’s output at below-market prices and then sold it for much more, while paying virtually no taxes and reaping hidden profits, which didn't go to minority shareholders.

Yukos

All this brings us to Yukos, the oil company that was sold in more auctions rigged by Menatep. But this time, the stakes were even higher. Khodorkovsky paid $309 million for a controlling 78 percent of Yukos. The new “owners” were his offshore shell companies. Months later, Yukos traded on the Russian stock exchange at a market capitalization of $6 billion.