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[Senate Hearing 109-83]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 109-83
 
                     DEMOCRACY IN RETREAT IN RUSSIA

=======================================================================

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED NINETH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 17, 2005

                               __________

       Printed for the use of the Committee on Foreign Relations

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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)

                            C O N T E N T S

                              ----------                              
                                                                   Page

Aslund, Dr. Anders, Director, Russian and Eurasian Program, 
  Carnegie Endowment for International Peace, Washington DC......    43
    Prepared statement...........................................    45
Jackson, Bruce P., President, Project on Transitional 
  Democracies, Washington, DC....................................    49
    Prepared statement...........................................    52
    Open Letter to Heads of State and Government of NATO and the 
      European Union.............................................    58
Ledsky, Hon. Nelson, Regional Program Director for Eurasia, 
  National Democratic Institute, Washington, DC..................    66
    Prepared statement...........................................    68
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     1
Nix, Stephen, Regional Program Director for Eurasia, 
  International Republican Institute, Washington, DC.............    60
    Prepared statement...........................................    63
Osborne, Timothy, Member, Board of Directors, Group Menatep, 
  United Kingdom.................................................    12
    Prepared statement...........................................    15
    Report of the Council of Europe Parliamentary Assembly.......    29
Theede, Steven, Chief Executive Officer, Yukos Oil Company, 
  Moscow, Russia.................................................     4
    Prepared statement...........................................     7

              Additional Material Received for the Record

Prepared statement received from Mikhail Khodorkovsky............    82
Response from Steven Theede to question submitted by Senator 
  Hagel..........................................................    83

                                 (iii)

  

                     DEMOCRACY IN RETREAT IN RUSSIA

                              ----------                              

                      THURSDAY, FEBRUARY 17, 2005

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:34 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Richard G. 
Lugar, chairman of the committee, presiding.
    Present: Senators Lugar, Sununu, Martinez, Biden, Sarbanes, 
and Obama.

 OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM 
                            INDIANA

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order.
    In his Inaugural Address, President Bush stated that, 
quote, ``It is the policy of the United States to seek and 
support the growth of democratic movements and institutions in 
every nation and culture, with the ultimate goal of ending 
tyranny in our world,'' end of quote.
    I agree with the President. Democracy must be at the core 
of United States foreign policy and diplomacy. Our country must 
be prepared to play a leadership role in ensuring that 
democracy and basic freedoms are promoted and preserved around 
the world.
    The states of the former Soviet Union present a special 
challenge to the advancement of democracy. Some states, such as 
Latvia, Lithuania, and Estonia, have solidified democracy, and 
used this foundation to establish strong economic security 
links to Europe, including membership in NATO. Elsewhere, the 
people of Ukraine and Georgia have struggled and sacrificed for 
democracy. Those efforts have paid off with new governments 
based on democratic principles and the rule of law.
    But these encouraging signs are not universal. Belarus is 
the last remaining dictatorship in Europe, a virtual police 
state. The countries of Central Asia are controlled by 
strongmen, and the effective and consistent application of 
democracy, the rule of law, and human rights remain, in some 
cases a distant goal.
    The biggest concern in the region for democracy advocates, 
however, is Russia. Despite elections and the experience of 
post-Soviet personal freedoms by the Russian people, the fate 
of democracy in Russia is perhaps more ambiguous now than at 
any time since the collapse of the Communist system. Russia is 
a vitally important country with which the United States must 
have a constructive relationship. Those who would discount 
Russia's relevance to United States national security in a 
post-cold-war world are seriously mistaken, in my judgment. The 
interests of our two countries intersect in countless areas. 
Russia can be a critical partner in the war on terrorism, in 
preventing nuclear nonproliferation, in meeting world energy 
needs, in organizing international responses to emergencies, 
and in maintaining economic vibrancy in both Europe and Asia.
    With the adoption and maintenance of strong democratic 
institutions, Russia would develop from an occasional partner 
of the United States into a close friend. The benefits of such 
a relationship, for both countries, would be enormous.
    However, the United States/Russian relationship cannot 
develop in positive directions while basic freedoms are being 
violated in Russia. This is not just a policy of the U.S. 
Government. When a country does not respect the rule of law, 
private businesses around the world impose market-driven 
consequences on that country. Investment and other economic 
links that would help Russia diversify its economy and improve 
its trading relationships are far less likely to appear if 
foreign companies cannot count on a fair and consistent 
business climate and legal system.
    The Russian people have suffered from suicide bombings and 
terrorist attacks, including the tragedies at the Moscow 
theater and the elementary school at Beslan. Russia is fighting 
to overcome terrorist threats that pose grave risks to citizens 
on its own soil. In this struggle, we identify with the people 
of Russia, and we pray for their safety. But even as we 
understand the complex choices facing the Russian Government, 
we can attest that these horrible events should not be used to 
justify the rolling back of democracy. This is a self-defeating 
strategy that will weaken, and not strengthen, Russian society.
    In recent months, the Kremlin has taken action to stifle 
public dissent and political opposition. Rival political 
parties have been suppressed; the election of regional 
governors was canceled; and most of the media has been brought 
under state control. This pattern of behavior has spilled into 
the Russian Government's handling of the economy. The campaign 
against Yukos and Mikhail Khodorkovsky reached a new low, on 
December 28, when one of President Putin's senior economic 
advisors criticized the forced sale of Yukos' main oil-
producing unit and its purchase by a state-owned company as, 
quote, ``the scam of the year,'' end of quote. This honesty 
resulted in the official being stripped of most of his 
responsibilities by the Kremlin.
    Outside of Russia, the Kremlin has attempted, 
unsuccessfully, to alter the outcome of the election in 
Ukraine, and has provided overt support to the breakaway 
regions, specifically Abkhazia, in Georgia. Russian backing 
remains a critical component in President Lukashenko's hold on 
power in Belarus and in efforts by governments in Central Asia 
to rebuff democratic advancements. These anti-democratic 
actions do not make Russia safer, because they contribute to 
regional instability.
    The West's next opportunity to reinforce democratic values 
is in Moldova next month. Moldova's path toward democracy has 
been marked by free and fair multiparty elections. We must be 
vigilant to ensure that the people of that country have the 
freedom to choose their leaders.
    As the United States encourages democracy in the former 
Soviet Union, we must maintain the foreign policy tools that 
support this effort. The administration's fiscal year 2006 
request for the foreign-affairs account is an especially good 
one. But one area that should be revisited, in my judgment, is 
its 13-percent cut in the funding for the Freedom Support Act, 
which underwrites democracy programs in the former Soviet 
Union. With so much at stake in Russia, this is not the time to 
diminish our funding in this area.
    Next week, our President, President Bush, will meet with 
President Putin in Bratislava. The discussion may focus on the 
proliferation of weapons of mass destruction and the global war 
on terrorism. There is much to discuss in these areas, 
including the identification of additional weapons sites in 
Russia in need of security upgrades and Russia's resistant 
posture toward granting liability protections to United States 
contractors working on the Plutonium Disposition Program.
    In addition to these important subjects, President Bush 
must make democracy, human rights, and the rule of law 
priorities of the discussion. The United States must continue 
to press Russia to adopt a free and fair political and judicial 
system. Only then will the United States/Russian relationship 
reach its full potential.
    To examine the threats to democracy and the rule of law in 
Russia, we are joined today by Mr. Steven Theede, the chief 
executive officer of Yukos, and Mr. Tim Osborne, director of 
Group Menatep. We appreciate their appearance, especially given 
that hearings in the Yukos court case, including claims against 
the Russian Government, are still continuing in Houston today.
    On our second panel, we are pleased to welcome Stephen Nix 
of the International Republican Institute, Nelson Ledsky of the 
National Democratic Institute, Anders Aslund of the Carnegie 
Endowment for International Peace, and Bruce Jackson of the 
Project on Transitional Democracies.
    Gentlemen, we thank all of you for joining us today. We 
look forward to your insights.
    Let me mention that my colleague, the distinguished ranking 
member of the committee, may not be with us for a period of 
time, or perhaps throughout the entire hearing, because a 
bankruptcy bill, which he initiated 8 years ago as the original 
cosponsor, is suddenly being marked up this morning in the 
Judiciary Committee. That will necessarily require his 
presence, and we understand that. That bankruptcy markup was 
unknown when this hearing was scheduled. He deeply regrets that 
he will not be present to, at least, hear the initial 
testimony, but we know that he will participate if he possibly 
can.
    Let me, at this point, call upon you, gentlemen, in the 
order that I have introduced you, for your opening statements. 
Perhaps you can summarize in roughly a 10-minute period of 
time. The Chair will not be that rigorous with time 
restrictions. We're here for your information, not to restrict 
the amount that you have to say--but let me just say, at the 
outset, that your full statements will be made part of the 
record in their completion.
    Mr. Theede.

STATEMENT OF STEVEN THEEDE, CHIEF EXECUTIVE OFFICER, YUKOS OIL 
                    COMPANY, MOSCOW, RUSSIA

    Mr. Theede. Well, thank you very much, Mr. Chairman.
    My name is Steve Theede, and I am chief executive officer 
at Yukos Oil Company. And I do very much appreciate the 
opportunity to be here today, so thank you for the invitation.
    I will be brief, and have submitted a more full copy of--
and statement for the record.
    There is much at stake in how the Yukos situation is 
resolved: The supply and price of global oil, the safety and 
welfare of Yukos employees and communities, the future of 
economic development and rule of law within Russia, and the 
relationship of the Russian Federation with the United States 
and other nations.
    The United States has a direct interest in the resolution 
of the Yukos situation. Beyond the important political or 
strategic concerns, there are the vital issues of global energy 
and economic security. There are the rights of more than 60,000 
individual and institutional investors, many of them Americans, 
who express their faith in Yukos and their faith in Russia by 
investing in the company and in the country.
    Investors, whether they are American or not, must have 
confidence that investments made in the international 
marketplace will be protected and that the rule of law, not 
politics or greed, will dictate the actions of government.
    I've spent more than 30 years working in the international 
oil and gas business, engaging successfully in different legal 
and political systems around the world. And I moved to Moscow, 
and I joined Yukos about 18 months ago because I believed that, 
within the global oil business, no country had more potential 
than Russia, and no company had more promise than Yukos.
    In less than a decade, as a privatized company, Yukos had 
become Russia's most stable and reliable oil producer and among 
the most efficient and fastest growing producers in the world. 
As an innovator, a taxpayer, and an employer, Yukos had become 
the true Russian success story and Russia's most progressive, 
transparent, and successful oil company.
    Were there risks in the Russian business environment? Of 
course there were. But less than 2 years ago, the risks seemed 
more commercial than political. I heard and believed President 
Putin's message of an independent judiciary, of private 
ownership, of more protection for investors, of participation 
by international companies to help tap Russia's vast reserves.
    But those high expectations at the start only deepen the 
feelings of disappointment and betrayal today. We've seen, Mr. 
Chairman, a ruthless and unprecedented campaign by the Russian 
Government against Yukos, carried out by way of dubious and 
discriminatory taxes, illegal expropriation of property, 
arrests, and individual intimidation. A modern, globally 
respected company has been dismantled by a series of carefully 
timed and politically motivated attacks by the Russian 
Government. The market value of Yukos has plummeted from $40 
billion to $2 billion in less than 6 months.
    As a litmus test for future investors, the Yukos experience 
certainly is not encouraging. The rules have clearly changed. 
For reasons known only inside the Russian Government, it has--
seems to have reversed its commitment to privatization and 
chosen instead to increase the role of the state. As a result, 
the whims of those in power have replaced the guarantees of due 
process, adherence to the rule of law, and protections for the 
rights of shareholders and property owners.
    Sitting here today, secure in the rule of law, it's hard to 
imagine the human tragedy that is still unfolding in Russia 
today. The former leadership of Yukos sits in a Russian jail. 
Most troubling to me personally, many loyal and outstanding 
Yukos employees, people whom I have worked side by side with 
over the last year and a half, find themselves subject to 
intimidation by the government and threats by its agents. I 
fear for those good people and the uncertain future that they 
face in a country that they love just as we love our own.
    The economic tragedy continues to unfold. It represents the 
dismantling of a potentially great oil company, and one of 
Russia's largest taxpayers, through a systematic and deliberate 
government campaign to bankrupt Yukos.
    First, government officials instructed tax authorities to 
make a tax case against Yukos. The tax claims are a contrivance 
without merit or precedent. They are based on a selective and 
retroactive application of Russian tax laws, and on fines and 
penalties that are unconstitutional. They totaled the 
incredible sum of $27\1/2\ billion.
    I have a chart that I would like to submit that, in 
essence, shows the total tax bill that has been assessed 
against the company. And those are the red bars. That is the 
total of taxes paid at--during the current years that they were 
due, plus the additional penalties that have been assessed--
taxes and penalties that have been assessed against the company 
as a result of this most recent attack. And that's compared to 
the gross revenues of the company. Total gross revenues of the 
company, which is shown in the blue chart.
    And we're showing this just to give you an idea how 
outlandish these tax claims are, because, consider, in 2002, 
the total taxes, both invented and otherwise, along with fees, 
fines, and penalties assessed against Yukos, totaled 111 
percent of the company's gross revenue. There is no business or 
economic logic that explains how a company can be assessed more 
in taxes than it collects in revenue.
    As their next step, the Russian court and bailiff sought to 
collect the total amount, more than $27 billion, before our 
legal appeals were even exhausted.
    In addition, while demanding immediate payment, they 
simultaneously froze all Yukos assets and bank accounts; in 
effect, leaving the company unable to properly function.
    The government's resolution to this contrived situation was 
to declare that, because Yukos could not pay its fictitious 
taxes, the bailiffs would have to seize Yuganskneftegaz, our 
most valuable asset, which produces about a million barrels a 
day, and sell it at auction to satisfy these tax charges. 
Drained of cash and unable to sell assets, we were left with 
limited means to invest in operations, pay salaries, meet 
expenses, or pay taxes that we allegedly owned--owed.
    The so-called auction was a sham in which Yuganskneftegaz, 
which accounted for roughly 60 percent of our total production 
capability, was sold for less than half its appraised value. 
Not surprisingly, the buyer was an unheard-of company, created 
just 2 days earlier and of no certain address, that sold its 
prize almost immediately to Rosneft, a 100-percent completely 
state-owned and controlled company whose new chairman also 
continues in his position as a senior government official.
    Despite the government's unsupportable claims, Yukos acted 
in a responsible way. Even while challenging the tax claims 
through all available legal, political, and diplomatic 
channels, as a matter of good faith and as a signal of our 
interest in finding a reasonable resolution, we began to pay 
some of the taxes. But it quickly became clear that this was 
not really about taxes, but, rather, an orchestrated effort to 
wrest control of the company and its assets.
    As the Moscow Times summarized it on January 14, 2005, 
``State-controlled banks helped a state-controlled oil company 
purchase a controlling stake in Yugans, which was being sold by 
the state for tax debts owed to, and defined by, the state.''
    The legality of these actions has apparently stirred debate 
even within top ranks of the Russian Government. Just last 
week, Andrei Illarionov, a long--a close and long-term economic 
advisor to the Russian President said, Yuganskneftegaz should 
be returned to Yukos. He said there are certain common human 
commandments, such as, ``Thou shalt not steal.'' Not 
surprisingly, by speaking truth to power, this once-influential 
advisor has reportedly been stripped of many of his duties.
    When Americans ask, ``Why should we care about this?'' I 
could give you a number of reasons, but I'll focus on the 
reasons that I know best, and that's energy. As the world's 
largest oil consumer, clearly America's energy security and the 
strength of its economy depend, in good measure, on the 
stability and reliability of global oil supplies. Yukos had the 
potential to add significantly to the stability of the supply 
coming from Russia, making its dismantling an important 
economic blow.
    The numbers are quite impressive. Operating with the 
efficiencies and incentives of a publicly traded company 
utilizing world-class technology and expertise, the annual 
production of Yukos grew by 300 percent from 2000 to 2003. At 
the same time, Russia's overall production grew just 30 
percent.
    Before the government campaign began, in 2004, Yukos had 
become the largest producer of crude oil in Russia and the 
largest exporter of crude oil from Russia. Slightly less than 
20 percent of all crude oil produced in Russia came from Yukos 
and its subsidiaries.
    The production growth is rapidly decelerating. Production 
growth rate has now fallen 4 straight months in Russia. The 
International Energy Agency cut its forecast of Russian oil 
output growth this year to 3.8 percent, citing higher taxes and 
a worsening regulatory climate. The treatment of Yukos and the 
increasing state control of oil production, in general, are the 
critical contributing factors. State control is increasing, 
even as production growth is decreasing.
    Just last week, the Russian Federation announced a ban on 
United States and other foreign-owned companies from bidding 
for new permits to develop several large oil fields. This will 
further discourage needed investment capital and expertise.
    Ronald Nash, Chief Strategist at Renaissance Capital, which 
is a Moscow-based investment bank, called the ban a dramatic 
step down the road of state intervention which Russia has been 
following for some time. The ban could dissuade foreign 
companies from investing in Russia.
    The eyes of not just this body, today, but also the world 
are on Russia as it attempts to gain full membership in the 
global economic community. Russia may be tearing up its own 
rule book, but it cannot be allowed to tear up the 
international rule book.
    Would-be investors might well be wary of doing business in 
a country where international norms and the rule of law can be 
so easily violated, and where property and shareholder rights 
cannot be guaranteed. As long as that system exists, Yukos will 
not be the last company to find its rights violated and its 
assets seized by the Russian authorities.
    I appreciate this chance to take part in the hearing today, 
Mr. Chairman, and I also thank you for unanimous--thank the 
committee for unanimously passing a strong resolution of 
disapproval against the actions of the Russian Government. I 
hope this strong show of resolve will inspire similar protests 
by the full Senate, the House, the President, and Americans, in 
and out of government.
    Thank you very much.
    [The prepared statement of Mr. Theede follows:]

Prepared Statement of Steven Theede, Chief Executive Officer, Yukos Oil 
                        Company, Moscow, Russia

                              introduction
    Yukos is one of the largest multinational oil companies in the 
world. The company had a market capitalization of $40 billion before 
the Russian Federation engaged in a ruthless and unprecedented campaign 
of dubious and discriminatory taxes, illegal expropriation of property, 
arrests and intimidations. The attack by the Russian Federation against 
Yukos violates Russia's foreign investment laws, which provide for 
international arbitration of investment disputes, as well as Russia's 
obligations under its treaties and international law.
    There is much at stake in how this situation is resolved: The 
security, reliability and price of global oil supplies; the safety and 
welfare of Yukos' employees and communities; the future of economic 
development and rule of law within Russia; and the relationship of the 
Russian Federation with the United States and other nations.
    The United States has a direct interest in the resolution of the 
Yukos situation. Beyond the important political or strategic concerns, 
there are the vital issues of our nation's energy and economic 
security. There are the rights of more than 60,000 individual and 
institutional investors, many of them Americans, who expressed their 
faith in Yukos by investing in the company.
    Today, the market value of Yukos has plummeted from $40 billion to 
$2 billion because of the Russian government's campaign of persecution 
and intimidation against Yukos and its officials.
    The Russian government has carried out a ruthless and unprecedented 
campaign against Yukos by way of dubious and discriminatory taxes, 
illegal expropriation of property, arrests and intimidation. For 
reasons known only inside the Kremlin, Russia has decided to reverse 
its commitment to privatization and chosen instead to increase the role 
of the state. It has made an equally unfortunate choice to ignore the 
Western-style reformist laws it passed over the past several years when 
those laws conflict with the interests of the Kremlin. As a result, 
there are no guarantees of due process, no adherence to the rule of 
law, and no protections for the rights of shareholders or property 
owners.
                               background
    Following the collapse of the Soviet Union in the early 1990s, the 
Russian Federation's oil industry consisted of hundreds of stand-alone 
state-owned entities. The vast majority of these were inefficiently 
run, unprofitable and overstaffed. They survived only through continued 
state support. In 1993, the Russian government set out to restructure 
the nation's oil and gas sector. Through privatization, the government 
hoped to make the Russian oil and gas sector viable in a global market 
and, above all, attract much needed direct foreign investment into the 
country.
    Yukos was founded by the Russian government on April 15, 1993 
through the integration of state-owned producing, refining and 
distribution entities. Although it had become a separate legal entity, 
the newly created Yukos remained entirely state owned. It remained that 
way until December 1995 when the Russian government sold its stake in 
Yukos to a group of Russian investors. Thus, through a series of 
tenders and auctions held in 1995 and 1996, Yukos essentially became 
Russia's first fully privatized oil company.
                         russian success story
    Despite the arrival of private investors, Yukos continued to 
experience a sharp decline in production output and mounting salary 
arrears, and faced the technical bankruptcy of its main production 
unit, Yuganskneftegaz or YNG. Its debts to the Russian government had 
grown to more than $3.5 billion. In May 1996, Mikhail Khordokovsky 
stepped in as Chairman of Yukos' Executive Board, bringing with him a 
dynamic, professional management team. The task of this team was clear: 
Transform the company into a multinational enterprise managed in 
accordance with the highest international standards of operational 
efficiency, transparency and corporate governance. Over the next eight 
years, Yukos was successfully transformed into a viable, vertically 
integrated, transnational oil company competing with the biggest oil 
industry players in the world.
    The company repaid all debts owed to Russian federal and regional 
governments, and increased its production capacity by reinvesting its 
profits in drilling, capital construction and new oil field 
development. Further, realizing that attaining Yukos' goal of becoming 
a successful international energy player would require substantial 
foreign investment, Yukos embarked on an ambitious program to transform 
the company's corporate culture into that of a fully transparent, 
Western-style corporation. For example, Yukos became the first Russian 
company to switch to international accounting standards, and the first 
Russian-based multinational to disclose its management and ownership 
structure to the public.
    The company's annual production output grew by 17 percent in 2001 
and by 19 percent in 2002. By 2002, Yukos accounted for approximately 
18 percent of Russia's total oil production, producing an average of 
1.4 million barrels a day. Before the government launched its 
deliberate campaign to destroy the company, Yukos and its subsidiaries 
were the largest producers of crude oil in Russia and the largest 
exporters of crude oil from Russia. Together they produced slightly 
less than 20 percent of all the crude oil produced in Russia, and 
refined and marketed slightly less than 20 percent of the refined 
products in Russia. This made Yukos one of the largest oil and gas 
companies in the world.
    In December 2002, Standard & Poor's rated Yukos ``BB with stable 
outlook,'' and in January 2003, Moody's Investor Service assigned the 
company a rating of ``Ba2.'' At the time, these were the highest long-
term and foreign currency issuer ratings for any privately-held Russian 
multinational. Khodorkovsky himself won the 2002 ``Entrepreneur of the 
Year'' prize, awarded annually by Russia's leading business daily 
Vedomosti, published jointly by the Financial Times and the Wall Street 
Journal. The same year, the Russian government named Yukos the ``Best 
Company for Compensation and Social Payments Programs,'' as well as for 
the ``Implementation of Social Programs at Enterprises and 
Organizations.'' By 2003, Yukos had signed major joint venture and 
strategic affiance agreements with international companies such as 
Total, Schlumberger, and Microsoft. In fact, the company's success was 
so internationally celebrated that, in 2003, ExxonMobil expressed its 
interest in acquiring between 40 and 50 percent of Yukos for an 
estimated $25 billion--a transaction that would have been the single 
largest direct foreign investment in Russian history.
    Not surprisingly, since 1998, the value of Yukos' shares increased 
more than tenfold, including a growth of 250 percent in 2001 alone. By 
all accounts, Yukos was the signature success story of the new Russian 
Federation. By October 2003, the market capitalization of Yukos' 
worldwide stock was estimated at more than $30 billion. As late as 
April 2004, Yukos' market capitalization was estimated at more than $40 
billion. United States investors owned interests in Yukos that were 
worth approximately $4 billion in October 2003, when the Russian 
authorities began their persecution of Yukos' chief executive officer.
    American investors (and investors from around the world) bought 
their interest in Yukos in the good faith belief that their investment 
would not be expropriated. Russia, recognizing the importance of the 
rule of law to international investors, adopted the Russian Foreign 
Investment Law which states in its preamble that it is, ``aimed at . . 
. ensuring stable terms for operations of foreign investors and 
compliance of the legal order of foreign investment with the standards 
of the international law.''
    A company that had been formed from the decaying remnants of the 
Soviet era had become a standard bearer for the new, pro-foreign 
investment Russian Federation. Within a mere eight months, however, 
between April and December 2004, this transparent, globally-respected 
multinational corporation, worth an estimated $40 billion, was 
subjected to a series of carefully timed and politically motivated 
attacks by the Russian government, ultimately forcing it to seek 
bankruptcy protection in the United States on December 14, 2004.
                         khodorkovsky arrested
    During 2002 and early 2003, Mikhail Khodorkovsky reportedly became 
concerned the country's upcoming general election would result in a 
two-thirds pro-government majority in the Russian Parliament 
(``Duma''). He began to contribute openly to major opposition parties, 
but reportedly refused requests to finance United Russia, the current 
governing party. He became an outspoken critic of the alleged endemic 
corruption in the Russian administration and advocated for progressive 
legislative reforms. Due to his close ties with Western business and 
political leaders, his words were resonating outside of Russia and his 
reputation growing.
    In mid-2003, an election year in Russia, the Kremlin reacted. 
Platon Lebedev, Chairman of Menatep Limited, Yukos' largest 
shareholder, was arrested in July 2003 on charges of fraud and tax 
evasion, and Vasily Shakhanovsky, a member of Yukos' Management Board, 
was charged with tax evasion. In July 2003, the Russian Government 
raided Yukos' offices where it went through computer records for 
approximately 17 hours. And on October 25, 2003, Mikhail Khordokovsky 
was arrested at gunpoint by government agents and jailed on charges of 
tax evasion, theft of state property, and fraud. He remains jailed to 
this day. In addition, many loyal and outstanding Yukos employees have 
found themselves subject to intimidation by the government and threats 
by its agents. The Government continues to arrest Yukos' managers, 
intimidate its employees through illegal searches of their homes 
conducted by masked, armed forces, confiscate personal property of the 
company and its officers, and jail or threaten other company employees 
on trumped up criminal charges. In a recent example of this repugnant 
methodology, Svetlana Bakhmina, a young Deputy General Counsel of Yukos 
and the mother of two young children, was arrested late at night at her 
home in Moscow on charges relating to her legal work at Yukos. She 
remains incarcerated.
    Despite the political activism of its largest individual 
shareholder, however, Yukos itself was never involved in 
Khordorkovsky's political activities. All his contributions to 
opposition parties, for example, were made from his personal funds and 
not from corporate accounts. Nevertheless, hand-in-hand with its 
criminal investigations, the government also apparently perceived that 
it had to move against Khordokovsky by targeting Yukos, the single most 
concentrated source of his wealth. In December 2003, a few weeks after 
Khordokovsky's arrest, the Ministry of Taxation conducted a perfunctory 
two-week ``special'' audit of Yukos' books. In April 2004, the 
government slapped a $3.4 billion audit report on Yukos, which it 
claimed Yukos owed in respect of the 2000 fiscal year. The Russian 
government's moves against Khordokovsky's wealth, through tax 
assessments against Yukos, have been numerous since then, clearly 
retaliatory and have involved the systematic repudiation of the rule of 
law.
                          the tax assessments
    Following the first assessment against Yukos, the government levied 
additional tax assessments against Yukos and certain of its 
subsidiaries. Including massive penalties, fines and interest, these 
assessments eventually totaled approximately $27.5 billion. They were 
based on government audits of Yukos' books, which had already been 
audited by PricewaterhouseCoopers, formally audited and confirmed as 
correct by Russian tax authorities, and made as transparent as possible 
as part of the company's corporate philosophy. Further, in light of the 
fact that Yukos was one of Russia's largest taxpayers, it was in 
constant communication with the regional Russian tax authorities, which 
had approved all of Yukos' previous filings following similar audits. 
Yukos has always maintained that the company, like many other companies 
in Russia, used legal and government-approved tax reduction provisions. 
Allegations that Yukos had acted illegally could only be made under a 
selective and retroactive reinterpretation of Russian tax law that 
could not reasonably have been anticipated when the transactions took 
place.
    In addition, the amount of the taxes has been swelled by usurious 
default interest, penalties, and fines. This exponential rate of 
increase jeopardized Yukos' ability to conduct business and decimated 
its net equity. In a blatant example, tax assessments for 2001 and 2002 
have been in excess of 100 percent of Yukos' annual consolidated gross 
revenue; for 2003 the assessments have been in excess of 80 percent of 
Yukos' consolidated gross annual revenue. Indeed, the assessments 
levied against Yukos for 2001 were in excess of four times the 
consolidated gross industry average taxes; for 2002, in excess of 3\1/
2\ times the industry average; and for 2003, in excess of 2\1/2\ times 
the industry average.
                    kremlin moves to bankrupt yukos
    Despite the government's insupportable tax claims, Yukos acted in a 
responsible manner. Even while challenging the tax claims through all 
available legal, political and diplomatic channels, as a matter of good 
faith and as a signal of our interest in finding a reasonable 
resolution, Yukos began to pay some of the taxes. But it became clear 
this was not really about taxes. It was about an illegal and 
politically motivated campaign to expropriate valuable oil assets and 
return them to the close control of the government. Having ignored any 
number of settlement proposals by Yukos, or other reasonable proposals 
to pay the entire amount of the tax assessments over time, the Russian 
government instead intensified its collection efforts against Yukos by 
utilizing the full apparatus of the state.
    On April 15, 2004, the government obtained an injunction forbidding 
the disposal, encumbrancing or other dealing with any of the assets of 
the company. On June 30, 2004, a further freezing order forbade any 
disposals of assets while at the same time requiring an additional tax 
payment of more than $3.4 billion to be made within 5 working days on 
pain of a penalty surcharge of 7 percent of the total debt ($241 
million).
    Because of the injunction and the freezing order, the company was 
prohibited from making that additional tax payment. Its formal 
application on July 2, 2004, that sufficient assets to meet the 
liability should be released for that purpose was rejected. The 
surcharge was duly applied. The government's ultimate resolution to 
this contrived situation was to declare that because Yukos could not 
pay its fictitious taxes, the bailiffs would have to seize 
Yuganskneftegas, the company's most valuable asset, and sell it at 
auction to satisfy the tax charges.
    On August 31, 2004 the bank accounts of Yuganskneftegas were frozen 
and on September 9, 2004, following a further additional tax assessment 
of $2.7 billion, thirteen further freezing orders were imposed on 
Yukos' bank accounts forbidding all transactions. As a result, the 
company had no access to cash to reinvest in their operations, operate 
their businesses, disburse company expenses, pay salaries to employees, 
satisfy any amounts levied under the tax assessments, and most 
importantly, pay current taxes. In essence, by forcing the company to 
operate with no money, the Russian government left Yukos incapacitated 
and unable to function.
    Having rendered Yukos cash-flow insolvent, the Russian government 
through its bailiffs conducted an auction of Yuganskneftegas on 
December 19, 2004, allegedly to raise money to pay a portion of Yukos' 
tax bill. In violation of a restraining order from a U.S. Bankruptcy 
Court, the auction proceeded as scheduled, with the assets being sold 
for half their appraised value. The buyer in this sham auction was an 
unheard-of company of no certain address that sold its prize almost 
immediately to Rosneft, a front for the Kremlin, whose chairman had led 
the attack on Yukos in the first place.
    By forcing down the value of YNG stock at the auction, the 
subsequent set-off against Yukos' tax bill still left a significant tax 
liability, potentially putting other assets in jeopardy. At the Russian 
government's request, Dresdner Kleinwort Wasserstein valued the shares 
of YNG in preparation for the auction. It gave a valuation of between 
$15-$18 billion. Despite that valuation by an independent bank, the 
Russian government set the auction to start at significantly under $9 
billion, less than half the valued amount.
    In recent comments, Andrei Illarionov, a close and long-term 
economic adviser to the Russian president, said Yuganskneftegas should 
be returned to Yukos. ``There are certain common human commandments,'' 
Mr. Illarionov said. ``Such as `thou shalt not steal.' '' Not 
surprisingly, this once influential adviser has reportedly been 
stripped of many of his duties following his comments.
    The Kremlin's deliberate campaign against Yukos has serious 
implications for the United States. Americans should be concerned about 
a Russian government still willing to unleash its agents in a ruthless 
campaign against companies or individuals. Likewise, we should be wary 
of a retreat from democratic values in Russia and a seeming level of 
instability, especially given Russia's strategic location and nuclear 
capability.
    As the world's largest oil consumer, America's energy security--and 
by extension its economic security--depends on the stability and 
reliability of global oil supplies. Yukos had made significant 
investment in technology, equipment and talented staff, and was playing 
a growing role in stabilizing world supplies.
    Today, industry analysts note that the Russian government is 
tightening its grip on the energy sector. Christopher Weafer, chief 
strategist for Alfa Bank, said this move ``is not unexpected and is 
part of the government's efforts to exercise greater control over the 
energy sector.'' Just last week, the Russian Federation announced a ban 
on U.S. and other foreign-owned companies from bidding for new permits 
to develop several large oil fields. This action will further slow the 
growth of Russian oil production by discouraging needed investment 
capital and expertise.
    Roland Nash, chief strategist for Renaissance Capital, a Moscow-
based investment bank, called the ban ``a dramatic step down the road 
of state intervention, which Russia has been following for some time.'' 
Mr. Nash concluded: ``The ban could dissuade foreign companies from 
investing in Russia.''
    As the Wall Street Journal reported recently, slowing growth in 
Russian oil production has helped drive up world oil prices. Production 
has fallen for four straight months. The International Energy Agency 
cut its forecast of Russian oil output growth this year to 3.8 percent, 
citing higher taxes and a worsening regulatory climate. These 
circumstances run counter to the energy and economic security of the 
United States.
                            uncertain future
    In July 1999 the Russian Federation adopted the Russian Foreign 
Investment Law in order to attract and encourage foreign investment on 
its territory. According to its preamble: ``This Federal Law determines 
the basic guarantees of foreign investors' rights to the investments, 
and to the income and profits obtained from such investments, and the 
terms of business activities of foreign investors in the Russian 
Federation.'' The legislation's preamble declares its purposes to be: 
``Attracting foreign material and financial resources, advanced 
engineering and technologies, managerial experience and efficient 
application thereof in the economy of the Russian Federation, and 
ensuring that the legal regime of foreign investments is in compliance 
with the norms of international law and the international practice of 
investment co-operation.''
    The Yukos matter puts the eyes of the world squarely on the Russian 
Federation to judge whether it is living up to that commitment. Yukos 
is protected by the investment guarantees set forth in the Russian 
Foreign Investment Law because foreign investors own at least 10 
percent of Yukos' capital stock and because Yukos reinvests its income 
and profits in oil production and related activities on the territory 
of the Russian Federation.
    By any measure, the Russian government tax claim is not in keeping 
with international norms or even Russian law. It was imposed without 
substantive due process by retroactive application of substantive law 
that was different from what had been applied to Yukos in the past and 
different from what was applied to other similar companies. It involved 
an interpretation of law that could not reasonably have been 
anticipated. It was also imposed without procedural due process 
involving a fair opportunity to be heard, in many cases imposing taxes 
for prior years in which the Russian government had previously said no 
more tax was due.
    This has resulted in a discriminatory taxation of Yukos as compared 
to other oil and gas companies operating in Russia, many of which are 
not foreign-owned corporations, and at $27.5 billion, it was so 
grotesquely large that it equaled between 80 to 111 percent of Yukos' 
U.S. GAAP consolidated gross revenues (before expenses are taken into 
account) for the years 2001, 2002 and 2003, and about 70 percent in 
2000.
    The inequitable and illegal actions surrounding these extraordinary 
tax claims substantially impaired Yukos' ability to pay its more than 
$1.5 billion of debt to over 150 legitimate lenders and trade 
creditors, and caused the value of Yukos' common stock, owned by over 
60,000 shareholders, to plummet from over $40 billion to less than $2 
billion.
    These actions also focus attention on Russia as it attempts to gain 
full membership in the global economic community. Would-be investors 
might well be wary of doing business in a country where international 
norms and the rule of law can be so easily violated, and where property 
and shareholder rights cannot be guaranteed. The Kremlin may feel it 
has license to tear up the Russian rule book, but international rules 
are another matter. The rights of international investors can only be 
protected in a legal system that is fair and unbiased, not one where 
the Russian government picks winners and losers before it ever decides 
to hear the case. As long as that system exists, Yukos will not be the 
last company to find its rights violated and its assets seized by the 
Kremlin.
    The actions of the Russian government have bankrupted a company 
that once seemed destined to serve as a model for Russia's economic 
future. The European Union has condemned the actions against Yukos as a 
politically motivated, coordinated attack by the Russian government 
designed to regain control of strategic economic assets. The Senate 
Foreign Relations Committee has also added its influential voice 
through a resolution of disapproval which the Committee passed on a 
unanimous vote.
    Sadly, the Russian people will bear much of the burden as well. At 
its peak, Yukos employed more than 100,000 people, paid billions of 
dollars in taxes and invested generously in local communities. A 
modern, globally-respected company has been dismantled by a series of 
carefully timed and politically motivated attacks by the Russian 
government. As a litmus test for future investors, adherence to the 
rule of law and compliance with international norms, the Yukos 
experience is not encouraging.

    The Chairman. Thank you very much, Mr. Theede.
    Mr. Osborne, would you proceed, please?

STATEMENT OF TIMOTHY OSBORNE, MEMBER, BOARD OF DIRECTORS, GROUP 
                    MENATEP, UNITED KINGDOM

    Mr. Osborne. Thank you, Chairman Lugar, for inviting me to 
the hearing today. I've already submitted formal remarks, but 
I'd like to offer a brief summary.
    My name is Timothy Osborne. I have practiced as an attorney 
in the United Kingdom for over 25 years, specializing in 
international tax issues and corporate governance. I am a 
member of the Independent Board of Directors of Group Menatep. 
Group Menatep is a diversified international financial holding 
company established in 1997 by Mikhail Khodorkovsky, Platon 
Lebedev, and others.
    I've experienced firsthand Russia's approach to the rule of 
law and to property rights. Group Menatep, its founders, and 
its main asset, Yukos Oil Company, have been the subject of a 
coordinated and relentless onslaught by the Russian 
authorities.
    Group Menatep is the majority owner of Yukos Oil Company, 
holding approximately 51 percent of the Yukos equity capital. 
In addition, Group Menatep placed a separate 10 percent of the 
Yukos shares in a trust, the Veterans Petroleum Trust, which 
provides retirement benefits for Yukos workers in the remote 
oil fields in Siberia.
    I was appointed as one of the three members of the board, 
in March 2004, to manage the company in keeping with Western 
standards of corporate governance. More recently, I've been 
primarily involved in trying to protect the company and its 
assets.
    The attacks on Group Menatep and its founders are an 
integral part of an orchestrated and sustained campaign by the 
Russian authorities, and need to be explained in the context of 
what is happening in Russia.
    The Council of Europe Parliamentary Assembly, known as 
PACE, appointed Sabine Leutheusser-Schnarrenberger, a member of 
the Bundestag, a former German Justice Minister, to examine the 
nature of the cases launched by the Russian authorities against 
Yukos and its former executives. Her report, which was based on 
an extensive legal analysis of the facts surrounding the case, 
was adopted by the plenary session of PACE on January 25 of 
this year. The report found that the prosecutions went beyond 
the mere pursuit of justice to include such elements as to 
weaken an outspoken political opponent, intimidate other 
wealthy individuals, and regain control of strategic economic 
assets.
    I would like, Mr. Chairman, that this report be entered 
into the record.
    The Chairman. It will be entered in full.
    Mr. Osborne. Mr. Chairman, I'd like to summarize briefly 
the attacks against Group Menatep that began in 2003.
    The Russian authorities have used the pretext of unpaid 
taxes to justify their attacks on Yukos and Group Menatep's 
founders, despite the fact that they had all retained the 
highest quality financial advisors. Prior to the assault 
undertaken by the Russian authorities, Yukos has been widely 
praised for its financial openness. It was audited by 
PricewaterhouseCoopers according to U.S. GAAP standards. 
Neither PricewaterhouseCoopers nor the Russian tax authorities 
raised any questions of additional taxes when the books were 
closed and taxes paid for the years in question. No suggestion 
of tax evasion was made at any time until the current onslaught 
began.
    Rather than evading taxes, Yukos was the third-largest 
payer of taxes in Russia during this period, and it paid taxes 
at or above the industry average, amounting to billions of 
dollars.
    The attitude of the Russian authorities to Yukos changed 
completely in the wake of their dispute with Mr. Khodorkovsky. 
Suddenly, massive amounts became due, in some years amounting 
to over 100 percent of the gross revenue of the company for 
that year, as just explained by Mr. Theede.
    Having improperly levied abusive taxes on Yukos, the 
Russian authorities then froze Yukos assets, and, in August 
2004, seized its subsidiary, Yuganskneftegaz. Yuganskneftegaz 
had been valued by Western bankers appointed by the Russian 
Government as worth between $15 and $18 billion. 
Yuganskneftegaz represented 60 percent of Yukos oil production 
and was, until its seizure, the core asset of the company.
    By freezing assets and seizing Yuganskneftegaz, the Russian 
authorities essentially assured Yukos' inability to pay the 
disputed outstanding tax bills. They then proceeded to put 
Yuganskneftegaz to auction, arranged to have a sole state-
controlled bidder, who bought Yuganskneftegaz for less than 50 
percent of its true value.
    However, it would be misleading to look at this solely as a 
corporate matter. This case originates in politics. What began 
as a vendetta brought by the Russian authorities against Mr. 
Khodorkovsky and his colleagues has now expanded to include 
intimidation and harassment of employees at all levels of 
Yukos.
    Two examples. The wife and children of one of Yukos' 
outside counsel was recently detained at the airport in Moscow 
for hours on alleged drug offenses. No drugs were found, no 
charges were made, and, ultimately, they were let go. Another 
example is the female employee in the Yukos legal department 
who was arrested, leaving her young children unattended, and 
has, in effect, been held hostage in custody to encourage the 
return to Russia of her boss.
    What is Group Menatep doing about this? Initially, we made 
every possible good-faith effort to resolve the conflict in an 
amicable and reasonable fashion. We retained former Canadian 
Prime Minister Jean Chretien. He met with President Putin in 
July 2004 and followed this with a number of telephone calls 
and letters. President Putin committed to review proposals to 
resolve the tax and other legal issues then outstanding. 
Separately, Yukos, I understand, has made over 50 different 
settlement approaches to the Russian Government. No response 
has been received to any of these approaches.
    Given the complete lack of response, we concluded, toward 
the end of 2004, that the Russian Government's aim was the 
expropriation of Yukos. We consider that any final hopes that 
the Yukos affair could be settled reasonably and in a legal 
fashion were crushed last December, when the government ordered 
the sale at auction of Yukanskneftegaz, the core asset. As 
mentioned above, the auction was little short of a farce.
    On November the 2nd, Group Menatep delivered notification 
to the Russian Federation requiring them to enter into the 
discussions required under the 1994 Energy Charter Treaty. The 
Russian Federation totally ignored this request. Consequently, 
on February 9 of this year, at the end of the 3-month 
standstill period, Group Menatep filed its notes of 
arbitration, statement of claim against the Russian Federation 
for the losses caused. The claim seeks compensation for 
approximately $28 billion.
    Our objective in doing this is to protect Group Menatep's 
remaining assets, to seek compensation for the losses of all 
Yukos shareholders, and demonstrate to the world that Yukos, 
Group Menatep, and its founders have been the victims of an 
illegal, politically motivated campaign designed to expropriate 
and renationalize Yukos, with total disregard for the rights of 
all shareholders, the rule of law, and generally accepted 
principles of international law.
    Mr. Chairman, let me just touch briefly on the impact of 
the Russian Government's actions on the United States.
    The United States has minority shareholders in Yukos, 
including state pension funds, such as that of Ohio. They've 
been directly and negatively impacted by the Russian 
authorities' flagrant disregard for the rule of law and 
individual property rights, with losses to United States 
shareholders estimated in the billions of dollars.
    The Yukos affair has broad implications for the global 
investment community in which U.S. citizens are heavily 
represented. Group Menatep and all international investors have 
an interest in open and free markets where the investments are 
protected by legal systems adhering to the rule of law.
    The risk of loss should be based on market forces and 
business performance, not on arbitrary governmental actions. 
Moreover, as Mr. Theede has describe, the repercussions for the 
U.S. energy security are serious. We now have a situation where 
decisions are being made based on Russian foreign-policy 
objectives and internal politics, not markets.
    I'm not an expert on foreign policy, and would not presume 
to make recommendations on United States policy toward Russia; 
however, it is widely acknowledged by foreign-policy experts 
that the attacks on Group Menatep, Yukos, and Menatep's 
founders are selective and politically motivated. It's 
increasingly clear, moreover, that this is a part of a 
concerted effort to reclaim state control over a major element 
of Russia's energy sector, for strategic reasons.
    Since the collapse of the Soviet Union, the central goals 
of the United States have been the promotion of democracy, the 
rule of law, and free markets. All of these have been 
threatened by what is taking place.
    The upcoming summit meeting of Presidents Bush and Putin 
will provide another opportunity for the United States to raise 
these concerns, and we will be watching to see that the United 
States is still trying to advance and protect these 
commitments.
    Given the current ominous trends in Russia, I note that 
many experts have called into question Russia's accession to 
the WTO, its participation in the Group of Eight, and, in 
particular, the appropriateness of its hosting the G8 meeting 
in 2006. These are a rules-based organization and a grouping of 
the world's leading democracies, respectively. I wonder whether 
the Russian Federation is currently a suitable candidate for 
either.
    Mr. Chairman, hearings such as these send an important 
signal to the Kremlin that the United States is closely 
watching its actions and is vitally concerned about the rule of 
law, as well as property rights and human rights, in Russia.
    I thank you for the opportunity to testify here today. Once 
again, I'm grateful for the interest and attention this matter 
is receiving.
    [The prepared statement and related material of Mr. Osborne 
follows:]

  Prepared Statement of Timothy Osborne, Member, Board of Directors, 
                     Group Menatep, United Kingdom

                              introduction
    I wish to thank Chairman Lugar and Senator Biden for convening this 
hearing today. The past 18 months has seen a veritable onslaught 
against Group Menatep, its holdings and its shareholders by the 
authorities in Russia, against the backdrop of an apparent retreat in 
democratic development in Russia. I am grateful to you, Mr. Chairman 
and Senator Biden, along with your colleagues in the Senate, for your 
early recognition of the serious nature of these events in the 
Resolutions that were introduced in the previous session of Congress.
    My name is Tim Osborne and I am a member of the independent Board 
of Directors of Group Menatep. My fellow Board members and I were 
appointed in March 2004 to conduct the day to day operations for the 
company following the detainment of Director Platon Lebedev in July 
2003 and then the still-unexplained death of Mr. Stephen Curtis, 
appointed as his successor, in a helicopter accident in the spring of 
2004.
    Group Menatep is a diversified financial holding company, 
established in 1997 by Mikhail Khodorkovsky, Platon Lebedev and others, 
and it owns strategic stakes in a number of Russian companies, 
including YUKOS, as well as a number of financial portfolio investments 
on stock markets in Russia and internationally. It is incorporated and 
existing in accordance with the laws of Gibraltar. Group Menatep is the 
majority owner of Yukos Oil Company, holding approximately 51 percent 
of Yukos equity capital through wholly owned subsidiaries.
    As a member of the Group Menatep Board of Directors, I am 
responsible for stewardship of the company in keeping with recognized 
standards of transparency and corporate governance and, more recently, 
in protecting the company's remaining assets. I do not represent Yukos 
Oil Company or the individuals mentioned above, however, the attacks on 
Group Menatep holdings and its founders are an integral part of an 
orchestrated and sustained campaign against the company by the Russian 
authorities and therefore need to be explained in the context of what 
is happening in Russia.
    I hope at some stage there will be an opportunity for a hearing on 
the nature of these charges and the conduct of the criminal cases 
against these individuals. Foreign policy experts, government 
officials, financial analysts, the defense attorneys and independent 
human rights groups agree that the trials, like the charges against 
Yukos, are politically motivated and that they have been riddled with 
violations of due process and human rights. I will submit for the 
record along with my written testimony some of their statements and 
reports.
                   the attacks against group menatep
The Tax Issues
    While some Russian companies' accounting practices may remain 
insufficient for the standards of international investment markets, 
Group Menatep adopted a different approach. It chose to hire top 
quality financial professionals and auditors for its companies, 
including Yukos, putting into place internal controls sufficient to 
meet the highest standards of market economies. Prior to the assault 
undertaken by the Russian authorities, Yukos had been widely praised 
for its financial openness and the maintaining of its accounts in 
accordance with Western accounting practices. While its competitors 
included firms whose accounts remained less than transparent, it was 
Yukos, the company that had opened its books to the world, which was 
selected for prosecution. The fact that Yukos keeps open books meant 
that it was audited by both outside accounting firms and the Russian 
government, neither of which raised any issues of tax evasion when the 
books were closed out and taxes paid for the relevant years.
    The assessment by the Russian authorities that Yukos had paid all 
of its taxes changed completely in the wake of the political dispute 
between the Russian authorities and the leadership of Group Menatep. 
Suddenly, massive amounts became due, in some years amounting to more 
than 100 percent of the gross revenue of a company for that year. The 
Russian authorities only raised tax evasion allegations after they had 
already initiated their political crackdown on Group Menatep's 
shareholders. The tax charges against Yukos both tracked, and followed 
in parallel, the events in the trials of these executives. Thus, as the 
trial against these executives heated up, the initial charge for US 
$3.5 billion in back taxes quickly ballooned to over US $27 billion.
    A few simple numbers provide the context for the absurdity of the 
Russian authorities' assessments. Yukos has already paid $15 billion in 
taxes for the period 2000 through 2003, on total gross income for that 
period of $29 billion. Thus, the taxes paid amount to approximately 52 
percent of gross income. Beyond that amount, the Russian authorities 
allege that Yukos owes an additional US $27 billion for that period, 
bringing Yukos' total tax liability for the period to over US $42 
billion, or nearly 145 percent of the company's gross income. Let us 
call a spade a spade. This is not taxation. This is confiscation.
    The crux of the Russian government's allegation is that Yukos 
evaded taxes through the illegal use of tax havens in the years 2000 
through 2003. Beyond the fact that Yukos paid taxes at a level 
equivalent to or in excess of, on a percentage basis, every one of its 
competitors in the Russian energy business, there is a fundamental 
problem with the Russian government's legal case against Yukos. The 
fundamental problem is that the structures used by Yukos to limit its 
taxes were lawful under Russian law at the time that Yukos employed 
them. Russian authorities first had to change the tax law and then 
apply these changes retroactively in order to even allege tax evasion. 
Notably, Yukos competitors in the oil and gas field also employed these 
same tax structures and yet no significant charges of tax evasion have 
been brought against these companies.
    One need not be a Russian legal expert to judge that the actions of 
Russian authorities are improper. Not only is Russia imposing tax laws 
retroactively, it is singling out and punishing one company for actions 
that were industry norms.
    The retroactive application of tax law and the selective 
prosecution by Russian authorities of Yukos are two objective 
indicators of the abusive nature of these cases. But there are many 
other objective facts that show that the Russian tax assessments were 
improper. Prior to the levy of any of these additional taxes against 
Yukos, the company was already the third largest taxpayer in Russia. 
Indeed, its tax-to-revenue ratio ranged between 30 to 32 percent during 
that time and during this period, Yukos paid more in taxes during this 
period than the industry average. In fact, if one was to add the amount 
of taxes Yukos originally paid in these years to the amount of taxes 
that the Russian government alleges that Yukos evaded, the Yukos tax 
payments would represent 175 to 244 percent of the industry average. 
These figures do not include the further fines, penalties or interest 
that the Russian government has added to the tax bill. If such things 
as fines, penalties and interest payments are included, the amount that 
the Russian government has asked Yukos to pay represents approximately 
267 to 402 percent (depending on the year) of the industry average for 
taxes paid during this period.
    Let us examine a single year of taxes assessed by the authorities--
2002. On November 1, 2004, the Tax Ministry assessed Yukos an 
additional US $10 billion in back taxes and penalties for the year 
2002. According to these new allegations Yukos was expected to pay a 
total of US $7.9 billion in taxes for 2002. This US $7.9 billion does 
not include penalties, fees and interest and therefore represents what 
the Tax Ministry alleges Yukos should have paid in taxes in 2002. US 
$7.9 billion represents 70 percent of the total revenues earned in 2002 
and approximately 115 percent of the company's gross income for the 
year. If penalties, fees and interest are included, the total tax bill 
for 2002 represents 111 percent of total revenue earned by Yukos for 
the year 2002 and 184 percent of gross income for the year.
    The Russian tax authorities chose not to provide Yukos any 
opportunity to address these charges prior to the issuance of tax 
bills. Their demands for back taxes were immediately rubber stamped by 
the Russia courts. There was absolutely no effort on the part of the 
tax authorities and the courts to negotiate any schedule for repayment.
    The behavior by the Russian authorities in this case demonstrates 
how, when abused, the power to tax is indeed the power to destroy. To 
provide you with just some of the highlights of the abuses:

   On July 2, 2004, the Russian Tax Ministry issued a claim 
        against Yukos for US $3.3 billion in back taxes for the year 
        2001. This US $3.3 billion was in addition to a tax bill of US 
        $3.5 billion that the Russian Tax Ministry had issued the 
        previous December in connection with taxes for the year 2000. 
        On the same day, court bailiffs freeze Yukos bank accounts and 
        notify the company that it must pay a 2003 tax bill of US $3.4 
        billion within five days.
   On September 3, 2004 the Tax Ministry presents Yukos with a 
        new US $4.1 billion tax bill for 2001 and announces that the 
        company has only one day to pay.
   On September 8, 2004 Russian government officials begin to 
        collect on a Yukos tax bill from 2001, immediately confiscating 
        US $2.7 billion from Yukos bank accounts.

    These disproportionate tax claims against Yukos have been 
accompanied by the government's freezing of Yukos assets, making 
payment impossible. These improper actions by Russian authorities were 
then followed by the forced sale of Yuganskneftegas in December 2004 in 
an auction in which a false veneer of formal process was used to cover 
what was actually an illegal expropriation.
Russia's Illegal Expropriation of Yuganskneftegas
    Having improperly levied abusive taxes on Group Menatep's main 
holding, Yukos, Russian authorities then seized Yukos subsidiary 
Yuganskneftegas in August 2004. Yuganskneftegas had been valued by 
Western bankers as worth between US $15-$18 billion. It represents 60 
percent of Yukos oil production and was, until its seizure, the heart 
of the company. By seizing Yuganskneftegas, the Russian authorities 
essentially assured Yukos' inability to pay any of the outstanding tax 
bills. They then proceeded to put Yuganskneftegas to auction, arranged 
to have a sole friendly bidder, and to have the company bought up by a 
state-controlled firm.
    In an attempt to preserve shareholder value in the face of these 
improper actions by Russian authorities, Yukos declared bankruptcy in a 
federal bankruptcy court in Houston on December 15, 2004, which under 
traditional bankruptcy law rules would halt the auction. The Russian 
authorities chose to proceed regardless, auctioning off Yuganskneftegas 
on December 19, 2004, in violation of a December 16th Temporary 
Restraining Order (``TRO'') issued by the United States Bankruptcy 
Court for the Southern District of Texas.\1\ One Russian firm, Gazprom, 
participated in the bidding despite the express prohibition of the same 
by the TRO.
---------------------------------------------------------------------------
    \1\ In Re Yukos Oil Company, Case No. 04-47742-H3-11 (S.D. Tex., 
December 16, 2004).
---------------------------------------------------------------------------
    As noted above, Yuganskneftegas has been valued at between US $15-
$18 billion and yet the Russian government auctioned it off for only US 
$9.4 billion. The winner of the auction for Yuganskneftegas was an 
absolutely unknown company by the name of Baikal Finance Group. Baikal 
Finance Group had no apparent means of financing the purchase. It was 
obviously operating as a front company for the state-owned company 
Rosneft in this sale. Some have speculated that the reason for the use 
of the front company was an effort to shield Rosneft from any legal 
liability stemming from, amongst other things, the fact that the 
auction was in violation of the federal judge's stay order. What is 
absolutely certain is that Baikal itself was not a legitimate bidder.
    When research on the Baikal was conducted, nothing could be 
discovered regarding who owned Baikal or where its financing had come 
from. The company had no previous operations, no capital, and no known 
shareholders. The only information available on the company was that it 
shared an address with a tiny grocery store in the small Russian 
provincial town of Tver. Three days after the auction, Baikal Finance 
was ``sold'' to Rosneft, although public information as to who was paid 
what for this $15 billion to $18 billion asset remains scanty. Press 
accounts suggest that Rosneft received a loan of some $6 billion from a 
consortium of Chinese banks which paid that sum to the Russian 
government in order for Rosneft to ``buy'' Yuganskneftegas. The foreign 
policy implications of this sale are underlined by the recent 
disclosure that the Chinese helped fund Rosneft's acquisition of 
Yugansneftegas.\2\ The Chinese banks were reportedly acting on behalf 
of the Chinese and Russian governments. Following the acquisition, 
Rosneft now controls 16 percent of Russia's total crude oil output.\3\
---------------------------------------------------------------------------
    \2\ China Had Role in Yukos Split-Up, BBC News, February 2, 2005.
    \3\ Putin Backs State Grab for Yukos, BBC News, December 23, 2004.
---------------------------------------------------------------------------
    In summary, this was no auction in any normal sense, but an 
extraordinarily unethical, illicit and cynical expropriation of private 
sector assets by the Russian authorities. Group Menatep continues to 
contest the illicit proceedings relating to the sale of 
Yuganskneftegas, in Russia and in courts around the world. As Mr. 
Theede discussed, Yukos is serving notice under the U.S. bankruptcy law 
that the December 19 sale in contravention of the Bankruptcy Court's 
order was illegal and that it will seek to recover from those involved 
in the sale.
    There has been widespread condemnation of the forced sale of 
Yuganskneftegas, internationally and within Russia itself, including 
explicit recognition of its political nature. Most telling is the 
criticism of the sale from within the Russian government itself. Andrei 
Illarinov, then the most senior economic adviser to Russian President 
Vladimir Putin, described the sale as ``the swindle of the year.'' \4\ 
Shortly after he voiced his criticism of the sale, Illarinov was 
stripped of most of his responsibilities.\5\ Even Russian Economic 
Minister German Gref, a close associate of President Putin, referred to 
the sale as ``unjustified.'' \6\ Criticism outside of Russia has also 
been pointed. As summarized in one foreign press report: ``The Yugansk 
auction was the culmination of a Kremlin campaign to crush Yukos' 
politically ambitious principal owner, Mikhail Khodorkovsky, and seize 
control of strategic sectors of the economy sold off in the chaotic 
privatizations of the 1990s.'' \7\
---------------------------------------------------------------------------
    \4\ Minister Hits Out at Yukos Sale, BBC News, January 11, 2005.
    \5\ Id.
    \6\ Id.
    \7\ Richard Ayton and Andrew Hurst, State seizes Yukos' core oil 
unit, The Age, December 24, 2004.
---------------------------------------------------------------------------
Actions Against Individuals
    I have discussed at some length the corporate cases brought against 
key assets of Group Menatep. However, it would be misleading to look at 
this solely as a corporate matter. As I have suggested earlier, this 
case originated in politics. The vendetta brought by the Russian 
authorities against essentially every person involved with Group 
Menatep has included a wide range of criminal proceedings that are, 
like the tax charges, expressions of politics rather than law. For this 
reason, I feel it is necessary to discuss the actions taken by the 
Russian government against key individuals. While I do not represent 
these individuals, I have followed their plights closely because they 
are so intertwined with the fate of Group Menatep.
    The most notorious of these is the prosecution of Mikhail 
Khodorkovsky and Platon Lebedev. Khodorkovsky was until recently the 
CEO of Yukos and Lebedev was director of Group Menatep. My 
understanding is that all of the charges against Khodorkovsky and 
Lebedev are what one would consider ``white collar'' crimes and that 
there is no compelling state interest in their continued imprisonment 
during their trials. Despite the fact that they pose no threat to 
society and in spite of Lebedev's reported poor state of health, these 
two men remain in a Russian prison.
    I have tried to understand the charges against Khodorkovsky and 
Lebedev but there appears to be little rhyme or reason to the 
government's case. The case against these two focuses on the 
privatisation of a fertilizer company by the name of Apatit. However, 
this privatisation took place in 1994 and the allegations surrounding 
this transaction would seem to be issues of contract law, not criminal 
law. Nine years passed from the privatisation sale to the arrest of 
Khodorkovsky and Lebedev. During those nine years, three separate civil 
suits were concluded with regards to this privatisation, focusing on 
breach of contract issues, with no criminal issues being raised. They 
resulted in a signed settlement agreement between a Group Menatep 
company, Volna, and the Russian Federal Property Fund that seemly 
brought an end to what has now become referred to as the ``Apatit 
affair.''
    Remarkably, not only was the Russian government a signatory to the 
settlement agreement, but the Prosecutor General Vladimir Ustinov, in a 
letter to President Putin in April 2003, stated that there were no 
legal reasons for initiating an investigation into the Apatit affair. 
Throughout all three of these proceedings and the nine years that 
passed from the time of the transaction and the arrest of Lebedev and 
Khodorkovsky, no allegations of any criminal behavior were made against 
these two. Furthermore, although the Russian Federation has since moved 
to set aside the civil settlement, it has never returned the $16 
million paid by Group Menatep as part of the settlement. I can only 
imagine that no allegations of criminal behavior were made in the civil 
proceedings because there was no evidence of any criminal behavior.
    Khodorkovsky and Lebedev are the highest profile Yukos and Group 
Menatep executives, but the Russian government has targeted many more 
and has shown no sign of stopping in its persecution of anyone who is 
willing to defend Yukos or Khodorkovsky and Lebedev. In fact, some are 
being detained in an effort to build cases against Yukos and Menatep 
executives. Alexei Pichugin, a retired FSB major, was the first target 
in the Russian authorities' assault on Yukos. Pichugin worked in the 
department of economic and financial security at Yukos during 1998. In 
May 2003, Russian authorities used the disappearance of his close 
friends, Sergei and Olga Gorin, as a pretext to grill Pichugin on 
internal financial matters at Yukos. He was charged on June 26, 2003 
with the double murder of the Gorins, and later in August 2003 with 
three additional attempted murders (Victor Kolesov, Olga Kostina and 
Evgeni Rybin) from 1998. The initial trial began in October 2004 but 
ended in a mistrial in December. According to many observers, the jury 
was dismissed after it became apparent to the court that they would not 
return a guilty verdict. A second trial began in January of this year 
with a new jury.
    In Pichugin's trial, the authorities' entire case has rested on 
testimony from a convicted serial murderer and child abuser, Igor 
Korovnikov (``Korovnikov''). Korovnikov is currently serving a life 
sentence in the FSB-run Lefortovo Detention Center for eight murders 
committed between October 1998 and February 1999, and for the sexual 
assault of five young girls. While little is known of the actual 
testimony of Korovnikov because all of the proceedings have been held 
in secret, it is important to note that Korovnikov was imprisoned at 
the time some of these alleged crimes were committed and Korovnikov's 
``evidence'' surfaced only after he was moved in 2003 by the 
authorities from Ogenny Island, a penal colony for life-sentence 
prisoners renowned for its harsh regime, to Lefortovo prison.
    Beyond prosecutors putting on testimony from Koronikov which the 
original jury evidently found insufficient, and the state's ending the 
proceedings in order to avoid Pichugin's acquittal, outside experts 
assessing the proceedings have found that the authorities violated 
international human rights and due process standards in conduct of 
Pichugin's trial. Russian authorities classified the case as top 
secret, trying it in private. Portions of Pichugin's case files have 
been classified by the government. Pichugin was denied opportunities 
for confidential communication with his lawyers, and the judge in his 
case once gave Pichugin's counsel just days to review 35 volumes of 
documents. Pichugin's lawyers had limited access to his case files and 
were forced to sign ``state secret'' nondisclosure agreements that 
would give them a 10-year prison sentence should they disclose the 
files.
    The Parliamentary Assembly of the Council of Europe (``PACE'') has 
resolved that the unjustified restrictions on public access to court 
proceedings and the fact that, ``in particular, all proceedings against 
Pichugin have been held in camera even though only a small portion of 
the case file has been classified as secret'' are among the ``most 
serious corroborated shortcomings'' of the Yukos related 
prosecutions.\8\
---------------------------------------------------------------------------
    \8\ Europe Parliamentary Assembly, Circumstances Surrounding the 
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at 
para. 8 (January 25, 2005) (Exhibit 2).
---------------------------------------------------------------------------
    Notably, the Pichugin case is merely one, if egregious, example of 
a pattern of abuses by Russian authorities, which have undertaken these 
legal cases in a coordinated legal assault on people with ties to 
Khodorkovsky and Yukos. These abuses include the arrests of Svetlana 
Bakhmina and Elena Agronovskaya. Ms. Bakhmina worked in the Yukos legal 
department. Ms. Agronovskaya was a Yukos outside counsel. Both were 
expected to testify for the defense in the Khodorkovsky and Lebedev 
trials. They also include the issuance of arrest warrants in January 
2005 for other associates of Khodorkovsky and Lebedev, including 
Mikhail Brudno (``Brudno''), Vladimir Dubov (``Dubow''), Alexander 
Gorbachev, Vladislav Kartashov, Alexei Spirichev, and Irma Chernikova, 
after Brudno and Dubov were invited to the U.S. to discuss the Yukos 
affair with members of Congress.
Independent Judicial Review
    Each time the allegations by the Russian Federation have come 
before an independent court outside of Russia, the Court has found the 
allegations were substantively deficient:

          In August of 2003, Defendant Russian Federation secretly 
        submitted requests for mutual legal assistance to the Attorney 
        General of Switzerland requesting the seizure of business 
        documents related to, inter alia, Group Menatep, its 
        subsidiaries, Khodorkovsky, Lebedev, Yukos, and Yukos-related 
        trading companies. Subsequently in March 2004, Defendant 
        Russian Federation sought the freeze of numerous bank accounts 
        in Switzerland in the name of the same entities and 
        individuals, and the Swiss Attorney General froze accounts 
        holding approximately $4.9 billion dollars. On June 8, 2004, 
        the Swiss Federal Supreme Court directed the Swiss Attorney 
        General to release several of the accounts subject to orders 
        ripe for review and held that ``the [Russian] request and its 
        amendments do not contain any fact enabling determination, even 
        minimally, of the cause, nature and scope of such extensive 
        damages, which would be of a nature to justify the ordering of 
        the contested freeze.'' Pecunia Universal Ltd. v. The Office of 
        the Attorney General of Switzerland, No. 1A.86/2004/col at 6 
        (Tribunal Federal June 8, 2004). The Court went on to assess a 
        5,000 Swiss Franc penalty on the Swiss Attorney General. Id.
          Prior to implementing the Swiss Supreme Court's ruling, the 
        Swiss Attorney General contacted Defendant Russian Federation 
        representatives and asked whether it had any additional 
        evidence to warrant the freeze of the accounts. Defendant 
        Russian Federation's representatives did not offer such 
        evidence and accounts containing approximately $4.7 billion 
        dollars were released.
          In 2003, the Russian Federation also requested the Attorney 
        General of Liechtenstein seize records located in Liechtenstein 
        and relating to Khodorkovsky and Group Menatep's alleged 
        illegal activity. Menatep and Khodorkovsky objected and 
        Liechtenstein's highest court denied the request and held (i) 
        that there were no facts presented underlying the alleged 
        criminal offenses against Khodorkovsky and Lebedev, (ii) that 
        ``the suspicion arises that the alleged tax offenses do not 
        even exist . . . and the other alleged crimes are mere 
        allegations without substance,'' and (iii) that the request by 
        the Russian government was a ``fishing expedition'' and to 
        grant the seizure request would amount to a violation of 
        International Law. Case No. 12 RS.2003.255-ON 25 at 6 
        (Furstliches Obergericht April 25, 2004).
Political and Economic Motivations for Legal Cases
    One does not have to specialize in human rights issues to see that 
in these cases Russian authorities are not abiding by international 
standards relating to rule of law, but are instead approaching these 
cases politically. These proceedings exhibit a ``Red Queen'' approach 
to justice: ``verdict first--evidence later.'' These are not merely my 
conclusions, they are shared by essentially every outside observer. As 
the Parliamentary Assembly of the Council of Europe has recently found 
following an extensive fact-finding by a senior Rapporteur,

          The circumstances of the arrest and prosecution of leading 
        Yukos executives suggest that the interest of the State's 
        action in these cases goes beyond the mere pursuit of criminal 
        justice, to include such elements as to weaken an outspoken 
        political opponent, to intimidate other wealthy individuals and 
        to regain control of strategic economic assets.\9\
---------------------------------------------------------------------------
    \9\ Europe Parliamentary Assembly, Circumstances Surrounding the 
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at 
para. 14 (January 25, 2005) (Appended hereto as Exhibit 2).

    Similar conclusions were reached late last year by the U.S.-based 
human rights organization, Freedom House. On December 20, 2004, Freedom 
House downgraded Russia's status to ``Not Free,'' in its annual survey 
of global freedom. Russia was the only country to register a negative 
category change in 2004, moving from Partly Free to Not Free. In making 
the designation, Freedom House Executive Director Jennifer Windsor 
stated that ``Russia's step backwards into the `Not Free' category is 
the culmination of a growing trend under President Vladimir Putin to 
concentrate political authority, harass and intimidate the media, and 
politicize the country's law-enforcement system.'' Freedom House 
described the arrest of Khodorkovsky as the event that ``signaled the 
increasing politicization of the legal system,'' and concluded that 
``the arrests and investigations in 2003 of Mikhail Khodorkovsky, the 
Yukos energy company, and the Menatep Group reinforced perceptions that 
the rule of law is subordinated to political considerations and the 
judiciary is not independent of the president and his inner circle.'' 
\10\
---------------------------------------------------------------------------
    \10\ http://www.freedomhouse.org/research/freeworld/2004/
countryratings/russia.htm.
---------------------------------------------------------------------------
    The abnormal nature of the arrest and prosecution of Khodorkovsky, 
Lebedev and others affiliated with Yukos, as well as the treatment of 
other business leaders not affiliated with Yukos which has been held in 
violation of international law,\11\ reflect the Russian authorities' 
political motivations in prosecuting the Yukos-related defendants. But 
it is also worth looking at the processes of the trials themselves, 
because they raise the question of whether the founders of Menatep are 
in essence now political prisoners in Russia. As I appreciate it, the 
U.S. government is required by the Congress to make such human rights 
judgment on an annual basis, looking country-by-country. Last year, 
while expressing concern about the political nature of these cases, the 
U.S. State Department did not make a finding that Khodorokovsky, 
Lebedev and Pichugin were political prisoners. However, the facts that 
have emerged over the past twelve months, combined with what preceded 
them, may provide a basis for the U.S. government to give further 
consideration to that question.
---------------------------------------------------------------------------
    \11\ See e.g., Gusinskiy v. Russia, Eur. Ct. H.R., April 29, 2004, 
all European Court of Human Rights cases cited are available at http://
www.echr.coe.int.
---------------------------------------------------------------------------
    Separately from the personal cases, there is the issue of the 
handling of Yukos by Russian authorities, its tax cases, and the forced 
auction of Yukos' most important energy subsidiary, Yuganskneftegas, 
for a fraction of its actual value by Russian authorities to a shell 
company. This shell company in turn sold the subsidiary back to a 
state-owned enterprise, though there is no record that any payments 
were actually made in the purchases. Thus, the Russian government 
levied false taxes against Yukos, not lawfully due the government, as a 
strategy to steal its prime assets. These proceedings, too, were a 
sham, fundamentally unjust, and reflecting not just improper political 
motivations, but improper commercial ones as well, as I will discuss 
further later in this testimony.
The Question of Political Imprisonment
    I wish to address here the question of the political imprisonment 
of Khodorkovsky, Lebedev, and Pichugin as part of the vendetta engaged 
in by Russian authorities against Group Menatep.
    I understand that the State Department examines the existence of 
political prisoners in its Annual Country Reports on Human Rights 
Practices, usually without elaboration on the standard applied in 
making judgments about the existence of political prisoners in a 
country.\12\ I have been advised that in 1992, in response to 
congessional concerns expressed about human rights conditions in 
Turkey, Assistant Secretary of State for Legislative Affairs Janet 
Mullins wrote a letter to the Chairman of the Subcommittee on Europe 
and the Middle East of the Committee on Foreign Affairs explaining the 
Department's review and opinion on the situation or existence of 
political prisoners in Turkey. Ms. Mullins explained:
---------------------------------------------------------------------------
    \12\ U.S. Department of State, Country Reports on Human Rights 
Practices: China (2003), available at http://www.state.gov/g/drl/rls/
hrrpt/2003/27768.htm.

          Our working definition of political prisoner is broadly 
        inclusive. To summarize, it includes persons who are 
        incarcerated without charges, or on charges for offenses 
        commonly held to be matters of belief or for membership in a 
        religious social, racial or national group. This definition 
        extends our concern to persons prosecuted even under ostensibly 
        internationally acceptable law when the charges are trumped up, 
        or trial unfair. Our definition includes those convicted of 
        politically motivated acts where the punishment is unduly harsh 
        because of the person's race, religion, nationality or social 
        group.\13\
---------------------------------------------------------------------------
    \13\ 138 Cong. Rec. E2747 (September 22, 1992) (extension of 
remarks of Hon. Lee H. Hamilton on Human Rights in Turkey).

    I have been advised that the U.S. continues to apply this working 
definition in assessing persons as foreign political prisoners.\14\ 
Under this working definition, the trumped-up charges against 
Khodorkovsky, Lebedev and others affiliated with Yukos, the unfair 
nature of their trials, the political motivation of the authorities in 
the conduct of these cases, and the circumstances of their arrests, 
detention and trials, would appear to provide grounds for an assessment 
in the upcoming 2004 Report on Human Rights Practices in Russia that 
Khodorkovsky, Lebedev, and Piguchin are being held as political 
prisoners.
---------------------------------------------------------------------------
    \14\ Telephone interview with Peter Su, Office of Legislative 
Affairs, U.S. Department of State on January 27, 2005.
---------------------------------------------------------------------------
    I understand that Congress may also request a report from the State 
Department that addresses the specific situation of these individuals. 
The more detailed criteria adopted by the Parliamentary Assembly of the 
Council of Europe (PACE) for identifying political prisoners, discussed 
below, may provide a useful analytical framework for U.S. government 
officials and members of the Senate to consider the question of whether 
these persons are political prisoners from the perspective of U.S. law.
    PACE has adopted a series of objective criteria developed by a 
group of experts to define ``political prisoners.'' \15\ According to 
PACE:
---------------------------------------------------------------------------
    \15\ Europe Parliamentary Assembly, Resolution 1359: Political 
Prisoners in Azerbaijan (January 27, 2004).
---------------------------------------------------------------------------
    A person deprived of his or her personal liberty is to be regarded 
as a political prisoner:

   If the detention has been imposed in violation of one of the 
        fundamental guarantees set out in the European Convention on 
        Human Rights and its Protocols (``ECHR''), in particular 
        freedom of thought, conscience and religion, freedom of 
        expression and information, freedom of assembly and 
        association;
   If the detention has been imposed for purely political 
        reasons without connection to any offense;
   If, for political motives, the length of the detention or 
        its conditions are clearly out of proportion to the offense the 
        person has been found guilty of or is suspected of;
   If, for political motives, he or she is detained in a 
        discriminatory manner as compared to other persons; or,
   If the detention is the result of proceedings which were 
        clearly unfair and this appears to be connected with political 
        motives of the authorities.\16\
---------------------------------------------------------------------------
    \16\Europe Parliamentary Assembly, Committee on Legal Affairs and 
Human Rights, Political Prisoners in Azerbaijan, Doc. No. 9826, App. 1 
(June 6, 2003).

    In the cases of Khodorkovsky, Lebedev and others affiliated with 
Yukos and Group Menatep, all of whom are accused of non-political 
crimes, e.g., tax evasion, the last three criteria are the most 
strongly indicative of the status of these defendants as political 
prisoners. Each of the criteria is discussed further below.
Detention Disproportionate to Offense Charged
    Under the third criterion, Khodorkovsky, Lebedev and others 
affiliated with Yukos and Group Menatep Limited should be held to be 
political prisoners because the manner in which Khodorkovsky and 
Lebedev were arrested, as well as their continued detention and 
treatment, are disproportionate to the non-violent economic crimes with 
which they are charged. Russia's prolonged arbitrary detention of these 
individuals is a violation of international law, and, particularly with 
respect to Khodorkovsky, has been declared by PACE as a corroborated 
and serious shortcoming of the Russian proceedings.\17\
---------------------------------------------------------------------------
    \17\ Europe Parliamentary Assembly, Circumstances Surrounding the 
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at 
para. 8 (January 25, 2005) (Appended hereto as Exhibit 2).
---------------------------------------------------------------------------
    The European Court of Human Rights (``ECHR'') has described the 
prohibition on arbitrary detention contained in the European Convention 
of Human Rights to require release once detention ceases to be 
reasonable, and has ruled that the judicial officer before whom the 
arrested person appears must review the circumstances mitigating for or 
against detention, to decide by reference to legal criteria whether 
there are reasons to justify detention, and to order release if there 
are no such reasons.\18\ Furthermore, according to the ECHR, 
``continued detention can be justified in a given case only if there 
are specific indications of a genuine requirement of public interest 
which, notwithstanding the presumption of innocence, outweigh the rule 
of respect for individual liberty laid down in Article 5 of the 
Convention. . . .'' \19\ The same prohibition against arbitrary 
detention is contained in the Universal Declaration of Human Rights 
(``Universal Declaration'') \20\ and the International Covenant on 
Civil and Political Rights (``ICCPR'') \21\ Even under Russian criminal 
law, I understand, pretrial detention is supposed to be exceptional, 
and is only sanctioned if it is impossible to find alternative means to 
guarantee appearance at trial.\22\
---------------------------------------------------------------------------
    \18\ Aquilina v. Malta, Eur. Ct. H.R., April 29, 1999, para. 47.
    \19\ Kalashnikov v. Russia, Eur. Ct. H.R., July 15, 2002, para. 
114; see also L.A. v. France, Eur. Ct. H.R., September 23, 1998, para. 
102.
    \20\ G.A. Res. 217A, U.N. Doc. A/810, at art. 9 (1948) (hereinafter 
Universal Declaration).
    \21\ International Covenant on Civil and Political Rights, 999 
U.N.T.S. 171, at art. 9(1) (1967) (hereinafter ``ICCPR'').
    \22\ Russian Code, Article 108 (``[t]aking into custody as a 
measure of restriction shall be applied by the court towards the 
suspect or the accused of committing crimes, for which the criminal 
court envisages the punishment in the form of the deprivation of 
freedom for a term of over two years, if it is impossible to apply a 
different, milder measure of restriction.'' (emphasis added)).
---------------------------------------------------------------------------
    In five hearings dealing with Lebedev's detention (July 3, August 
28, October 28, and December 23, 2003, and June 23, 2004) and four 
hearings respecting Khodorkovsky's detention (October 25 and December 
23, 2003, and March 19 and June 23, 2004), the court determined, and 
appellate courts upheld, that the defendants should continue to be 
detained.
    These determinations were defective because they failed to address 
whether less extreme measures than detention could balance the 
defendants' rights to pretrial release against the interests of the 
judicial system as Russian, international, and U.S. law require. 
Khodorkovsky and Lebedev have been charged only with economic crimes 
and there has been no allegation of continuing crimes, yet they are 
being treated as posing serious threats to society and have now been in 
prison for 15 months and 19 months respectively.
Discrimination in Detention and Prosecution
    Similarly, application of the second criterion suggests 
Khodorkovsky and Lebedev are political prisoners. Independent observers 
have described the Russian case against Yukos and its former executives 
as ``a case of highly selective law enforcement,'' and have added that 
the prosecutors and the courts are ``highly politicized.'' \23\ Based 
on the investigation of its Rapporteur, PACE has resolved that these 
defendants have been, ``in violation of the principle of equality 
before the law--arbitrarily singled out by the authorities.'' \24\
---------------------------------------------------------------------------
    \23\ Organization for Economic Cooperation and Development, 
Economic Survey Russian Federation 2004, available at http://
www.oecd.org/document/62/0,2340,en_2649_201185_ 
32474302_1_1_1_1,00.html.
    \24\ Europe Parliamentary Assembly, Circumstances Surrounding the 
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at 
para. 9 (January 25, 2005) (Appended hereto as Exhibit 2).
---------------------------------------------------------------------------
    The crimes with which they are charged, to the extent that the 
charges are even cognizable, relate to the privatization of state-owned 
assets, tax evasion, and fraud. Khodorkovsky and Lebedev are being 
prosecuted for these alleged offenses while other individuals who 
engaged in similar alleged conduct have been left unscathed. As PACE 
has noted, ``the allegedly abusive practices used by Yukos to minimize 
taxes were also used by other oil and resource companies operating in 
the Russian Federation which have not been subject to a similar tax 
reassessment, or its forced execution, and whose leading executives 
have not been criminally prosecuted.'' \25\
---------------------------------------------------------------------------
    \25\ Id. at para. 10.
---------------------------------------------------------------------------
Unfair Proceedings
    Lastly, application of the third criterion supports a finding that 
Khodorkovsky, Lebedev, Pichugin and others affiliated with Yukos and 
Group Menatep are political prisoners because the proceedings are 
devoid of fairness and have not been held before an open, independent, 
and impartial tribunal, with defendants enjoying unrestricted rights to 
counsel.
    The Universal Declaration provides, ``[e]veryone is entitled in 
full equality to a fair and public hearing by an independent and 
impartial tribunal, in the determination of his rights and obligations 
and any criminal charge against him.'' \26\ It further provides, 
``[e]veryone charged with a penal offence has the right to be presumed 
innocent until proved guilty according to law in a public trial at 
which he has had all the guarantees necessary for his defense.'' \27\ 
The ICCPR and the European Convention provide for the same rights.\28\
---------------------------------------------------------------------------
    \26\ Universal Declaration, at Art. 10.
    \27\ Universal Declaration, at Art. 11(1).
    \28\ European Convention at Art. 6.
---------------------------------------------------------------------------
    In the proceedings against Khodorkovsky and Lebedev, the Russian 
authorities' restriction of public access to pre-trial proceedings, 
interference with defense lawyers, and the manner in which evidence is 
presented against the accused, have been declared by PACE as 
corroborated and serious shortcomings of the Russian proceedings.\29\
---------------------------------------------------------------------------
    \29\ Europe Parliamentary Assembly, Circumstances Surrounding the 
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at 
para. 8 (January 25, 2005) (Appended hereto as Exhibit 2).
---------------------------------------------------------------------------
            Right to an Independent Tribunal
    Most of the pre-trial detention hearings of the Yukos defendants 
were held in the Basmanny Court in Moscow, whose judges are regarded by 
many independent observers as taking instructions from the Kremlin.\30\
---------------------------------------------------------------------------
    \30\ Anna Neistat (Director of the Moscow office of Human Rights 
Watch), Russia: Yukos Trial Begins Amidst Rights Rollback (on the 
trials of Mikhail Khodorkovsky and Platon Lebedev, ``if it's anything 
like most trials in Russia it is unlikely to showcase the judiciary's 
independence. More likely, defense arguments will be downplayed, most 
of its motions overturned, and the outcome will have little to do with 
the hearing and a lot with executive will''), available at,
http://www.hrw.org/english/docs/2004/06/16/russia8852.htm.
---------------------------------------------------------------------------
    The U.S. State Department has found that the Russian judiciary is 
``seriously impaired by a shortage of resources and corruption, and 
still subject to influence from other branches of Government.'' \31\ 
There is substantial question over whether the courts will 
independently hear the cases against Khodorkovsky, Lebedev and their 
colleagues. The performance of the courts in the repeated denial of 
bail for the defendants, the refusal to allow an independent medical 
evaluation of Lebedev (who was in the hospital at the time of his 
arrest and is believed to suffer from hepatitis and other illnesses), 
and the fact that the same judge was assigned the Khodorkovsky and 
Lebedev cases (which were initially separate trials), as well as other 
facts, call into question the independence of the court that will try 
these defendants.
---------------------------------------------------------------------------
    \31\ U.S. Department of State, Country Reports on Human Rights 
Practices: Russia at Introduction (February 25, 2004), available at 
http://www.state.gov/g/drl/rls/hrrpt/2003/27861.htm.
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            Right to Open and Public Proceedings
    PACE has declared the ``unjustified restrictions on the publicity 
of certain court proceedings'' involving Khodorkovsky, Lebedev and 
others affiliated with Yukos and Group Menatep as a serious violation 
by Russian authorities of applicable human rights standards.\32\
---------------------------------------------------------------------------
    \32\ Europe Parliamentary Assembly, Circumstances Surrounding the 
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at 
para. 8(vi) (January 25, 2005) (Appended hereto as Exhibit 2); but see 
Lebedev v. Russia, Eur. Ct. H.R., Application No. 4493/04 (November 25, 
2004).
---------------------------------------------------------------------------
    As discussed above, the pretrial hearings against Khodorkovsky and 
Lebedev took place in closed sessions of the Basmanny Court, and 
sometimes even defense attorneys were excluded. Meanwhile, Pichugin's 
entire trial has been held in camera and most of the evidence in the 
case has been classified.
            Denial of the Assistance of Counsel
    Restrictions on the ability of the lawyers for Khodorkovsky, 
Lebedev and others affiliated with Yukos and Group Menatep Limited to 
meet with their clients, denial of access of Lebedev's lawyers to the 
court room during a hearing, and the search and seizure of documents 
from a lawyer's office have been declared by PACE as examples of 
additional serious shortcomings in the proceedings against the 
defendants.\33\
---------------------------------------------------------------------------
    \33\ Europe Parliamentary Assembly, Circumstances Surrounding the 
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at 
para. 8 (January 25, 2005) (Appended hereto as Exhibit 2).
---------------------------------------------------------------------------
    Attorneys for Yukos have had their offices searched and files 
seized and, Svetlana Bakhmina, deputy general counsel of Yukos, has 
been arrested. Just this month the British Law Society and the 
International Bar Association called upon Russian authorities to 
release Ms. Bakhmina.
Russian Motivations
    As my testimony has now outlined, the tax charges against Yukos and 
the criminal cases against Khodorkovsky and Lebedev brought by Russian 
authorities are not about the pursuit of justice or the tracking down 
of a corporate scofflaw. These actions of the Russian government are 
about something quite different. They are means to an end, and that end 
is the solidification of power by the persons currently in charge of 
the Russian government through the elimination of economic and 
political competition.
    It is easier to see this when one focuses on what Group Menatep was 
trying to accomplish in its approach to business. In a nutshell, it was 
an approach in which the company treated its assets as belonging to its 
shareholders, not to any government, individual, or grouping, including 
management. Given this focus, Group Menatep had to be both transparent 
and extremely competitive. Its major energy asset, Yukos, competed 
directly against major state-owned energy companies, such as the oil 
company Rosneft, the pipeline company Transneft, and the gas company 
Gazprom. Yukos became an effective and aggressive competitor to state 
owned companies, and was on its way to becoming a partner with non-
Russian oil firms. The vision of a substantial Western presence in the 
Russian oil industry deeply disturbed the Russian government. In fact, 
the actions against Khodorkovsky, Lebedev, and their associates 
derailed the proposed acquisition of Sibneft by Yukos and scuttled the 
purchase of a substantial block of Yukos stock by a major U.S. oil 
company. In addition, Yukos' production and distribution decisions, 
based on market forces, have often clashed with the dictates of the 
Russian state as it attempts to control access to its energy resources 
to curry international favor or to punish countries that had fallen 
from grace with the current Russian authorities.
    Because Yukos was focusing on meeting its obligations to its 
international share-holders, regardless of their location, Yukos had a 
number of serious disputes with the oil company Rosneft, the only 
Russian domestic oil company wholly-owned by the Russian state. Yukos' 
relations with Rosneft deteriorated significantly in 2002 and 2003, and 
Rosneft appears to have played an important role in the initiation of 
the persecution of the Yukos officials. As I have already mentioned, it 
was Rosneft that ended up acquiring Yuganskneftegas when it absorbed 
Baikal Finance Group, the front company that had purchased 
Yuganskneftegas.
    Yukos had also clashed with Transneft, the wholly state-owned 
pipeline company responsible for the distribution of 93 percent of all 
oil produced in Russia. The Russian government's control of Transneft 
has enabled it to maintain control, through quotas and other 
mechanisms, of oil distribution both domestically and internationally, 
and to collect taxes and fees on oil production, transport and export. 
The Russian government has used the distribution channels of oil and 
gas as a strong foreign policy tool, particularly in its dealings with 
its neighbors in the former Soviet Union and Eastern Bloc countries. 
Ukraine gets most of its energy from Russia and the Russian government 
provides discounted sales of oil and gas to the central Asian republics 
as a means of maintaining influence in these countries. Therefore, when 
Yukos challenged Transneft proposed plans for pipelines, it was in fact 
challenging a vital aspect of Russian foreign policy. For example, 
after the Russian authorities rejected a proposal for a pipeline to 
Murmansk, intended to facilitate oil exports to the West, Khodorkovsky 
announced his intent for Yukos to privately finance and construct the 
line.
    The most significant conflict between Transneft and Yukos had been 
over the construction of pipelines to China and Japan. While Yukos had 
been championing a proposed pipeline to China, Transneft had for many 
years stated its intention to build a much longer pipeline from Eastern 
Siberia to a Pacific export point to serve the Pacific Rim market. Both 
China and Japan actively lobbied the Russian government over the 
pipeline route and it appears that in the end, both countries got at 
least a part of what they wanted. It was recently announced that the 
pipeline will stretch to the Pacific, bypassing China. However, 
Rosneft, using the assets of Yuganskneftegas, recently signed a long-
term oil supply agreement with the Chinese. The Japanese and Chinese 
have returned the favors bestowed upon them by the Russian government 
with pledges of financing for the development of Russia's energy 
sector.
    The largest company in Russia is the state controlled gas giant, 
Gazprom. Gazprom has viewed Yukos as a threat to its gas monopoly and 
also wants to break into the oil business. Yukos is perceived as a 
threat to Gazprom because of its ability to produce gas cheaper than 
Gazprom and also because Yukos was exploring the idea of building a 
pipeline to the Arctic Ocean where its gas could be liquefied at a 
terminal and exported to Europe. Such a project would place Yukos in 
competition with Gazprom in the sale of gas to Europe and allow Yukos 
to completely bypass Gazprom's pipelines.
    While I have outlined above the economic and geopolitical 
motivations of the Russian government in targeting Yukos, it is 
important to note that just because the Russian government has been 
successful in hobbling Yukos, this does not mean that the government is 
finished in its quest to gain control of Russian oil fields and pipe-
lines. This is clearly seen in last week's declaration by the Russian 
government that only companies that are majority owned by Russians will 
be allowed to participate in tenders for oil and mineral rights. As the 
state's control over the Russian oil industry grows, decisions in the 
industry will become less and less about market forces and, instead, 
will be increasingly driven by Russia's international policy 
aspirations.
    The Russian authorities have also been motivated to move against 
Yukos in its attempt to silence political opponents of the current 
regime. The Russian authorities considered Khodorkovsky, Lebedev and 
their colleagues to be ideological and political opponents. 
Khodorkovsky was seen as a potential future political threat to the 
current government due to his economic support of liberal candidates 
for the Duma and the Presidency. As chairman of Yukos, he engineered 
reforms that brought transparency, corporate governance, Western 
management and global investments. By contrast, the current 
Administration favors increased state control of the economy and the 
subordination of political and economic institutions to the will of the 
executive. The arrest of Lebedev was seen as a warning to Khodorkovsky 
to step down and/or flee Russia as had other persecuted oligarchs. 
Instead of heeding this warning, Khodorkovsky continued to openly 
criticize the Russian authorities and, despite many opportunities to do 
so, refused to go into exile.
    Prior to his arrest and incarceration, Khodorkovsky was an active 
critic of Russia's current President and funded opposition parties, 
including the Union of Rightist Forces (SPS) and Yabloko. In addition, 
Khodorkovsky had many allies in the Duma and it was rumored that he was 
in favor of limiting the power of the Russian presidency by moving the 
country towards a parliamentary democracy.\34\ He was also widely 
believed to have political aspirations himself, including the Russian 
presidency. Khodorkovsky's role in opposition politics was expressly 
cited in the U.S. State Department's 2003 Human Rights Report which 
stated that ``[o]pposition parties, particularly those receiving 
funding from some so-called oligarchs, were seriously hampered by the 
investigation and arrest of Yukos President Mikhail Khodorkovsky, a 
step widely believed to have been prompted, at least in part, by the 
considerable financial support he provided to opposition groups.'' \35\
---------------------------------------------------------------------------
    \34\ Dr. Martha Brill Olcott, The Energy Dimension in Russian 
Global Strategy, Vladimir Putin and the Geopolitics of Oil, The James 
A. Baker III Institute for Public Policy, October 2004.
    \35\ U.S. Department of State, Country Reports on Human Rights 
Practices: Russia at Sec. 3 (February 25, 2004), available at http://
www.state.gov/g/drl/rls/hrrpt/2003/27861.htm.
---------------------------------------------------------------------------
    While it is hard to determine whether the Russian government has 
gone after Lebedev and Khodorkovsky to get at the assets of Yukos, or 
if the campaign against Yukos was an attempt to weaken Khodorkovsky, 
the end result is that the government has used its ongoing 
investigation of Yukos as leverage against Lebedev and Khodorkovsky in 
their criminal proceedings. The tax case against Yukos has never been 
about the reclamation of taxes, but instead has been a naked attempt to 
destroy Group Menatep, its shareholders, and Yukos, thereby eliminating 
a major source of support for Khodorkovsky and also renationalizing 
strategic assets.
    These cases are part of a continuing pattern of the consolidation 
of power by the Kremlin. The Kremlin now controls the press, and to a 
great degree, the Russian energy sector.
                         group menatep response
    The Board of Group Menatep has made every possible good faith 
effort to reach an amicable settlement with the Russian authorities. To 
that end, we asked the former Prime Minister of Canada, Jean Chretien, 
to act as an intermediary in opening discussions with the Russian 
government. Prime Minister Chretien met with President Putin in the 
Kremlin on July 5th of last year. Also present at the meeting was 
Alexei Miller, president of Gazprom. Over lunch, the President agreed 
that his government would review in good faith any proposals by Yukos 
to resolve the tax and other legal issues then outstanding. Prime 
Minister Chretien had numerous subsequent telephone conversations with 
President Putin and wrote him several letters. More than 50 proposals 
to resolve the outstanding claims against Yukos were sent, some of them 
directly to President Putin's office. All of these efforts yielded no 
response from the Russian government. After several months, we could 
only conclude that the Government's campaign against the company had 
nothing to do with legitimate tax collection or fair minded prosecution 
of alleged financial crimes, and instead serves the Government's 
political ends, which were, and remain, the expropriation of Yukos and 
the destruction of Group Menatep and its shareholders.
    Any hopes that the Yukos affair would be settled in a reasonable 
and legal fashion were finally crushed last December, when the 
Government ordered the sale of Yuganskneftegaz, Yukos' largest and most 
valuable oil production arm, as detailed above. None of the money 
realized by the sale will go to Yukos or its shareholders. Ostensibly 
it will be used to repay the inflated tax arrears and arbitrary 
penalties which the Russian Government imposed on Yukos to justify the 
sale in the first place. Indeed, every effort to appeal the tax 
assessments and other proceedings against Yukos in the Russian courts 
has been summarily denied except one, when a brave judge did rule 
against a particularly egregious government decision; in that one case, 
the judge was quickly dismissed and his ruling overturned.
    As a result, on February 9 of this year, Group Menatep proceeded to 
file a claim against the Russian Federation under the terms of the 1994 
Energy Charter Treaty. Group Menatep's claims are based on the Russian 
Federation's failure to protect the company's investments in Russia, 
and specifically the expropriation of Yuganskneftegaz. The claims seek 
compensation of approximately US $28.3 billion. Under the terms of the 
Treaty, breaches by the Russian Federation of its international 
obligations entitle the Claimants to the payment of prompt, adequate 
and effective compensation. Under Article 26 of the Energy Charter 
Treaty, disputes can be referred to international arbitration if they 
are not settled amicably between the disputing parties within 3 months 
of a notification of claim. The Claimants delivered original 
notifications to the Russian Federation on November 2, 2004. Since 
then, the Russian Federation has totally ignored the notifications and 
has failed to settle amicably the dispute.
    Group Menatep will pursue the ECT claim and all other available 
legal remedies in jurisdictions around the globe, using all means at 
our disposal. Our objective is to protect the company's remaining 
assets, seek compensation for the losses Group Menatep has incurred in 
the Russian Federation and demonstrate to the world that Yukos, Group 
Menatep and its shareholders have been the victims of an illegal, 
politically motivated campaign by the Russian Government outside the 
bounds of accepted international norms, behavior and custom.
                           impact on the u.s.
    The detrimental impact of the ``Yukos affair'' has been widely 
reported in the media, as have its repercussions for Russia's relations 
with the West. Not only have U.S. shareholders--including public 
pension funds--been directly and negatively impacted, but the actions 
of the Russian authorities show a flagrant disregard for rule of law, 
as the circumstances around the auction of Yuganskneftegas clearly 
demonstrate. Along with my remarks, I am submitting for the record 
today a handful of media reports on the Yuganskneftegaz auction that 
refer to the ``farcical'' nature of the Russian authorities' conduct 
(Financial Times, December 20, 2004). As a majority owner in Yukos, 
Group Menatep has seen the value of its stake plummet.
    In my role as a Director of Group Menatep, I have duties and 
obligations to the company. Investors rely on the integrity of the 
company itself and on its public filings with securities regulators. 
But they also rely on the political and legal systems in the countries 
in which such companies operate, for if rule of law is not followed and 
property rights are not protected in a country, the whole international 
system for attracting and protecting foreign investment breaks down.
    The U.S. has been a leader in the development of this international 
system, and has worked to bring Russia into it through economic 
agreements designed to protect investors from such risks as 
expropriation of their assets by state authorities. These include the 
United States' Treaty with the Russian Federation Concerning the 
Encouragement and Reciprocal Protection of Investment which expressly 
is designed to protect American investors from such risks in Russia, 
and which provides as follows in relevant part:

          Investments shall not be expropriated or nationalized either 
        directly or indirectly through measures tantamount to 
        expropriation or nationalization (``expropriation'') except for 
        a public purpose; in a nondiscriminatory manner; upon payment 
        of prompt, adequate and effective compensation; and in 
        accordance with due process of law and the general principles 
        of [non-discriminatory] treatment. . . .\36\
---------------------------------------------------------------------------
    \36\ Treaty with the Russian Federation Concerning the 
Encouragement and Reciprocal Protection of Investment, TIAS 11471, at 
Art. III(1); Treaty Doc. 102-33 (June 17, 1992).

    Despite Russia's signing this treaty in Washington on June 17, 
1992, the treaty did not go before the Russian Duma for serious 
consideration of its ratification under Russian law until 2003, and it 
has yet to be ratified.
    This treaty is clearly intended to protect U.S. investments in 
Russia including securities of a Russian company held by U.S. 
nationals. By our estimates, approximately 15 percent of Yukos' shares 
are owned by U.S. nationals. Accordingly, regardless whether the Duma 
has ratified the treaty, Russia's expropriation and nationalization of 
Yukos would appear to constitute a failure by Russian authorities to 
comply with the treaty obligation that Russian representatives 
undertook in 1992.\37\ These actions have directly harmed U.S. 
nationals whose interests were protected in theory by that treaty.
---------------------------------------------------------------------------
    \37\ I note that under article 18 of the Vienna Convention on the 
Law of Treaties, May 23, 1969, 1155 U.N.T.S. 331, a State is obliged to 
refrain from acts which would defeat the object and purpose of a treaty 
it has signed pending ratification.
---------------------------------------------------------------------------
    I do not know whether the U.S. government is concerned about this 
apparent violation by Russia of its duties to the U.S. under the 
Bilateral Investment Treaty or the fact that Russia has failed to 
ratify this treaty after nearly 15 years. While the issue of whether 
private individuals have remedies available to them under the treaty 
notwithstanding its ratification status in Russia is currently being 
studied, it is clear that if the U.S. concludes that Russia is not 
living up to its responsibilities under the Treaty, or that Russia is 
not even taking seriously the practice of treaty making, it has a 
number of remedies available to it. These could include deferring 
decisions to grant Russia additional economic privileges, given its 
apparent inability or unwillingness to abide by one of the most basic 
provisions of a bilateral investment treaty--the prohibition on 
expropriation without compensation.
    Mr. Khodorkovsky was a leading proponent for Russia's integration 
into world markets, and particularly for closer ties with the U.S. and 
the West, another factor mentioned as a possible catalyst for his 
arrest. This sends a chilling signal to Russia's business leaders and 
discourages the sort of open and collaborative economic relationship 
that would be of mutual benefit to the U.S. and Russia.
    As Mr. Theede explained, energy security is another critical factor 
in the ``Yukos affair.'' The Russian Government's desire to 
renationalize energy assets held by Yukos was, in my personal view, an 
important motivating factor for the attacks on Group Menatep. Whereas 
under Mr. Khodorkovsky's leadership, Yukos was exploring new ways of 
cooperating with the U.S., including the diversification of Russian 
export markets through the construction of pipelines to supply both the 
east and west coasts of the United States, we now have a situation 
whereby these decisions will be made based on Russian foreign policy 
objectives and internal politics, not markets. Indeed, just this past 
week, the Russian Government announced that only majority owned Russian 
oil firms will be allowed to bid on exploration contracts later this 
year--an announcement rightly seen as extremely worrisome by major news 
media and Western analysts alike.
                             u.s. reaction
    As I have previously mentioned, I am not an expert in foreign 
policy and would not presume to make recommendations on United States 
policy towards Russia. However, it is widely acknowledged by such 
experts that the attacks on Group Menatep and its leadership are 
selective and politically motivated. It is increasingly clear, 
moreover, that the ``Yukos affair'' is not a one-off occurrence, but 
rather forms part of a concerted effort to reclaim state control over 
Russia's energy sector for both strategic reasons and personal 
enrichment. It may be that the United States government finds 
expropriations, unfair arrests, prosecutions and trials, and 
consolidation of key sectors in Russia's economy under state control to 
have national security implications. It is obvious that U.S. interests 
will continue to be dramatically affected until the Yukos ``affair'' is 
resolved in a manner consistent with international standards and rule 
of law.
    A wide array of commentary points to the negative impact this 
matter is having on capital flight out of Russia, foreign investment 
into Russia and U.S.-Russia energy cooperation. U.S. minority 
shareholders in Yukos have also lost a great deal of money, among them 
public pension funds such as the State of Ohio.
    Hearings such as these send an important signal to the Kremlin that 
the U.S. is closely watching its actions and is vitally concerned about 
rule of law, as well as property and human rights in Russia.
    The upcoming Summit meeting of Presidents Bush and Putin will 
provide another opportunity for the United States to raise these 
concerns, and I would hope you will urge President Bush to send a 
strong signal when he meets with President Putin next week.
    Given the current ominous trends in Russia, I note that many 
experts have called into question Russia's accession to the WTO, its 
participation in the Group of Eight, and in particular its hosting of 
the G8 meeting in 2006. As rules based organizations and a grouping of 
the world's leading democracies respectively, my personal experience 
has provided a stark example as to why the Russian Federation is not 
currently a suitable candidate for either.
    I thank you for the opportunity to testify here today, and once 
again, am grateful for the interest and attention this matter is 
receiving.
                                 ______
                                 

         Report of the Council of Europe Parliamentary Assembly

The Circumstances Surrounding the Arrest and Prosecution of Leading 
        Yukos Executives
Doc 10368 Addendum, 24 January 2005
Addendum to Report: Committee on Legal Affairs and Human Rights. 
        Rapporteur: Mrs. Sabine Leutheusser-Schnarrenberger, Germany, 
        Liberal, Democratic and Reformers Group
                            a. introduction
    1. Following the adoption of the report in the Committee for Legal 
Affairs and Human Rights on 25 November 2004, a number of events have 
prompted me to present the following additional information to the 
Assembly.
                  b. reply of the federal tax service
i. Comparative tax burdens on Yukos and its competitors
    2. On 5 January 2005, the Rapporteur received a reply to the 
questions I had asked the head of the Federal Tax Service, Mr. 
Serdyukov, following my visit to Moscow in September.
    3. As regards the requested official figures on the comparative tax 
burden for oil producing companies, the reply was evasive.
    4. The question on Yukos' tax burden before and after the 
reassessments was not answered because of the confidentiality of such 
information; I was encouraged to obtain the information from the 
taxpayer itself, i.e. from Yukos.
    5. I had already received this information from Yukos' CEO Steven 
Theede and the CFO, Bruce Misamore, during my visit to Moscow in 
September. My question to the Federal Tax Service was intended to 
cross-check the information provided by Yukos, in line with my quest 
for utmost fairness and objectivity. I take it that if the information 
provided by Yukos, which I published in the Explanatory Memorandum with 
the proviso that confirmation by the Federal Tax Service was still 
outstanding, were false, Mr. Serdyukov would have said so in his reply.
    6. I must therefore assume that the total tax burden for Yukos, 
including the retroactive reassessments, is indeed about triple that of 
its Russian competitors and that the total tax burden for 2002 exceeds 
Yukos' turnover for that year.
ii. Temporary reprieve for taxpayers threatened by financial 
        difficulties
    7. The reply to my question regarding the legal possibility of 
temporary reprieve for taxpayers threatened by financial difficulties 
following tax reassessments is clear: The law does not allow for any 
such reprieve if procedures for criminal tax evasion have been 
instituted.
    8. While the answer is quite clear, the categorical exclusion of 
any payment facilities to avoid bankruptcy for the sole reason of the 
opening of criminal proceedings raises legal issues concerning the 
principles of proportionality and the presumption of innocence (Article 
6 paragraph 2 of the ECHR).
iii. Treatment of other Russian oil companies having used the same tax 
        minimisation schemes
    9. In reply to my question, whether other Russian oil companies, 
and if so which ones, had been subjected to similar reassessments and 
their executives criminally prosecuted, given that we had been told 
that other oil and resource companies had used the same tax 
minimisation schemes, I was given detailed legal explanations, 
underpinned by copies of judgments of different Russian and CIS courts, 
according to which agreements between local and regional authorities 
granting individual taxpayers privileges with regard to federal taxes 
are, legally, invalid.
    10. The question of the legality, in tax law, of the tax 
minimisation schemes used by Yukos, as well as many other resource 
extraction companies between 2000 and 2002, was neither the subject of 
my question, nor even of my report. The reply mentions some other 
companies whose agreements with local authorities have been declared 
unlawful, But the core of my question--whether Yukos' competitors and 
their leading executives have been subjected to the same excessive 
enforcement measures and even criminal prosecutions, has not been 
addressed.
    11. I must therefore conclude that Yukos and its leading executives 
have indeed been ``arbitrarily singled out by the authorities,'' as it 
is said in paragraph 9 of the draft resolution.
     c. new developments and further information relating to ``the 
 circumstances surrounding the arrest and prosecution of leading yukos 
                              executives''
i. Sale of Yugansneftegaz
    12. What was still not certain at the time the Committee on Legal 
Affairs and Human Rights adopted the report--i.e. that Yukos' principal 
asset, its oil-producing subsidiary Yugansneftegaz, would be sold off 
below market value to players closely linked to the Kremlin, has 
meanwhile turned into actual fact: On 19 December 2004, ``Baikal 
Finance Group,'' registered under an address in Twer in central Russia, 
which houses a fast-food joint (``Cafe London''), a mobile phone shop 
and the liquor Store ``Dionis,'' successfully bought Yugansneftegaz for 
= 7 bn, i.e. less than half of the ``fair value'' estimated inter alia 
by Dresdner Kleinwort Wasserstein at an auction in which other 
potential bidders, including from abroad, were discreetly 
``discouraged'' from participating. Reportedly, the detour via Baikal 
Finance Group and Rosneft, the State-owned oil company to whom the 
original buyers are said to have transferred Yugansneftegaz, had become 
necessary after Gazprom and international banks supporting Gazprom's 
expected bid had been discouraged from acting overtly as buyers by an 
injunction pronounced by a Texan court a few days before the auction 
pronounced at the request of Yukos. At the end of the day, 
Yugansneftegaz has been effectively renationalised.
    13. The auction and the proceedings leading up to it have been 
widely criticised internationally, for example by the spokesperson of 
the U.S. State Department, who highlighted the lack of transparency and 
independence of the courts leading to a loss of confidence of foreign 
investors, and by the Finnish Minister for Foreign Affairs, Erkki 
Tuomioja, who said that the renationalisation of Yukos was not the 
right way to promote foreign investment in Russia. Kremlin economic 
advisor Illarionov and Economic Affairs Minister German Gref also 
criticised the handling of the Yukos affair and the sell-off 
Yuganskneftegaz, recalling that the State had proved to be an 
``inefficient'' owner of key industrial assets. Mr. Illarionov was 
reportedly recently demoted and lost his function as the Russian 
``sherpa'' for the G8 economic summit process.
ii. European Court of Human Rights asking for explanations from the 
        Russian authorities
    14. On 14 December 2004, the Court, which had granted the Yukos 
case priority in July 2004, asked the Russian authorities for 
explanation on six substantive points arising from the company's April 
2004 application. The questions concern, inter alia, the fairness of 
the hearings before the competent Russian courts, and issues related to 
the deprivation of property (Article 1 of Protocol 1 ECHR), and to the 
principle of nullum crimen, nulla poena sine lege (Article 7 of the 
ECHR).
iii. New developments in the court proceedings--allegations of 
        increased pressures on lawyers and witnesses
    15. On 12 January 2005, Mr. Khodorkovsky--who has rarely taken the 
floor in the courtroom until now--made a statement bitterly accusing 
the State organs of having destroyed the very riches that they say they 
want him to return. Citing numerous procedural violations by the 
prosecution tolerated by the court, he said that he lost all faith in 
the authorities' objectivity. In the interest of the country, society 
and the prosecution and courts themselves, he called for a truly 
independent judiciary. Prosecutor Shokhin replied via Interfax that Mr. 
Khodorkovsky, in order to avoid punishment, just tried to blacken those 
who perform their duty.
    16. On 14 January 2005, it was announced that new criminal charges 
for money laundering (article 174 part 1 of the Russian Criminal Code, 
i.e. legalisation of proceeds of crime) would be brought against Mr. 
Khodorkovsky and Mr. Lebedev.
    17. On 18 January 2005, Mr. Robert Amsterdam, international legal 
counsel for Mr. Khodorkovsky and Mr. Lebedev, sent me a written 
statement with fresh allegations of increased pressures on lawyers 
working on the Yukos case and witnesses of the defense.
                         resolution 1418 (2004)
    1. The Parliamentary Assembly, reaffirming its commitment to the 
Rule of Law as one of the Council of Europe's core values, is concerned 
by the shortcomings of the Judicial process in the Russian Federation 
revealed by the cases of several former Yukos executives.
    2. The rule of law requires the impartial and objective functioning 
of the courts and of the prosecutors' offices, free from undue 
influences from other branches of government and the strict respect of 
procedural provisions guaranteeing the rights of the accused.
    3. The Rule of Law includes the equality of all before the law, 
regardless of wealth or power.
    4. The right to a fair trial, as protected by Article 6 of the 
European Convention on Human Rights (ECHR), includes the right to a 
fair and public hearing by an independent and impartial tribunal 
established by law, the presumption of innocence and adequate time and 
facilities for the preparation of the defence. A fair trial requires 
respect of the rights of the defence, the privileged lawyer-client 
relationship and the equality of arms between defence and prosecution.
    5. The public character of judicial proceedings, as guaranteed by 
Article 6 of the ECHR, is an important element of a fair trial, in the 
interests of the accused, but also of the public at large and its 
confidence in the correct functioning of the judiciary.
    6. The Assembly stresses the importance of the independence of the 
judiciary and of the independent status of judges in particular and 
regrets that legislative reforms introduced in the Russian Federation 
in December 2001 and March 2002 have not protected judges better from 
undue influence from the executive and have even made them more 
vulnerable. Recent studies and highly publicised cases have shown that 
the courts are still highly susceptible to undue influences. The 
Assembly is particularly worried about new proposals to increase 
further the influence of the President's administration over the 
judges' qualification commission.
    7. Facts pointing to serious procedural violations committed by 
different law enforcement agencies against Mr. Khodorkovsky, Mr. 
Lebedev and Mr. Pichugin, former leading Yukos executives, have been 
corroborated during fact-finding visits whilst some allegations appear 
to have been exaggerated by the defence team. On balance, the findings 
put into question the fairness, impartiality and objectivity of the 
authorities which appear to have acted excessively in disregard of 
fundamental rights of the defence guaranteed by the Russian Criminal 
Procedure Code and by the ECHR.
    8. The most serious corroborated shortcomings include the 
following:

          i. Despite specific requests of the defence lawyers, tests 
        were not carried out in good time that could have established 
        whether or not Mr. Pichugin had been injected with psychotropic 
        drugs; Mr. Pichugin was also held in the ``Lefortovo'' prison 
        that is not subject to the usual controls of the Ministry of 
        Justice and remains under the direct authority of the Federal 
        Security Service (FSB), contrary to a specific commitment the 
        Russian Federation undertook when joining the Council of 
        Europe;
          ii. Shortcomings in medical attention to Mr. Lebedev in 
        prison: In the face of serious concern about Mr. Lebedev's 
        deteriorating state of health, the prison authorities have so 
        far refused to allow an examination of Mr. Lebedev by 
        independent doctors, despite repeated requests;
          iii. Delays in obtaining the prosecutor's permission have 
        prevented the lawyers from entering into contact with their 
        clients during a particularly critical time after their 
        arrests, making it more difficult for them to organise their 
        defence; a legislative reform abolishing the requirement of a 
        prior permission from the prosecutor's office for a lawyer to 
        visit his or her client in prison has not been applied in 
        practice, at least not in the cases of the former Yukos 
        executives;
          iv. Denial of access of Mr. Lebedev's defence lawyers to the 
        courtroom during the hearing deciding on his pre-trial 
        detention;
          v. Search and seizure of documents in the defence lawyers' 
        offices, summons of lawyers for questioning on their clients' 
        cases and alleged eavesdropping against defence lawyers: The 
        prosecution must not be allowed to circumvent the lawyer-client 
        privilege by a simple play on case file numbers, especially 
        when the cases are as closely related to one another as the 
        criminal cases against MM. Khodorkovsky, Lebedev and Pichugin 
        and the tax cases against Yukos and its subsidiaries;
          vi. Unjustified restrictions on the publicity of certain 
        court proceedings: Members of the public have had extremely 
        limited access to certain hearings that were announced as 
        public whilst other hearings were or are being held in camera 
        in the first place. In particular, all proceedings against Mr. 
        Pichugin have been held in camera even though only a small 
        portion of the case file has been classified as secret; his 
        lawyers have been placed under strict instructions not to 
        discuss the proceedings in public, even the reasons of the 
        final judgment may be kept secret;
          vii. Denial of bail (in particular regarding Mr. 
        Khodorkovsky): Mr. Khodorkovsky was placed in pre-trial 
        detention several months after Mr. Lebedev's arrest on very 
        similar grounds, an arrest that media reports interpreted as a 
        ``warning'' to Mr. Khodorkovsky. Mr. Khodorkovsky's conduct 
        showed that there was no risk of absconding or of interfering 
        with evidence. After the completion of the pretrial 
        investigation, Mr. Khodorkovsky and Mr. Lebedev were kept in 
        custody which raises additional issues in light of the 
        judgments of the European Court of Human Rights in the cases of 
        Kalashnikov v. Russia and Letellier v. France. Also, following 
        a recent legislative reform, persons accused of nonviolent 
        ``economic crimes,'' such as those allegedly committed by Mr. 
        Khodorkovsky, are generally not placed in pre-trial detention;
          viii. Other unfair features of the trials against Mr. 
        Khodorkovsky, Mr. Lebedev and Mr. Pichugin: The court 
        systematically allows the prosecutor to read out the minutes of 
        the pre-trial interrogation of witnesses and to put pressure on 
        the witness in the courtroom to simply confirm those minutes. 
        This undermines the effectiveness of the right of the defence 
        to question witnesses of the prosecution, whose pre-trial 
        interrogation they are generally not able to attend. The 
        defence lawyers are also not allowed to exchange written notes 
        with the accused in the pre-trial detention centre and in the 
        courtroom. They can only exchange notes after the court has 
        first read them.

    9. The Assembly notes that the circumstances surrounding the arrest 
and prosecution of the leading Yukos executives strongly suggest that 
they are a clear case of non-conformity with the Rule of Law and that 
these executives were--in violation of the principle of equality before 
the law--arbitrarily singled out by the authorities.
    10. In particular, the allegedly abusive practices used by Yukos to 
minimise taxes were also used by other oil and resource companies 
operating in the Russian Federation which have not been subjected to a 
similar tax reassessment, or its forced execution, and whose leading 
executives have not been criminally prosecuted. Whilst the law was 
changed in 2004 and the alleged ``loophole'' thus closed, the 
incriminated acts date back to 2000 and retrospective prosecution 
started in 2003.
    11. Intimidating action by different law enforcement agencies 
against Yukos and its business partners and other institutions linked 
to Mr. Khodorkovsky and his associates and the careful preparation of 
this action in terms of public relations, taken together, give a 
picture of a coordinated attack by the State.
    12. The criminal charges laid against persons who made use of the 
possibilities offered by the law as it stood at the time of the 
incriminated acts, following a retroactive change of the tax law, 
raises serious issues pertaining to the principle of nullum crimen, 
nulla poena sine lege laid down in Article 7 of the ECHR and also to 
the right to the protection of property laid down in Article 1 of the 
First Protocol to the ECHR.
    13. The circumstances of the sale by auction of Yuganskneftegaz to 
``Baikal Finance Group'' and the swift take-over of the latter by 
State-owned Rosneft raises additional issues related to the protection 
of property (ECHR First Protocol Article 1). This concerns both the 
circumstances of the auction itself, leading to a price far below fair 
market value, and the way Yukos was forced to sell off its principle 
asset, by way of trumped-up tax reassessments leading to a total tax 
burden far exceeding that of Yukos' competitors, and for 2002, even 
exceeding Yukos' total revenue for that year.
    14. In view of paragraphs 8-12 above, the Assembly considers that 
the circumstances of the arrest and prosecution of leading Yukos 
executives suggest that the interest of the State's action in these 
cases goes beyond the mere pursuit of criminal justice, to include such 
elements as to weaken an outspoken political opponent, to intimidate 
other wealthy individuals and to regain control of strategic economic 
assets.
    15. The Assembly recognises the right, and even the duty, of the 
law enforcement bodies to bring to justice the perpetrators of criminal 
offences. It also recognises the legitimate right of the elected 
political leadership to pursue its political objectives, including in 
the economic sphere. However, it strongly objects to the use of law 
enforcement procedures for such purposes. In this context, reference is 
made to the judgment of 19 May 2004 of the European Court of Human 
Rights in the Gusinskiy case in which the Court found that the 
detention in remand of N-TV founder Gusinskiy violated Article S of the 
ECHR because it had established that the applicant's prosecution had 
been used to intimidate him into selling off his stake in N-TV to 
Gazprom.
    16. The Assembly therefore, in general terms,

          i. Calls upon the Russian authorities to vigorously pursue 
        and implement reform of the legal and judicial system and of 
        law enforcement agencies with a view to strengthening the Rule 
        of Law and the protection of human rights and to continue co-
        operating with the Council of Europe, in the framework of 
        ongoing programmes;
          ii. Encourages the courts to assert their independence vis-a-
        vis the executive authorities in assessing the guilt or 
        innocence of all accused persons, applying the law in 
        conformity with the European Convention on Human Rights;
          iii. Invites the authorities in charge of pre-trial detention 
        centres to ensure that lawyers' access to their clients in 
        detention is no longer subjected to any conditions not 
        prescribed by law, notably to prior authorisation or 
        recommendation by the public prosecutor, and to provide the 
        conditions for the effective exercise of the defence rights of 
        the persons in their custody, including the respect of the 
        privileged relationship between lawyers and their clients;
          iv. Urges the competent authorities to ensure that all pre-
        trial detention centres, including Lefortovo isolation centre 
        in Moscow, be subject to supervision by the Ministry of 
        Justice, in line with earlier commitments by the Russian 
        Federation.

    17. As regards more specifically the cases of the former leading 
Yukos executives, the Assembly:

          i. Requests the executive, authorities of the Russian 
        Federation to guarantee the full independence of the judicial 
        proceedings against leading Yukos executives from any attempt 
        to influence them and to take measures to stop any such 
        attempt;
          ii. Requests the public prosecutors to carry out their work 
        in these proceedings in a professional, impartial and objective 
        manner, respecting the letter and the spirit of the procedural 
        protections for the accused laid down in the Russian Criminal 
        Procedure Code and the European Convention on Human Rights and 
        the principles set out in Recommendation (2000)19 of the 
        Committee of Ministers on the role of public prosecution in the 
        criminal justice system;
          iii. Calls upon the courts to ensure effective public access 
        to the hearings in the proceedings against the leading Yukos 
        executives;
          iv. Urges the competent authorities to ensure in particular 
        that only those parts of the trial against Mr. Pichugin remain 
        closed to public scrutiny which are directly linked to 
        information for which there is a legitimate need for secrecy, 
        taking account the importance attached to the principle of open 
        court hearings by the European Convention on Human Rights;
          v. Urges the competent authorities to allow immediately an 
        independent medical assessment of Mr. Lebedev's state of 
        health.
                       recommendation 1692 (2005)
    1. The Parliamentary Assembly, referring to its Resolution 1418 
(2005), recommends that the Committee of Ministers in general terms:

          i. Continue offering to the Russian Federation the Council of 
        Europe's co-operation in preparing and implementing reforms of 
        the legal and judicial system and of law enforcement agencies, 
        aimed in particular at further strengthening the effective 
        independence and transparency of the courts and of their 
        proceedings, particularly as regards the distribution of cases 
        among judges of a given court (principle of the judge 
        determined by law);
          ii. Evaluate the extent to which progress has been achieved 
        under past and current assistance and co-operation programmes 
        carried out in these fields of judicial reform, and to inform 
        the Assembly of the results of this evaluation and of any 
        adaptations that may turn out to be necessary in order to 
        achieve better results;
          iii. Urge the Russian Federation to ensure that all pre-trial 
        detention centres, including Lefortovo isolation centre in 
        Moscow, be submitted to supervision by the Ministry of Justice, 
        in line with earlier commitments and be open to visits by 
        representatives of the Parliamentary Assembly as requested.

    2. Concerning more specifically the cases of the leading Yukos 
executives, the Parliamentary Assembly recommends that the Committee of 
Ministers:

          i. Remind the Russian authorities of the importance it 
        attaches to the principle of open court hearings and ask them 
        to ensure that exceptions to this principle in the Pichugin 
        case are limited to the strict minimum, in accordance with 
        Article 6 Sec. 1 of the European Convention on Human Rights;
          ii. Remind the Russian authorities of the importance it 
        attaches to the principle that detention on remand shall be an 
        exceptional measure and ensure that this principle is also 
        applied in the case of Mr. Khodorkovsky;
          iii. Urge the Russian authorities to immediately allow an 
        independent medical assessment of Mr. Lebedev's state of 
        health.

    The Chairman. Thank you very much, Mr. Osborne. We 
appreciate the testimony of both of you gentlemen.
    We've been joined by the distinguished ranking member of 
the committee, Senator Biden. Do you have an initial word of 
greeting to----
    Senator Biden. Just a welcome. I apologize for not being 
here, and I'll withhold an opening statement. I'm anxious for 
us to move on.
    Thank you, gentlemen.
    The Chairman. Very well. We'll proceed with a round of 
questions. We'll start at 8 minutes, and I'll commence the 
questioning.
    Many have suggested taking a long view of Yukos. The 
privatization of assets moving from the time of the Soviet 
Union to a time of private ownership brought about some 
successes. And Yukos was clearly one of these. But many critics 
have said the disbursal of the shares of stock was unusual and, 
in some cases, led to certain persons or groups accumulating 
great wealth. And, however they may have obtained it, some 
cynics point out that some of the wealth may have been 
accumulated in strange ways, but, in the event that it was, 
those who were managing the wealth ought to presume to stay in 
business, as opposed to politics. These cynics have argued that 
if you've decided to take what might be thought as ill-gotten 
gains, however well developed subsequently, into the political 
arena, you could expect consequences.
    Such has been a rationalization for the fate of the 
chairman of Yukos, for example. But, as you pointed out, Mr. 
Osborne, this has now proceeded down through the rank and file 
of the company, not simply the leadership, whatever may have 
been the political struggle of that variety. And it's led other 
observers of Russia to point out that even though we have, as a 
country--that is, the United States--from the time that Bob 
Strauss went to Russia as an Ambassador--advocated the rule of 
law, banking reform, proper titling of property, all sorts of 
procedures that would make Russia, in quotes, ``a normal 
country'' for investment by Europeans. The Europeans are close 
by, but obviously they have an interest in the United States. 
This advice has been taken rather haltingly, in bits and 
pieces, and not without a great deal of development, even to 
the present.
    Now, in the past, some have pointed out, Russia suffered 
because of this. The amount of investment going into Russia was 
substantially less, for example, than that going into China. 
And Russians have complained to some of us on this committee, 
and others, that they have been unfairly dealt with. Our 
response was often that the rules of the game made such 
investment much more precarious. Some people in the energy 
business decided to take those risks, because the opportunities 
were enormous and the long-term situation might have been 
different. But, nevertheless, the amount of investment was 
always somewhat deficient.
    Now, for the moment, Russia, unlike during the times of 
Boris Yeltsin, for example, is flush with cash, in terms of its 
overall budget. The leverage for advice seems to have 
diminished very substantially. As a matter of fact, many 
Russians in the government resent any critiques. They perhaps 
resent the fact that we're reviewing this situation today. They 
might argue that this is Russian business; as a matter of fact, 
they don't need our help, they don't need our investment. And, 
in fact, steps have been taken in Russia recently to forestall 
investment by other countries, indicating hostility, as a 
matter of fact, to that sort of intervention.
    Now, it's in this context that we have this hearing. I want 
to get some idea, leaving aside Russian interests that might 
have been involved, were there United States stockholders who 
lost money? Were there people from other countries who lost 
money? In other words, what has been the impact, in your 
judgment, either one of you, upon our country, upon other 
countries, leaving aside whether this is good business for 
Russia? In my opening statement, I have opined that I don't 
think it's very good business for Russia. It's rather 
shortsighted, to say the least. These good times come and go. 
But, at the same time, leaving aside that editorial comment, 
what are the implications for our business or for the world 
economy?
    Mr. Osborne. Mr. Chairman, if I could make a couple of 
comments first, I'll let Mr. Theede talk about the numbers, 
because I think he's got them much more at his fingertips than 
I have. But I think, on the accusations about the acquisition 
of Yukos, I don't think that, although there's resentment, 
there's ever been an accusation that anything illegal was done 
on the acquisition of Yukos by Mr. Khodorkovsky and his 
colleagues at the time. They acted in accordance with the law 
of the time. And I think, in any country, you can look back, 
and laws develop. I think, also----
    Senator Biden. Generous.
    Mr. Osborne [continuing]. I think that there are also, if 
there was resentment and the feeling that that was acquired 
cheaply, that there are legitimate ways that governments use to 
rectify those matters. In the UK, there was a view that Mrs. 
Thatcher had sold off some of the state assets rather cheaply 
and we had windfall taxes. People complained about them, but 
they seemed to resolve the situation. This has just turned into 
a vendetta against Mr. Khodorkovsky and the others.
    And, you know, they forget that also what Mr. Khodorkovsky 
was doing was developing a very open Western-style-run company, 
which was very profitable. And that was really the resentment.
    Mr. Theede. Well, I could add a couple of things to that. I 
think, first of all, I have been very impressed with what Mr. 
Khodorkovsky and his colleagues did, in terms of improving the 
performance of the company that they did buy at the time of 
privatization. And, through the process of improvement, they 
not only focused on efficiency of production and all the 
fundamental things, but they also focused on corporate 
governance and transparency, and really, in many ways, became a 
poster-child, I think, for Russia, in terms of corporate reform 
and becoming a model of what is possible; and, as part that, 
also encouraged a number of Western investors to invest in 
Yukos.
    The Chairman. Just on that point, Mr. Theede, is there any 
supposition that President Putin recognizes this? In other 
words, one accusation is that President Putin is a governance-
type, comes from a KGB background. He's a bureaucrat, not an 
economist, not a venture capitalist. I ask this, because 
obviously a very severe judgment has been made to invade this 
entire process, one that appeared to be wealth-producing, all 
for other reasons.
    Mr. Theede. Yes. Well, I've refrained from personalizing 
the actions against the----
    The Chairman. Yes.
    Mr. Theede [continuing]. Company over the last year, but I 
will say that approximately 20 percent of the company today is 
owned by Western investors, and about half of those, or 10 
percent of the company, owned by Americans. The attack on the 
company seems to have taken place without regard to those 
international investors.
    The Chairman. I thank you.
    Senator Biden.
    Senator Biden. Thank you.
    Gentlemen, let me follow up on that point. And you've 
answered my question. Twenty percent of Yukos is owned by 
foreign investors. Is that correct? Is that what you said?
    Mr. Theede. Twenty percent of the company is owned by ADR 
holders, yes.
    Senator Biden. Okay. I mean, engage in conjecture for me. 
You may have done this before I came in. If you did, I'll 
withhold, and I'll move to something else. What do you think 
the motivation for the action was? Was it the fact that there 
was this transparent company growing here, and that was a 
threat? Or what do you think the motive was?
    Mr. Theede. My personal opinion is, there is just no 
question that it's politically motivated.
    Senator Biden. But a lot of things are politically 
motivated. It could be politically motivated, in the sense that 
they did not want to have a Western-style corporation emerging 
that is transparent. It may be politically motivated because 
they viewed Khodorkovsky as a direct threat to Putin's 
political security.
    Mr. Theede. I believe it had its--has its roots in the fact 
that Mr. Khodorkovsky posed an opposition threat and an 
alternative point of view of Russia's future.
    Senator Biden. I guess what I'm trying to say is that it's 
an important distinction. There is, understandably, all kinds 
of conjecture as to why and what individual or multiple reasons 
prompted this action. And if one is--as I understood the 
Chairman--a growing resentment of Western investment, period, 
``We don't need anybody's help,'' a sort of a xenophobic 
feeling about Russian resources and assets, that's one thing. 
If it is a political vendetta--put it another way, assume that 
Yukos had been a political ally of Putin. I expect, from your 
answer, that you think this would not have happened, 
notwithstanding the fact it had all these other markings of a 
progressive, open, Western-style corporate governance.
    Mr. Theede. That is correct, Senator Biden. I believe it 
has its roots in political differences of opinion.
    Senator Biden. Gotcha.
    Mr. Theede. And my observation has been that--I think that 
the government has been quite concerned about the impact that 
their actions against Yukos are having, in terms of investment 
climate for Russia. And----
    Senator Biden. That was my next question. Talk to me more 
about that. There has still been much less than the investment 
in China, and much less than the investment in Turkey, for 
example. But there's still been--what was it, $10 billion or 
thereabouts, invested? Would that be on track as to what would 
have occurred, in your view, anyway? Or do you think, had this 
action not been taken by Putin, that there would have been 
significantly more activity and investment?
    Mr. Theede. Well, I--that's getting a bit out of my area. 
But I would answer your question in this way. Having worked in 
international companies for 32 years, and knowing how 
corporations, in general, make investment decisions, all 
companies assign certain political and economic risks to their 
investment opportunities. And, to a large extent, those risks 
are based on--are related to country risk.
    Senator Biden. Right.
    Mr. Theede. And my view is that international investors 
have most likely increased the country risk associated with 
investing in Russia as a result of the Yukos situation.
    Senator Biden. Mr. Osborne, do you want to comment on that?
    Mr. Osborne. Yes. Could I go back to your previous 
question----
    Senator Biden. Surely.
    Mr. Osborne [continuing]. About why the confrontation with 
Mr. Khodorkovsky? I think it's rooted in Yukos' success. I 
think the fact that Yukos was a significantly more profitable, 
more efficient company than the state-owned comparisons, the 
fact that Mr. Khodorkovsky was not backward in pointing that 
out. He was confrontational. He believed that there was a 
democracy occurring and that he was entitled to support 
opposition parties. But I think, at the end, the root of the 
problems was his success.
    Senator Biden. Well, again--this may be a distinction 
without a difference--what I'm trying to get at here is that it 
tells us one thing about Putin and his leadership and where he 
wants to take the country. If the motivation was the 
comparative success and failure--state-run company, corporate 
Western-style-run company, one failing, one succeeding, or one 
succeeding much more than the other--that's one thing. Assume 
that he had decided that the way to deal with Putin was not to 
be outspoken. Assume that he more accurately read the situation 
and said that, ``There is no democracy like I think''--like he 
thought there may have been. And assume he had decided to do 
what would not be unknown in any country, that his best 
interest was to align himself with Mr. Putin. Is it your 
assertion that the success of the company still would have led 
to its being undermined by Putin?
    Mr. Osborne. I think that it's my belief, that there was a 
decision that they wanted to take back into state ownership 
large parts of the energy sector. And what got Yukos to being 
first choice was its success----
    Senator Biden. Gotcha.
    Mr. Osborne [continuing]. And the fact that it was entering 
into active discussions with Western petroleum companies to 
come in and joint-venture with it.
    Senator Biden. I see. Last question--Mr. Chairman, my time 
is--I only have a minute left--to either of you. Is there any 
indication that Putin understands, comprehends, or is worried 
about the future investment prospects that he needs, in terms 
of the Russian economy, to attract dollars or euros, and that 
he is in any way reaching out to cherry-pick by making 
assurances, private assurances, or to court such investment in 
either the oil sector or any other sector? Is there any 
evidence of that?
    Mr. Osborne. Not as far as I can see. I haven't seen any.
    Mr. Theede. Well, I think that I have seen some of that. I 
think that there have been a number of comments made by Kremlin 
officials trying to characterize the Yukos situation as being 
Yukos-specific. And once the Yukos situation is finally 
resolved, whatever that might look like, then Russia will go 
back to--on track, on plan. And, of course, my position is--has 
consistently been that if the systems are in place that allow 
this to happen to Yukos, then it can certainly happen again in 
the future.
    Senator Biden. Thank you very much.
    The Chairman. Thank you, Senator Biden.
    Senator Sununu.
    Senator Sununu. Mr. Theede, I think you mentioned the 
number of 60,000 investors, and an answer to Senator Biden's 
question indicated that 20 percent of the company is foreign-
owned. How many investors, roughly, does that translate to? How 
many foreign investors are there in the company?
    Mr. Theede. Basically, that's the 60,000. The balance----
    Senator Sununu. And that includes individuals and 
institutions?
    Mr. Theede. Yes, it does.
    Senator Sununu. But a pretty significant number.
    Mr. Theede. Yes
    Senator Sununu. It's not in the dozens, it's in the 
thousands.
    Mr. Theede. Yes.
    Senator Sununu. And, Mr. Osborne, could you describe a 
little bit--or try to characterize a little bit more 
specifically the reaction of foreign capital markets to the 
confiscation? Have we seen a fall in the share prices of other 
ADRs? Have there been increases in interest rates or risk 
premiums associated with investments in Russia? Has there been 
any attempt to try to characterize the reaction of the capital 
markets?
    Mr. Osborne. That's not a subject that I feel particularly 
competent to talk about, but I think there has certainly been a 
flight of capital out of Russia. I think the government's own 
statistics show that there's been multibillion dollars of 
capital leaving Russia. And, I think that the only energy-
sector investments that have been made from abroad into Russia 
have been made with state-owned enterprises, with presumably 
fairly well-regulated agreements before they've gone in there.
    So I'm conscious that I haven't answered your question, but 
I don't have that information. I can obtain it and make sure 
it's put on the record.
    Senator Sununu. Anything you want to add, Mr. Theede?
    Mr. Theede. Well, I'm--as Mr. Osborne said, I don't have 
the facts at my fingertips, but I think if you look at the 
performance of the Russian stock index for 2004, compared to 
international indices, it has not performed as well. And, to a 
large extent, that's due to Yukos' share price plunging from 
$16 to less than a dollar, and Yukos had been a significant 
part of the--of that exchange--measures.
    Senator Sununu. I think it's clear that the members of this 
committee condemn this kind of private property confiscation. 
You've heard the chairman talk about the importance of the rule 
of law. You know, democracy is not just a question of having a 
vote or an election, but it consists of having institutions 
that apply the law equally, judicial institutions that are--
that have integrity. All of those things are important, are 
supported by the members of this committee. But aside from 
our--or condemning the action or speaking out against this, or 
trying to characterize the negative outcome, what other 
appropriate response would you like to see from the 
international community?
    Mr. Theede. Well, I--for me, it's fairly simple. I think 
that there should be an expectation that Russia lives up to its 
international commitments and it follows the law.
    Senator Sununu. That's an expectation, though. I mean, I'm 
looking for specific--sort of, a recommendation or a course of 
action that you think would lead to that outcome. For example, 
WTO is obviously something of great interest to the Russian 
Federation. I think some people might argue that accession to 
the WTO might provide a mechanism through which great incentive 
is created for applying the law appropriately for establishing 
and maintaining these institutions. Other people might argue 
effectively the opposite: No; participation in WTO, because of 
its value, should not be granted until there's a more 
consistent track record. Do you have an opinion?
    Mr. Osborne. I think you've accurately set out the 
alternative views. And, I think, what one's got to do is 
balance that with history and see where--what Russia has done 
with other similar organizations. And, in particular, look at 
the way it's treated the decisions of the European Court of 
Human Rights, where it's ignored them; and, therefore, one 
might conclude that it would accede to the WTO based on 
promises, going forward, and then not feel obliged by them. So 
I think my view--and I am totally unqualified to express the 
view--is that they--one should be sure that they have reached 
the level playing field before they are allowed on to play.
    Senator Sununu. Given your personal experience, which does 
qualify you to express your view, and probably does make your 
view fairly well informed--given your personal experience with 
this situation and the--your sort of personal experience with 
the actions and statements of Mr. Putin, what do you think he 
will respond to most effectively, or most directly, in this 
situation? And, I mean, for example--and this may not be the 
only answer--the President is meeting--President Bush is 
meeting with President Putin later this month, I believe, on 
the 24th. Do you think this is an issue that can be dealt with 
effectively on a personal level, or do you think that the 
European community or WTO or a wider circle of global actors 
needs to be brought into play?
    Mr. Osborne. Well, I'm sure that if President Bush was to 
let it be known to President Putin that he thought that this 
sort of behavior was reprehensible, then that would go a very 
long way. If that can be coupled with similar comments from 
other world leaders in the G8, then that's got to strengthen 
the message. And the impression that I have--and it's a 
personal impression--is that President Putin wants to be seen 
on that level playing field with the other world leaders, and 
they've got to explain to him what it takes to get there.
    Senator Sununu. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Sununu.
    Senator Obama.
    Senator Obama. Thank you, Mr. Chairman. I'll be very brief.
    I just want to pick up on Senator Sununu's line of 
questioning, and just get some impression, in terms of what the 
U.S. Government's role in sorting this through has been, and 
whether you think that there are additional steps that the U.S. 
Government, whether at the consular level or through other 
mechanisms, should have been doing, that has not happened. 
Because, obviously, although we're disturbed by what's--the 
story that's been described, at a certain point our task is to 
see what kind of impact we can have on U.S. foreign policy over 
the long term.
    So, I'm wondering how has our government responded, and 
what steps you think we might have taken differently, or 
additional steps we need to take in the future.
    Mr. Osborne. I'm very conscious of not being a citizen and 
it being wrong for me to express views of--like this. And--but, 
I think, my view is that all of the Western leaders and the 
Western governments have got to emphasize the importance of the 
rule of law, and that that is fundamental, and the short-term 
gains about oil or energy or anything else must come secondary 
to getting the rule of law applied in all countries, including 
Russia.
    Mr. Theede. Well, in answer to the first part of your 
question, there's been really tremendous cooperation and 
support and, I think, open channels of communication with 
United States Government officials at a number of levels, from 
the Embassy in Moscow to Washington and so forth. And, you 
know, I've been very pleased with the concern that's been 
shown.
    In the end, that has not, I don't think, had an impact on 
the outcome of the situation to date, but certainly there has 
been a very strong interest in what Yukos' future might hold 
and what's happening to Yukos.
    My personal experience, having worked in Russia for a 
relatively short period of time, a year and a half, is--and I 
found out this--I learned this the hard way--is that standard--
I want to--I'll call it diplomatic, but we use it in business, 
too--but standard diplomatic language doesn't always make its 
point in Russian culture. And I found that, for me to be 
effective, I had to have a strong position, and I had to state 
it clearly, and I had to--and that was whether I was agreeing 
with an individual I was working with, or whether I was 
disagreeing. But, either way, they respected the fact that I 
had a strong position and I was clearly outlining that 
position.
    Senator Obama. Okay.
    Thank you, Mr. Chairman. That's really the only question I 
had.
    The Chairman. Well, thank you very much, Senator Obama.
    Let me just initiate a final question or two by saying that 
your point, Mr. Theede, is, you found, as a businessman in 
Russia in the last 18 months, the need to state a strong 
position. And let me just say, I think we have tried, in our 
questions, to be probing and philosophical and to find the 
nuances of this. In my own judgment, in this particular case, I 
believe the President of Russia, President Putin, made a 
monumental blunder. It was a blunder, not only in terms of 
breach to the rule of law, but, if you were simply to look at 
it in economic terms, in substituting an inefficient state-run 
corporation for something that was doing very well, and had 
international backing. It's a loser any way you look at it.
    Now, you can say, well, President Putin knew what he was 
doing. He saw a rival out there, and he was going to suppress 
that rivalry, taking a look at the maintenance of his regime as 
the important aspect. So perhaps, in that line of thinking, he 
would say, ``I've been successful. I have my rival in jail. 
He's bottled up. And it ought to be a lesson for anybody else 
who happens to think about this.''
    Now, you know, as we recite all this, I'm reminded of a 
meeting of a number of Members of the Senate and the House, not 
long ago, talking about this subject. And one of the Members 
said, ``Now, I don't want to be considered isolationist and 
nativist and what have you. We're all international. But why do 
we care about Russia? What difference does it make?'' In other 
words, this Member, not just to play the devil's advocate, was 
saying that if President Putin wants to get into a squabble and 
jail his opponents and go for inefficiencies and downgrade the 
Russian state--after all, Russia has the economy about the size 
of Belgium, that's what we're looking at here, and it may 
diminish lower than Belgium by the time they're finished--why 
should we care?
    Now, some of us, on the other hand--and I'm one of these, 
admittedly--would say, well, we do care about Russia, for a 
good number of reasons. We've cared about Russia for a long 
time, about the people of the country, about its culture, about 
its future, about its relationship with us. This can be a 
remarkable situation, of relationship and friendship, and we 
ought to work at this. And some of us would say, in fact, most 
of the work is occurring just at that level, with the two 
Presidents, President Putin and President Bush.
    Now, how do we enrich the fabric of this discussion? Most 
of our other international relationships have many, many other 
players, people like yourself, in business, people in all sorts 
of cultural realms, lots of students. Now, we have a good bit 
of this, but it's diminished over the course of time.
    In our hearing with Secretary Rice, yesterday, I mentioned 
the Freedom Support Act budget. It's to diminish by about 13 
percent, and that's not the first time it's diminished. There 
was an enthusiasm at the beginning, as '91 and '92 came and so 
forth, and that's diminished a whole lot.
    Well, there are the farm groups going through Russia, quite 
apart from the cultural groups. Some of this still occurs, but 
much less than it should. And, reciprocally, our visa problems 
pose a lot of difficulty for Russians--not just visas for 
students, but also for others--so that the intersection there, 
in our war against terrorism, what have you, has had its toll. 
And we have to examine those things.
    I very much appreciate both of you being very forthcoming 
about the business aspects of this. You have been reticent to 
speculate into the political realm, to take the position that 
President Bush might or might not take when he meets in 
Bratislava with the Russian President. But my own view is that 
there is, at even the level of President Putin and the Foreign 
Minister and the Defense Minister and people with whom some of 
us have had some contact, a real desire for better outcomes. I 
think it's very important that we keep pressing that 
possibility, even, as you say, sometimes making strong 
statements, making our position well known. It would be a 
mistake to be ambiguous in this case, in my judgment, if you 
care about Russia and about the relationship. I have said to my 
congressional colleagues, ``If you don't care, then, as a 
matter of fact, you just let things run.'' And they will run 
badly, not just for Russians, but for others who are in the 
periphery of the Russian state and for others with whom they 
come in contact. And that, I think, will be ultimately tragic--
if we are not observant, if we are indifferent.
    Let me ask if either of you have any final thoughts. And if 
not, we'll press on with our next panel. Do you have a final 
summary, Mr. Theede or Mr. Osborne?
    Mr. Theede. No, sir; I have nothing to add from what's been 
said.
    The Chairman. Thank you.
    Mr. Osborne. I think just to take up the points that were 
made by your colleagues about: What can the world do? I really 
think that one thing it can do is make a condition of access to 
the WTO the cessation of these politically motivated attacks. 
Whether they will or not, I don't know. But that's my only 
final thought.
    Thank you very much.
    The Chairman. Well, I think you make a very good point. I 
think some skeptics would say that, given the course of 
affairs, Russia is so far from WTO membership. It's not really 
clear it's heavily motivated to want to be in the WTO if, in 
fact, current activities are an indicator. But perhaps there is 
leverage here. We've asked you what are the levers? Some 
Russians tell me, ``This is not a lever, this is simply 
patronizing, on your point. You believe in the WTO. And, in a 
way, it might be interesting for us, but it is hardly 
essential.'' Perhaps President Bush will discover that 
President Putin has much more interest in the WTO and issues of 
that ilk than has been apparent. And, if so, then perhaps we 
will have more to talk about.
    Well, we thank both of you for your testimony.
    The Chair would like to call now a distinguished panel that 
would include Dr. Anders Aslund, the Director of Russian and 
Eurasian Program of the Carnegie Endowment, Mr. Bruce Jackson, 
President of the Project on Transitional Democracies, Mr. 
Stephen Nix, Regional Program Director for Eurasia, and the 
Honorable Nelson Ledsky, Regional Program Director for Eurasia, 
at the National Democratic Institute.
    Welcome, gentlemen. We very much appreciate your coming to 
the hearing this morning.
    And let me say at the outset, as I mentioned with our 
previous witnesses, your statements will be published in full 
in the record. You need not ask for that to occur. And to the 
extent that you are able to summarize those statements, that 
would be appreciated.
    I'll ask you to testify in the order that I introduced you. 
That would be, first of all, Dr. Aslund, then Mr. Jackson, then 
Mr. Nix, and, finally, Mr. Ledsky.
    Dr. Aslund.

STATEMENT OF DR. ANDERS ASLUND, DIRECTOR, RUSSIAN AND EURASIAN 
     PROGRAM, CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE, 
                         WASHINGTON, DC

    Dr. Aslund. Mr. Chairman, thank you very much. I would like 
to thank you for this opportunity to speak on an important 
topic.
    Russia is something that I care very much about. I've 
studied Russia for more than 30 years. And I don't think that 
the developments that we have seen in Russia, particularly in 
the last year or so, have been very fortunate.
    But my major argument is that Mr. Putin has chosen 
authoritarianism. This choice of his is not strengthening, but 
weakening the Russian state. And, therefore, there is, as you 
mentioned at the beginning, unfortunately less that the United 
States today can do together with Russia.
    During his first 4-year term, President Putin was highly 
successful. The country enjoyed political and economic 
stability and great economic growth. He did also carry out 
reforms on a broad front--judiciary reform and tax reform, but 
also many others. He succeeded in his policymaking, because he 
balanced two groups--on the one hand, the old oligarchs from 
the Yeltsin era; on the other hand, his KGB people from St. 
Petersburg--but left a small group of liberals with inordinate 
influence as arbiters.
    He managed enigmatically to be everything to all voters, 
and, indeed, was elected President with 71 percent of the votes 
cast in an election that was deemed free, but not fair, by the 
OSCE. But after that we have seen that since he consolidated 
power, he has done what he really wanted to do. And the choice 
is not very encouraging. I think that we should focus upon four 
major policy failures in the year past. They reflect the 
inadequacy of the new system that President Putin has built so 
meticulously.
    The first policy failure, indeed, was the Yukos affair. The 
arrest of Mikhail Khodorkovsky meant that Mr. Putin eliminated 
the oligarchs as a political force. That meant that only a 
small group of KGB officers really sat on top of state power in 
Russia and at the same time, as we have heard, the lawless 
confiscation of Yukos rendered his excellent tax reform and the 
substantial judicial reform little but jokes.
    The second scandal was the hostage drama at the school in 
Beslan in Northern Ossetia. The scandal was that the government 
didn't do anything. In the end, on the third day, it was the 
locals who stormed the school, and the result was, of course, a 
maximum blood bath. This was simply state distortion. Russians 
accept a lot, but not that the state does nothing.
    The third big policy mistake was the massive intervention--
by Mr. Putin personally--in the Ukrainian Presidential 
election. There he proved himself poorly informed, 
antidemocratic, anti-Western, and ineffective. You can say that 
in one stroke he managed to unite the United States and the 
European Union, which is quite an achievement, but he did so 
against himself, and he left much of his prior realist foreign 
policy in tatters.
    A fourth big policy drama has been the recent reform of the 
social benefits, which has simply been bungled, which makes it 
look like an action directed against the poor in the midst of 
Russia's oil boom.
    All these four policy mistakes illustrate the systemic 
shortfalls of President Putin's new regime.
    First of all, Mr. Putin is too jealous of power to share it 
with anybody, even with his Prime Minister. This leads to an 
excessive centralization of power which has virtually paralyzed 
his government.
    Second, President Putin is now increasingly representing 
only a narrow circle of KGB officers from St. Petersburg. You 
can't manage a country for long with such a narrow power base. 
And, naturally, his personal popularity is now falling fast.
    Third, by strangling independent information, President 
Putin allows himself to be increasingly disinformed by his own 
bureaucracy.
    Fourth, checks and balances have been minimized, which 
means that the quality of decisionmaking gets worse, as we saw 
in the social benefit reform.
    And, fifth, as his regime has changed, so has its 
interests. The dominant interest now is of the small circle of 
KGB officers who sit on the top of the state administration and 
on top of the state enterprises. This is the most antireformist 
interest that you can imagine. Therefore, there are no reforms 
coming forward.
    So my point here is that Putin's rule is not only 
authoritarian, but it's dysfunctional. It is too rigid and too 
centralized to handle crises, and crises always happen. Rather 
than addressing any of these problems, President Putin just 
stubbornly continues further in the same direction of further 
centralization.
    My suggestion here, without developing it further, is that 
such a regime can hardly be very stable.
    What does this then mean for United States/Russia 
relationship?
    First of all, no illusion can be harbored any longer about 
shared values between the United States and Russia. President 
Putin does not believe in freedom and democracy, which he has 
well shown, contrary to prior statements of his.
    Second, the consequences of these differences in values are 
most evident in the newly independent states in Eurasia. We are 
likely to see more standoffs, as we have just seen in Ukraine, 
where President Putin supports authoritarian rulers, while the 
United States, of course, must stand on the side of democracy.
    Third, much of the bilateral talks between the United 
States and Russia have been devoted to development of Russian 
energy. As we have just heard, of course, all these policy 
changes in the last year or so, around the Yukos affair, hamper 
that.
    Fourth, as you mentioned in your introductory words, 
Russia's redeeming feature in recent years has been that it has 
been seen as a firm and capable ally of the United States in 
the war on international terrorism and on nonproliferation. 
Alas, major terrorist acts in Russia, both in Moscow and North 
Caucasus, suggest that Russia might not be very effective in 
doing so, even at home.
    So, let me conclude, Mr. Chairman. It should be emphasized 
that the United States and Russia still have common interests 
in the nonproliferation of arms of mass destruction and many 
regional conflicts around the world, and they should be further 
pursued. But, I think that it's time to talk to Russia with a 
firm public voice.
    We have to see, as the final point, that President Putin's 
unfortunate choice of an authoritarian regime has reduced both 
the efficacy of a Russian state and the shared interests of the 
United States and Russia.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Aslund follows:]

  Prepared Statement of Anders Aslund, Director, Russian and Eurasian 
  Program, Carnegie Endowment for International Peace, Washington, DC

    Mr. Chairman, I would like to thank you for this opportunity to 
speak on the important topic of the retreat of democracy in Russia. 
Russia in the 1990s was not a full democracy, but it was a much freer 
society than Russia today, while its economy has developed very 
positively since then. The retreat of democracy in Russia is nothing 
that has been forced upon President Vladimir Putin but an intentional 
result of his. Therefore, I shall discuss how his regime has evolved. 
In particular, I shall focus on major events of the last year and what 
they tell us about the nature of Mr. Putin's regime. Finally, I shall 
discuss the potential impact of the changes in Russia on the future of 
the U.S.-Russia relationship.
The Evolution of President Putin's Regime
    Overtly, Russia's President Vladimir Putin appears to have 
undergone a remarkable transformation between his first and second 
term. By and large, he was highly successful during his first term. The 
country enjoyed political and economic stability, and the economy grew 
by a solid annual average of 6.5 percent. The country carried out 
reforms on a broad front.
    It appeared as if President Putin was steered by four major aims:

          1. Political control;
          2. High economic growth of 7-8 percent a year attained 
        through market economic reforms;
          3. Rule of law through judicial reform; and
          4. Realist foreign policy enhancing Russia's international 
        standing at little cost. During his first term, President Putin 
        was highly successful in achieving these goals.

    Yet, the black marks were by no means absent. Putin had risen to 
power on a ruthless war in Chechnya, and his first term saw ever worse 
terrorist attacks, against which his government stood helpless. Another 
negative was a steady reduction of democratic freedom of rights. 
Independent media were reined in or taken over. Frequent regional 
elections were increasingly tampered with. State power was ever more 
centralized to the President.
    There was an obvious contradiction between President Putin's first 
goal of political control and his other objectives, but his 
concentration of political power was so gradual that the contradiction 
was not all too striking. In fact, policymaking from 2000 till 2003 was 
conditioned on a balance of power between the Yeltsin-era big 
businessmen and Putin's rising friends from the KGB in St. Petersburg. 
As a result, a small group of liberal reformers, such as Minister of 
Economy German Gref and Minister of Finance Alexei Kudrin, tended to 
exert inordinate influence, although they had no independent power 
base. An avid reader of opinion polls, President Putin tried 
enigmatically to be everything to all voters. The outcome was an 
excellent and comprehensive reform wave, improving the economy and the 
judicial system. In particular, a new tax code was adopted, introducing 
a flat personal income tax of 13 percent, and the new Land Code 
sanctified private ownership of land.
    Thanks to his many policy successes, President Putin became 
genuinely very popular. He exploited his attainments to reinforce his 
personal power, and in the parliamentary elections in December 2003 his 
United Russia party won a majority of two-thirds of the seats. 
President Putin won the Presidential elections in March 2004 with no 
less than 71 percent of the votes cast in elections that were deemed 
free but not fair by the Organization for Security and Cooperation in 
Europe (OSCE). After having been a bit of everything to everybody, he 
had now consolidated his power to do what he really wanted to do.
Four Monumental Failures
    The last year has seen four monumental policy failures by the Putin 
regime. They reflect the inadequacy of the new system President Putin 
has built so meticulously. The first big policy failure was the Yukos 
affair. On October 25, 2003, Mikhail Khodorkovsky, the richest man in 
Russia and Chief Executive Officer of Yukos Oil Company, was arrested. 
The motives of his arrest appear to have been two. First, President 
Putin wanted to further enhance his political control, by arresting the 
richest oligarch. Second, various interests around Mr. Putin aspired to 
seize Yukos assets. The immediate effect was that Mr. Putin's political 
system changed. The balance between oligarchs and KGB officers ceased 
instantly, because the other oligarchs heeded the warning and largely 
withdrew from political activities. Rather than being the arbiter 
between two powerful groups and thus representing the population at 
large, Putin instantly became the representative only of a small group 
of KGB officers from St. Petersburg, minimizing his power base.
    Yukos appears to have utilized loopholes in the tax legislation, 
but biased tax authorities and courts have levied an incredible total 
of $28 billion in additional taxes and penalties on the company, 
forcing it into bankruptcy. Thus, Russia's progressive tax reform has 
been rendered a joke. The judiciary has delivered the judgments that 
the Kremlin has required, effectively jeopardizing also the substantial 
judiciary reform. The Yukos affair has been long and sordid. At each 
turn, the worst possible option has been chosen by the authorities. In 
the end, President Putin has let Yukos be confiscated through arbitrary 
taxation and kangaroo courts. Characteristically, Mr. Putin has not 
made any concession whatsoever at any stage.
    The second scandal was the hostage drama in Beslan. On September 1, 
2004, a group of terrorists seized a school in Beslan in Northern 
Ossetia in Russian Northern Caucasus. Russia's foremost special forces 
were sent to Beslan, but they were given neither ammunition nor body 
armor, battle plans or operative command. At no time was the school 
cordoned off. The Chairman of the Federal Security Service (FSB) and 
the Minister of Interior arrived in Beslan soon after the siege 
started, but they just hid, doing nothing in public. The two regional 
governors concerned refused to go there and did nothing. In fact, 
nobody from the government did anything. Putin and his government just 
ignored the Beslan crisis apart from minimizing news coverage, and the 
rare official statements were just gross lies. On the third day, local 
Ossetians had had it. They stormed the school themselves with their own 
guns and killed several special troops in the process. No less than 330 
hostages were killed.
    It is difficult to imagine a worse government performance. Law 
enforcement failed the population. It possessed no relevant 
intelligence. Policemen accepted bribes to let the terrorists through. 
Mr. Putin, however, has refused to accept any criticism of law 
enforcement. He sacked none of the culprits, only the editor in chief 
of the private newspaper Izvestiya because of his accurate reporting. 
He has done nothing against the rampant corruption and incompetence of 
the FSB, his alma mater. To reconsider his failed Chechnya policy does 
not appear to be in question. Rather than giving governors more 
authority, he immediately demanded to appoint them. Instead of seeking 
a cure, he persists in aggravating his policies that contributed to the 
problem in the first place, showing inordinate stubbornness.
    The third big policy mistake in the last year was the Russian 
involvement in the Ukrainian presidential elections. According to 
information that I have received from the Yushchenko campaign, 
President Putin promised Russian enterprise financing of no less than 
$300 million for Prime Minister Viktor Yanukovich's campaign. Russian 
TV, widely viewed in Ukraine, campaigned for Yanukovich and slandered 
the democratic candidate Viktor Yushchenko. Dozens of Russian political 
advisors descended on Ukraine, campaigning for Yanukovich. In the last 
month of the election campaign, President Putin himself went twice to 
Ukraine to campaign for Yanukovich. President Putin's preference for 
Yanukovich is rather odd. Yanukovich had served two prison sentences 
for violent crimes. He represented the largest oligarchic clan in 
Ukraine, while Mr. Putin had been combating the oligarchs in Russia. It 
was Yushchenko who had allowed Russian companies to buy big assets in 
Ukraine, while Yanukovich had opposed such purchases. Mr. Putin's 
choice only made sense as an action against democracy and against the 
West.
    In Ukraine, Mr. Putin proved himself, poorly informed, anti-
democratic, anti-Western and ineffective. In one stroke, he managed to 
unite the United States and the European Union, but against himself, 
leaving much of his realist foreign policy in tatters. Strangely, it 
does not appear as if the Kremlin has learned anything from its 
spectacular failure in Ukraine. It appears as if the conclusion drawn 
is that Moscow should have acted earlier and even more heavy-handedly. 
On the one hand, this is depressing from an intellectual point of view, 
and it means that anti-Americanism is likely to increase in the 
Kremlin. On the other hand, it is rather reassuring, because it means 
that Moscow will be as ineffective stemming democratization in other 
countries in Eurasia. Russia's policy is too inadequate to pose any 
serious threat of neo-imperialism in the region, even if Putin's regime 
certainly has proven its bad intentions in Ukraine.
    A fourth big policy drama has been the recent reform of the social 
benefits. Russia has a multitude of old social benefits that are 
primarily targeted on the privileged, and many of the benefits on the 
books are never paid out. It would make sense to sort this system out, 
to target benefits on those in true need, while unjustified benefits 
that could never be afforded were taken off the books. However, 
everything was done wrongly. The reform was presented as the 
monetization of benefits in kind, while many were just abolished. Full 
compensation was promised for the actual benefits in kind, but it 
appears that only about one-third of them were actually compensated 
for. Proper calculations were not undertaken, and the federal and 
regional governments did not agree on who should pay for what. Although 
the benefit reforms affected about 40 million people, they were not 
properly explained. To add insult to injury, the 35,000 highest 
officials, including Mr. Putin, had their salaries quintupled at the 
same time, and none of their very substantial benefits in kind was 
taken away. The social benefit reform seemed outright anti-poor, and 
this occurred in the midst of Russia's oil boom and a huge budget 
surplus. This was just politically inept, and spontaneous popular 
protests against the reform and Putin himself erupted throughout the 
country. They have been spearheaded by pensioners and are still 
continuing.
The Nature of Putin's Current Regime
    There are many other policy mistakes to record, but the reason why 
I have discussed these four policy mistakes in such detail is that they 
are probably the biggest and show that they are not accidental but 
systemic. Therefore, there are reasons to believe that they will be 
repeated. Alas, President Putin's very success in his consolidation of 
power may lead to his future fall. He was so fortunate during his first 
term because he recognized the limitations to his power. Now, he seems 
to think himself free of constraints, but no politician is that lucky. 
He has not only changed policies, but the very structure of the Russian 
government.
    First of all, Mr. Putin is too jealous of power to delegate. In the 
last year, President Putin has unwisely concentrated far more power in 
his hands than he can manage. He has replaced his strong chief of staff 
and prime minister he had during his first term with men famous for 
never making any decisions. One reason for this extreme 
overcentralization is that Mr. Putin does not trust anybody. Rather 
than creating a strong vertical command, he has paralyzed his own 
government because, although he is a micromanager, Putin takes his time 
and is not very decisive. In effect, he has transformed himself from a 
strategic policymaker, tilting the balance at the conclusion of a 
decision, to a fireman running around fighting with all bush fires. A 
critical shortcoming of this rigid centralized system is its inability 
to handle crises, as was so obvious in the Beslan school hostage drama, 
but crises are common in Russia.
    Second, by playing KGB officers and oligarchs against one another, 
Putin managed to represent the whole people and be everything to 
everybody. Now, he is increasingly representing only a narrow circle of 
KGB officers from St. Petersburg. The Russian elite is overwhelmingly 
against Mr. Putin, but they dare not oppose him openly as yet. 
President Putin could have won in free and fair elections, but he chose 
not to. As a result, his legitimacy depends on little but his personal 
popularity, which is falling fast. According to the Russian Public 
Opinion Foundation, 65 percent would have voted for Mr. Putin in 
presidential elections in March last year. Ten months later this number 
had fallen to 42 percent, that is, a drop of over one-third in ten 
months.
    Third, by strangling independent information, President Putin 
allows himself to be increasingly disinformed by his own bureaucracy. 
Being a true secret policeman, Mr. Putin is preoccupied with secrecy, 
and he seems to rely more on intelligence from his old circle of KGB 
men from St. Petersburg than on real information.
    Fourth, checks and balances have been minimized. By depriving the 
parliament, the council of ministers and the regional governors of much 
of their power, President Putin has emptied the formal institutions of 
any real content. Instead, he is busy setting up informal advisory 
institutions, such as the State Council and the Public Chamber, which 
are of little or no consequence. Ironically, the last Russian leader to 
do so was Mikhail Gorbachev from the summer of 1988. Therefore, no 
institution can lend legitimacy to Mr. Putin if he starts faltering. He 
could have won a free and fair election in March 2004, but he chose not 
to, so he does not enjoy that legitimacy either.
    Fifth, as the regime has changed, so have its interests. The 
dominant interest is that of Mr. Putin's KGB friends, who dominate the 
state administration and now also the big state enterprises. The state 
administration and the remaining large state enterprises should be 
focuses of reform, but reforms cannot go against their ruling 
interests, and nobody expects any further significant reforms. Even 
during Putin's first term, the share of public expenditure devoted to 
state administration, law enforcement and military have steadily 
increased at the expense of social expenditures.
    Sixth, politicians in power usually ration their public statements 
to be able to maintain a fair degree of deniability. President Putin, 
however, evidently does not want anybody to speak for him but acts as 
the only authoritative spokesman of his government. This leads to his 
overexposure, the decline of his enigma, and his dwindling authority, 
since his words are not always substantiated by actions. Again, the 
thought goes to Mikhail Gorbachev, who made ever more frequent and long 
television speeches toward the end of his reign.
    Seventh, many political leaders manage to maintain their 
credibility and authority by blaming top aides and sacking them 
repeatedly. For instance, Belarus' President Alexander Lukashenko is a 
master in that art. So far, however, Mr. Putin has been very reluctant 
to undertake personnel changes, and he has missed repeated occasions to 
sack obvious culprits, notably in the Beslan hostage drama. Obviously, 
this is a means that he has at his disposal, but strikingly he has not 
even demoted any of his many KGB loyalists from St. Petersburg as yet.
    Admittedly, the Putin regime has skillfully manipulated elite, 
media and civil society, but you can only manipulate that much before 
you lose credibility and authority, and that threshold has probably 
been crossed during the protests against the social benefit reform this 
January. The point is that Mr. Putin's rule is not only authoritarian 
but dysfunctional. It is too rigid and centralized to handle crises, 
which always occur. Rather than addressing any actual problem, Putin 
just pursues his personal authoritarian agenda further. This 
centralized police state appears to be interested in little but its own 
economic and political power. It is difficult to escape the impression 
that Putin is more concerned about pampering his KGB men than fighting 
terrorism. Since liberal economic reforms harm their interests, they 
have been abandoned. This regime can hardly be very stable, and our 
future study should be devoted to how this regime is likely to crumble.
    Russia's problem today is not the economy, which is doing very well 
with a growth of 7 percent last year. The standard of living is rising 
even faster. But we have just seen a popular revolution in neighboring 
Ukraine, although that economy grew by 12.4 percent last year, and real 
incomes almost twice as fast. Most regime changes in post-communist 
countries, democratic or not, are driven by popular discontent with 
corruption. For a long time, in Russia such concerns have been directed 
against the oligarchs, but it is now all too obvious that the oligarchs 
no longer dominate Russia, whereas Putin's KGB men do. At the same 
time, opinion polls are showing that popular demands for freedom and 
democracy are on the rise again. In the Ukrainian Orange Revolution, 
the two dominant demands were for democracy and freedom, and Ukraine 
was reminiscent of Russia with its mild authoritarianism.
Potential Impact on the Future of the U.S.-Russia Relationship
    Russia's regime has changed significantly in the course of the last 
five years. Under President Boris Yeltsin, it was a somewhat flawed 
democracy, but it was still a rather free society. This is no longer 
the case. Naturally, such a change must have consequences for the U.S.-
Russia relationship.
    First, no illusion can persist any longer about any shared values 
between the United States and Russia beyond those of certain realism in 
foreign policy. Even publicly, the Kremlin is abandoning its talk about 
the oxymoron ``managed democracy,'' instead talking more accurately 
about mild authoritarianism. The repeated policy disasters in the last 
year show that Russia has not benefited, but suffered, from this rising 
authoritarianism.
    Second, the consequences of the differences in values are most 
evident in the newly-independent states in Eurasia. Today, most of 
these countries are considered not free or authoritarian by the 
authoritative Freedom House. The natural American attitude is of course 
to support democracy, but, as events in Ukraine have shown so well, 
President Putin's natural policy is to stand up for the old 
authoritarian rulers against democracy. As people in other countries in 
the region are about to rise against their dictators, this conflict 
between Russia and the United States is likely to be repeated. The 
United States must stand firmly on the side of democracy.
    Third, for years, much of bilateral talks between the United States 
and Russia have been devoted to development of Russian energy. 
Unfortunately, little has come of these many talks, and the recent 
developments in Russia have seriously limited the future opportunities. 
The reinforced state oil pipeline monopoly in Russia means that private 
pipelines are no longer an option. In particular, that has seriously 
delayed the construction of an oil pipeline to Murmansk, which could 
have supplied the United States with Russian oil. A recent decision to 
prohibit companies that are not predominantly Russian-owned to bid for 
licenses for new deposits of Russian resources has further limited the 
possibilities for American companies in Russia. The Yukos affair shows 
how much the legal and tax climate has been aggravated even for Russian 
energy companies.
    Fourth, Russia's redeeming feature in recent years has been that it 
has been seen as a firm and capable ally of the United States in the 
war on international terrorism. Alas, repeated major terrorist acts in 
Russia, both in Moscow and North Caucasus, suggest that Russia is not 
very effective in this task even at home.
    The overall conclusion is that President Putin's unfortunate choice 
to build a mildly authoritarian regime has reduced both the efficacy of 
the Russian state and the shared interests of the United States and 
Russia. This testimony has focused on the problems arising from 
Russia's domestic change, but this does not mean that the United States 
should turn its back on Russia. After all, Mr. Putin's authoritarianism 
is relatively mild by international comparison, and its international 
threat appears limited. The United States and Russia still have common 
interests in the non-proliferation of arms of mass destruction and many 
regional conflicts around the world. The United States has an interest 
in strengthening the modern and progressive forces in Russia through 
further exchanges of people and trade. Notably, Russia's accession to 
the WTO should be welcomed as a progressive step.

    The Chairman. Thank you very much, Dr. Aslund.
    Mr. Jackson.

     STATEMENT OF BRUCE P. JACKSON, PRESIDENT, PROJECT ON 
            TRANSITIONAL DEMOCRACIES, WASHINGTON, DC

    Mr. Jackson. Thank you, Mr. Chairman.
    Perhaps I could just focus my summary on the interpretation 
of what has gone on in Russia, what it means to its neighbors, 
and what it means to us, since, I think, there is no 
disagreement about the facts of the case. Judging from your 
opening statement, the facts are well known.
    Beginning with Mikhail Khodorkovsky's arrest in 2003, it 
was a watershed event in democracy in Russia, where Putin moved 
from the concept of a managed democracy to something more 
sinister, and marked the beginning of a profound crackdown, a 
comprehensive crackdown, against all the foundations of 
democracy in Russia, not simply Yukos.
    We know now, from looking at the Orange Revolution in 
Ukraine and the Rose Revolution in Georgia, that there are six 
preconditions for democratic change: An effective civic 
society, independent political parties, an opposition in 
parliament, the beginnings of a business community, an 
independent media, and some control over the military and 
security system by civilians.
    It seems to me that what President Putin evidently decided 
was to destroy these foundations of democracy in Russia, and to 
discourage their development in countries around Russia. And 
that is precisely what has occurred.
    In May 2004, Putin attacked the NGO sector and accused them 
of being foreign agents, effectively silencing the NGO sector. 
Human Rights Watch reports that opposition parties have either 
been decimated or eliminated altogether beginning from the 
elections in December 2003. United Russia now controls two-
thirds of the Duma, so all legislation that Mr. Putin wants 
goes through, including constitutional change, which allowed 
the elimination of the regional governors.
    The destruction of Yukos speaks for itself. This is 
precisely what Mr. Putin wished to accomplish, and largely, 
many of us think, because he viewed Mr. Khodorkovsky as a 
political rival to him in the 2008 elections, which I think was 
likely, at the time.
    All television and radio stations are now under state 
control. And most ominously, the rise of the KGB as the 
political class in Russia. Russian sociologists estimate that 
70 percent of all Russian officials--regional officials are KGB 
agents, and that the KGB has increased their presence in the 
Russian bureaucracy by 300 percent since the time of Mr. 
Gorbachev. This is why, in the aggregate, the Freedom House has 
downgraded Russia to the ``Not Free'' status, where it now sits 
with Belarus, North Korea, and Saudi Arabia.
    Thus, I do not think it is accurate to say that democracy 
is in retreat in Russia. Democracy has been assassinated in 
Russia. And it was deliberate.
    Now, my second point is, as Andrei Sakharov wrote, ``A 
country that does not respect the rights of its own people will 
not respect the rights of its neighbors.'' So it's not simply 
an undemocratic regime in Russia; it's an antidemocratic Russia 
abroad. And what are the consequences and the manifestations of 
an anti-democratic state in Eurasia?
    I think it is interesting to look at the doctrinal writings 
in Russia right now by one Mr. Pavlovsky, who is quite close to 
Mr. Putin. He says, ``One should be aware that, at least, until 
the end of President Putin's tenure, and probably until the end 
of the Presidency of his successors, Russian foreign-policy 
priority will be to turn Russia into a 21st century world 
power.'' This is all about power.
    And, basically, the growing view is, to achieve this 
status, Russia must be undemocratic at home in order to 
consolidate the power of the state, and it must be 
antidemocratic abroad in order to block the entry of political 
competitors--such as the NATO, the European Union--into the 
states around Russia. And this is what justifies their actions. 
They have actually formally introduced the concept of 
preemptive counterrevolution; where democracy looks like it may 
flourish or there's proclivities, that they will intervene.
    And if we look through their conduct in nearby states, just 
to tick off a few--since you are well aware of their actions in 
Georgia, I won't draw on that at length--but the attempt to 
eliminate the OSCE monitoring of the borders between the North 
Caucasus and the South Caucasus--the only explanation is to 
allow military and paramilitary intervention in the affairs of 
a weaker democratic state.
    And since, in Moldova, as you know, since the 2003--Russia 
has been sponsoring a criminal enterprise in Transdnistria, 
which is basically one of the largest arms exporters in 
Eurasia, despite the fact that it has--doesn't even have a 
border with Moldova.
    In Ukraine, their intervention there was profound. Analysts 
like Dr. Aslund have estimated that in excess of $300 million 
was spent to basically rig the outcome in favor of Mr. 
Yanukovich and possible--and many Western diplomats in Kiev 
believe that the assassination attempts that were repeatedly 
directed against President Yushchenko originated from Russia, 
certainly from criminal interests in Russia, and quite possibly 
intelligence interests.
    Turning, finally, to their policy toward Belarus, this is a 
regime that sponsors the dictatorship in Belarus. Again, in 
their own words, ``Russia will clearly distinguish between 
certain characteristics of a political regime in a neighboring 
country and its observance of allied commitments. Belarus is a 
model ally.'' This is their conclusion. Frankly, that the last 
dictatorship in Europe is the closest ally of the Putin 
government, if this fact were not a tragedy, it would be 
laughable. But this is essentially what we're dealing with.
    It seems to me that the argument that we--our partnership 
with Russia is bearing fruit does not stand any scrutiny. They 
are not supporting us in weapons--in an effort to limit the 
proliferation of arms, nor are they cooperating in any manner 
in the war on terror. In fact, Putin flew, personally, to 
Kazakhstan to tell President Nazarbayev to pull his troops out 
of Iraq. And if this is a partner in the war on terror, I'm--I 
just don't understand the term any longer.
    Now, it seems to me, turning to the implications of: What 
can we expect from a regime like this?--it seems to me that 
there's six quick conclusions.
    One, Russia will actively contest the growth of democratic 
governments along its western border with Europe, throughout 
the Black Sea and Caucasus region, and in Central Asia. As part 
of blocking the movement of democracy, they will block the 
resolution of frozen conflicts. So we cannot expect any 
movement there.
    Second, Russia will obstruct the development of effective 
multilateral institutions and their operations, not limited to 
the OSCE, also NATO's Partnership for Peace, and I would expect 
this year you'll see them try to restrict funds from United 
Nations peacekeepers in the region. Russian will increasingly 
engage in paramilitary and criminal activities beyond its 
borders.
    But President Putin's goal of a 21st century empire will 
inevitably cause him to seize, extort, or otherwise secure the 
oil and gas reserves of the Caspian and Central Asia as a 
source of state funds. This is not limited to Yukos. They're 
talking about the entire strategic--what they call the 
strategic resources of the state. They want it all.
    Fifth, it seems to me that the policies of Russia and the 
conduct of President Putin are growing increasingly eccentric. 
References to ``castrating journalists'' is sort of a humorous 
aside, it's not the characteristics of a democratic leader. So 
we are not dealing with a benevolent autocracy; we are dealing 
with a violent and vulgar ``thuggery.''
    And, sixth, this plan, as you observed in your remarks, 
sir, cannot possibly work. It will ultimately take the Russian 
people to financial and political destruction. And the second 
fall of Russian power could be far more catastrophic to world 
politics than the fall of the Soviet Union in 1989. So we have 
a serious challenge to policy, as to: How do we manage them and 
get them to turn back from this dangerous path that they've 
embarked upon?
    It seems to me--and this has come up in earlier testimony, 
and I think Dr. Aslund again covered it--there are four things 
we have to do.
    The exemption that President Putin seems to enjoy from 
public criticism simply must end. If we can criticize Saudi 
Arabia and Egypt for undemocratic activities, we can certainly 
call what's happening in Russia by its true name. And among 
other names, Mikhail Khodorkovsky is a political prisoner. 
That's all--that's just, flat and simple, what it is.
    Second, we must move to suspend Russian access to these 
privileged institutions of the West which they are trying to 
undermine at the same time. Not only WTO. The G7, Jackson-Vanik 
should stay in place, and, across the board, access to the 
institutions of the West must be limited until behavior 
conforms with standards.
    Third, we need to talk--engage our European allies, who 
have firsthand experience with Russian power and know exactly 
what they are seeing. We have to coordinate with them, much in 
the way, under your leadership, we've tried to begin to 
coordinate a policy on Belarus. There has to be a common policy 
toward the failure of democracy in Russia, and that can only be 
worked out with our European allies.
    And, finally, Natan Sharansky talks about the concept of 
moral clarity. I think that that is closely related to the 
concept of strategic clarity. We simply must tell Mr. Putin 
directly what is unacceptable behavior and where the red lines 
are. Crossing borders into Ukraine to steal the Kerch channel, 
insisting that Georgia sign a framework agreement limiting 
their sovereignty in perpetuity, those things have to be ruled 
out of bounds, and we have to be clear and up front about that.
    I think that the time to begin that is obviously next 
Thursday, in Bratislava. And President Bush really--we are all 
looking for Mr. Bush to draw the red lines at that summit, 
which is critical.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Jackson follows:]

     Prepared Statement of Bruce P. Jackson, President, Project on 
                Transitional Democracies, Washington, DC

    Mr. Chairman, Members of the Committee, thank you for the 
opportunity to testify before you on the rapid deterioration of 
democracy in Russia over the past 24 months, the cause of this 
deterioration, and the significant dangers Russian policy now poses for 
the United States, its European allies and friends, and for the future 
prospects of democracy in the Euro-Atlantic. I would like to discuss 
three major questions:

          (1) What are the necessary institutional requirements for a 
        successor state of the former Soviet Union to succeed in a 
        transition to democracy? And how have these institutions, which 
        would be essential for a democratizing Russia, fared in 
        President Putin's Russia?
          (2) What policy is President Putin pursuing towards democracy 
        in Russia and towards the prospect of positive democratic 
        change in Russia's neighbors?
          (3) Has Russia become hostile to both the democratic values 
        and the institutions of the West? And, if so, what should be 
        done about it?
                                   i
    In retrospect, we now recognize that the arrest of Mikhail 
Khodorkovsky on October 25, 2003 by heavily armed, special forces 
troops was the watershed event in the deterioration of democracy in 
Russia. Prior to this arrest, the soft suppression of democratic forces 
appeared to some as a manifestation of Moscow's historic political 
insecurity and an understandable effort to ``manage'' democracy and 
ameliorate the excesses of, and societal stress from, the Yeltsin era. 
Subsequent to October 2003, it became apparent that what President 
Putin had undertaken was a comprehensive crackdown on each and every 
perceived rival to state power and the re-imposition of the traditional 
Russian state, autocratic at home and imperial abroad.
    However, if we focus only on the animus President Putin has towards 
Mr. Khodorkovksy and the resultant ``show trials'' of Yukos executives, 
we risk missing the breadth of the crackdown on democratic forces and 
risk failing to see the logic of authoritarian and possibly even 
dictatorial power behind the events in Russia over the past two years.
    Let me contrast the situation in Russia with the positive 
developments in Georgia during the Rose Revolution in November 2003 and 
in Ukraine during the Orange Revolution of December 2004. Democratic 
leaders in CIS countries and outside analysts have paid considerable 
attention to the attributes of Georgian and Ukrainian society that 
allowed their respective transitions to peacefully sweep away 
autocratic regimes despite their total control of the hard power of the 
security services and military forces.\1\
---------------------------------------------------------------------------
    \1\ See Dr. Irma Krasovskaya, ``The Georgian and Ukrainian 
Revolutions: Implications for Central Eurasia (Belarus)'' presented at 
the Nixon Center Seminar, chaired by Dr. Zeyno Baran, January 26, 2005 
(forthcoming.)
---------------------------------------------------------------------------
    While the encouragement of Western democracies and the prospect of 
membership in such important institutions as the European Union and 
NATO have been important factors in the thinking of reformers in CIS 
countries, the preconditions of democratic change in the former Soviet 
Union appear to be:

          (1) An extensive civic society comprised of multiple NGO's 
        where pluralism can develop;
          (2) Independent political parties which can contest 
        elections;
          (3) An opposition bloc in Parliament which can offer 
        alternative policies and serve as a training ground for future 
        governance;
          (4) The beginnings of a business community which can 
        financially support an opposition as a counterweight to the 
        regime's use of government resources and corrupt business 
        allies;
          (5) An independent media with the capability to distribute 
        printed materials and with access to at least one independent 
        television station; and
          (6) Civilian control of the military and security services 
        adequate to ensure that armed force will not be used to 
        suppress civil dissent.

    Regrettably, Mr. Putin and the former KGB officers who surround 
him, the so-called ``Siloviki,'' conducted an analysis of the 
preconditions of democratic change, similar to the one I have just 
outlined, but reached a radically different conclusion. Rather than 
support and encourage these positive developments in post-conflict and 
post-Soviet states, President Putin evidently resolved to destroy the 
foundations of democracy in Russia and actively to discourage their 
development in countries neighboring Russia and beyond. And this is 
precisely what he has done.
    (1) In May 2004, Putin formalized the attack on the civil sector in 
his state-of-the-nation address by accusing NGO's of working for 
foreign interests and against the interests of Russia and its citizens. 
Coupled with the conviction of academics Igor Sutyagin and Valentin 
Danilov on fabricated charges of espionage, the NGO sector in Russia 
has been effectively silenced.\2\
---------------------------------------------------------------------------
    \2\ See among others the reporting of Masha Lipman, Carnegie 
Endowment for International Peace, Moscow.
---------------------------------------------------------------------------
    (2) Human Rights Watch reports that ``opposition parties have been 
either decimated or eliminated altogether, partially as a result of the 
deeply flawed elections of December 2003.'' \3\
---------------------------------------------------------------------------
    \3\ See Human Rights Watch, Russia Country Summary, January 2005.
---------------------------------------------------------------------------
    (3) By 2004, United Russia, Putin's party in the Duma, controlled 
two-thirds of all seats and enough votes to enact legislation of any 
kind and to change the constitution to suit the President. On December 
12, 2004, Putin was thus able to sign into law a bill ending the 
election of regional governors and giving the President the right to 
appoint Governors, thereby eliminating the possibility of any 
parliamentary or regional opposition.
    (4) The destruction of Yukos and the seizure of its assets marked 
the beginning of the destruction of the business class, but do not 
fully convey the scale of renationalization. The Kremlin has made no 
secret that Russia claims all oil and gas reserves in the former Soviet 
Union as well as ownership of the pipelines which transit the territory 
of the former Soviet Union. The outflow of investment from Russia over 
the past year and a half confirms that the business base which could 
support alternative political views inside Russia is shrinking rapidly. 
The elimination of a politically active business community was 
precisely what President Putin intended to bring about by the arrest 
and subsequent show trial of Mikhail Khodorkovsky.
    (5) Of all the areas where the Russian Government has suppressed 
the possibility of democracy, it has been most comprehensive and 
ruthless in its attack on independent media. All significant television 
and radio stations are now under state control. The editor-in-chief of 
Izvestia was fired for attempting to cover the tragic terrorist attack 
on the school children of Beslan, and two journalists attempting to 
travel to Beslan appear to have been drugged by security services. The 
state of journalism in Russia is so precarious that Amnesty 
International has just reported that security services are targeting 
independent journalists for harassment, disappearances and killing.\4\ 
It should surprise no one that the distinguished Committee to Protect 
Journalists lists Russia as one of the World's Worst Places To Be a 
Journalist in its annual survey.\5\
---------------------------------------------------------------------------
    \4\ Amnesty International Press Release, ``Russian Federation: 
Human Rights Group Threatened By Security Forces,'' January 20, 2005.
    \5\ The Committee to Protect Journalists, Annual Survey of the 
World's Worst Places To Be a Journalist, May 2, 2004.
---------------------------------------------------------------------------
    (6) Among the most alarming of recent developments, however, is the 
return of the KGB to power in the Presidential Administration. 
According to Olga Kryshtanovskaya, a leading Russian sociologist, 
former KGB officers are regaining power at every level of government 
and now account for 70 percent of regional government leaders. Other 
analysts state that the number of former secret police in Putin's 
government is 300 percent greater than the number in the Gorbachev 
government. In this situation, there is a high probability that 
military and security services would be used to suppress civil dissent 
and, indeed, are already being used to this effect.
    As a consequence of the systematic suppression of the basic 
foundations of a democratic society, on December 20, 2004, Freedom 
House downgraded Russia to the category of ``Not Free'' which Russia 
now shares with Belarus, North Korea and Saudi Arabia, among other 
undemocratic regimes.\6\ Indeed, the majority of informed opinion on 
both sides of the Atlantic had reached that same conclusion much 
earlier and I have included their collective assessment as an annex to 
this testimony.\7\ What I wish to add today to the near-unanimous view 
that Russia has become an autocratic state is my belief that the 
destruction of democracy in Russia was a premeditated and calculated 
act of state power, ordered by President Putin, and executed by a class 
of KGB-trained officials assembled for this purpose.
---------------------------------------------------------------------------
    \6\ Freedom House, ``Russia Downgraded to Not Free,'' December 20, 
2004.
    \7\ An Open Letter to the Heads of State and Government of NATO and 
the European Union, September 23, 2004.
---------------------------------------------------------------------------
    If the conditions which supported democratic change and reform in 
Georgia and Ukraine are any guide, President Putin has orchestrated a 
sustained and methodical campaign to eliminate not only democratic 
forces in civil and political life, but also the possibility of such 
forces arising again in the future. I do not think that it is accurate 
to say that democracy is in retreat in Russia. Democracy has been 
assassinated in Russia.
                                   ii
    Nobel Peace Prize Laureate Andrei Sakharov wrote, ``A country that 
does not respect the rights of its own people will not respect the 
rights of its neighbors,'' and this is an admonition to hold in mind 
when assessing the overall direction of Putin's policies.\8\ Rather 
than simply label Russia as an autocracy or as a borderline 
dictatorship, it is probably more accurate and useful for this 
Committee to regard Russia as an ``anti-democratic state'' locked in 
what its leadership imagines is a competition with the West for control 
of the ``post-Soviet space.'' \9\
---------------------------------------------------------------------------
    \8\ Quoted in Natan Sharansky, ``The Case for Democracy: The Power 
of Freedom to Overcome Tyranny and Terror'' Public Affairs, 2004, pg. 
3.
    \9\ Vladimir Socor, ``Kremlin Redefining Policy in `Post-Soviet 
Space,' '' Jamestown Foundation, February 8, 2005.
---------------------------------------------------------------------------
    President Putin's initial argument for ``managed democracy'' rested 
on his belief that the sometimes unpredictable quality of liberal 
democracy could weaken the security of the Russian state unless it were 
subject to a substantial degree of state control. Whether or not he 
actually believed this, he quickly advanced to a more militant 
conviction that independent political parties, NGO's and journalists, 
by questioning the wisdom of his policy towards Chechnya, were 
effectively allies of terrorism. It is a short walk from the 
authoritarian view that domestic freedom must be curtailed in wartime 
to the dictatorial conclusion that all opposition and dissent is 
treasonous. By 2004, President Putin had arrived at the dictatorial 
conclusion.
    Despite the fact that Moscow has killed upwards of 100,000 Chechens 
in the last decade and is estimated to be ``disappearing'' 
approximately 400 Chechen civilians annually, curiously, the war on 
terror does not figure prominently in Russian doctrinal statements. To 
the contrary, the casualties in the North Caucasus seem to be regarded 
as a cost associated with a larger strategic objective. As Kremlin 
consultant Gleb Pavlovsky explained on February 3, 2005, ``One should 
be aware that, at least until the end of President Putin's tenure and 
probably until the end of the presidency of his immediate successors, 
Russia's foreign policy priority will be to turn Russia into a 21st 
century world power.'' \10\
---------------------------------------------------------------------------
    \10\ Socor, op. cit.
---------------------------------------------------------------------------
    To put it bluntly, the growing view in Putin's inner circle is that 
in order to regain the status of a world power in the 21st century, 
Russia must be undemocratic at home (in order to consolidate the power 
of the state) and it must be anti-democratic in its ``near abroad'' (in 
order to block the entry of perceived political competitors, such as 
the European Union or NATO, invited into post-Soviet space by new 
democracies). The war on terror is not central to this calculation and 
is little more than something to discuss with credulous Americans from 
time to time.
    Again, the statements of Gleb Pavlovsky confirm understandable 
suspicions about Russian intentions. Shortly after the election of 
Victor Yushchenko as President of Ukraine, Pavlovsky urged the Kremlin 
to adopt a policy of ``pre-emptive counter-revolution'' towards any 
neighbor of Russia which manifested politically dangerous democratic 
proclivities.\11\ Another of the so-called ``polit-technologists'' 
Sergei Markov, who also advises President Putin, has called for the 
formation of a Russian organization to counter the National Endowment 
for Democracy, whose purpose would be to prevent European and American 
NGO's from reaching democratic movements anywhere in the Commonwealth 
of Independent States, in other words in post-Soviet space. (There is, 
of course, not the slightest reference to countering militant 
fundamentalism or Islamic terrorist cells in any of this.)
---------------------------------------------------------------------------
    \11\ Dr. Ivan Krastev, Center for Liberal Studies, Sofia, Bulgaria. 
(Interview with author.)
---------------------------------------------------------------------------
    With this framework, it might be useful to review the recent 
interventions of Russia in the internal affairs of its neighbors:
    Since the Rose Revolution in Georgia in late 2003, the Government 
of President Misha Saakashvili has been under constant pressure and 
occasional threat from Russia. In August 2004, Russia blocked the 
reinforcement of the OSCE peace-keeping mission to South Ossetia to 
facilitate its movement of military equipment and criminal traffic 
through the Roki tunnel into the zone of conflict. In that same month, 
Russian-backed South Ossetian paramilitary forces began to distribute 
AK-47's widely among the South Ossetian populace, adding to the danger 
of inter-ethnic conflict. In return for this type of Russian 
``protection,'' the OSCE estimates that the ``government'' of South 
Ossetia sends $50m per year to the mafia-KGB bosses in St. Petersburg.
    In December 2004 Russia vetoed the continuation of the OSCE-led 
border monitoring operation which polices the mountain passes along 
Georgia's borders with Ingushetiya, Chechnya and Dagestan in the North 
Caucasus. Most observers believe the removal of international monitors 
is intended to allow Russia complete freedom to conduct military and 
paramilitary operations inside Georgia under the pretext of chasing 
terrorists. Russia has continued to hand out Russian passports to 
secessionists in Abhazia and South Ossetia, and, despite its multiple 
international commitments to withdraw its military forces from Soviet-
era bases in Georgia, continues to occupy and reinforce these bases. In 
a word, Putin's policy towards Georgia is indistinguishable from the 
19th century policies of Czarist Russia towards the easily intimidated 
states of the South Caucasus.
    In Moldova, since December 2003 when the Russian negotiators 
proposed in the infamous Kozak Memorandum to legalize the permanent 
stationing of Russian troops in Transdnistria, Russia has worked 
tirelessly to exacerbate tensions between Transdnistria and Chisinau 
and to prevent the demilitarization of Transdnistria. As a result, 
Russia has been able to keep Moldovan leadership sufficiently weak, 
divided, and corrupt so as to be incapable of enacting the reforms 
necessary for democratization. Transdnistria remains exclusively a 
criminal enterprise under Moscow's protection and the largest export 
hub of illicit arms traffic in the Black Sea region. And remember, 
Russia shares no border with Moldova, a fact which adds to the imperial 
character of Russian intervention.
    In Ukraine, the massive scale of Russian interference and President 
Putin's personal involvement in the recent fraudulent presidential 
elections is well-known. Most analysts believe that the Kremlin spent 
in excess of $300m and countless hours of state television time in the 
attempt to rig the election for Victor Yanukovich. What may be less 
well known to this Committee is that explosives used in the botched 
assassination attempt on Victor Yushchenko and the dioxin poison that 
almost succeeded in killing him both almost certainly came from Russia. 
Western diplomats and numerous Ukrainian officials in Kiev say 
privately that the investigation into these repeated assassination 
attempts is expected to lead to Russian organized crime and, 
ultimately, will be traced to Russian intelligence services. There is 
mounting evidence that the murder of political opposition figures in 
neighboring countries is seen by some factions of the Russian security 
services, such as the GRU, as being a legitimate tool of statecraft, as 
it was in the dark years of the Soviet Union.
    With regard to Belarus, President Putin's government has been an 
accomplice with Alexander Lukashenko in the construction and 
maintenance of what has been often called ``the last dictatorship in 
Europe.'' This unholy alliance has brutalized and impoverished the 
people of Belarus and is distinguished only by the degree of Russian 
cynicism which motivated it. Here again, I cannot improve on the words 
of Putin-advisor Gleb Pavlovsky:

          We are totally satisfied with the level of our relations with 
        Belarus. Russia will clearly distinguish between certain 
        characteristics of a political regime in a neighboring country 
        and its observance of allied commitments. Belarus is a model 
        ally.\12\
---------------------------------------------------------------------------
    \12\ Socor. op. cit.

    Think about this for a moment. The last dictatorship in Europe is 
the closest ally of the Putin Government. If this fact were not a 
tragedy, it would be laughable.
    These are only illustrations of the growing belligerence of 
Russia's near abroad policy. A more comprehensive treatment would 
include the threatening manner the Kremlin uses in discussions with the 
Baltic states on commercial transit and Russian-speaking minorities; 
the seizure of the waterway (the Kerch Channel) connecting the Black 
Sea and the Sea of Azov from Ukraine; the demands on concessionary 
energy rights from Kazakhstan; not to mention the extermination of 
100,000 Chechens. There is little doubt that President Putin believes 
that 19th century mercantilism and militarism are appropriate tactics 
for a 21st century Russian leader.
    In all fairness, there are some U.S. Government officials who 
believe that, although Russia's internal conditions are disappointing 
even deplorable, the benefits of a U.S.-Russian partnership in the war 
on terror, energy export issues, and the effort to counter the 
proliferation of weapons outweigh these concerns. This is at least an 
argument for the case advanced by Russian apologists. Unfortunately, 
there is no evidence that Russia is helping with the war on terror, the 
world energy supply, or on weapons proliferation beyond what the 
Russian government would do anyway in its own national interest. 
Indeed, the evidence available points to the opposite conclusion.
    Not only is President Putin deliberately working to create weak and 
vulnerable states on Russia's borders which will serve as a breeding 
ground for future criminals and terrorists, he is actively trying to 
undermine American interests in building a democratic Iraq. In January 
2005, President Putin visited President Nazarbayev in Kazakhstan and 
ordered him to pull the Kazak troops out of Iraq. When President 
Nazarbayev refused, Putin cut short his visit and returned to Moscow.
    Promises to increase Russian energy production and exports remain 
unmet. Russia's most capable and modern energy company was re-
nationalized and its resources taken over by some of its least 
efficient producers. Russia not only refuses to support Western anti-
proliferation efforts in Iran, but it has been and continues to be a 
critical foreign supplier to Tehran's weapons programs.
    In 2004, Russia blocked a NATO naval mission which would have 
provided surveillance in the Black Sea of weapons traffic and potential 
terrorist attack. I have already outlined the Kremlin's campaign to 
push OSCE peacekeepers and border monitors out of the former Soviet 
space, which will soon be followed by efforts to curtail U.N. missions 
in places such as Abkhazia. The overall effect of our ``partnership'' 
with Russia appears to have rendered the citizens of a dozen 
independent countries more vulnerable to terrorism and organized crime, 
while allowing the Russian military to remain the largest source of 
proliferated arms in the world. This hardly seems fair value for the 
compromise of American principles which this partnership obviously 
entails.
                                  iii
    Given the reversal of democratic trends in Moscow and the 
appearance of a threatening Russia in Eurasian politics, what are the 
implications for U.S. foreign policy? It seems to me that we are forced 
to six conclusions:
    (1) Russia will actively contest the growth of democratic 
governments along its Western border with Europe, throughout the Black 
Sea and Caucasus region, and in Central Asia. President Putin intends 
to block the resolution of the frozen conflicts from Transdnistria to 
South Ossetia to Nagorno-Karabakh and to maintain the Soviet-era 
military bases which serve as occupying forces and prolong these 
conflicts. The instability this policy will cause in the governments 
throughout the post-Soviet space will be a long-term threat to the 
interests of Europe and the United States in stabilizing and 
democratizing this region.
    (2) Russia will obstruct the development of effective multi-lateral 
institutions and their operations, such as the OSCE and NATO 
Partnership for Peace, anywhere in what Putin perceives as Russia's 
historical sphere of influence, thereby isolating Russia's neighbors 
from the structures of international dialogue, conflict resolution, and 
cooperation.
    (3) Russia will increasingly engage in paramilitary and criminal 
activities beyond its borders, both as an instrument of state policy 
and as a function of simple greed. Thus, the United States should 
expect the persistence of arms traffic to embargoed states and the 
irresponsible proliferation of small arms (as in South Ossetia) as well 
as a higher incidence of both politically and criminally motivated 
bombings and murders (as in the recent car bombing in Gori, Georgia and 
the repeated attempts on Victor Yushchenko's life).
    (4) President Putin's goal of a 21st century empire will inevitably 
cause him to seize, extort or otherwise secure the oil and gas reserves 
of the Caspian and Central Asia as a source of funds for state power. 
Indeed, the seizure of Yukos and the network of pipelines were the 
first two steps in a larger plan to control the resources of Central 
Asia. Setting aside the negative impact these developments will have on 
world energy prices, our allies in Europe will become increasingly 
dependent on an oil monopoly controlled by the Russian security 
services for its growing energy needs. Without doubt, this oil and gas 
will come with a political price.
    (5) The policies of Russia and the conduct of President Putin are 
growing increasingly eccentric and seem to be motivated more by an 
angry romanticism, than by a rational calculation of national interest. 
Mr. Putin's insistence in an interview with Russia journalists at the 
time that there were no casualties in the slaughter in the Nord-Ost 
Theater is revealing. Mr. Putin was only conscious of casualties among 
the Russian security services; the lives of civilians did not figure in 
his calculus. As everyone knows, the unpredictable and uncalculated use 
of power in international politics is highly dangerous. In a word, we 
are not dealing with a benevolent autocracy; we are now dealing with a 
violent and vulgar ``thuggery.''
    (6) And, finally, President Putin's plan cannot possibly work. Both 
strategically and economically, Russia cannot support itself as a world 
power and cannot feed its people with an economy run by the Kremlin. 
Thus, if these trends are not reversed, Mr. Putin will bring about the 
second collapse of Moscow which may well be far more dangerous and 
violent than the collapse of the Soviet empire in 1989. It was 
precisely this outcome, the return to empire and the resultant 
collapse, that U.S. policy has been trying to avert since the fall of 
the Berlin Wall. As Secretary of State Condoleezza Rice advised 
presciently some years ago, a critical challenge for U.S. policy will 
be ``to manage the decline of Soviet power.'' So far, we are not 
meeting this challenge.
    It seems to me that there are four policy steps that the United 
States should take in response to the threat posed by an anti-
democratic Russia. First, we have to end the exemption from public 
criticism that President Putin's administration seems to enjoy. There 
has been almost no testimony on this critical issue before this 
Committee by senior Administration officials for the last two years. 
This silence is not in our interests and conveys a false impression of 
permissiveness to the Kremlin. If Saudi Arabia and Egypt are no longer 
immune from legitimate criticism of their undemocratic practices, so 
too must Russian practices be subject to public censure by U.S. 
policymakers.
    Second, as Senator John McCain has called for, the United States 
must end the policy of advancing access to the inner councils of 
democratic institutions (the G7, NATO, and the White House) as long as 
Mr. Putin continues to abuse human and political rights at home and 
attempts to undermine democratic institutions abroad. If the conduct of 
Mr. Putin is free from penalty, he will undoubtedly continue to pursue 
policies counter to the interests of the community of democracies.
    Third, the United States should work with our partners in NATO and 
the European Union to develop common strategies to deal with the death 
of democracy inside Russia and with its imperial interventions abroad. 
The recent enlargements of the EU and NATO added many European 
countries with first-hand knowledge of what it means to be an object of 
Russia's predatory policies. For Czechs, Slovaks, Poles, Balts and 
others, Russian imperialism is not an abstraction. We can and must 
expend the political capital to develop a common Western approach that 
promotes democracy inside and alongside the Russian Federation.
    Finally, Natan Sharansky reminds us that ``moral clarity'' is the 
essential quality of a successful democracy in its foreign policy. As a 
nation, we have been far from morally clear about the political 
prisoners in Russia and the human rights abuses throughout the North 
Caucasus, to name two of the most egregious examples.
    Closely related to the lack of moral clarity is the absence of 
``strategic clarity.'' We simply have not informed Russia where the 
``red lines'' are in their treatment of vulnerable new democracies and 
what the consequences are for Russia in pushing beyond what used to be 
called ``the rules of the game.'' This Committee can play a very 
significant role in urging the Administration and communicating 
directly to Moscow, quite specifically, that the continuation of the 
arrests, seizures, murders and threats I have described will result in 
the suspension of commerce with and access to the United States.
    A stern and public rebuke to Mr. Putin may cause Russia to rethink 
the self-destructive path on which it has embarked and serve to protect 
the long-term democratic prospects and future prosperity of Russia and 
its neighbors. It would also send a message of hope to embattled 
democrats inside Russia and the beleaguered democracies on its borders. 
Let us hope that President Bush delivers this message to Mr. Putin next 
week in Bratislava.
    Thank you, Mr. Chairman.
                                 ______
                                 

  An Open Letter to the Heads of State and Government of NATO and the 
                   European Union, September 23, 2004

    As citizens of the Euro-Atlantic community of democracies, we wish 
to express our sympathy and solidarity with the people of the Russian 
Federation in their struggle against terrorism. The mass murderers who 
seized School No. 1 in Beslan committed a heinous act of terrorism for 
which there can be no rationale or excuse. While other mass murderers 
have killed children and unarmed civilians, the calculated targeting of 
so many innocent children is an unprecedented act of barbarism that 
violates the values and norms of our community and which all civilized 
nations must condemn.
    At the same time, we are deeply concerned that these tragic events 
are being used to further undermine democracy in Russia. Russia's 
democratic institutions have always been weak and fragile. Since 
becoming President in January 2000, Vladimir Putin has made them even 
weaker. He has systematically undercut the freedom and independence of 
the press, destroyed the checks and balances in the Russian federal 
system, arbitrarily imprisoned both real and imagined political rivals, 
removed legitimate candidates from electoral ballots, harassed and 
arrested NGO leaders, and weakened Russia's political parties. In the 
wake of the horrific crime in Beslan, President Putin has announced 
plans to further centralize power and to push through measures that 
will take Russia a step closer to authoritarian regime.
    We are also worried about the deteriorating conduct of Russia in 
its foreign relations. President Putin's foreign policy is increasingly 
marked by a threatening attitude towards Russia's neighbors and 
Europe's energy security, the return of rhetoric of militarism and 
empire, and by a refusal to comply with Russia's international treaty 
obligations. In all aspects of Russian political life, the instruments 
of state power appear to be being rebuilt and the dominance of the 
security services to grow. We believe that this conduct cannot be 
accepted as the foundation of a true partnership between Russia and the 
democracies of NATO and the European Union.
    These moves are only the latest evidence that the present Russian 
leadership is breaking away from the core democratic values of the 
Euro-Atlantic community. All too often in the past, the West has 
remained silent and restrained its criticism in the belief that 
President Putin's steps in the wrong direction were temporary and the 
hope that Russia would soon return to a democratic and pro-Western 
path. Western leaders continue to embrace President Putin in the face 
of growing evidence that the country is moving in the wrong direction 
and that his strategy for fighting terrorism is producing less and less 
freedom. We firmly believe dictatorship will not and cannot be the 
answer to Russia's problems and the very real threats it faces.
    The leaders of the West must recognize that our current strategy 
towards Russia is failing. Our policies have failed to contribute to 
the democratic Russia we wished for and the people of this great 
country deserve after all the suffering they have endured. It is time 
for us to rethink how and to what extent we engage with Putin's Russia 
and to put ourselves unambiguously on the side of democratic forces in 
Russia. At this critical time in history when the West is pushing for 
democratic change around the world, including in the broader Middle 
East, it is imperative that we do not look the other way in assessing 
Moscow's behaviour or create a double standard for democracy in the 
countries which lie to Europe's East. We must speak the truth about 
what is happening in Russia. We owe it to the victims of Beslan and the 
tens of thousands of Russian democrats who are still fighting to 
preserve democracy and human freedom in their country.
                     russia statement participants
Mr. Urban Ahlin, Swedish Foreign Relations Committee, Sweden
The Honorable Giuliano Amato, Former Prime Minister, Italy
Dr. Uzi Arad, Institute for Policy and Strategy, Israel
Mr. Timothy Garton Ash, Writer, United Kingdom
Dr. Anders Aslund, Carnegie Endowment for International Peace, United 
        States
Dr. Ronald D. Asmus, The German Marshall Fund of the United States
Mr. Rafael L. Bardaji, Spain
Mr. Arnold Beichman
Mr. Jeff Bergner
The Honorable Carl Bildt, Former Prime Minister, Sweden
Mr. Max Boot
Ms. Ellen Bork
Mr. Pascal Bruckner, Writer, France
Mr. Mark Brzezinski, McGuire Woods LLC, United States
Mr. Reinhard Buetikofer, Chairman, Green Party, Germany
Sir Michael Butler, Former British Permanent Representative to the 
        European Community, United Kingdom
The Honorable Martin Butora, Former Ambassador, Slovakia
Mr. Daniele Capezzone, Italy
The Honorable Per Carlsen Danish Institute of International Affairs
Ms. Gunilla Carlsson, Member of the European Parliament, Sweden
The Honorable Massimo D'Alema, Former Prime Minister, Italy
The Honorable Pavol Demes, Former Foreign Minister, Slovakia
Mr. Larry Diamond
Mr. Tom Donnelly
Mr. Nicholas Eberstadt
The Honorable Uffe Ellemann-Jensen, Former Foreign Minister, Denmark
Mr. Francois Fukayama
Mr. Jeffrey Gedmin
Mr. Andre Glucksmann, Writer, France
Dr. Phil Gordon, Brookings Institution, United States
The Honorable Istvan Gyarmati, Ambassador, Turkey
Mr. Pierre Hassner, Center for International Studies and Research, 
        France
The Honorable Vaclav Havel, Former President Czech Republic
Dr. Francois Heisbourg, Fondation pour la Recherche Strategique, France
The Honorable Richard C. Holbrooke, Former Ambassador to the United 
        Nations, United States
Mr. Bruce Jackson, Project on Transitional Democracies, United States
Mr. Donald Kagan
Mr. Robert Kagan, Carnegie Endowment, United States
Ms. Glenys Kinnock, Member of European Parliament, United Kingdom
Mr. Bernard Kouchner
Dr. Ivan Krastev, Center for Liberal Strategies, Bulgaria
Mr. William Kristol
The Honorable Girts Valdis Kristovskis, Former Minister of Defense of 
        Latvia
Prof. Dr. Ludger Kuehnhardt, University of Bonn, Germany
The Honorable Mart Laar, Former Prime Minister, Estonia
Mr. Michael McFaul
The Honorable Vytautas Landsbergis, Former Head of State, Lithuania
Dr. Stephen Larrabee, RAND Cooperation, United States
Mr. Mark Leonard, The Foreign Policy Center, United Kingdom
Mr. Tod Lindberg
Mr. Tom Malinowski, Human Rights Watch, United States
Mr. Will Marshall, Progressive Policy Institute, United States
Dr. Margarita Mathiopoulos, University of Potsdam, Germany
The Honorable John McCain, Senator, United States
Dr. Michael McFaul, Hoover Insitute, United States
Mr. Matteo Mecacci, Italy
Mr. Michael Mertes, Former Chief of Staff, Chancellor Helmut Kohl, 
        Germany
The Honorable Ilir Meta, Former Prime Minister, Albania
Mr. Richard Morningstar
Mr. Joshua Muravchik
Gen. Klaus Naumann (ret.), Former Chairman NATO Military Committee, 
        Germany
Mr. Dietmar Nietan, Member of Parliament, Germany
Mr. Jim O'Brien, Former Presidential Envoy to The Balkans, United 
        States
Mr. Martin Peretz
Dr. Friedbert Pflueger, Member of Parliament, Germany
Ms. Danielle Pletka
Mr. Florentino Portero, Spain
Ms. Samantha Ravich
The Honorable Alex Rondos, Former Ambassador, Greece
The Honorable Jim Rosapepe, Former U.S. Ambassador to Romania
Dr. Jacques Rupnik, Center for International Studies and Research, 
        France
Mr. Eberhard Sandschneider
Mr. Gary Schmitt
Mr. Stephen Sestanovich
Mr. Radek Sikorski
Mr. Martin Simecka, Editor, Slovakia
Dr. Gary Smith, American Academy in Berlin, Germany
Mr. Abraham Sofaer
Mr. Gary Titley, Member of European Parliament, United Kingdom
The Honorable Sasha Vondra, Former Deputy Foreign Minister, Czech 
        Republic (?)
Ms. Celeste Wallander, Center for Strategic and International Studies, 
        United States
Ms. Ruth Wedgwood
Dr. Richard Weitz, Institute for Foreign Policy Analysis, United States
Mr. Kenneth Weinstein

    The Chairman. Thank you very much, Mr. Jackson.
    Mr. Nix.

    STATEMENT OF STEPHEN NIX, REGIONAL PROGRAM DIRECTOR FOR 
  EURASIA, INTERNATIONAL REPUBLICAN INSTITUTE, WASHINGTON, DC

    Mr. Nix. First of all, thank you, Mr. Chairman, for this 
opportunity to appear before you today. I will try to be brief 
on a very important and lengthy topic.
    Mr. Chairman, the Russian Federation today is a country in 
which the rights of citizens to participate in government 
through free and fair elections, independent media, and civic 
activism are being severely curtailed. As my esteemed 
colleagues here have noted, the list of democratic rollbacks 
implemented by the Putin administration is as long as it is 
egregious: Complete control over national media, ongoing 
attempts to control the course and results of elections by 
changing the electoral system, the arbitrary arrest and 
prosecution of business leaders and the triumph of state-run 
monopolies over the rule of law, and the absence of checks and 
balances within the decisionmaking process. Mr. Putin has 
periodically introduced terms in which to couch these alarming 
trends: Dictatorship of the law, managed democracy. My friends 
and colleagues in Russia, however, are now using a new term to 
describe these events: Bureaucratic dictatorship.
    The watershed event of Russia's creeping authoritarianism 
was the election of December 2003, when Russian prodemocratic 
parties failed to garner sufficient support to remain a faction 
in the Russian National Parliament. The fourth invocation of 
the Russian State Duma, with 360 out of 450 seats occupied by 
Unified Russia, is, therefore, now dominated by a single 
progovernment party. With no national parliamentary presence 
and no real access to mass media, prodemocratic parties have 
fallen into a crisis of identity at the national level, marked 
by a lack of leadership, organization, and consistent ideology.
    Mr. Chairman, if the prodemocratic forces are absorbed in a 
crisis of identity, the Russian public is engulfed in a crisis 
of faith in the political party system. A nationwide poll 
conducted by the Levada Center last month indicated that nearly 
50 percent of the population feel that political parties play 
either absolutely no role, or just a very minor one, in the 
daily life of Russia. Only 7.2 percent feel that political 
parties play a major role. In contrast, nearly 50 percent of 
those polled believe that the FSB plays either an important, or 
a very important, role. I think you'll agree with me, Mr. 
Chairman, that these statistics are very alarming.
    The Kremlin, meanwhile, has moved further to undermine the 
crippled national opposition movement. With only a shadow of an 
opposition, the Duma has devolved into little more than a 
rubber stamp for legislation. With the help of a loyal state 
Duma, the Kremlin has taken steps to eliminate single-mandate 
districts, increase the threshold required to enter Parliament 
from 5 percent to 7 percent, and to outlaw the formation of 
electoral blocs in future national parliamentary elections. 
This divide-and-conquer approach, Mr. Chairman, is intended 
solely to force democratic parties to campaign against one 
another for pro-reform votes. By splitting the vote this way, 
the Kremlin all but guarantees that the democratic opposition 
will once again be shut out of Parliament.
    In order to stifle grassroots democratic movements, the 
Kremlin has moved to prohibit the creation of regional 
political parties and the emergence of new parties by 
artificially inflating registration requirements, raising 
obligatory party membership, and applying direct pressure on 
party members. On January 31, Russia's Ministry of Justice 
again delayed the registration of a new democratic party, Novye 
Pravye, or ``New Right,'' saying that it needs more time to 
review the case.
    Despite all of these things, Mr. Chairman, the political 
pendulum is not swinging in only one direction in Russia. 
Russia's first year of a return to a single-party state has 
also proved to be a year of setbacks for the Putin 
administration. The economy is faltering, Russia's strong-arm 
tactics in the ``near abroad,'' as has been noted previously, 
have failed, and Putin's ``vertical of power'' has proved 
unable to protect Russian citizens from acts of terrorism. 
Recent public-opinion data shows falling approval numbers for 
the Prime Minister, his government, and even President Putin 
himself.
    We are now witnessing as Russians take to the streets 
throughout the country to protest social reforms. On January 
29, thousands of St. Petersburg citizens marched against 
Kremlin policies, including pensioners, World War II veterans, 
and students.
    Mr. Chairman, these actions by the Russian people are 
heartening to me, as it proves what I believed all along, that 
apathy is not, in fact, endemic in the Russian population, and 
that the Russian public does not--does believe that the 
government must be accountable to the people. Russia remains, 
despite the setbacks, fertile ground for democracy. And I make 
this assertion based, not only on dramatic images of street 
protests and public demonstrations, but on more subtle ongoing 
developments.
    The truth is, a lot is happening at the regional level. 
During regional legislative elections over the last year, 
regional opposition parties have doubled and even tripled the 
support the national party received in the 2003 national 
elections. Many have accomplished this with little support from 
national leadership or, indeed, international assistance. In 
fact, regional opposition parties have been able to accomplish 
what the national parties could not; namely, form coalitions 
and work together.
    At the same time, civil activists and political leaders at 
the regional level are coming together to counteract what they 
rightfully see as the skewed monopoly progovernment forces have 
on public discourse.
    Mr. Chairman, the Russian Federation today is a country at 
critical crossroads. Despite the results of the 2003 elections, 
despite the crisis of Russia's democratic opposition, despite 
the Russian public's lack of faith in political party 
processes, and despite the Putin administration's concerted 
efforts to achieve an absolute grip on power, Russian democracy 
is not a lost cause. Russian citizens have been bombarded with 
Mr. Putin's attempts to discredit democratic ideals and 
movements, including the government and media. And yet, the 
Levada poll, I cited earlier, indicates that at least 10 
percent of Russians are still willing to vote for a democratic 
party; enough to enter the state Duma, even if the Kremlin's 
attempts to raise the threshold does succeed.
    The United States, and the international community as a 
whole, must provide whatever support we can to these defenders 
of Russian democracy in the regions. Without them, Russia's 
future is bleak.
    We must support Russia's democratic community in their 
efforts to unite behind common goals and ideals. Only by 
building real, effective coalitions with like-minded partners 
can the democratic movements provide a viable alternative to 
the proponents of the Kremlin status quo. This process has 
already begun, to a certain extent, as evidenced by the 
electoral gains that I mentioned earlier.
    We must also engage and encourage young people to be 
involved in representative government as civil-society 
activists, candidates, or party members. The talent and 
idealism of Russia's youth cannot be allowed to waste away. 
Initiatives as simple as community service projects can help to 
underscore the ways in which a participatory democracy can 
address the concerns of Russia's young people.
    Finally, we must engage Russia's leadership in such a way 
that it recognizes the dangerous line it is walking. President 
Putin must come to understand that his authoritarian policies 
are bad for Russia and are leading to a systemic crisis in 
every sector--economic development, foreign policy, and civil 
society. Only by opening up Russia to a range of opinions and 
healthy debate will Russia truly thrive. The current climate of 
oppression will lead only to stagnation.
    Mr. Chairman, we, in the United States, applauded in the 
early 1990s, as the Russian people threw off the yoke of 
oppression, and watched with hope as they began to create a 
society dedicated to democracy, a free and open economy, and 
adherence to the rule of law. And we, in the United States, 
have watched with profound sadness as these hard-fought 
achievements and sacrifices have been cast aside by an 
increasingly authoritarian regime. This is not a government 
that the Russian people deserve. This is not a government that 
the Russian people should tolerate.
    I say this because I firmly believe that our friends, the 
Russian people, are capable of creating a democracy that offers 
them the stability, the prosperity, and the freedom that they 
so richly deserve.
    Again, thank you, Mr. Chairman, for this opportunity.
    [The prepared statement of Mr. Nix follows:]

   Prepared Statement of Stephen Nix, Regional Program Director for 
      Eurasia, International Republican Institute, Washington, DC

    Mr. Chairman, first of all, thank you for the opportunity to 
testify here before you today. I would like to request that my 
statement be submitted to the record. This hearing is in itself 
testimony to the crucial importance of the issue of deepening 
authoritarian tendencies in the Russian Federation.
    The Russian Federation today is a country in which the rights of 
citizens to participate in government through free and fair elections, 
independent media, and civic activism are being severely curtailed. As 
my esteemed colleagues here have noted, the list of democratic 
rollbacks implemented by the Putin Administration is as long as it is 
egregious: The complete control over national media outlets by the 
state; on-going attempts to control the course and results of elections 
by changing the electoral system; the arbitrary arrest and prosecution 
of business leaders and the triumph of state-run monopolies over rule 
of law; and the absence of checks and balances within the decision-
making process. Mr. Putin has periodically introduced terms in which to 
couch these alarming trends--``dictatorship of the law,'' and ``managed 
democracy.'' My friends and colleagues in Russia, however, are now 
using a new term: Bureaucratic dictatorship.
    The watershed event of Russia's creeping authoritarianism was the 
election of December 2003, when Russian pro-democratic parties failed 
to garner sufficient support to remain a faction in the Russian 
national parliament. The fourth invocation of the Russian State Duma, 
with 360 of 450 seats occupied by Unified Russia, is therefore now 
dominated by a single, pro-government party. With no national 
parliamentary presence and no real access to mass media, pro-democratic 
parties have fallen into a crisis of identity at the national level, 
marked by a lack of leadership, organization, and consistent ideology.
    If the pro-democratic forces are absorbed in a crisis of identity, 
the Russian public is engulfed in a crisis of faith in the political 
party system. A nationwide poll conducted by the Levada Center late 
last month indicated that nearly 50 percent of the population feel that 
political parties play either absolutely no role, or just a very minor 
one, in the life of Russia. Only 7.2 percent feel that the political 
parties play a major role. In contrast, nearly 50 percent of those 
polled believed that the FSB, the KGB successor, plays either an 
important or very important role. I think you will agree that these 
statistics are extremely troubling.
    The Kremlin, meanwhile, has moved to further undermine the crippled 
national opposition movement. With only a shadow of an opposition, the 
Duma has devolved into little more than a rubber stamp for initiatives 
put forward by the Kremlin to strengthen its almost absolute grip on 
power. With the help of a blindly loyal State Duma, the Kremlin has 
eliminated single mandate districts, increased the threshold required 
to enter parliament from 5 percent to 7 percent, and outlawed the 
formation of electoral blocs in future national parliamentary 
elections. This ``divide and conquer'' approach is intended to force 
democratic parties to campaign against each other for pro-reform votes. 
By splitting the vote in this way, the Kremlin all but guarantees that 
the democratic opposition will once again be shut out of parliament. In 
order to survive, these parties have no choice but to merge into a 
single organization, a task which is fraught with political, legal, and 
bureaucratic challenges.
    In order to stifle grassroots democratic movements, the Kremlin has 
moved to prohibit the creation of regional political parties and the 
emergence of new parties by artificially inflating registration 
requirements, raising obligatory party membership, and applying direct 
pressure on party members. Just last Monday (January 31), Russia's 
Ministry of Justice, violating the spirit, if not the letter, of the 
law, again delayed the registration of a new democratic party--Novye 
Pravye, or the New Right,\1\ saying that it needs more time to review 
their case.
---------------------------------------------------------------------------
    \1\ Novye Pravye submitted registration papers on November 22, 
2004. According to the law on political parties (June 21, 2001), their 
registration must be decided on within one month. The party believes 
that the law gives the government one month to review the case and come 
up with either a positive or a negative answer. However, a loophole in 
the law allows the government to drag its heels on the process 
indefinitely. Point 4 of Article 15 states that the government has one 
month to make a decision ``upon verification of correspondence of 
documents, necessary for registration . . ., to the requirements of the 
federal law.'' The government can claim that it is still ``verifying 
documents'' and win the case in court on a technicality.
---------------------------------------------------------------------------
    Despite the foregoing, Mr. Chairman, the political pendulum is not 
swinging in only one direction. Russia's first year of a return to a 
single party state has also proved to be a year of unequivocal setbacks 
for the Putin Administration. The economy is faltering, Russia's 
strong-arm tactics in its ``near abroad'' have failed, and Putin's 
``vertical of power'' has proved unable to protect Russian citizens 
from heinous acts of terrorism. Recent public opinion data shows 
falling approval numbers for the Prime Minister, his Government, and 
even President Putin himself.
    We are now witnessing as Russians take to the streets throughout 
the country to protest what they feel to be the Kremlin's failure to 
fulfill basic social responsibilities to the public. On February 6, 
2,000 people in Petrozavodsk took part in a protest to demonstrate 
against Kremlin-initiated reform of pension benefits. On the same day, 
a number of youth groups, including Youth SPS, Youth Yabloko, and 
``Iduschie bez Putina'' (``Walking Without Putin''), organized a 
protest in Moscow against the presidential appointment of governors and 
the strengthened ``vertical of power.''
    On January 29, thousands in St. Petersburg marched against Kremlin 
policies, including pensioners, World War II veterans, and students. 
The protest was organized by the ``St. Petersburg Civic Resistance'' 
movement, which consists of opposition parties, movements, and NGOs, 
including Yabloko, KPRF, Social Democrats, League of Women Voters, 
Committee of Soldiers' Mothers, St. Petersburg Democratic Assembly, and 
Walking Without Putin.
    On January 29, Yabloko organized a protest in more than 30 cities 
and regions throughout Russia to protest against benefits legislation 
and the actions of Unified Russia, who voted for benefit monetization 
legislation, housing reform, auto insurance reform, the abolition of 
gubernatorial elections, and changes to the military draft law.
    Families of the Beslan school hostage victims have blocked a 
central highway in the region in an attempt to voice their frustration 
with the Administration's response to the horrific tragedy that took 
place there last September 1.
    The response of the Putin Administration to these protests has been 
remarkable only in its complete failure to adequately address the 
concerns being aired by citizens. The Beslan families have been rebuked 
by a key Kremlin aide for their attempts to demand accountability from 
regional leadership. The Kremlin has also attempted to wholly discredit 
the massive protest movement against pension reforms by labeling 
organizers as provocateurs and radical opportunists. Organizers were 
targeted for arrest, especially young people. However, some 
participants have alleged that elderly pensioners were arrested, and 
even beaten. Not until after the voice of the people became 
overwhelming did the government respond, if only to point fingers an 
promise half-hearted revision of the reforms.
    Mr. Chairman, these actions by the Russian people are heartening to 
me, as it proves what I have believed all along--that apathy is not, in 
fact, endemic in the Russian population, and that the Russian public 
does believe that the government must be accountable to its people. 
Russia remains fertile ground for democracy. I make this assertion 
based not only on dramatic images of street protests and public 
demonstrations, but on more subtle, ongoing developments.
    The truth is that while Putin rushes to eliminate democratic voices 
at the national level, democracy shows signs of re-invigoration at the 
regional level. During regional legislative elections over the last 
year, regional opposition parties have doubled and even tripled the 
support the national party received in 2003. Many have accomplished 
this with little support from national leadership, or indeed, 
international assistance.
    In fact, regional opposition parties have been able to accomplish 
what the national leadership could not last year; namely, form 
coalitions with other like-minded parties and candidates to present a 
unified opposition choice on the ballot. A united bloc of Yabloko and 
SPS received 8 percent in elections for the Arkhangelsk Oblast regional 
legislature. During elections in Kurgan, SPS received 10.4 percent. In 
the Republic of Ingushetiya (which borders Chechnya), Yabloko reached 
10.8 percent. And most recently in Taimyr, Yabloko cooperated with the 
Party of Life to take 22 percent of the vote.
    At the same time, civil activists and political leaders at the 
regional level are coming together to counteract what they rightfully 
see as the skewed monopoly pro-government forces have on public 
discourse. Hundreds of thousands of human rights and political party 
activists continue their work in the regions regardless of pressure 
applied on them by the FSB and the Kremlin. IRI has worked with a 
number of these activists and the organizations they represent. Using 
innovative means to reach out to the public, they communicate their 
messages through forums, press releases, internet sites, newsletters, 
rallies, and even leaflet campaigns. They are fighting to make sure 
that dissenting voices, no matter how small, are heard.
    On December 12, Russia's Constitution Day, more than 1,200 
representatives of Russian civic groups, political parties, and media 
from all over the country came to Moscow to take part in the ``All-
Russia Civic Forum.'' These advocates of democracy came to say ``no'' 
to Kremlin policies and to develop a democratic agenda for their 
country. The Civil Resistance movement in St. Petersburg brought 
together opposition parties, movements, and civic groups to stand up 
for media freedoms, picketing local television stations to protest 
censorship on TV, and allow the voice of democratic Russia to be heard.
    Mr. Chairman, the Russian Federation today is a country at a 
critical crossroads. Despite the results of the 2003 elections, despite 
the crisis of Russia's democratic opposition, despite the Russian 
public's lack of faith in political party processes, and despite the 
Putin Administration's concerted efforts to achieve an absolute grip on 
power, Russian democracy is not a lost cause. Russian citizens have 
been bombarded with Mr. Putin's attempts to discredit democratic ideals 
and movements through any means available, including the government and 
the media. And yet, the Levada poll I cited earlier also indicates that 
10 percent of Russians are still willing to vote for a democratic 
party--enough to enter the State Duma even if the Kremlin's attempt to 
raise the threshold succeeds.
    I firmly believe that the real strength and indeed, the future of 
pro-democracy forces lies in the regions and among Russia's younger 
generations, who must not, and will not, tolerate a return to 
dictatorship.
    The United States, and the international community as a whole, must 
provide whatever support we can to these defenders of Russian 
democracy. Without them, Russia's future is bleak.
    I believe that we must act now to help Russians re-establish their 
faith in a democratic system. We must work to assist democratic 
political parties to regain legitimacy in the eyes of their 
constituents by focusing on their development at the grassroots level. 
Targeting promising activists, civil organizations, and political 
movements at the local level, we can provide training and support to 
help them more effectively represent the needs of their communities. In 
addition, we can assist these activists in crafting messages and 
platforms that demonstrate to their constituents that someone is paying 
attention to their interests.
    We must support Russia's democratic community in their efforts to 
unite behind common goals and ideals. Only by building real, effective 
coalitions with like-minded partners can the democratic movement 
provide a viable alternative to proponents of the Kremlin status quo, 
or supporters of nationalist radicals. This process has already begun, 
to a certain extent, as evidenced by electoral gains made by democratic 
coalitions in the regions I mentioned earlier. Although Russia's 
democratic opposition parties may not have a clear national party head, 
national leadership can benefit from the momentum growing at the 
regional level and learn from the successful examples of their 
colleagues in the regions. Initiatives like Committee 2008, a group of 
pro-democracy advocates and leaders who are working together to find 
common ground for a diverse group of political parties, civil society 
organizations, and individual activists, are an important step towards 
this goal.
    We must also encourage young people to re-engage in representative 
government as civil society activists, candidates, or party members. 
The talent and idealism of Russia's youth cannot be allowed to waste 
away to apathy and disenfranchisement. Initiatives as simple as 
community service projects can help to underscore the ways in which 
participatory democracy can address the concerns of Russia's young 
people much more effectively than radical nationalism, or rote 
acceptance of pro-government ideology.
    Finally, we must engage Russia's leadership in such a way that it 
recognizes the dangerous line it is walking. President Putin must come 
to understand that his authoritarian policies are bad for Russia, and 
are leading to a systemic crisis in every sector--economic development, 
foreign policy, and civil society. Only by opening up Russia to a range 
of opinions and healthy debate will Russia truly thrive. The current 
climate of oppression will lead only to stagnation.
    We in the United States applauded in the early 1990's as the 
Russian people threw off the yoke of oppression, and watched with hope 
as they began to create a society dedicated to the ideals of democracy, 
a free and open economy, and adherence to the rule of law. And we in 
the United States have watched with profound sadness as these hard-
fought achievements and sacrifices have been cast aside by an 
increasingly authoritarian regime. This is not a government that the 
Russian people deserve. This is not a government that the Russian 
people should tolerate. I say this because I firmly believe that our 
friends, the Russian people, are capable of creating a democracy that 
offers them the stability, the prosperity, and the freedom they so 
richly deserve.
    Thank you.

    The Chairman. Well, thank you very much, Mr. Nix, for your 
testimony.
    I apologize for my abrupt departure for a few minutes, but 
I would simply indicate, because I think this will be of 
interest to all of you, that I was on the telephone with 
Ambassador John Negroponte. He has been nominated to be our 
Director of National Intelligence. We congratulate him. He 
assures me, as he has assured all of you, that he will go back 
to Iraq. He will work through the formation of the government 
that is currently in process there, and, much as he tried to do 
with his work with the United Nations as he underwent the 
confirmation process for Ambassador to Iraq, he will do a 
similar role for our country now during another transition 
period.
    Let me ask now for you, Mr. Ledsky, to give your testimony. 
We appreciate your coming.

STATEMENT OF HON. NELSON LEDSKY, REGIONAL PROGRAM DIRECTOR FOR 
     EURASIA, NATIONAL DEMOCRATIC INSTITUTE, WASHINGTON, DC

    Ambassador Ledsky. Thanks, Senator Lugar.
    I don't want to repeat what my colleagues have said. Each 
has made a--what I think--a very excellent presentation of the 
problems in Russia, and there is no point in going over them 
again.
    I want to start off by thanking you, Senator Lugar and 
Senator Sarbanes, for the work you've done on democratic 
development over the years all around Europe and the world. 
It's been my pleasure to work with both of you--for more than 
20 years now, I know what role each of you has played in the 
furtherance of democratic development in the Ukraine and 
Georgia, and, I think, it wholly appropriate that the committee 
turn its attention now to Russia. This is a country which, 
frankly, deserves to be at the top of everybody's list. It has 
not been at the top of any of our lists over the last 4 or 5 
years.
    I speak today as the Director of the National Democratic 
Institute's programs in the former Soviet Union. I share with 
my colleague, Steve Nix, the difficult task of being an 
operating nongovernmental organization in Russia. So we speak 
as people who are on the ground, who are facing the 
difficulties day by day that have befallen Russian citizens, 
Russian political parties, Russian civic society. And it's in 
that sense that I would like to be heard.
    We've prepared a statement, and you can read it, but I'd 
just like to emphasize two or three points.
    First, we've had an office in Moscow since 1992, and we've 
been operating with whatever political parties want to talk to 
us and work with us over the course of the last 13 years. And, 
literally, we have trained and worked and consulted and talked 
to thousands of people in Russia. And it is these people who 
want us there, who need us there, who are not giving up the 
struggle, even as the current situation is as described by 
Anders and Bruce.
    Second, we have been working with civil society in Russia. 
We've been seeking, since the mid '90s, to work with a series 
of organizations that can monitor elections effectively. And 
within the last 3 or 4 years, we've brought together a 
coalition of groups into what is called the VOICE coalition, 
``Golos'' in Russian. This group monitored the 2003-2004 
elections, issued a report, had a press conference, explained 
the deficiencies of that electoral process, received absolutely 
no publicity in the Russian press, and very limited publicity 
in the United States. But they did outline the very specific 
failures that occurred in the elections of December 2003 and 
March 2004. And it is from those failed elections that a Duma 
has been installed which represents only a single group, that 
decisions have been taken to stop the election of governors in 
the regions, to re-alter the judiciary so that there is less 
rule of law today than there was 2 years ago, or 5 years ago. 
So the trend is all downward, and it's been particularly 
downward in the last year or two, since those elections of 2003 
and 2004.
    I would like to point out one thing in particular that 
Bruce mentioned, and that is the attack that the Russians have 
made at the Organization of Security and Cooperation in Europe, 
the Russian assault on that organization's ability to do 
monitoring around the former Soviet Union and in Europe. The 
Russians want to put the emphasis on economic factors, move it 
away from human rights and the rule of law and monitoring.
    So the Russian attitude, over the last year, has not only 
grown worse at home, it has grown worse in its effect on 
overseas activities.
    I think it's also important to say, rather flatly, that the 
democratic gains that were made in the early '90s have all but 
been erased. The trend is clearly in the wrong direction. But 
there are, as Steve points out, not only pockets of 
independence and liberalism in the country, but areas of the 
country where NDI and IRI have tried to work, where there 
clearly are organizations that are beginning to grow. And, I 
think, it's that very growth which the Kremlin is now 
attacking, by eliminating the possibility of elections and free 
expression in the regions.
    So--both Bruce and Steve and I--want to keep working in the 
regions. It's become increasingly difficult given the 
application of what the Russians call law to actually operate 
outside Moscow and to build groups outside Moscow. It's 
difficult to bring people from the regions outside of Moscow, 
because the name of each individual trained or consulted must 
be reported to the Russian police. And if we buy a railroad 
ticket or a lunch for somebody, that must be declared as income 
by that individual. So people are naturally frightened from 
coming to see us or being seen by us.
    There are two very hopeful signs, which I want to 
highlight.
    The first is that, last December a Civic Congress was 
organized in Moscow, and it brought together 1,500 political 
and civic activists who asserted their determination to promote 
peaceful political reform. It sought to foster cooperation 
between the liberal reform parties that have been in existence 
in Russia for the last 10 years and to bring civic 
organizations of all kind together into a united congress. And 
they set forth an agenda for the future, and they set in motion 
an organization which will continue to meet in Moscow and in 
the regions over the course of the next 2 or 3 years. And we 
believe that that congress, and efforts which has begun earlier 
this year, need to be supported and encouraged and helped.
    Second, the civic organization, VOICE, which we have helped 
found, has now some 23 chapters across Russia. They are seeking 
to grow, with the help of USMD, to some 40 or 45 organizations 
across the country so that they will be in a position to 
monitor whatever elections are allowed in the future, including 
the parliamentary elections of 2007 and the Presidential 
elections of 2008. We believe that that organization must be 
encouraged, strengthened, and supported.
    I end by simply saying that international engagement with 
Russia is important and must be maintained. We need your help. 
We need the support of the Congress. We need the support of 
every individual Senator and Representative if we are to be 
effective in Russia, to convince the Russians that they are 
moving in the wrong direction and that what lies ahead, if they 
move in the current direction, are all the dangers that Bruce 
has outlined. There is another path, we want to work with the 
Russians along that path, we want to help support democratic 
development. I would urge you to help support organizations 
like mine and the hundreds of other nongovernmental 
organizations that are trying to function in Russia today.
    [The prepared statement of Ambassador Ledsky follows:]

  Prepared Statement of Nelson Ledsky, Regional Program Director for 
         Eurasia, National Democratic Institute, Washington, DC

    On behalf of the National Democratic Institute (NDI), I would like 
to thank the Committee for this opportunity to discuss the current 
political situation in Russia. I would especially like to recognize and 
thank Senators Lugar and Biden for their leadership and support for 
promoting democracy worldwide.
    NDI has followed democratic development and civil society in Russia 
since the early 1990s. The Institute has maintained a field office in 
Moscow since 1992, from which it has provided assistance to a broad 
spectrum of political parties that exist in Russia. NDI had sought to 
help these parties strengthen their structures and assist them in 
advocating for their priorities at both the federal and local level. 
NDI has provided training and consulted with thousands of individuals 
on long term party organization. Our objective has not been to promote 
a particular ideology or electoral outcome, but to support development 
of a genuine multiparty system that allows for divergent viewpoints.
    The same objective holds true for our activities with civil society 
groups. Here we have sought to assist the organizational development of 
nonpartisan groups that can monitor the conduct of elections and 
promote popular political participation at the national and local 
levels. We have been able to assist these groups over the past decade, 
and since 1999 have supported the efforts of a cross-regional 
association of civic groups called The Voice Association for the 
Defense of Voters' Rights (VOICE). VOICE, or Golos in Russian, has 
become Russia's leading nonpartisan election monitoring organization. 
It has 23 affiliates with programs covering two-thirds of the country's 
population.
    The political environment in Russia has grown progressively more 
difficult over the past two years, particularly since the December 2003 
parliamentary elections and the March 2004 presidential election. Both 
contests failed to meet Russia's commitment as an OSCE member. The 
VOICE Association identified widespread vote tabulation irregularities 
and uncovered numerous accounts of voter coercion. VOICE noted that: 
Municipal workers were ordered to vote, sometimes for one particular 
candidate; members of the military were told to report the time they 
voted; students were threatened with losing housing if they did not 
vote; and voter lists were being manipulated to ensure a high turnout. 
VOICE documented an unexplainable decrease in the voter rolls of two 
million individuals between December 7, 2003 and March 14, 2004. All 
possible avenues, from media, to security services, to electoral 
commissions, appear to have been used to ensure a large margin of 
victory for the incumbent president, and a large voter turnout figure.
    As a consequence of these elections, United Russia and other pro-
government parties now hold a two-thirds majority in the State Duma, 
while two of the reform-oriented parties, Yabloko and the Union of 
Right Forces (SPS), have lost all their representation in the 
legislature. With little access to the media, constant attacks by the 
national news channels, and their financial support significantly 
affected by the government's investigation of their primary supporters, 
these parties are now clearly disadvantaged in the Russian political 
environment.
    As 2004 drew to a close, the Russian administration successfully 
eliminated elections for regional governors, consolidated its control 
over the judiciary by putting high court appointments under Kremlin 
control, increased the legal hurdles faced by non-Kremlin-aligned 
political parties attempting to take part in upcoming elections, and 
limited the rights of citizens to hold mass demonstrations.
    Through various pieces of legislation, the Russian government has 
also made it increasingly more difficult for international NGOs to 
provide support to their Russian partners. Since last year, NDI has 
faced ongoing investigations by both regional and national Russian 
authorities.
    Russia is also presently taking forceful initiatives to undercut 
the contributions of the OSCE to help promote democratic processes in 
Russia and in other countries in the Commonwealth of Independent States 
(CIS), by charging that there is an overemphasis on the so-called 
``human dimension'' of the OSCE, which concentrates on human rights and 
democracy, and by accusing unjustly the OSCE's Office for Democratic 
Institutions and Human Rights (ODIHR) of politically biased assessments 
of elections in Russia and the CIS. Russia's criticisms and threats to 
pull back from the OSCE and its institutions jeopardize international 
election monitoring, as well as the role of international assistance 
organizations and the activities of domestic democratic reformers.
    The democratic gains that characterized Russian politics in the 
1990s have largely been overturned, and there are no guarantees that 
current trends will be reversed any time soon. The parliamentary and 
presidential elections scheduled for 2007 and 2008 could provide 
opportunities for greater political engagement by civic and political 
groups. It is equally possible, however, that the 2007 and 2008 
elections will be scripted to ensure a continuity or even amplification 
of current tendencies. The challenge for parties and civic 
organizations, therefore, is to rebuild and reconnect at local, 
regional and national levels and to take advantage of any political 
openings.
    There are clearly pockets of independence in Russia. Last December, 
The Civic Congress, a meeting of 1,500 political and civic activists 
publicly asserted their determination to promote peaceful political 
reform. It sought to foster cooperation among political parties, civic 
groups and members of the media and business communities as a 
counterweight to anti-democratic trends. The Congress was remarkable in 
the Russian context because it brought together diverse groups that had 
not previously associated with one another. Also, it appeared to be a 
rejection of the resignation and complacency that have gripped many 
democratic reformers over the past several years. The Congress released 
a declaration on proposed joint actions and established leadership 
bodies to oversee its follow-on activities.
    In addition, organizations like The VOICE Association have grown 
steadily in size and coverage, providing a counterweight to those who 
may seek to manipulate the electoral process. The Association is hoping 
to expand its local branches from 23 to 40 in time to observe upcoming 
local elections as well as the 2007 and 2008 national elections. 
VOICE's growing presence year-round would give them a unique 
perspective, and their ability to remain involved in the electoral 
process between elections provides small but potentially significant 
opportunities to engage citizens in the political process and help 
deter electoral misconduct.
    International engagement in the furtherance of Russian democracy 
remains critically important. Russian democrats depend upon assistance 
and require the continued attention of world opinion makers. The 
international community should concentrate its support on those seeking 
to build democratic institutions and processes in Russia and should 
counter initiatives that make it more difficult for organizations like 
NDI, the OSCE and others to provide assistance. NDI remains optimistic 
about the prospects over the long run for Russian democracy and intends 
to remain committed to this cause.

    The Chairman. Thank you very much, Mr. Ledsky.
    Indeed, there is strong support for the Democratic 
Institute and the Republican Institute, not only in Russia, but 
all over the world, as you pursue, with their umbrella agency, 
the National Endowment for Democracy, some remarkable goals.
    I want to call now on Senator Sarbanes to commence the 
questioning.
    Senator Sarbanes. Well, Mr. Chairman, thank you very much. 
And I apologize, because I'm going to have to leave very 
quickly for another hearing. But I did want to come and hear 
this panel, and I want to thank all of the members of the panel 
for their very helpful contributions.
    I particularly want to note the contributions that 
Ambassador Ledsky has made over the years, first in the 
government and then in his service with the National Democratic 
Institute. He's made a significant difference in many policy 
areas, and I just want to underscore that here this morning.
    Ambassador Ledsky. Thank you.
    Senator Sarbanes. I want to put one question to the panel, 
to which I hope each of you will respond.
    The first time Mr. Bush met with Mr. Putin, he said, ``I 
looked the man in the eye. I was able to get a sense of his 
soul.'' I think you recall that comment. Now, he's meeting with 
President Putin in Bratislava 1 week from today. I'd be 
interested in knowing which items you think the President 
should have on his agenda to present to Putin. What should he 
say to Putin?
    In fact, as you answer the question, imagine that we were 
to take the transcript of what you say and send it down to 
those who are preparing the President for the trip, and say, 
``At this hearing, we asked these four experts which issues 
they thought you should raise, and here's a suggested set of 
talking points for your meeting with President Putin.''
    Mr. Nix, why don't we start with you, and we'll just go 
right across the panel?
    Mr. Nix. Yes, Senator; thank you.
    Well, I'll tell you what the International Republican 
Institute would propose to the President of the United States 
in the course of this meeting, and that is--we've already 
prepared a letter, a draft letter, for President Bush, which we 
hope that our colleagues at the National Democratic Institute 
will sign, as well as the president of the National Endowment 
for Democracy. In essence, what we would ask in this letter, 
sir, is that the President repeat his desire, and the United 
States desire, for Russia to reaffirm commitments to democratic 
principles such as we have listed: The rule of law, free and 
fair elections, a market economy, all of the things that have 
been discussed here today. And in addition to those principles, 
what we would ask the Russian Government, and what we think 
that the President of the United States might ask, is that 
Russia work with the United States to help two newly-emerging 
democracies--that is, Georgia and Ukraine. And, we think, it's 
very important that Russia be involved. And we think that 
Russia could play a pivotal role in helping these newly 
developed democracies if they work with the United States in 
doing so.
    Ambassador Ledsky. I have nothing to add to what Steve has 
suggested. It is true that the nongovernmental organization 
community is preparing a letter for the President, and we all 
hope to endorse it.
    Dr. Aslund. Thank you, Mr. Sarbanes, for the question.
    Since nobody has quoted President Bush's last major 
statement on President Putin, I thought I should quote it, from 
the 27th of September, 2003. ``I admire President Putin's 
vision of building democracy and freedom and the rule of law in 
Russia.'' That is what should be clearly and firmly denied. 
Such a statement should not be left on the record. I think that 
President Bush has a moral right of publicly revoking that 
statement when he meets President Putin.
    I think that the most important thing is to speak clearly 
and loudly, as both Stephen Nix and Nelson Ledsky suggested 
here, continue engaging in the practical issues. Of course, the 
United States and Russia have common interests that should be 
pursued, as we have discussed, but the United States cannot 
stay quiet when Russia is violating its legal commitment to 
various international conventions that it has ratified.
    Thank you.
    Mr. Jackson. Thank you, sir, for letting me--giving me 
enough time to try to think of what I'm going to say to your 
question. [Laughter.]
    I'm diplomatically challenged, at the best of times, and 
this is such an easy target to go after some statements which, 
I think, we all regret, you know, as Americans, to basically 
countenance or basically say that we do not see what's 
happening in Russia.
    I think there are three points that one would make to 
President Bush. There has been a profound and negative change 
in the conditions in Russia, in terms of democracy, but there 
has been no detectable change in United States policy toward 
Russia. That seems to be a disconnect that I would also--would 
hope that this committee would look into in the course of this 
year.
    The second point is, moral clarity, which figured 
prominently in the inaugural speech, is not something you do in 
private conversations; it's something you do in public, and 
when the whole world is watching. The whole world will be 
watching Bratislava. And, I think, Anders is absolutely right, 
we need to loudly say what we stand for as a nation.
    And the third point is, every single NGO has downgraded 
Russia over the last year and a half. They are now among the 
worst places, and the most dangerous places, in the world to be 
a journalist. How come there has been no downgrade by the 
governments of the Western world in this same period, when 
every part of civic society is reporting this?
    So those would be the three questions I would pose to the 
White House.
    Senator Sarbanes. Yeah. Could I sharpen the question just a 
moment? But what should President Bush, in a more specific way, 
push President Putin to do? What is it, exactly, we want Putin 
to do? I mean, how do you transpose respect for the rule of law 
into specifics, given what Russia has done? What changes did 
the Russians make that they should reverse, whether by law or 
by practice?
    Mr. Jackson. Could I take a shot, sir?
    I think President Putin deeply--about the only thing he 
does value is reputation and status. This achievement of great 
power status is key to who he is. And, I think, you basically 
can say, ``We will not endorse that.'' You can begin by having 
the President say, ``We're not going to this celebration in 
May,'' of the, sort of, Stalinist legacy of Russia. You could 
say, ``There isn't going to be a G8 Summit in Moscow next year, 
under these conditions. And we are going to basically limit 
your access into the democratic institutions of the world while 
you continue to maintain this antidemocratic conduct.''
    Senator Sarbanes. Anyone else want to add to that?
    Mr. Nix. I would encourage the rollback of some of the 
recently pronounced, and some enacted, constitutional reforms 
and legal reforms, such as the appointment of governors, as 
opposed to their direct election, and also this change to a 
total partyless system, which is designed to root out any 
opposition that remains in the Duma, a number of legal changes 
that relate to electoral processes that could be rolled back to 
show, and to demonstrate, support for true multiparty 
competitive system.
    Senator Sarbanes. What about the courts? What could they do 
to move to an independent judiciary?
    Mr. Nix. I'm an attorney, sir, and I would be happy to try 
to answer that question, because I've worked in the area of 
rule of law, as well.
    It's a tremendous challenge. If you talk to people in the 
rayon level and the oblast level, there is no independent 
judiciary, there is no enforcement of contracts. In fact, I 
noted recently that Boris Nemtsov, a very active Union of Right 
Forces party leader, has been appointed an advisor to newly 
elected President Kuchma of Ukraine. And the reason for that--
I'm sorry--Victor Yushchenko--newly elected President 
Yushchenko of Ukraine--and the basic reason for that 
appointment is that there are a number of Russian businesses 
that now want to invest in Ukraine, because they see a newly 
elected democratic government that will respect the rule of 
law, and they see an independent court system, or, at least, 
the possibility and the prospect of one, that will enforce 
contracts. So you see this move, that Russian businessmen now 
actually view Ukraine as a better investment than their own 
country. And, I think, the root problem is that the President 
has to undertake some reforms within the courts of general 
jurisdiction in Russia to enhance the independence of the 
judiciary. It has to come from the executive branch.
    Senator Sarbanes. Thank you very much, Mr. Chairman. I 
appreciate your courtesy.
    The Chairman. Well, thank you very much, Senator Sarbanes.
    Dr. Aslund, you may have some information about this issue, 
and this is why I raise the question with you. In July 2004, 
Paul Khlebnikov, editor of Forbes Russia, was shot and killed 
outside his apartment. The Russian Government has pledged to 
fully investigate the murder, and suspects are reportedly in 
custody. The United States has offered assistance, but, to 
date, our help has not been accepted. Can you bring us up to 
date on the status of this investigation? What are the 
implications on United States/Russian relations arising from 
this?
    Dr. Aslund. I knew Paul Khlebnikov, and he was, of course, 
a very knowledgeable journalist. In particular, he knew a lot 
about Russian business, since he was composing this list of the 
100 richest people in Russia. By composing such a list, 
probably he knew so much about various business deeds that the 
suspicions can go in any direction.
    What the authorities are now suggesting is that he was 
murdered because of a book that he wrote about--``Conversations 
with a Barbarian,'' which is about a conversation with one of 
the Chechen terrorists, and if I remember rightly, there were 
three Chechens who are in custody accused of his murder. For an 
outsider, it's impossible to know. Threads can draw in very 
different directions. And, of course, we do not have the 
highest regard for the Russian law enforcement system in these 
cases.
    Thank you.
    The Chairman. What is likely to occur with regard to this 
case? Will it finally just simply pass away without further 
action, or is there likely to be some resolution, in whatever 
the Russian legal system may be?
    Dr. Aslund. We can see, in similar cases, if we take the 
murder of Galina Starovoitova, long time has passed, certain 
people accused and, indeed, arrested; albeit, to my knowledge, 
no judgment has been passed. The judgments are often passed 
several years after the event, or don't really take place. So 
it's very much in limbo, or somebody else might know more.
    The Chairman. During the panel, mention has been made about 
Georgia and Ukraine. Let me take up the Georgian situation for 
a moment.
    The end of the OSCE monitoring--that is, Europeans on the 
border of Georgia, noting comings and goings--terminated at the 
beginning of the year. You've suggested that this is not by 
coincidence. The Russians really did not like that monitoring 
to proceed.
    Now, during a visit that I had with President Saakashvili 
of Georgia recently, the point that he made through me to our 
government was to press the importance for the United States to 
visit with Europeans about coming back to the border, and that 
this, in fact, is in the interest of Georgia, but also in the 
interest of Russia.
    There are allegations from time to time of so-called 
Chechen terrorists coming across the Georgian border into the 
Pankisi Gorge. There is ambiguity as to what Russian 
responsibilities are, in terms of chasing and capturing them or 
so forth. But certainly, there is on the part of the Georgians, 
the feeling that clearly the Pankisi Gorge is inside territory 
of Georgia and that this would be a violation of the 
sovereignty of the country. That ambiguity continues, and the 
need to sort things out is important. So that is a major point.
    A second one, and perhaps even more profound, is a general 
fear on the part of Georgians, not just the President of the 
country, that Russia is suggesting that Abkhazia ought to be an 
independent state, that a vital part of the territory of 
Georgia ought to become an independent state. This is of 
interest to Russia, as a foreign-policy problem. The beginnings 
of negotiations between Russia and Georgia about this have not 
been fruitful, and many do not expect they will be, so long as 
there is a general feeling of a potential split-off of parts of 
the territory of the country.
    Now, under those circumstances, the Georgians, of 
necessity, look to us--that is, the United States. They hope 
Europeans might be involved, particularly in the case of the 
monitoring. They suspect that Europeans should be involved, 
because of Georgia's interest in NATO, and its interest 
ultimately in the EU. Admittedly that is a stretch, in terms of 
the requirements of the EU and the very small economy that 
Georgia has now and the large leaps that would be required to 
come into this. Can any of you on the panel offer, at least, 
some thoughts about whether these are your perceptions, in 
terms of their requests of us, and, likewise, the nature of our 
response? How vigorous should the United States be with regard 
to the monitoring of the borders of the country and the fact 
that Abkhazia and South Ossetia--another issue that continues 
in abeyance there--are parts of Georgia, and that the 
territorial integrity of Georgia as a fledgling democracy are 
important to us? Does anyone have a comment on that issue?
    Yes, Mr. Jackson.
    Ambassador Ledsky. I have several----
    The Chairman. Mr. Ledsky.
    Ambassador Ledsky [continuing]. Comments. And Bruce does, 
too, I'm sure.
    First of all, I think the United States has a very 
important stake in the success of the Georgian Government and 
the success of the experiment that is now going on in Tbilisi. 
It's very much in the interest of the United States that that 
effort succeed and that that government be successful in 
reforming the state and putting it on a viable basis.
    I think there are three or four major problems that 
government has. The first is one you haven't mentioned, and 
that is the continued presence of Russian troops on Georgian 
soil.
    The Chairman. The bases.
    Ambassador Ledsky. The bases. The Russian bases in Georgia. 
And I do think, here, the Georgian Government has received, and 
should continue to receive, support from the United States in 
this area.
    The second is the question of South Ossetia. I think that 
and the Abkhazia situation are somewhat different. But, I 
think, the idea of a U.N. force or a multilateral force of some 
kind on those two borders is very important, and we--I see no 
reason why the U.S. Government shouldn't support that kind of 
idea.
    The Chairman. Mr. Jackson.
    Mr. Jackson. I completely agree with what Mr. Ledsky has 
laid out, but let me add a couple of other factors.
    One, I go the Pankisi Gorge every--virtually every time I 
visit Georgia, and there are no Chechen terrorists. I mean, 
there is a significant social problem up there, but this is a 
pretense, the notion that there are Chechens attacking Russia 
from Pankisi. It's just flat not true.
    It seems to me we have to look at this in context. The 
reason that there is increasing pressure from the Kremlin on 
this new government is because of its democratic image. This 
was the source of the Rose Revolution, this was a Presidency 
that had succeeded in unifying the country, first in Ajaria, 
and it tabled a peace plan, a very progressive peace plan, for 
South Ossetia. This was threatening. So Russia wants to keep 
them on the defensive, either undermining the democracy in 
Georgia or subordinating it to Moscow's geostrategic interests.
    They did this in three manners:
    In August, they blocked the OSCE from expanding its 
presence in South Ossetia and to keep the rocky tunnel, a 
transshipment point, open to essentially military and 
paramilitary goods.
    Second, they refused to withdraw their bases and are now 
gridlocking that and forcing--trying to force Georgia to limit 
its rights by--they say that their Istanbul commitments to 
withdraw no longer pertain, and they are asking onerous 
provisions to continue discussions.
    And, finally, they want the international peacekeepers out, 
to leave them a free hand, and they want, not only in the 
border monitoring, but they also want Russia to say, in all 
peacekeeping operations, Russia will be the only referee, that 
the international community won't be allowed to be present.
    So this is a pattern of activity, and Pankisi Gorge is only 
a pretext.
    The Chairman. Well, let me just follow along this idea. 
When I visited in Ukraine in August, authorities of the 
government with whom I visited made the point--informally, but 
very firmly--that there would be no Rose Revolution in Ukraine 
as their elections approached. They had noticed what had 
occurred in Georgia, and it did not meet their approval. And as 
chapter and verse of this, they pointed out that, in fact, the 
mayoral election in Ukraine had been firmly dealt with earlier 
in the year. By ``firmly dealt with,'' they meant that it 
included international observers being thrown down the stairs 
of the city hall and other violent activities, such as 
suppression of the ballots and the declaration that the 
government candidate was the winner. So, at least, the 
authorities were indicating that the stage of democracy in 
Ukraine was fairly well contained in this vivid incident, and 
that they would not countenance the type of public 
demonstrations and other activities that characterized the Rose 
Revolution in Georgia.
    Now, that was August. This is now February, not too long 
after. But I also, at that time, visited with the Presidential 
candidate of the opposition. He is now the President of the 
country. He was a dashing figure, 50 years of age, looked like 
he was 35, from Hollywood vintage. But he already was 
commenting that he thought his automobiles were being run off 
the road by various authority figures. Obviously, his messages 
were being suppressed on television in Ukraine, except for 
Channel 5. And, therefore, there were already difficulties. 
This was long before the poisoning occurred and other 
situations that were vividly to change his life and the life of 
the country.
    Now, I mention all this because, you know, we're about to 
come up to an election in Moldova, which has not been widely 
commented on by the world, as a whole, but is of great interest 
to each of you gentlemen, as close observers of the situation.
    What can we anticipate in Moldova? And what, for instance, 
are the organizations that you represent, Mr. Nix and Mr. 
Ledsky, planning to do in Moldova? Do you know of other 
activities that will illuminate that situation for everyone?
    Would you start, Mr. Nix?
    Mr. Nix. Yes; thank you, Senator.
    Yes; both IRI and NDI maintain a presence in Moldova, and 
we've been working very, very hard with--again, with all the 
parties, including the Communist Party, which is, as you know, 
in control of both the executive and legislative branches of 
that country.
    In terms of the election, the elections have been troubled 
in the past, but certainly the threat of fraud at the level 
that we knew was a certainty in Ukraine doesn't appear to exist 
in Moldova. Again, we think that there are going to be problems 
with the count and with the election administration at a 
certain level, but not nearly the level that we knew would take 
place in Ukraine. We do not, therefore, have funding for the 
large numbers of international observers that you saw when you 
traveled to Ukraine.
    And, in terms of the outcome, it's difficult to assess. 
There is a united opposition. Again, they face some of the same 
problems that Russian political parties face and Ukrainian 
political parties face; that is, no access to media whatsoever, 
and oppression from the government, and the use of 
administrative resources to further the aims and goals of the 
party in power.
    In terms of an actual result, I mean, our polls show that 
the opposition will do fairly well in this election. Whether 
they will do well enough to achieve a majority in parliament 
remains to be seen.
    That would be my take on Moldova.
    The Chairman. Mr. Ledsky.
    Ambassador Ledsky. We have been working together with the 
International Republican Institute in Moldova for about 2 years 
now. We have cooperated, we've been working with the same 
parties, including the Communist Party, including the 
government party. Our representative in Kishinev had a meeting 
only 2 weeks ago, I think, with the President of the Republic, 
President Voronin, and we discussed very carefully the problems 
that were arising with respect to the elections.
    Those elections are on March 6th. We have not only worked 
with all of the lists that are running in the election, but we 
have come to work now, over the last few months, with a 
monitoring--domestic monitoring organization, which is being 
funded by the Europeans and by the Eurasia Foundation. And, we 
think, there will be a decent and effective monitoring 
operation at the Moldovan elections. We'll be doing a parallel 
vote tabulation, as we did in the Ukraine and as we did in 
Georgia.
    So I don't know what the results of this election will be, 
but I, myself, agree with Steve that the level of fraud and 
mismanagement will be sufficiently--well, it will be down from 
the last election.
    The Chairman. Yes, Mr. Jackson.
    Mr. Jackson. Could I just add to that? I think, clearly, 
the Orange Revolution in Ukraine unsettled or caught Moscow off 
balance so that they did not prepare the kind of political 
intervention in Moldova. It is, however, true that consultants 
paid by the Kremlin came down--the same people that were 
arranging Yanukovych's election appeared in Moldova in 
September and October. They set up meetings in Moscow in 
November, and with Kuchma. And then after their defeat, in 
December, they don't appear to have renewed their activity in 
Moldova. It will take them some time to regroup. But they have 
been able to take polling places that would have been open to 
international scrutiny and move them into Transdnistria, so 
there will be a certain amount of votes coming in from 
Transdnistria that we can't see.
    The Chairman. Those will be beyond observation.
    Mr. Jackson. I don't see how you get anybody in there.
    The Chairman. Well, let me follow through with the broader 
point that each of you have made in various ways. The Rose 
Revolution certainly was unexpected. The Orange Revolution may 
have been expected, in a way. There certainly was some 
sophisticated organization by persons in Ukraine who were 
prepared to protest, as they did, although the degree of 
support, the longevity of all that, maybe, could not have been 
predicted, nor the circumstances that were involved in that. 
But clearly--and you stated this at the beginning, Mr. 
Jackson--the Russian situation presently is one of wishing to 
block resolution of frozen conflicts elsewhere, or to place, 
under the penumbra of Russia, surrounding situations where 
there appear to be conflicts or elections or opportunities of 
this sort. That has not worked in the case of Georgia, thus 
far, although you've all noted now that there are still 
Russians in military bases. Abkhazia and South Ossetia, 
undecided; foreign observers at the border, vanished.
    Our President, as he visited with President Putin, and in 
his Inaugural Address, has made some very strong statements 
with regard to democracy and the universality of these 
principles. He does so, obviously, with humanitarian concern 
for each of the individual persons, sacred persons, in the 
affected countries, but also, in terms of the interests of our 
country, that we are safer if other countries have democracies 
and if there is this dialog with other democracies. That is a 
prominent part of foreign policy that he sees for this country, 
the ethics of what we are doing.
    In Russia, some reforms that were meant to have a more 
efficient social-service economy have not been administered 
very well, if they were something that should have been in play 
to begin with; namely, the cash payments, as opposed to 
payments-in-kind, as people rode buses or received other 
services. The idea is that this will be rationalized now, and 
some order brought out of the chaos at a time when Russia was 
cash poor and did not have the ability to deal with these 
situations.
    Some would say that Russia still is cash poor outside of 
Moscow and St. Petersburg and some other places. And this is a 
part of the problem of administering the new social programs. 
They would say that it's not surprising that the elderly or 
pensioners or so forth would rise up and say, ``We liked the 
old system, as a matter of fact. We wanted to catch the bus and 
we don't want to pay the bus fare. We want to move ahead as we 
used to. So it's all right for you social economists to have 
rationalized how all this is going to work, but it doesn't 
really work very well for us.''
    Thus, the unthinkable has been occurring, and that is, 
demonstrations, larger and larger groups of people bobbing up 
in various parts of the country. President Putin, perhaps 
surprised by this, has sent out persons to try to help fix the 
situation, but these do not appear to have been very adept 
people. There just is not a social administration in Russia 
that handles these things very well, quite apart from maybe 
formulating the policy to begin with in a Duma that was not 
very democratically based, in which the dialog was perhaps 
somewhat truncated by the nature of the elections that you have 
talked about.
    Now, some have also commented, ``Not to worry. Regardless 
of whether there are some elderly people out there in the 
streets demonstrating, and their problems may be fixed, or not, 
this is not the Rose Revolution, this is not the Orange 
Revolution, and it is not the forerunner of any revolution.'' 
On the other hand, others have suggested that the inspiration 
of Georgia and Ukraine could take hold with some people in 
Russia who wonder why they might not have a great deal more 
freedom, as is being enjoyed in the periphery. And some then, 
darkly, have suggested, before you get into wishing what you 
think ought to occur here, it's not really at all clear what 
would be the successor regime to this situation. Are the 
forerunners for democracy, the potential for institution-
building aspects, at hand, that could bring a change?
    This is blue-sky thinking, way down the trail, but I 
mention in the same breath that many dismissed the Rose 
Revolution, dismissed the potential for the Orange Revolution. 
Maybe some feel that, after all, given the way the world works, 
the Rose Revolution might be ultimately suppressed by Russia, 
and we might see a different turn. Likewise, Ukraine may have a 
heady moment now, but, after all, they live in a dangerous 
neighborhood.
    Which way are things going to turn? Are they going to move 
more toward the Rose/Orange direction or toward the suppression 
of dissent, with a penumbra over the whole situation?
    Yes; Dr. Aslund.
    Dr. Aslund. Thank you, Senator.
    I very much think like you about this question. First, on 
the social-benefit reform. It was as bungled as it could be. 
Part of the benefits were supposed to be taken away because 
they had never been paid out. They were just taken off the 
books. But it was called monetization. Then the calculations 
were wrongly done. Probably only one-third of the actual 
benefits were compensated for. The federal government pushed 
this to the regional governors, who didn't want to pay. 
Therefore, it was ever more complicated. Just in case, it was 
not explained to the population, and 35,000 top officials in 
Russia, including President Putin, at the same time got a 
quintupling of their salaries, and they kept all their benefits 
in kind. So this was just a massive affront to the population.
    So the poor are losing the benefits, when the country is 
booming. And----
    The Chairman. Well, that's a very good statement--I'm going 
to stop you for a moment--that the poor saw two-thirds of their 
benefits vanish in this so-called reform of monetization, but 
35,000 officials in Russia, including President Putin, saw 
their salaries quintuple, did you say, at this same juncture?
    Dr. Aslund. Yeah. And, indeed, you don't even get away with 
it with a--in a mildly authoritarian state. So these protests 
were clearly spontaneous, and they were massive, and they were 
outside of the main centers. This reminds me very much of what 
happened in Poland in August 1980, when solidarity was founded. 
And we saw how that ended.
    So, indeed, I think that this shows that President Putin's 
power has passed the peak. You can't make four such big 
mistakes in one year without suffering. And, I think, that what 
this shows is really how dysfunctional this mild authoritarian 
rule is. But we also see that it's not organizations that pick 
it up, but it's spontaneous protests, which make this more 
difficult to predict. Therefore, it doesn't quite look like the 
Orange Revolution where Our Ukraine had one-quarter of the 
seats in Parliament since the last parliamentary elections.
    So I would say that this was the beginning of the end, and 
we are already seeing more liberalism right now in the Russian 
media, simply because the safety valve needs to be used, or 
because the Kremlin can't control it quite as much as we 
thought.
    Thank you.
    The Chairman. Mr. Jackson.
    Mr. Jackson. I completely agree with your point, that the--
we don't quite understand how big the Orange and Rose 
Revolutions were in Eurasia. I think they were--those twin 
events were the most important geopolitical change in Eurasia 
certainly since the fall of the Berlin Wall, and we're still 
seeing the aftereffects. It's not just in Belarus and Moldova, 
where their effects are obvious, but throughout Central Asia, 
all the way to China. The concept of this democratic change is 
changing the way people think about the world. And, frankly, 
the words of President Bush, in his inaugural, were part of 
that message, that freedom and democracy were possibilities, 
where I don't think they were viewed as such before.
    But for the people and the youth of these countries, these 
are messages of freedom and hope, but for the regimes in 
Moscow, in Minsk, and in Turkmenistan, this was tantamount to a 
declaration of war. This threatens, you know, their privileged 
positions, their monopoly of state power, their monopoly of 
resources, and they view it as such.
    Democratic change is profoundly threatening to these 
oligarchies and elites and security services who basically 
persist by their monopolization of power. This means sharing 
power. I think it is not a structural question, though: Will 
it--will these--Kiev and Tbilisi succeed or will they fail? I 
think that is deeply to be affected by people here--yourself, 
sir, your committee--funding IRI and NDI to give them the 
resources to support democracy. This is a competition.
    The Chairman. Mr. Jackson, just on that point--these are 
sort of strong words--if the speech that the President gave out 
around the steps is a declaration of war, as perceived by the 
regime in Turkmenistan, for example, or Belarus, do you suppose 
President Bush saw that in what he had to say? In other words, 
he is now proceeding to visit with President Putin. He has 
declared, really, what our ethos is, in pretty strong terms. It 
is awfully difficult to square how you find the words, say, of 
2 years ago, the evaluation of President Putin, with this 
today, especially if it strikes President Putin as strongly as 
you're suggesting. Might President Putin conclude that, in 
general, our President is talking about eternal verities, that 
there is a timeframe in which all good things happen--in other 
words, that this is not necessarily a current or urgent 
problem, but rather, one down the trail that we all hope will 
occur? What is your judgment as to the reaction out there to 
these words, on the part of President Putin, quite apart from 
the authorities in Turkmenistan?
    Mr. Jackson. I think what the President was talking about 
in the inaugural is nothing more than basic American values, 
``This is what our country believes. This is what our allies 
believe. This is what we mean when we talk about democracy. 
This is a community of shared values.'' And, I think, the 
President correctly and eloquently summarized those values. 
There is a claim, I think, all Americans share that democracy 
is universal, that all peoples should have equal access to 
those freedoms, and that's the central foundation belief--
political belief of the West. I think it is very uncomfortable 
for regimes that basically are reactionary in nature and that 
much prefer the policies of the 19th century, the militarism 
and mercantilism and unchecked nationalism that characterized 
that century. We do not stand for that. And I--it is only 
disappointing that Putin and others find themselves so distant 
from those values. And, frankly, that's their problem, not our 
problem.
    The Chairman. Mr. Nix, do you have a comment about this?
    Mr. Nix. Senator, I'd like to address your comments about 
the effects of the Orange and Rose----
    The Chairman. Yes.
    Mr. Nix [continuing]. Revolutions. And I'd like to make two 
points. First of all, it no doubt had a profound effect on 
democratic movements, not only in Russia, but the rest of the 
former Soviet Union. Political parties, opposition movements, 
are reinvigorated. They see that it could happen. And so, that 
has given them a sense--as has been noted previously, a sense 
of hope and confidence that it could be.
    Conversely, it's had another effect, in terms of the 
governments of those countries--again, not just in Russia, but 
in Central Asia, Belarus, and other countries where IRI and NDI 
work. The governments in those countries have acted very 
swiftly, in terms of disrupting the political parties' 
operations, trying to disrupt and prevent IRI from--NDI--from 
providing technical assistance and training. In a very short 
time, operationally, we have felt the brunt of these government 
crackdowns, as have the political parties that we work with.
    So it's had a tremendously positive effect on these 
political party movements. At the same time, it has made it 
much more difficult for these political parties to operate, and 
has made it increasingly difficult for IRI and NDI to continue 
to provide the type of assistance that we do.
    And I'd like to sum up by connecting up to your opening 
statement, sir, when you noted the proposed cutbacks in FSA 
funding. I firmly believe that this is not the time to cut 
back. This is the time to accelerate and to expand on our 
support to these democratic movements. The time is right, based 
not only on the Georgian and Ukrainian experience, but other 
things that we see out in the regions that should be supported.
    The Chairman. Mr. Ledsky.
    Ambassador Ledsky. I have just a small footnote. How Mr. 
Putin, and how the other autocrats around the former Soviet 
Union, view the President's statement, I don't know. I suspect 
they think it is pure rhetoric and it doesn't have to be paid 
much attention to. I hope they're wrong, if that is their 
judgment.
    My own feeling is that we won't know, exactly, and we won't 
be able to have much direct effect on their behavior--that is, 
the autocrats' behavior. What is critically important--and I go 
back to the point I made earlier--is that the experiment in 
democracy, which the Georgians and the Ukrainians have now 
undertaken, succeeds and that American assistance to those 
governments is critical at this juncture--that is, 2005.
    We have already seen in Georgia that the USAID mission of 
the United States Embassy looks upon organizations like ours as 
already having achieved its objective, and that there is now 
the chance to move to some other country or some other project. 
Because the Georgian revolution is complete, democracy has been 
established, organizations such as ours are no longer needed. 
That is the most tragic mistake that could be made by the U.S. 
Government and U.S. agencies in 2005.
    And I would urge you to, whatever you do to the Freedom 
Support Act, in terms of percentages, that sufficient money be 
devoted to Georgia and the Ukraine, because the examples of 
those two countries are what the President Putins of the world 
will be looking at, not the declarations by politicians or 
bureaucrats, like myself.
    The Chairman. Well, I think that's very sound advice. And 
let me just say, I was pleased that, in the request for the 
supplemental appropriation bill, the President has asked for 
$60 million for Ukraine. Now, as a part of that effort, really 
over and above outside altogether of our situation, the 
Millennium Challenge group in Georgia is impressive, and it 
would appear that this may be an avenue for some support, but 
it's very modest, given the amounts of money that are involved 
in Millennium Challenge all together. But the fact is that 
Georgia is working those problems quickly and successfully.
    But I just pick up your general point. There has been a 
tendency on the part of the Congress, maybe even society as a 
whole--hopefully, never NDI and IRI--to finish off an election 
and move on.
    Ambassador Ledsky. Right.
    The Chairman. Many of us feel that this was a tendency in 
Latin America, during the 1980s, during which a great number of 
you and Members of the Congress were involved in El Salvador, 
Guatemala, Honduras and Nicaragua. Many of these governments 
have continued to do well, although some are having their 
problems. This committee has found, throughout Latin America, a 
good number of precarious situations and a relative paucity of 
interest.
    It is so important right now to make certain that, in 
Georgia and Ukraine, just to name the two that you have 
mentioned, these are success stories. That may require a 
commitment on our part that has not yet been rationalized, 
perhaps, as fully and programmatically as needed. That is one 
purpose of our hearing today; to bring these thoughts to the 
fore, as a memo to all of us, including during our visits with 
our administration.
    There is more work to be done. Today we have talked about 
Yukos as a case that is important. This panel has a broad 
interest in the relationship with Russia. I think that it has 
been important to illuminate it, and hopefully we may do so 
again.
    I thank each one of you for your contributions, your 
testimony, and your forthcoming responses.
    The hearing is adjourned.
    [Whereupon, at 12:10 p.m., the hearing was adjourned.]
                              ----------                              

              Additional Material Received for the Record

         Prepared Statement Received From Mikhail Khodorkovsky

    1. I regret profoundly that my personal political position and 
public activity have served as an excuse for the illegal expropriation 
of property from all YUKOS shareholders, organized by a group of 
corrupt officials and businessmen working in their own interest.
    2. I have never belonged to any party. However, I always believed 
and continue to believe that it is my right as an individual and 
citizen to support various political forces financially no matter what 
the current government may feel about them.
    3. In supporting various political forces, I did everything 
possible to promote the establishment and strengthening of system-
forming institutions within the Russian state and of civil society in 
Russia.
    4. Over the course of the seven years that my colleagues and I 
managed the YUKOS companies, we achieved a state of total transparency 
of the corporation and openness in its business dealings. In protecting 
shareholder rights, we tried to keep corrupt bureaucrats from meddling 
in YUKOS affairs. This made the corrupt bureaucracy decide to wreak 
vengeance on me, my partners and colleagues.
    5. I frequently spoke out in public--at the State Duma, at sessions 
of the cabinet of the Russian Federation, at meetings of business 
people with the president of Russia--in favor of legislation that would 
completely and precisely spell out the rules for the formation of the 
business milieu in Russia, including the mutual obligations of state 
and business. I felt and still feel that the bureaucracy must be 
stripped of its right to interpret laws arbitrarily and of its ability 
to substitute decisions by officials for legislation.
    I spoke out, in particular, for a stable and transparent tax 
system, as well as for equality of access for all oil producers to the 
state-owned main pipelines and for the construction of a private 
infrastructure for transporting energy, which would have substantially 
intensified and improved the energy and fuel sector of Russia.
    6. I gave lectures to many audiences in Russia and abroad on the 
need for the democratic development of the Russian Federation, on the 
prospects for free-market reforms and the development of an open 
economy in my country, and on the social responsibility of business. I 
also wrote articles on the paths of development for my country in 
numerous authoritative Russian and foreign publications.
    7. I had expected my public activity to lead to pressure on myself, 
but I did not imagine that the pressure would turn into the total 
destruction and plunder of YUKOS and the illegal persecution of 
numerous shareholders and staff, as well as their relatives, even young 
children.
    8. Despite the fact that I no longer have major holdings, I 
continue to support--to the extent of my abilities from my prison 
cell--various social, human rights and charitable initiatives, both 
through Open Russia, the NGO I founded, and in other ways. I maintain 
that there is a need for a real separation of powers in Russia, the 
creation of an effective system for protecting human rights, and the 
guarantee of independent mass media in my country. I intend to support 
Russian science, culture, and the right of Russians to freedom of 
religion.
    My fellow countrymen strive for freedom and they deserve it. The 
liberal economic reforms of the 1990s were not always well-considered 
and they turned out to be excessively painful for millions of Russians. 
But the reforms have not turned my people away from the desire to live 
in a free and just society where social harmony prevails. Today, in my 
restricted circumstances, and in the future, I firmly intend to fight 
for freedom and justice in Russia together with my nation, a nation of 
which I am an inalienable part.
                                 ______
                                 

  Response From Steven Theede to Questions Submitted by Senator Chuck 
                                 Hagel

    Question 1. Could you describe the Yukos Oil presence in the United 
States? Does Yukos Oil have offices in the United States? Number of 
U.S. Shareholders? Status of share trading in the United States?
    [Note.--An answer to this question was not available at the time of 
printing.]

    Question 2. Could you provide an overview of the charges before Mr. 
Khodorkovsky? Are these individual charges or charges against the 
company of Yukos? With the actions taken against Mr. Khodorkovsky and 
Yukos, are there laws that have been alleged to have been broken by the 
Russian government or Russian court system relative to this case?
    Answer. Counsel for Mikhail Khodorkovsky and Platon Lebedev have 
prepared the following brief statement and explanation regarding the 
substantive criminal charges filed against these two businessmen and 
the primary defenses to the charges and the procedural due process 
violations of Russian law that have occurred throughout the trial. On 
behalf of our clients, counsel thanks the Senate Foreign Relations 
Committee for the opportunity to submit this summary into the hearing 
record. It is impossible to address every pertinent detail that 
demonstrates why the charges are devoid of merit and rather represent a 
manipulation of the Russian criminal justice system to further the 
ulterior motives, both political and economic, of those in the Russian 
government. In addition, we outline the procedural violations that have 
occurred during the trial in order to further demonstrate why any 
conviction Messrs. Khodorkovsky and Lebedev should be given no 
currency.
    As a threshold matter, the Committee should understand that all of 
the legal defects and due process violations described below are based 
upon the application of Russian law, either as established in the 
Russian Constitution and the substantive and procedural Criminal Codes 
or under International laws expressly adopted by and incorporated into 
Russian law. The defense does not seek to exonerate Messrs. 
Khodorkovsky and Lebedev by changing the applicable law, but rather by 
attempting to secure the application of existing Russian law pursuant 
to the Rule of Law.
    The assessment that these cases are political in origin has now 
been made by every independent court or government body to review this 
matter. In January 2005, the Council of Europe endorsed the findings of 
its Human Rights Rapporteur, Sabine Leutheusser-Schnarrenberger, who 
summarized her assessment that these prosecutions were based on 
politics, not criminal justice, with the following sentence:

          I have come to my own conclusion, namely that the presence of 
        an interest of the State that exceeds its normal interest in 
        criminal justice being done and includes such elements as: to 
        weaken an outspoken political opponent, to intimidate other 
        wealthy individuals, and to regain control over ``strategic'' 
        economic assets--can hardly be denied.\1\
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    \1\ Europe Parliamentary Assembly, Committee on Legal Affairs and 
Human Rights, Circumstances Surrounding the Arrest and Prosecution of 
Leading Yukos Executives, Doc. No. 10368, Explanatory Memorandum at 
para. 57 (November 29, 2004 (text adopted by Parliamentary assembly on 
January 25, 2005) (Appended hereto as Exhibit 1).

    On Friday, March 15, 2005, the Bow Street Magistrates' Court in 
London ruled that two former executives of Yukos should not be 
extradited to Russia on the basis that the prosecution of Mr. 
Khodorkovsky was politically motivated and that no one associated with 
him or Yukos could receive a fair trial in Moscow. Between the 
Government of the Russian Federation v. Dmitry Maruyev and Natalia 
Chernysheva. In 2004, Courts in Liechtenstein and Switzerland have 
rejected Russia's requests for international legal assistance in their 
purported criminal investigations and prosecutions of Messrs. 
Khodorkovsky and Lebedev. Liechtenstein Superior Court for Civil Cases 
No. 12 RS. 2003.255; Pecunia Universal Ltd. v. The Office of the 
Attorney General of Switzerland, Federal Supreme Court of Switzerland, 
1A.86/2004, Decree of June 8, 2004.
      i. analysis of the criminal charges alleged against messrs. 
                        khodorkovsky and lebedev
    The Procuracy's case against Messrs. Khodorkovsky and Lebedev is 
rooted in what is, at best, a baseless mischaracterization and, at 
worst, a calculated lie: That these men are not business leaders, but 
kingpins of organized crime characterized in the allegations as the 
``Group.'' In other words, the Procuracy alleges that Group Menatep 
Limited (``GML'') and other corporate structures are not legitimate 
business entities, but components of a criminal enterprise.\2\
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    \2\ For ease of reference, the term Group Menatep will be used 
herein to include various corporate entities that existed at different 
times relevant to the Procuracy's allegations in which Defendants were 
associated, i.e., shareholders, officers and directors at, including, 
but not limited to, Bank ``Menatep,'' ZAO ``Rosprom,'' OAO NK 
``Yukos,'' and GML).
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    The Procuracy's motive for alleging the putative crimes were 
committed by an organized group in order to secure a procedural and 
political advantage:

   Imputing to and Holding Defendants Criminally Liable for the 
        Alleged Acts of Others in the So Called ``Organized Group'';
   Extending the Statute of Limitations Periods for the Charged 
        Offenses;
   Materially Increasing Penalties and Tightening Security 
        Measures Such as Imposition of the Pre-Trial Detention; and
   Providing a Pretext for the Violation of the Defendants' 
        Fundamental Human Rights.

    Furthermore, the allegation allows the Procuracy to stigmatize 
these men and the companies they built, thereby destroying their 
reputation and establishing a thin veneer of legitimacy to a 
politically and economically-motivated prosecution.
    The Procuracy alleges that Messrs. Khodorkovsky and Lebedev, their 
coshareholders and partners in Group Menatep, along with unidentified 
others, conspired and acted as an organized group to commit these 
crimes, and created Group Menatep as a vehicle to coordinate a network 
of ``false corporations'' to carry out and conceal the unlawful 
objectives of the organized group. The Procuracy fails to demonstrate 
scienter--criminal intent--in support of its contention that Group 
Menatep and its various holdings were structured for the purpose of 
conducting criminal activities. The Procuracy does not do so because it 
cannot; Messrs. Khodorkovsky and Lebedev and Group Menatep were 
associated for the lawful purpose of engaging in legitimate business 
activities.
    The Procuracy's effort to cast Group Menatep as a criminal 
organization is not credible in view of the extraordinary efforts of 
Messrs. Khodorkovsky and Lebedev to introduce transparency and accepted 
Western business practices to the Russia's often murky business world. 
In particular, GML has subjected itself, and the enterprises in which 
it has interests, to heightened standards of transparency and corporate 
governance, and has undergone rigorous audits by respected accounting 
firms such as Ernst & Young (GML) and PricewaterhouseCoopers (PWC) 
(Yukos). In addition, although not a public company, in 2002 and 2003 
GML publicly disclosed its audited financial statements, including on 
its website--www.groupmenatep.com. These actions refute their 
designation as a group of criminal racketeers. Criminals do not publish 
their structure or finances on the internet.
    Analysis of the law concerning organized criminal groups 
demonstrates its inapplicability here. The commentary to the Russian 
Criminal Code defines an organized group as ``comprise[d] of two or 
more individuals who have joined efforts in order to commit one or 
several crimes. This variety of complicity is characterized by 
professionalism and stability.'' Complicity refers to the agreement by 
the members of the organized group to engage in one or more criminal 
acts prior to their actually taking steps to implement any criminal 
objective. The stability component requires the existence of 
``permanent ties between the member of the organized group and [choice] 
of particular methods of activity involved in the preparation and 
perpetration of their crimes. Stability of an organized group, 
therefore, requires prior agreement and a degree of organization.''
    This definition of ``organized group'' simply does not comport with 
the true facts here. First and foremost, the Procuracy makes no 
credible allegation, let alone offers any evidence, of scienter--
criminal intent--or criminal agreement to support an assertion of 
complicity. That several persons or corporations, conduct business 
together does not, without more, make them criminal co-conspirators. 
For example, GML is a legal entity organized for the lawful purposes of 
overseeing the business interests of its various holdings. The 
Procuracy's mere assertion that entities with connections to Group 
Menatep ranging from merely holding accounts at Bank Menatep to having 
been founded by Bank Menatep employees does not provide any basis for 
allegations of criminal complicity, i.e., there is no basis for the 
leap from the existence of a banker-client relationship to the 
allegation of criminal collusion.
    Here, however, the Procuracy alleges that virtually anyone 
associated with Group Menatep as far back as 1990, whether or not named 
as a defendant, are members of the organized group. More is required to 
criminalize these legally formed corporate entities and those persons 
associated with them. The Procuracy cannot simply provide a list of 
persons and entities and, without more, transform their legitimate 
association for the lawful purpose of conducting business into a 
criminal organized group. The Liechtenstein Court cited this particular 
flaw in the Russian criminal allegations as part of its basis for 
denying Russia's request for mutual assistance. Both the Liechtenstein 
Superior Court and the Swiss Supreme Court found that the Russians had 
failed to identify a discernable link between the lawfully organized 
entities and the alleged illegal conduct. Stripped of this omnibus 
allegation, the substantive deficiencies of the charges in the 
individual episodes become even more apparent.
Episode I--Khodorkovsky and Lebedev committed no crimes in connection 
        with the privatization of Apatit \3\
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    \3\ In addition to the allegation of fraud in regard to 
privatization of Apatit, the Procuracy filed fraud charges in 
connection with the privatization of the Research Institute for 
Fertilizers and Insecto-Fungicides (``RIFIF'') in 1995. The issues with 
respect to RIFIF largely mirror those of Apatit's privatization, 
discussed in Episode I, infra, and in the interest of brevity are not 
addressed here.
---------------------------------------------------------------------------
    The Procuracy has alleged three forms of fraudulent conduct in 
connection with the 1994 acquisition of 20 percent of the stock in a 
Russian company named Apatit: (1) defendants conspired to create shell 
companies secretly controlled by Bank Menatep to bid on the shares, 
including the winner, Volna; (2) at the time it bid, defendants had no 
intention of complying with the terms of the bid, specifically an 
Investment Plan for the infusion of capital into the company; and (3) 
defendants submitted false documents to the Murmansk Region Property 
Fund as part of the bidding process. There is no legal or factual basis 
for the Procuracy's leveling these criminal fraud charges. Under the 
Russian Criminal Code (and United States criminal law), a fraud 
conviction requires establishing a specific intent to defraud--
scienter, malicious intent, or mens rea--at the time of the initial 
act. Here there is no, and can be no, evidence of any requisite 
malicious intent on the part of Messrs. Khodorkovsky and Lebedev. The 
evidence is to the contrary, all material information related to Bank 
Menatep's role in supporting bidders in the privatization tender was 
fully disclosed to the Russian government during the bidding process. 
Furthermore, Volna, through Bank Menatep, invested significant capital 
into Apatit, thus, substantially performed its obligations under the 
Stock Purchase Agreement and eliminating any possible finding of 
contemporaneous intent not to comply with the Investment Plan. Finally, 
the alleged conduct did not result in any harm to Apatit and so cannot 
support any fraud charges. As the prosecution's own witnesses testified 
during the trial, at the time of the tender Apatit was on the verge of 
bankruptcy, but as a direct result of Volna and Bank Menatep's infusion 
of capital and introduction of enhanced management, e.g., proposed 
revisions to the Investment Plan, and the implementation of revised 
payment practices and marketing and sales structures, Apatit became, 
and remains, a prosperous company.
Episode II--Misappropriation of corporate opportunities
    The Russian Authorities allege that between 1995-2002, Messrs. 
Khodorkovsky and Lebedev breached their fiduciary duty to Apatit by 
selling concentrate (``Apatit product'') at reduced prices through 
transactions wherein ``shell'' entities under their control, purchased 
Apatit product at reduced prices (e.g., $40 per ton), resold it at 
higher market prices (e.g., $63.50 per ton), and retained the price 
differential. To reach this fanciful position, the Procuracy disregards 
fundamental economic propositions, business realities, and the facts.
    What the Procuracy casts as criminal conduct is the commonly used 
business practice of downstream sales. The realities of the early years 
of privatization provide needed context here. After privatization, 
Apatit lost the benefit of the government's trading and distribution 
infrastructure as well as the government's financing and credit-backed 
sales. The newly privatized Apatit, as with the rest of Russian 
industry, lacked cash for the supplies and salaries necessary to 
continue production. As a result, it was forced to barter its product 
at a discounted price in exchange for needed inventory. One of the 
first changes implemented by the new shareholders was, through the 
infusion of capital, the termination of swap sales and the creation of 
a trading structure whereby Apatit sold its product to a distribution 
company at a profit. The downstream structure--approved by its Board of 
Directors, including a representative of the Russian Government allowed 
Apatit to stabilize cash flow, develop meaningful budgets, guarantee 
sales, effectively plan production volumes, minimize and optimize its 
tax liabilities, and avoid the risks and additional costs with respect 
to the downstream sales. In the short term, it allowed the company to 
avoid involuntary bankruptcy proceedings and, thus, was essential to 
Apatit's survival and expansion and in the best interests of its 
shareholders.
Episode III--Yukos tax minimization structures complied with corporate 
        tax laws
    The Procuracy has alleged that defendants caused Yukos to 
systematically evade taxes through the use of ``affiliated entities'' 
registered in the restricted access jurisdiction of Lesnoy, 
Nizhneturinsky District, Sverdlovsk Region (``Lesnoy''). Such 
restricted access jurisdictions, carried over from the Soviet-era, were 
remade into legislatively created internal tax havens known as ZATOs. 
These special administrative territories were governed by federal law, 
pursuant to which all taxes collected within a ZATO's territory were 
retained for its own budget. ZATO's were authorized to provide tax 
benefits, principally reductions of effective rates, within its region 
at its own budgetary expense. The entities receiving these tax 
benefits, in turn, were required to transfer to a percentage of their 
tax savings to extra-budgetary funds of the ZATO. The ZATO's 
(``ZATOs'') came to be viewed as a ``loophole'' in the tax system, and 
``loopholes'' by definition are legal and utilizing one is definitely 
not criminal.
    It is beyond dispute that during the period covered toy the 
criminal charges, these were lawful vehicles for tax minimization, and 
the conduct the Procuracy challenges cannot constitute a criminal, or 
even civil, tax violation. These operating companies were legal 
entities, which complied with the applicable requirements, and their 
presence in ZATOs was a lawful, and for the ZATO's, a beneficial tax 
practice.
    The Procuracy alleges the illegal plan allegedly occurred in two 
phases; first the ``affiliated entities'' prepaid their tax obligations 
with promissory notes as opposed to cash, and, after overpaying and 
improperly negotiating tax reductions with the ZATOs, secured tax 
refunds without having paid on the original notes. In connection with 
phase one, the Procuracy alleges that, for the tax years 1999 and 2000, 
Khodorkovsky and Lebedev caused Yukos to register four ``affiliated 
entities'' in a ZATO to secure illegal tax reductions. The Procuracy 
claims that this scheme resulted in an underpayment of taxes of 
$601,814,702.19 by these entities which then also illegally received 
cash refunds causing the Federal budget losses totaling RUR 
407,120,540.28 ($14,084,782.92).
    The Procuracy's case fails for the following reasons:

   The ZATO registered entities qualified for tax benefits 
        negotiated with the finance administration in Lesnoy. Each of 
        the entities served as a trading company that provided 
        downstream services to Yukos by marketing and reselling crude 
        oil to third party purchasers or arranging for the crude oil to 
        be processed into refined petroleum products. The ZATO-
        registered entities' tax payments and subsequent claims for tax 
        deductions were disclosed and audited. The Federal Tax 
        Authorities conducted regular audits for compliance with the 
        requirements of the ZATO law and, other than the calculation of 
        certain specific payments, never challenged the structure.
   The use of promissory notes was a legal and accepted 
        business practice. Prior to January 1, 1999, it was permissible 
        to make tax payments in non-monetary form. In fact, payment 
        with promissory notes was a widely used business practice in 
        the years prior to 1999 until the Russian Duma changed the law. 
        Despite this change, the tax authorities continued to accept 
        tax payments in non-monetary form until the end of 1999. During 
        the trial the defense presented, or attempted to present the 
        testimony and reports of several Russian experts regarding the 
        legality of the payment of taxes with promissory notes during 
        this period, as well as a letter from the Russian Tax Ministry 
        grandfathering the right to use promissory notes for the year 
        2000.
   The ZATOs received payments on the promissory notes with 
        interest. During the trial at least one representative of a 
        ZATO testified how the local administration received payment 
        and utilized the funds from the promissory notes. The defense 
        also submitted a letter from the Lesnoy Finance Ministry 
        identifying numerous tax payers who utilized promissory notes 
        and the receipt of the applicable payments.
   There is no proof of specific intent, i.e., that the 
        defendants violated the tax laws ``willfully.'' Messrs. 
        Khodorkovsky and Lebedev are not accountants or tax lawyers and 
        the government offers no evidence that they developed the tax 
        strategy at issue. To the contrary, the tax strategy Yukos 
        utilized was implemented in good faith and in reliance upon the 
        advice of counsel and accounting experts, generated after the 
        full disclosure of all pertinent facts. This reasonable, good 
        faith reliance defeats the requisite element of intent to 
        violate the law.
Episode IV--Alleged personal criminal tax evasion
    The Procuracy also has leveled charges of personal tax evasion 
against Khodorkovsky and Lebedev, alleging that they unlawfully evaded 
taxes by submitting false tax declarations claiming certain income as 
private entrepreneurial revenues rather than as salary. Once again, the 
Procuracy distorts the facts in order to transform what was no more 
than the use of a lawful, permissible and widely employed tax 
minimization regime into criminal tax evasion. At the time, Russian law 
provided that a private entrepreneur could elect to make a fixed 
advance tax payment in exchange for a license, which constituted full 
satisfaction of taxes on earnings derived from the licensed, 
entrepreneurial services. Such licenses encouraged entrepreneurship by 
providing incentives in the form of a simplified and fixed advance tax 
payment for individuals engaged in providing services as independent 
contractors.
    Following then existing law, Messrs. Khodorkovsky and Lebedev 
applied to and were approved by their local taxing authority for 
licensing as private entrepreneurs. Both men paid their annual fee for 
such license status, and in all other respects acted in compliance with 
the law, and were in good standing as private entrepreneurs.
Episode V--Yukos funds were legally invested in Media Most Corporation
    The Procuracy alleges that Mr. Khodorkovsky engaged in a scheme to 
funnel money from Yukos Oil Company to Vladimir Gusinsky and in doing 
so caused the ``organized group, illegally and gratuitously [to] 
remove[] and put into the hands of V.A. Gusinsky'' monies belonging to 
Yukos and its shareholders, therefore committing a crime of 
misappropriation under Article 160(3)(a) and (b). The Procuracy's 
allegations against Mr. Khodorkovsky focus on two series of 
transactions which occurred between 1999 and 2000 involving the 
purchase of certain commercial paper issued by Media Most. These 
transactions were neither illegal nor gratuitous and were fully 
disclosed and approved by Yukos' Board of Directors.
    By that time, Media Most was the dominant private media outlet in 
Russia, and an increasingly vocal critic of the government 
administration. The Procuracy retaliated with a series of raids of 
Media Most's headquarters followed by Mr. Gusinsky's arrest on charges 
of fraud and embezzlement and the company's forced bankruptcy. The 
European Court of Human Rights (``ECHR'') last year held the Russian 
government, inter alia, had used the criminal justice system not to 
enforce the law but to further its economic priorities. Case of 
Gusinskiy v. Russia, App. No. 70276/01 (Eur. Ct. H.R. May 19, 2004). It 
concluded that the Russian government's attack on Media Most and Mr. 
Gusinsky constituted extortion, with the criminal justice system 
implementing the scheme.
    The first set of transactions involve three loans by Yukos to Media 
Most whereby Yukos agreed to loan RUR 635,450,000 and received as a 
collateral four promissory notes from Media Most with a nominal value 
of $25 million. By April 28, 2000, Yukos had redeemed the notes and 
received in excess of their full nominal value. Yukos then reinvested 
the full amount in four promissory notes, issued by MetaMedia, a Media 
Most related entity, with a nominal value of $25 million. Despite the 
2000 events which led Media Most into a forced bankruptcy proceedings, 
Yukos managed to recover the full value of its investments by April 19, 
2002.
    Similarly, the second set of transactions involve a purchase of 
Most-Bank promissory notes by two entities, ``Grace'' and ``Mitra,'' 
for RUR 1,014,434,620 and also were commercially reasonable at the 
time. Subsequently, as a result of the Government's persecution of Mr. 
Gusinsky and his businesses, the notes were written off. Yukos reported 
the write off on its consolidated financial statements for 2000 and 
2001 as prepared by PricewaterhouseCoopers pursuant to generally 
accepted accounting practices (``GAAP''). To the extent that Yukos 
shareholders suffered any loss, it was the result of the Procuracy's 
attack on Media Most and Mr. Gusinsky and not because of any illegal 
conduct by Mr. Khodorkovsky.
      ii. violations of due process in the prosecution of messrs. 
                        khodorkovsky and lebedev
    Much has been written about the due process abuses committed by the 
Russian Procuracy during the investigation and prior to the trial, 
e.g., the illegal search of defense counsel and the improper pretrial 
detention of Messrs. Khodorkovsky and Lebedev and the litany of 
violations will not be repeated here. Predictably, the due process 
abuses did not end with the commencement of the trial. The trial is 
replete with instances where the court violated the criminal procedure 
code. Moreover, the Procuracy and the defense have not been treated 
equally by the court. For example, the defense has been provided with 
less time to present their case and the overwhelming majority of 
defendants' motions and requests to court are denied. The court 
repeatedly has made thinly-reasoned decisions that simply parroted the 
Procuracy's self-serving and unsubstantiated assertions and completely 
ignored the Procuracy's violations of Russian law and the defense's 
arguments. \4\
---------------------------------------------------------------------------
    \4\ Id.
---------------------------------------------------------------------------
    Specifically, the Court, both upon the request of the Procuracy and 
sua sponte, has interfered with defense counsel and the manner in which 
evidence is present against the accused, have all been declared by PACE 
as corroborated and serious shortcomings of the Russian proceedings.\5\ 
The list of other violations include:
---------------------------------------------------------------------------
    \5\ Europe Parliamentary Assembly, Circumstances Surrounding the 
Arrest and Prosecution of Leading Yukos Executives, Res. No. 1418 at 
para. * (January 25, 2005).

   Impermissible introduction of evidence by the Procuracy:
     Evidence obtained through illegal searches and seizure, 
            and
     Unauthenticated documents;
   Defendants denied the opportunity to introduce exculpatory 
        evidence, including key expert reports;
   Restriction on scope of direct questions of defense 
        witnesses and of defense cross examination of prosecution 
        witnesses;
   Defendants denied requests to subpoena prosecution key 
        expert witnesses;
   Harassment and improper influencing of witnesses:
     Continued investigation and interrogation of trial 
            witnesses;
     Threats of searches, arrests and prosecution;
     Improper questioning during trial concerning witnesses' 
            personal life and work unrelated to the case;
   The Court's making motions on behalf of the Procuracy;
   The Court questioning witnesses on behalf of the Procuracy;
   Denial of effective assistance of counsel in the form of:
     Interference with access;
     Interference with confidential communications;
     Harassment of defense counsel;
   Failure to disclose exculpatory evidence.
                               conclusion
    The above is a mere thumbnail sketch of the total perversion of the 
Russian criminal justice system in the Khodorkovsky/Yukos Affair. It 
requires far greater detail to demonstrate all of the complexities and 
nuances of the abuses that have occurred during the past 18 months. 
Counsel is available to provide additional information for use in 
further investigation of the matter.

    Question 3. International energy policy is important to the Senate 
Foreign Relations Committee and in particular to the Subcommittee on 
International Economic Policy, which I chair. Please elaborate on the 
role that Yukos played in the overall energy market. What was the 
international market for Yukos? Did Yukos, for example, play a 
significant role in oil supplies to some of the large energy buyers 
such as the Europe Union or China. Was Yukos a supplier of U.S. 
resources?
    [Note.--An answer to this question was not available at the time of 
printing.]

                                  

```