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U.S.-RUSSIA ECONOMIC RELATIONSHIP:

IMPLICATIONS OF THE YUKOS AFFAIR

HEARING

BEFORE THE

SUBCOMMITTEE ON

DOMESTIC AND INTERNATIONAL

MONETARY POLICY, TRADE, AND TECHNOLOGY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

OCTOBER 17, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–71

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL MONETARY POLICY, TRADE, AND

TECHNOLOGY

LUIS V. GUTIERREZ, Illinois, Chairman

CAROLYN B. MALONEY, New York 

MAXINE WATERS, California 

PAUL E. KANJORSKI, Pennsylvania 

BRAD SHERMAN, California 

GWEN MOORE, Wisconsin 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

WM. LACY CLAY, Missouri 

KEITH ELLISON, Minnesota 

CHARLES A. WILSON, Ohio 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

RON PAUL, Texas 

MICHAEL N. CASTLE, Delaware 

FRANK D. LUCAS, Oklahoma 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JEB HENSARLING, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

(V)

C O N T E N T S 

Page 

Hearing held on: 

October 17, 2007 ............................................................................................... 1

Appendix: 

October 17, 2007 ............................................................................................... 23

WITNESSES 

WEDNESDAY, OCTOBER 17, 2007

Aslund, Anders, Senior Fellow, Peterson Institute for International Economics ........................................................................................................................... 7

Gaddy, Clifford, Senior Fellow, The Brookings Institution .................................. 8

Osborne, Tim, Wiggin Osborne Fullerlove, London .............................................. 5

Satter, David, Research Fellow, Hoover Institution ............................................. 10

APPENDIX 

Prepared statements: 

Aslund, Anders ................................................................................................. 24

Gaddy, Clifford .................................................................................................. 33

Osborne, Tim ..................................................................................................... 42

Satter, David ..................................................................................................... 50

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Roskam, Hon. Peter J.: 

Responses to questions submitted to Tim Osborne ....................................... 53

(1)

U.S.-RUSSIA ECONOMIC RELATIONSHIP: 

IMPLICATIONS OF THE YUKOS AFFAIR 

Wednesday, October 17, 2007

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC AND

INTERNATIONAL MONETARY POLICY, TRADE, AND TECHNOLOGY, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 2 p.m., in room 

2128, Rayburn House Office Building, Hon. Luis V. Gutierrez 

[chairman of the subcommittee] presiding. 

Present: Representatives Gutierrez, Sherman; Paul, Lucas, 

Roskam, and Marchant. 

Chairman GUTIERREZ. The Subcommittee on Domestic and International Monetary Policy, Trade, and Technology will come to 

order. The subject of today’s hearing is, ‘‘The U.S.-Russia Economic 

Relationship: Implications of the Yukos Affair.’’ 

First, I would say good afternoon and thank you to all of the witnesses for agreeing to appear before our subcommittee. I think that 

we have assembled an excellent panel of experts that will help the 

subcommittee get to the heart of this very complex subject matter. 

I yield myself 5 minutes. 

The purpose of this hearing is to discuss U.S.-Russian economic 

relations with an emphasis on the implications of the Yukos affair. 

This hearing will provide the subcommittee with an opportunity to 

closely examine the matter, including the losses suffered by U.S. 

shareholders, and determine what impact this incident will have on 

future U.S. investment in Russia. Quite simply, U.S. and other 

would-be foreign investors need to know whether the rules of law 

will be upheld in Russia. 

The subcommittee won’t answer that question today, but hopefully we can shed some light on this issue, and motivate the Administration to start asking the Kremlin some tough questions 

when it comes to protecting the interests of U.S. investors. Yukos 

Oil Company was initially created in 1993 by decree of the Russian 

government, but in 1996, Yukos became the first entirely private 

Russian oil company. By all accounts, Yukos was a successful private enterprise, growing substantially under the leadership of CEO 

Mikhail Khodorkovsky who took significant steps to apply Western 

standards of accounting and corporate governance to Yukos. 

Yukos continued to progress. Yukos continued its progressive 

trend in 2001 by becoming the first Russian oil company to publish 

quarterly reports in accordance with international standards. The 

2

company also hired several dozen Western European and American-based accountants. As a result of these reforms, Yukos was 

widely recognized as Russia’s most transparent corporation and enjoyed a good reputation in the West. 

With the help of international investors, Yukos continued to expand, and by April of 2003, as a result of an agreed merger with 

Rosneft, Yukos was poised to become Russia’s largest oil company 

and one of the world’s largest, non-state-owned oil companies. And 

that’s when things started to unravel for Yukos and its CEO. In 

October of 2003, Khodorkovsky was arrested and later charged 

with tax fraud. 

Less than a week after his arrest, the Russian government froze 

ownership of 44 percent of Yukos’ shares. In July of 2004, Yukos 

was officially charged with evading payment of over $7 billion in 

Russian taxes. Later that same year, the Russian government sold 

Yukos’ main production unit through a questionable auction process to recover some of the nearly $30 billion in alleged back taxes 

and penalties. Our witnesses today will add significant detail to the 

questionable Yukos auction and the entire unwinding of the company. But suffice it to say that the course of events I just briefly 

outlined caused the value of Yukos shares to plummet. And in the 

end, U.S. investors were never compensated for their losses. 

While we still don’t exactly know how many Americans have suffered financial losses from the Yukos affair, some estimates put the 

total of U.S. investor losses as high as $6.7 billion. Those who lost 

are not just institutional investors but include individual investors 

as well as public and private pension plans. Instances like the 

Yukos situation create an uncertainty among potential investors, 

which could result in substantial loss of investment for Russia and 

impede its integration into the global economy. 

Treatment of American shareholders in the Yukos affair is the 

focus here, but there are several other key issues which I think the 

witnesses should discuss. Beyond the Yukos affair, Vladimir 

Putin’s actions in the energy sector represent an assertion of government control over a primary source of economic growth in Russia in recent years. For example, in June 2006, Russia’s officials 

announce that no foreign entity would be allowed to own greater 

than a 49 percent stake in all but the country’s smallest oil and 

gas fields, keeping the richest reserve for Russian state-controlled 

energy companies. Neither the United States nor European companies impose such restriction on Russian companies, and it is something that should be examined and detailed here today. 

The United States and Russia signed the bilateral investment 

treaty, BIT, in 1992, but the treaty has not been ratified by Russia. 

Ratification of the BIT would provide protection for U.S. investors 

against the types of actions taken by the Russian government in 

the Yukos case. The failure of Russia to ratify the BIT has been 

a key weakness in the U.S.-Russia economic relationship. Compared to investors from other nations, U.S. investors are at a disadvantage. 

For example, 38 countries including Russia, Germany, Ireland, 

Italy, Spain, and the United Kingdom have concluded bilateral investment treaties with Russia that have also been ratified. The 

presence of the treaties allow Yukos investors from these countries 

3

to sue the Russian government, but that option is not available to 

U.S. shareholders. 

I want to take this opportunity to call on the Bush Administration to persuade Russia to ratify the BIT. By ratifying the BIT, 

President Putin would send a strong message to U.S. investors that 

investing in projects in Russia is safe and that the Yukos situation 

is the exception, not the rule. 

Again, thanks to our panel of witnesses, and I now recognize Dr. 

Paul for his opening statement. 

Congressman? 

Dr. PAUL. Thank you, Mr. Chairman. 

As you know, I have consistently favored a policy of non-intervention with regards to foreign affairs and to economic policy. 

Where there may well be problems with the Russian economy in 

terms of failed privatization and government expropriation of assets, etc., there’s no reason that these issues should concern the 

U.S. Government. 

Four nations could easily criticize the United States for its weak 

dollar policy, which favors our exporting industries while harming 

the exporting industries of our trading partners; for our eminent 

domain policies, which make a mockery of property rights; and for 

Sarbanes-Oxley, which unfairly burdens companies operating in 

this country and causes companies to move to foreign capital markets, we would understandably resent this intrusion into our affairs. 

While I empathize with the investors who have lost money 

through the Yukos incident, the fact remains that markets are 

fraught with risk. Our loose monetary policy and stimulation of 

credit have led to expectations of permanent, positive economic 

growth. The technological bubble and the housing bubble have 

caused many to believe that markets can only go up. When bubbles 

burst, when stocks decline, something must have gone awry and 

the government is called upon to right the wrong. 

While many innocent investors are lured into the stock market 

as a result of our flawed, expansionary government policies leading 

to visions of ever increasing wealth and may not be entirely at 

fault for their losses, the principle of caveat emptor seems to have 

been forgotten. In the case of a burst asset bubble or a stock’s decline in price, some investors will lose out. It might be painful. It 

may have come about through injustice and government meddling, 

but government wrongdoing cannot be undone by more government 

wrongdoing. 

Neither at bailout, as in the case of the housing bubble, nor attempted government pressure on a foreign government, as in the 

case of Yukos, are appropriate reactions to the losses of investors. 

I wish the investors affected in the Yukos incident well, but urge 

my colleagues to resist the temptation to intervene in Russia’s internal affairs. 

I yield back the balance of my time. 

Chairman GUTIERREZ. Thank you very much, Congressman. 

We will now proceed to the witnesses that we have. Thank you. 

First on our panel is Mr. Timothy Osborne. Mr. Osborne is director of GML, a private equity fund which is the owner of a majority 

stake in Yukos Oil Company. He serves as senior partner of 

4

Wiggin, Osborne & Fullerlove, an international tax law firm based 

in the United Kingdom, where he has practiced since 1978. 

Prior to joining his current firm, Mr. Osborne was articled at 

Lavelle, White & King. Mr. Osborne’s specialty areas of business 

and law include company, commercial, and tax work for clients 

with international interests. Mr. Osborne received an LLB in 1972 

at University College, London. 

Second, we have Mr. Anders Aslund. Mr. Aslund is a senior fellow at the Peterson Institute for International Economics. He previously served as the director of the Russian and Eurasian program 

at Carnegie Endowment for International Peace and is co-director 

of the Carnegie Moscow Centers Project on Economics of the postSoviet states. 

Mr. Aslund is also an adjunct professor at Georgetown University. Mr. Aslund has served as an economic advisor to the government of Russia, the Ukraine, and to the President of Kyrgyzstan. 

He was a professor at Stockholm School of Economics and director 

of Stockholm Institute of East European Economics. 

Mr. Aslund has worked as a Swedish diplomat in Kuwait, Poland, Geneva and Moscow. He is a member of the Russian Academy of Natural Sciences and co-chairman of the Economics, Education, and Research Consortium, and chairman of the Advisory 

Council of the Center for Social and Economic Research in Warsaw. 

Mr. Aslund is the author of several books on Russia, including: 

‘‘Building Capitalism: The Transformation of the Former Soviet 

Bloc’’; ‘‘How Russia Became a Market Economy’’; ‘‘Gorbachev’s 

Struggle for Economic Reform’’; and ‘‘Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed.’’ 

Third, we have Mr. Clifford G. Gaddy. Mr. Gaddy was born in 

1946 in Winston-Salem, North Carolina. He earned his Ph.D. in economics from Duke University in 1991. He has held various teaching and research positions at Duke, Georgetown, and Johns Hopkins University, and at the Brookings Institution in Washington, 

D.C., where he is currently a senior fellow and senior in foreign 

policy and global economy and development programs. He has published several books and a large number of articles on the Russian 

economy. 

And finally, we have Mr. David Satter. Mr. Satter is a research 

fellow at the Hoover Institution, and a former Moscow correspondent for the Financial Times of London. He has written on 

Russia and the former Soviet Union for 3 decades. He is also a senior fellow at the Hudson Institute and a visiting scholar at the 

Johns Hopkins University School of Advanced International Studies. 

Satter has written two books about Russia, ‘‘Age Of Delirium: 

The Decline and Fall of the Soviet Union,’’ and ‘‘Darkness At 

Dawn: The Rise Of the Russian Criminal State.’’ ‘‘Age’’ is also being 

made into a documentary film by the Russian director, Andrei 

Nekrasov. 

I mispronounced that name. 

Mr. Satter began his career as a police reporter for the Chicago 

Tribune. In 1976 he was named Moscow correspondent for the Financial Times where he worked for 6 years before becoming a special correspondent on Soviet Affairs for the Wall Street Journal. He 

5

graduated from the University of Chicago and Oxford University 

where he was a Rhodes Scholar and earned a B.Litt degree in political philosophy. Welcome to you all. 

Mr. Osborne, you may proceed. 

STATEMENT OF TIM OSBORNE, WIGGIN OSBORNE 

FULLERLOVE, LONDON 

Mr. OSBORNE. I would like to thank Chairman Gutierrez for convening this hearing today and I respectfully request that my full 

written statement be entered as part of the record. 

Chairman GUTIERREZ. Without objection, so ordered. 

Mr. OSBORNE. My name is Tim Osborne. I’m a director of GML 

Limited, formerly known as Group Menatep, Ltd., the majority 

shareholder in Yukos Oil Company. 

Yukos was, before its demise, the largest oil company in Russia 

and the fourth-largest oil company in the world. The past 4 years 

have seen a veritable onslaught against Yukos by the authorities 

in Russia and American investors as all Yukos investors worldwide 

have suffered. We should be alarmed at the lack of investor protection and willingness to ignore shareholder rights in Russia. 

The Yukos case was about the illegal seizure of legitimate private assets using trumped-up charges all for the political and financial benefit of the Russian state. I call our attention to four 

principles of free market capitalism that are being undermined in 

Russia today: transparency in capital markets; maximizing shareholder value; protecting investors; and adherence to the rule of law. 

Free, open, and transparent markets are an essential element if 

buyers and sellers in any marketplace are to trade with confidence. 

Public and accurate disclosure of all material information is a basic 

ingredient of a more efficient market. Accurate information is what 

separates investing from roulette, and if Russia restricts the flow 

of information about publicly owned companies, American investors 

will be paying Russian roulette with their financial future. 

If all that investors can buy is a minority share in a state-owned 

enterprise and if critical information about the controlling shareholder, an ultimate parent is restricted by that very government, 

there is neither transparency nor investor protection. Yukos was 

the first Russian company to adopt Western standards of corporate 

governments with its American depositor receipts trading over the 

counter in the U.S. market since 2001. 

By 2003, U.S. investors including state pension funds and individuals held approximately 15 percent of the shares in Yukos, 

worth in excess of $6 billion. In 2003, Yukos was preparing to go 

fully public in the United States, preliminary submissions have 

been made to the SEC, and under Mr. Khodorkovsky’s leadership, 

Yukos and GML were willing voluntarily to accept the stringent reporting, transparency, disclosure and internal control requirements 

of Sarbanes-Oxley, a distinguished product of this committee. 

The Russian government’s effort to investigate and dismantle 

Yukos in my view was in part directly related to Yukos efforts to 

integrate with the West. In the United States and other Western 

markets, corporate managers act with a rational business purpose 

to maximize value for all shareholders. American securities laws 

contained a set of rights for shareholders in order to protect their 

6

financial interests. In Russia today, state-owned enterprises often 

acting further into the Kremlin’s political and strategic objectives 

rather than in the interest of shareholders. 

Rosneft, the Russian state-owned oil giant and the recipient of 

most of Yukos’ major assets, in its July 2006 prospectus said: ‘‘The 

Russian government, whose interest may not coincide with those of 

other shareholders, controls Rosneft, and may cause Rosneft to engage in business practices that do not maximize shareholder 

value.’’ The issue of protecting the interests of investors, particularly individual investors, is an important principle of the American free-market economic system, regardless of whether the protection is for investments in the United States or overseas markets. 

U.S. shareholders, investors, institutional investors, consumers, 

and others should be protected. Russia is an emerging market 

where U.S. investment will and should occur more and more often. 

It’s therefore increasingly important to minimize the risk to U.S. 

citizens of non-market factors. Russia is a growing segment of the 

U.S. economy and there should be laws to protect U.S. investor 

rights. 

There’s a very important role for government in ensuring free, 

open, and efficient markets. The application of the rule of law, a 

share in a company is a property right, and it must be enforceable 

in law. So we need honest, independent courts and tough independent regulators. The role for government is as a neutral policeman, not as a player and referee at the same time. In Russia, the 

courts are responsive to political pressure and the regulator and 

the regulated are one and the same. 

Respect for the rule of law in Russia appears to be a principle 

in jeopardy. The courts outside Russia are reaching this conclusion. 

Each time the Russian authorities’ allegations regarding Yukos, its 

founders and employees, have come before an independent court 

outside Russia, the court has found the allegations to be unsubstantiated, invalid, and politically motivated. On this basis, the 

Swiss Supreme Court has rejected mutual assistance requests and 

the courts in England have refused extradition requests. All of 

these events beg the crucial question: From an American investor 

perspective, how can you have confidence in your ability to enforce 

in Russia your property right in a Russian publicly owned company 

without an independent judiciary applying the rule of law to serve 

as arbiter of your claim? 

In conclusion, Mr. Chairman and members of the committee, the 

Yukos affair is a dark cloud having over American investors and 

their ability to invest in Russia with confidence. I believe there 

must be a change of course in Russia with significant economic and 

political reforms to protect investors and free-market principles. 

American investors should be wary until they can be confident that 

their rights and interests will be protected according to internationally recognized standards of corporate governance, business transparency, and the rule of law. 

At the moment, Russia appears to be heading in the wrong direction. It must abide by its international commitments and aspire internally to internationally recognized standards. 

Thank you again for convening this important hearing, and I 

welcome your questions. 

7

[The prepared statement of Mr. Osborne can be found on page 

42 of the appendix.] 

Chairman GUTIERREZ. Thank you. 

Mr. Aslund, please? 

STATEMENT OF ANDERS ASLUND, SENIOR FELLOW, 

PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. ASLUND. Thank you very much, Mr. Chairman. 

I would like to thank you for this opportunity to speak on an important topic, the implications of the Yukos affair for the U.S.-Russia economic relationship, and I want to focus on three topics: the 

U.S. Government’s reaction; possible legal recourse; and plausible 

future remedies. As we have heard, Yukos was essentially subject 

to lawless confiscation through aberration of Russian tax laws. 

At its peak, Yukos market capitalization was $45 billion in October 2003, and since 15 percent of Yukos shares were traded in New 

York, but was $6.7 billion at the peak. The best approximation of 

the total losses of American investors is exactly that. Throughout 

this process, President Putin has denied any involvement, but he 

has also repeatedly, somewhat in contradiction, denied that Yukos 

would be bankrupted, confiscated, or nationalized. 

In fact, President Putin has hardly uttered a true word throughout this process. His central motive was to enhance his political 

control by jailing the most politically active businessmen while the 

state company Rosneft seized Yukos’ assets. Many foreign investors, including at least three major American fund management 

companies, naively believed President Putin’s words, and they lost 

billions of dollars because of his Russian miscarriage of justice. 

Even so, remarkably, the U.S. Government has not tried to defend 

American shareholders. Three months after the arrest of Yukos executive Lebedev, President Bush said, ‘‘I respect President Putin’s 

vision for Russia: a country of peace within its borders with its 

neighbors and with the world; a country in which democracy and 

freedom and rule of law thrive.’’ 

Reassured, Putin went ahead and had Khodorkovsky arrested 4 

weeks later. Before the fire sale of Yugansk, Yukos’ main oil field, 

U.S. Secretary of State Colin Powell stated in October 2004, ‘‘The 

Russian people came out of the post-Soviet Union era in a state of 

total chaos—a great deal of freedom, but it was freedom to steal 

from the state—and President Putin took over and restored a sense 

of order in the country and moved in a democratic way.’’ Last summer, President Bush revealed, ‘‘But one thing I found out about 

Vladimir Putin is that he is consistent, transparent, and honest. I 

know he’s always telling me the truth.’’ 

International law offers various safeguards against the confiscation of private property abroad; and, as you mentioned, Mr. Chairman, the most direct remedy is a bilateral investment treaty, and 

indeed the United States and Russia signed such a treaty in 1992. 

The U.S. Senate ratified it, but unlike most European countries, 

the United States has failed to convince Russia to ratify it so that 

it assumes legal force. And European shareholders have also two 

other legal options: one is a 1994 multilateral treaty, the Energy 

Charter Treaty; and the European Court of Human Rights in 

8

Strasbourg, and the United States, unfortunately, is not a party to 

either of these options. 

Thus, European citizens have three international options to sue 

Russia, while American citizens in this case have none. To conclude, first, American shareholders probably lost $6 to $7 billion in 

the confiscation of Yukos. Second, the U.S. President and Secretary 

of State have in no way protested against this confiscation. Third, 

because of U.S. Government neglect, American shareholders of 

Russian companies have considerably weaker legal protection than 

European shareholders. This absence of legal safeguards harms 

U.S.-Russian economic relations and U.S. investments in Russia, 

which are both remarkably low in any comparison. 

The first remedy must be that U.S. top officials speak up in defense of its citizens. Second, the United States should persuade 

Russia to ratify the bilateral investment treaty of 1992, as you suggested, Mr. Chairman. In the longer term, the United States needs 

a bilateral free trade agreement with Russia which would include 

investment guarantees, but that presupposes that Russia first becomes a member of a World Trade Organization. 

Thank you, Mr. Chairman, and I would happy to respond to any 

questions. 

[The prepared statement of Mr. Aslund can be found on page 24 

of the appendix.] 

Chairman GUTIERREZ. Mr. Gaddy? 

STATEMENT OF CLIFFORD GADDY, SENIOR FELLOW, THE 

BROOKINGS INSTITUTION 

Mr. GADDY. Thank you very much, Mr. Chairman, Thank you for 

your introductory comments, and I thank also Congressman Paul 

for his comments. 

My own comments here will focus on the business climate inside 

Russia, which exhibits some specific features that are important to 

understand. First, however, I think it’s important for us to be realistic about what is at stake when we talk about U.S.-Russian economic relations in general. The direct U.S. stake in Russia’s economy is quite small. 

For most of the past decade-and-a-half, since the fall of the Soviet Union, our direct investment in Russia has been less than onetenth of one percent of total U.S. direct investment abroad. Now, 

with Russia’s recent oil windfall, this investment has grown, but it 

still remains small. And even with the windfall, we still sell less 

of our products to Russia than we do to the Dominican Republic, 

less than half of 1 percent of total U.S. exports. 

Having said that, our economic interaction with Russia should be 

much bigger. Russia is sound, macro-economically and physically. 

It has 140 million consumers still with unmet, pent-up demand 

from decades of living with consumer goods shortages under communism, which should be a potential bonanza for U.S. and other 

Western companies. When expected returns are this high but investment and trade remains small, one can suspect perceived high 

risk on the market. Specifically, it is what is usually referred to as 

political risk, or risk to the investors property rights. The investor 

wants to know, will the money I commit and the earnings I make 

9

be secure from appropriation by other parties, whether they be 

criminals or the state? 

And there is indeed a perception of high risk of this kind in Russia, but I’ll argue that this risk stems from the lack of knowledge 

about the rules that prevail in Russia, and really, the key is to understand those rules. There are three elements of these rules that 

I would like to emphasize: First, it’s the formal tax system; second, 

the informal tax system; and, third, what I call the phenomenon 

of relational capital, the formal tax system. 

One early priority for Mr. Putin when he came in was a thorough 

overhaul of a dysfunctional tax system. His motive was to collect 

the wealth he needed to realize a stated goal of building a so-called 

strong state. The resulting Russian tax system has mostly clear 

and transparent tax rules. The rates are basically reasonable. Administration is strict, but the problem is it’s not always fair, and 

I’ll get to that point in a second, because it relates to my third factor of relational capital. But let me turn to informal taxes. What 

am I talking about. 

There are two main types of informal taxes in Russia. First of 

all, companies in Russia are ‘‘asked’’ to make ‘‘voluntary’’ contributions to off-budget infrastructure funds, social funds, road funds, 

and the like. The second form of informal taxes is excess cost of 

productions. Large and successful companies are expected to order 

equipment and other inputs from local manufacturing enterprises, 

even if the products are not competitive. These informal taxes are 

not prescribed by formal laws, but they are mandatory and failure 

to pay them exposes the owner to serious risk. 

The difficulty is to know exactly what is expected. The informal 

taxes are therefore like part of the iceberg that lies beneath the 

surface, hidden but dangerous; it’s the part that can cause shipwrecks. One victim of the hidden iceberg was Yukos. Mr. 

Khodorkovsky refused to pay the excess costs. He tried to be, economically speaking, a cost minimizer, that is a profit maximizer, in 

a system that dictated that he be a cost maximizer. 

Now, the key characteristic of both formal and informal taxes is 

that the administration can be highly discretionary. Whether or not 

you are deemed to have paid your taxes depends on the judgment 

of individual political officials. In my written testimony I refer to 

this as a ‘‘protection racket.’’ This means that success on the Russian market depends not just on the machines and equipment you 

have, the management you have, but also your connections to the 

right people and that’s what I term ‘‘relational capital,’’ because 

you can invest in it. However, this is bad, because it diverts effort 

and money away from investment and other factors, production. 

But if you don’t do it, you will be at a competitive disadvantage. 

Now, economically, as an economist, I think this system is bad 

for Russia. But the real question for us here is what are the implications for U.S. businesses, and is there any need for U.S. government action? Surely, this system imposes extra cost on businesses. 

U.S. businesses would like to have lower costs. More important, I 

think they want the competition to be fair. I think they want a 

level playing field. It’s not clear that this system disadvantages 

American, U.S., or other foreign investors. It may be possibly more 

10

difficult for outsiders than Russians to acquire adequate information. 

But I think that ultimately the burden rests on the businesses. 

The costs are calculable and the rules are knowable. They can 

make the business decision. It is up to them to make these decisions on their own. The question of whether or not the outside 

world, especially governments, can influence this system, is not at 

all clear to me. There’s certainly no magic bullet, and in my written 

testimony, I especially warn against what might seem to be a 

straightforward answer to this of an anti-corruption campaign. The 

Russian situation is not so simple, and an anti-corruption crusade 

might not be as desirable as it might seem. 

Thank you very much. 

[The prepared statement of Mr. Gaddy can be found on page 33 

of the appendix.] 

Chairman GUTIERREZ. All of the written testimony will be entered into the official record without objection. 

And, Mr. Satter, please continue. 

STATEMENT OF DAVID SATTER, RESEARCH FELLOW, HOOVER 

INSTITUTION 

Mr. SATTER. The Yukos affair represented a turning point for 

post-Soviet Russia. Ever since succeeding to the Presidency, Putin 

has worked to concentrate power in his hands, eliminated federalism in violation of the Russian constitution, subordinated the 

legislature, controlled the press, and subordinated the courts. 

With the arrest of Mikhail Khodorkovsky, however, he also acted 

to ensure that the nation’s oligarchs would serve only political candidates backed by the regime. His goal was to place the nation’s 

wealth in the service of his own political faction, choking off political opposition, and completing the transformation of Russia into a 

controlled society with a permanent political leadership. 

Khodorkovsky would hardly qualify as an international cause celebre if his arrest were an isolated incident unrelated to the political struggles within Russia. There’s no better example of the corrupt way in which property was divided up under Yeltsin than the 

way in which Khodorkovsky obtained control of the Yukos Oil Company. It was as a result of an auction in which his bank, the 

Menatep bank, was both the manager and the principal beneficiary. Unlike the other oligarchs, however, Khodorkovsky understood that the Russian rules of bandit capitalism were unacceptable internationally and he took steps to transform Yukos, introducing Western standards of accounting and corporate governance. 

He also began to exercise his rights as an honest businessman, as 

he saw fit, including the right to finance opposition political parties. In the end, I believe it was this that sealed his fate. The Russian bureaucracy depends on businessmen’s violations of the law 

and in particular tax avoidance in order to facilitate a steady flow 

of bribes, and to ensure that businessmen live in fear and so are 

amenable to political control. 

Khodorkovsky broke with that system and his example had to be 

suppressed in order for the system itself to survive. The Yukos affair casts a long shadow over Russian economic and political life. 

In the post-Yukos system, no individual doing business is comVerDate 0ct 09 2002 16:51 Jan 11, 2008 Jkt 039909 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\39909.TXT HFIN PsN: TERRIE
11

pletely secure in Russia. Khodorkovsky was not only Russia’s richest citizen, he was also the head of its most enlightened company. 

It was a measure of Yukos’ success that on the eve of 

Khodorkovksy’s arrest, the company was on the brink of attracting 

as much as $25 billion in foreign investment from Exxon-Mobil. 

Given the rise in oil prices, Yukos could not have gone bankrupt 

for purely economic reasons. Yukos proposed various restructuring 

schemes for paying back the alleged tax debt, all of which were rejected. The purpose was to break up the Yukos Oil Company and 

distribute its assets to state-run energy concerns that were run by 

Putin’s closest cronies. The aftermath of the Yukos affair makes it 

highly unlikely that Putin and his cronies will ever give up power. 

Yugansk-Neftegaz, which was the principal production unit of 

Yukos, was sold to a previously unknown company called the 

Baikal Finance Group at about half of its real value. 

The state oil company, Rosneft, then purchased Baikal Finance. 

Yukos had filed for bankruptcy in Texas and wanted an American 

injunction barring Gazprom and its Western financiers from participating in the auction. It was apparently out of a desire to avoid 

legal complications that the Baikal Finance Group, an obvious shell 

company, emerged to bid for Yugansk-Neftegaz. The sale duplicated the tactics used by Yeltsin era oligarchs during privatization. 

It was also illegal, because in tax settlement cases, non-core assets 

must be disposed of first. 

Ugansk-Neftegaz was the core of Yukos. Under these circumstances, it is very risky for the Putin regime and the people 

connected with it to give up power, because the same tactics that 

they used against Yukos can easily be used against them. The 

Yukos affair, therefore, contributed significantly to the downfall of 

democracy in Russia. And it was with a certain moral stupidity 

that Western companies reacted favorably to Rosneft’s London IPO, 

suggesting that for many of them the ethical and legal questions 

involved in the destruction of Yukos are simply not relevant. 

Finally, the Yukos case has emboldened the Russian leadership 

to use coercive tactics against foreigners. The best examples of this 

are the pressure which was brought to bear on Royal Dutch Shell 

to hand over its control of the Sakhalin-2 oil project to the staterun concern Gazprom in light of supposed environmental violations, which were forgotten the moment the company was handed 

over. Under these circumstances, there are certain steps that the 

United States needs to take. In the first place, we need to bear in 

mind that we gain nothing from giving undeserved grants of legitimacy to the Russian government in economic matters or in political matters. 

Such grants include membership in the G8, which is restricted 

to industrial democracies. Russia is not an industrial democracy. 

They also include membership in the WTO and the rescinding of 

the Jackson-Vanik amendment. We need to create the conditions 

for Russia to understand that it will be held to the same rules of 

legal and moral behavior as the Western countries, whose society 

it seeks to join. And we should be wary of attempts by Russian 

companies to acquire U.S. assets with strategic significance, both 

in light of the fact that Russia is determined to prevent such acquisition when it comes to its own strategic assets and because in the 

12

aftermath of the Yukos case no Russian company can be regarded 

as truly independent of the Russian state. 

[The prepared statement of Mr. Satter can be found on page 50 

of the appendix.] 

Chairman GUTIERREZ. Thank you all very much. 

I just have some general questions of the panel. 

Mr. Osborne, Mr. Aslund, Mr. Gaddy, who owns what was once 

Yukos today? Who owns it? 

Mr. OSBORNE. The majority of the assets have now gone to 

Rosneft, the Ugansk-Neftegaz went through the original option 

process via Viscount Finance. The other production facilities and 

major assets have gone to Rosneft through the current bankruptcy 

auctions at generally lower prices. 

Chairman GUTIERREZ. And who is this? 

Mr. OSBORNE. Rosneft—it’s a state-controlled company—shares 

are available on the London market. 

Chairman GUTIERREZ. So you can buy shares to the state-owned 

company? 

Mr. OSBORNE. Yes. 

Chairman GUTIERREZ. Okay. And that’s who owns what was once 

Yukos? They own it? 

Mr. OSBORNE. Yes, Rosneft currently has market capitalization of $91 billion. Yukos, if it were alive, would probably have $100 billion or plus. But Rosneft, partly because it’s more indebted, partly 

because it’s not as transparent and less well-managed; it’s worthless. 

Rosneft has taken over about 95 percent of the former Yukos assets and the means, as Mr. Osborne mentioned, has been through 

many of these bankruptcy auctions which took place this last summer. But they were by and large exclusive in the sense that other 

companies understood that it would be seen as a hostile act to the 

Russian government to try to be against Rosneft. 

Chairman GUTIERREZ. Okay. Mr. Gaddy, as you look at the rules 

in play in Russia, post-Soviet Union, and you look at the Yukos affair specifically, who benefitted other than the Russian state? Did 

anyone in particular in your examination benefit from the demise 

of Yukos and its demise, particularly any particular person? 

Mr. GADDY. Yes, to be frank, as I sort of suggested there, Mr. 

Khodorkovsky was in the process of making Yukos into a very 

Western-style company that would focus on the bottom line, reduce 

costs as much as possible in order to increase profits as much as 

possible, a laudable, normal goal for a Western market-oriented 

company. In doing so, however, he reexamined some of the contracts that the company’s subsidiaries in the Yukos empire had 

with various supplier enterprises, some big manufacturing plants 

throughout Russia, and was going to cancel those contracts and 

seek low-cost suppliers—again, a normal thing to do if you’re a 

businessman. 

But the fact of the matter was that what was at stake were thousands, probably tens of thousands of jobs, and there are some interesting cases that the people in question reacted, especially the politicians who depended on them. It’s like losing a plant in one of 

your districts, and so, I mean, it’s a complicated matter. There are 

certainly more beneficiaries—not just sitting in the Kremlin. There 

13

were beneficiaries in many local cities, towns, plants, and factories 

around Russia—to me, partly explains, I think. 

Mr. Satter gave a very nice description of the political threat that 

Mr. Khodorkovsky may have represented to the Kremlin, but the 

fact of the matter is whatever brought him down initially there 

were a lot of people who were willing to jump into the fray and give 

an extra kick. He had a lot of enemies. 

Chairman GUTIERREZ. Mr. Aslund, who do you think benefitted? 

Anybody other than the Russian state? 

Mr. ASLUND. Normally in Russian state companies you have substantial kickbacks by various means, which are normally very firmly concentrated to the top management and to the chairman of the 

company. 

Chairman GUTIERREZ. Mr. Satter, any comment? 

Mr. SATTER. Well, the people around Putin benefitted. Rosneft is 

staffed by and directed by people with close connections to Putin. 

What we have seen is a transfer of the country’s wealth from the 

Yeltsin era oligarchs to the KGB cronies of Putin who now not only 

monopolize power but also wealth and property. 

Chairman GUTIERREZ. Well, maybe we could examine who might 

have benefitted in terms of whether it is those close to the president, those in political positions and governmental positions, that 

may have benefitted personally. I understand that we kind of have 

this general rule of thumb that was transferred back to the Russian state through this corporation, but it seems to be an awful lot 

of money, something that was worth nearly $50 billion on an open 

market was sold for $9 billion, and there have been estimates given 

by the panel today that if it were transparent, it could be worth 

$100 billion today. It’s an awful lot of money somewhere put either 

directly today or potentially the money that is there. 

Mr. Paul? 

Dr. PAUL. Thank you, Mr. Chairman. 

I have no doubts about the apparent political chicanery surrounding the Yukos affair, but I have some questions about dealing 

with responsibility and jurisdiction in trying to sort this all out. I 

have a couple of questions, and they can be for anybody on the 

panel. Investors in the United States, basically, receive a full regime of protective self-regulatory protections coupled with SEC 

oversight. Foreign companies that list their shares or their ADRs 

on the NASDAQ or the New York Stock Exchange or the American 

Stock Exchange must meet and maintain financial corporate governance standards. 

Companies that are quoted in the pink sheet, like Yukos, do not 

need to fulfill any such requirements, and for these reasons the 

SEC has used companies listed on the pink sheet as ‘‘among the 

most risky investments,’’ and advises potential investors to heavily 

research the companies in which they planned to invest. 

I have two questions: Did investors, our investors basically, 

American investors, fail to do their homework and conduct their 

own due diligence about Yukos and the overall regulatory oversight 

of the Russian financial markets; and, number two, why shouldn’t 

shareholders of investment funds demand full disclosure if their 

money is being invested in this manner if they are uncomfortable 

with such an investment? 

14

If they don’t get satisfactory answers, then they can just forget 

about the investment. Does anybody care to comment? 

Mr. ASLUND. If I may start, first, I think we should clarify here 

that Yukos books were quite clear. No plausible complaint has been 

made by them. The tax case that has been made against them in 

Russia has been because they used loopholes in the tax system as 

it existed; and, retroactively, this has been considered a crime to 

utilize these loopholes. 

PricewaterhouseCoopers has withdrawn its audit from Yukos for 

10 years, but this can only be understood as a matter of Russian 

pressure on PricewaterhouseCoopers. I don’t think it discredits the 

books. Yukos, if anything, seems to have a very good standing. At 

least no plausible complaints have been made about them as far as 

I understand. There is essentially one problem here, and that is 

confiscation. And the way to handle confiscation is normally an investment for bilateral investment protection agreement, which as 

we have discussed is not enforced with regard to Russia. 

And the failure, I mean, there were of three major investment 

funds well known here in the United States, which are not publicizing how much money the lost on Yukos. I am not going to give 

their names, but the reason was that they believed in President 

Putin’s words. President Putin stated about half a dozen times in 

the course of one year that Yukos would not be bankrupted, etc.; 

and these foolhardy investors believed in President Putin’s word. 

That was a mistake. It’s not a problem of their financial analysis 

as we have seen Yukos has later on succeeded very well in terms 

of assets. That is Rosneft today. So the problem is one of political 

analysis and investment protection. Nothing else. 

Dr. PAUL. But wouldn’t an investor recognize that there was a 

lot of political risk in investing in Russia at that time? 

Mr. ASLUND. As David Satter emphasized here, Yukos turned everything around. As late as 2002, oil companies were still 

privatized in Russia. Yukos was the first in a trend and it started 

a trend of re-nationalization that investors still are very hesitant 

to believe in. Russia stock market value is still about 100 percent 

of GDP, the normal level for Western Europe. So there’s still a big 

belief in the property rights in Russia, if you look up on the stock 

market. 

Dr. PAUL. Mr. Satter, you wanted to add something? 

Mr. SATTER. I just wanted to say that the investors, in order to 

have made a wise decision, would have had to understand the nature of Russian society. They would have had to understand the 

lawlessness of the society, the lawlessness of the regime, because 

they were looking at a company which was transparent, well-organized, well-run, and obviously prospering. But is it fair to expect 

the investors to have had a more profound understanding than our 

own government had and to have achieved that understanding in 

the face of all the misleading things that were said by our government, whose responsibility it was to understand the political situation. 

Chairman GUTIERREZ. Mr. Gaddy, do you want to wrap up with 

the response to Mr. Paul? 

Mr. GADDY. Yes, I think the question is it’s very easy in hindsight to see that the investors made the wrong decision. They made 

15

a gamble. But it was really Mr. Khodorkovsky making a gigantic 

gamble himself by the very act of making his company so transparent, so Western-like, and in an environment, as I described, 

which simply could not tolerate such an entity. He was actually 

counting—I mean, he’s not naive—on the system moving in that direction. 

In fact, if you look at Mr. Khodorkovsky’s entire career from the 

time he was a kid, you know, in the Komsumol, a young Communist league trying to play the new system, he was always one 

step ahead of where things were going. He always gambled. He always gambled correctly. This, of course, was the biggest gamble of 

his life, and it was with maybe his life at stake. But he made a 

mistake. Investors followed him, but the conclusion I think is in 

the expression that Professor Aslund used. They were foolhardy in 

that sense. In hindsight we say yes, but at the time it seemed like 

a nice gamble to make. 

Were you an investor? 

Chairman GUTIERREZ. No. I wasn’t an investor, but I heard 

President Bush say he looked him in the eyes—looked—saw 

Putin’s. Well, the investors probably took that into account. Sure, 

it was somewhere written. He looked him in the eyes and saw his 

heart, saw a good man. Sounds like a place to invest to me, but 

anyway— 

[Laughter] 

Chairman GUTIERREZ. So, next we’re going to have Congressman 

Lucas, please, for 5 minutes. 

Mr. LUCAS. Thank you, Mr. Chairman. 

Isn’t it fair to say, gentlemen, that Yukos is the most high-profile 

example of the changes that have gone on under the present Administration? 

I read accounts in the popular media that the successor to the 

old KGB—what do we call it now, the FSB—that it seems to have 

evolved down to a network that has present or past players in that 

particular organization at every level of relevance throughout the 

economy of Russia. It would seem, and you can comment on this 

if you care to, but it would seem that if the accounts in the popular 

press are correct, it just simply reflects the reality of the environment in Russia. And if you’re going to be an investor, if you’re 

going to be a participant in any way, you have to accept that much 

as the old Soviet army had Commissars at every level to assist the 

generals and the commanders, so you’ll have the people to assist 

you in your decision-making process. 

Is that a fair observation in the popular press of the realities as 

they exist now in the economy in Russia? 

Mr. OSBORNE. I think it’s fair to see that happening. I think 

Yukos was certainly the first example and perhaps the most flagrant example of the people in the Kremlin who are clearly from 

the FSB taking control of all, particularly the energy companies. 

But Yukos, I think, was singled out for special attention because 

of the animosity felt to Mr. Khodorkovsky by President Putin because of the perceived political ambition. 

Mr. GADDY. I think it’s also important to realize that this phenomenon that you describe of oversight and control of the FSB people is predominantly in the strategic sectors of oil and gas, maybe 

16

some of the metals. I think that’s important to point out, because 

most American businesses that are active in Russia now are looking at Russia are not in those strategic sectors. They will encounter 

as they will describe to you problems with corruption at a more 

petty level, including sometimes officials of these institutions, these 

law enforcement institutions. But they in my opinion are at very 

low risk of being expropriated in the way that Mr. Khodorkovsky 

was or in the case of Royal Dutch Shell or some of the other big 

oil companies. It’s a more ‘‘normal’’ sort of environment in an 

emerging market. 

Mr. SATTER. I think that it’s important though for an investor to 

understand that although not every company and not every investor is going to be treated the way Yukos was treated, nonetheless, 

there are no guarantees. For Yukos to have been dismantled the 

way it was, it was necessary to ignore completely the rule of law. 

Comparable lawlessness prevails throughout the Russian economy. 

It may not affect a given investor in a given situation, but under 

certain circumstances, it may well. 

Mr. ASLUND. Yes, I would say that we see a clear pattern now 

of re-nationalization where Yukos was the first case we have seen 

the Gazprom gas company picking out quite a few assets cheaply 

and not very legally. We are seeing anything that is close to the 

military being picked off by state companies. You should not be in 

the sensitive sectors Dr. Gaddy emphasized, and, you should not be 

too big and you should not be too close to the state. 

So if you are a small, retail shop or a small producer, then you 

enjoy a lot of satisfaction and you can see a lot of Western companies that are doing very well in that area. So I don’t object to your 

picture, but it’s partial. You have another part of Russia, which is 

actually flourishing in a good sense. 

Mr. LUCAS. So depending on how big the porcupine is and how 

hard you hug it, it depends the result that will come from it. But 

as investors we have to bear that in mind when decisions are being 

made and understand that this is the reality depending on the sector and the part of the economy. It is just the reality of place and 

not be naive about it. 

Mr. SATTER. In Russia, the law does not protect you. Circumstances may protect you. You may be protected by the fact that 

no one has any interest in causing trouble for you, but you are not 

protected by the law. 

Mr. LUCAS. Thank you. Mr. Chairman? 

Chairman GUTIERREZ. Mr. Roskam, you are recognized for 5 minutes. 

Mr. ROSKAM. Thank you, Mr. Chairman. 

Mr. Aslund, I think in your testimony you said that in your opinion European investors were in a stronger position compared to 

American investors. I would assume you mean European investors 

in Russia compared to American investors in Russia. First of all, 

is my assumption correct? 

And could you elaborate on that a little bit? 

Mr. ASLUND. I elaborate on that more in my written testimony. 

First, bilateral investment treatments are by and large in force, 

and these are particularly designed to defend foreign investors 

against confiscation, goes back to the issue. And they offer arbitraVerDate 0ct 09 2002 16:51 Jan 11, 2008 Jkt 039909 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\39909.TXT HFIN PsN: TERRIE
17

tion in third country in those cases, exactly what you want to have. 

So that’s the straightforward remedy. 

In addition, you have the Energy Charter Treaty, which was concluded by 51 countries and 46 have ratified it, the United States 

left out. It came into force in 1997. Russia has said that it’s not 

ratifying it, but it abides by its rulings, and, therefore, this seems 

to be the favorite of the shareholders in Europe now to sue Russia 

for Yukos confiscations through the Energy Charter Treaty. 

The third venue, which is less popular, is the European Court of 

Human Rights in Strasbourg, which is attached to the Council of 

Europe. Although it’s focusing on human rights, it also deals with 

commercial conflicts. The most high-profile Russian commercial 

case that has been there is Vladimir Gusinsky, who accused the 

Russian state of having lost his media empire, and he won a judgment with substantial damages to Gusinsky. The Russian state acknowledges the Council of Europe, and Russia even chairs the 

Council of Europe this year. So this is the third possibility of suing 

Russia. 

The Yukos shareholders in this country are now trying to sue the 

Russian state or senior Russian officials for concrete crimes they 

have committed, usually on the territory of the United States, for 

example, insider trading or other securities violations. 

Mr. ROSKAM. Are there dissimilarly situated plaintiffs in this 

case? In other words are American plaintiff-investors in the Yukos 

affair, are they at a different situation procedurally or a different 

posture than European plaintiff investors? 

Mr. ASLUND. Yes, European investors have three different legal 

venues to utilize that are not open to American investors. 

Mr. ROSKAM. And is it ripe yet? Have the European investors, 

has there been any settlement yet or any attempt? Or, is it still 

very much in the beginning stages procedurally in those three 

venues? 

Mr. ASLUND. I can’t answer that question, since I deal with this, 

I’m approached by various investors from time to time in confidence. 

Mr. ROSKAM. I understand. 

Mr. ASLUND. I don’t deal with them. I mean, I am not involved 

in their affairs, but of course I receive information. Almost all of 

them are extremely quiet about it, because they think that we have 

a greater chance of winning damages from the Russian government 

if they keep it as a private arbitration issue, which is not publicized. So therefore we can’t know. 

Mr. ROSKAM. I understand. 

Mr. Osborne? 

Mr. OSBORNE. Yes, I represent the majority shareholder in 

Yukos, and we have brought a claim under the Energy Charter 

Treaty against the Russian government, which is I think the great 

advantage that European and each of the Charter Treaty’s signatories have over the U.S. investors, because they have a direct route 

to the Russian federation. 

As Mr. Aslund said, the Russian federation signed the treaty. It 

hasn’t been ratified but there’s a provision in the treaty that binds 

them on the basis that they haven’t opted out. It’s a slow process. 

18

It’s a minimum $30 billion claim. It’s likely to be more like $50 billion by the time we do the math. 

The tribunal was constituted and decided to bifurcate the hearing, firstly to hear issues of jurisdiction admissibility, and then if 

we survive that, they’ll go on to the substance. 

Unfortunately, one of the arbitrators—and the one appointed by 

us, so we couldn’t complain—had to retire, because he was given 

a job by Mr. Bush. And we just reconstituted the committee so that 

we had a procedural hearing before the end of the year and the 2-

week hearing on jurisdiction admissibility will be sometime in the 

first 6 months of 2008. Then there will probably be another 2 or 

3 years before we get a final decision. 

Chairman GUTIERREZ. We do things a little bit alike. You’re from 

Illinois. I gave you extra time. 

[Laughter] 

Chairman GUTIERREZ. Mr. Sherman, from California. 

Mr. SHERMAN. Yes, Mr. Chairman, thank you for holding these 

hearings. 

We need to focus not only on what happened in Russia and the 

Russian government’s actions, but whether American investors are 

adequately warned of the difficulties that they can experience investing in Russian companies or investing in Russia or investing 

in American companies that have exposure to Russia. 

To put our current situation in context, relations between the 

United States and Russia are at an all-time low since the end of 

communism. Both sides have done everything they can to destroy 

what should be a natural alliance between the American people 

and the Russian people. Today or yesterday, Putin was in Tehran 

embracing the idea of a nuclear Iran. This is not in the interest of 

Russia. 

The Iranians help the Chechen terrorists. It has never been in 

the interest of Russia to see Iran become nuclear, and yet perhaps 

just out of spite for the United States, Putin takes this stance. 

Then you contrast that with the Vice President’s speech in the Baltic states through our relatively inane idea of putting missile defense in the Czech Republic in Poland, and I’m not at all surprised 

to see poisonous relationships between our two countries when both 

sides are adding one helping of poison onto the other. 

I would hope that Russia would establish an image in the world 

as being in a place where the rule of law applies, where investors 

can make investments without political risk. That is in the interest 

of not only Russia but the entire world, especially as we become 

more concerned with energy resources in this world. Now, looking 

at the particularities of the Yukos situation, I want to ask each of 

the panelists a question. 

Who is Stephen Patrick Lynch? Dozens of stories identify him as an American who bought at action some $1.5 billion worth of Yukos 

assets for a discount price of $300 million. As far as I know, no one 

has made an effort to find out who he is and what his history is. 

I’d like to know if any of the panels think he or the American financiers of that deal might have any liability under U.S. law for 

participating in a process that has damaged Yukos and its U.S. 

shareholders. 

Let’s hear each panelist in turn. 

19

Mr. OSBORNE. I met Mr. Lynch. I know no more about him than 

you just described. 

I think it’s not quite correct to say that he bought $1.5 billion 

worth of assets for $300 million because out of that is also a liability of $800 million to GML for the loan that is involved with those 

assets, which are the assets currently in the Netherlands, and 

there are other liabilities to Rosneft. 

Over and above that, I have no further comments. 

Mr. SHERMAN. Okay. And I wasn’t stating as a fact that he got 

an incredible deal, just that that’s what limited amount I’ve been 

able to see in the press, which was why I have four experts in front 

of me who can tell me what really happened. 

Mr. Aslund? 

Mr. OSBORNE. Well, I think that it’s true as far as I’m aware that 

he did bid $300 million for the company, but I think it’s equally 

possible to perceive that as a huge risk, because there is no guarantee that the Dutch courts will acknowledge the validity of the 

Russian bankruptcy. They may well not. There are plenty of people 

out there arguing that the assets in the Netherlands should go first 

to legitimate creditors, IGML, and then to the shareholders that 

have been badly treated in the West. 

Mr. SHERMAN. Thanks for embellishing on your comments and 

let’s move on to Mr. Aslund. 

Anything to add, Mr. Gaddy? 

Mr. GADDY. I can’t help you. I never heard of him. 

Mr. SHERMAN. Mr. Satter? 

Mr. SATTER. I’ve heard of him, but I can’t add anything. 

Mr. SHERMAN. How important is it to Russia to be viewed by the 

World Business Community as a place where the rule of law applies, and are there those in Russia who say, ‘‘We don’t really want 

foreigners doing business within our borders. We would just as 

soon have Russian companies do all the business within our borders and so if foreigners fear to come within the jurisdiction of our 

courts, that’s a good thing.’’ 

Perhaps Mr. Satter has a comment? 

Mr. SATTER. I think they do want foreign investment, but you’re 

right. There’s a mood in Russia now which is really very retrograde 

and it consists of the idea that they have their values, we have our 

values; in fact, their notions of human rights and legality that they 

try to foist on us are just their way of defying us. A lot of this 

comes from the Russian Orthodox Church. But it has the effect of 

reinforcing and rationalizing the atmosphere of lawlessness in the 

country. 

Mr. SHERMAN. So you’re saying that in Russia you don’t always 

have rule of law and fairness to business linked with human rights 

and democracy. If I add a business dispute heard in the AustroHungarian Empire or the German Empire before World War I, I 

think I would get a relatively fair verdict. And yet at the same time 

you wouldn’t want to describe either of those countries as a democracy. 

Are you saying that there is an attitude that treating businesses 

fairly is just part and parcel of this larger concept, which some in 

Russia reject? 

20

Mr. SATTER. We’re talking about objective decisions that are 

handed down by courts in which people who may be very unequal 

in terms of the power they wield, nonetheless count on a fair decision. Well, that’s contrary to what exists in Russia today. In Russia 

today, those who have power can count on a decision in their interest rather than a decision based on the law. 

The political system in the country is also very much related to 

the lawlessness. Under present circumstances, the laws are so 

poorly written and so arbitrarily interpreted that anybody can find 

himself in violation under certain circumstances, and that makes 

people very, very cautions. 

Mr. SHERMAN. Thank you, very, very much. 

I’m going to let Mr. Aslund finish up. We’re well over 5 minutes. 

Mr. Aslund, please? 

Mr. ASLUND. Thank you very much. 

I would like to pick up on this question. Mr. Putin himself stated 

one year ago that foreigners should not be allowed to participate 

in market trade, and that should be reserved for the indigenous 

population; market stalls should be reserved for Russian citizens, 

and this has been implemented in law quite fiercely. 

A week ago, President Putin said that there were far too many 

foreign managers in Russian companies and that this was unacceptable. Russian television state television pursues the hard-core 

nationalist propaganda, so we should not blame anybody but Mr. 

Putin. This comes straight from him. Let me give you two numbers: in 1999, Russia’s GDP in dollar terms was $200 billion. This 

year it will be more than $1.2 trillion. It has increased 6 times in 

8 years. So therefore Mr. Putin and others have a sense that they 

are walking on water. Why should they be nice, when they as well 

can be nasty, so they prefer to do that. 

Chairman GUTIERREZ. Thank you, Mr. Aslund. 

Let me, first of all, thank all of the panelists. We have been 

greatly enriched by your testimony, your written testimony and by 

your verbal testimony here. We’re going to proceed as a subcommittee to write to the Administration to find out what the Administration is or isn’t going to do based on the testimony here 

today about the Yukos investors here in the United States and see 

if we can’t get some answers either from Treasury or from the 

White House on this issue about how they’re going to pursue this. 

And secondly, I think it’s very important that we look to the future. I mean Russia does have a sovereign wealth fund of over $130 

billion, and at some point you can only invest so much in your own 

country. You’re going to have to invest elsewhere, and it seems interesting to me that both Russia—and China has even more: billions of dollars that they wish to invest. That means they’re going 

to buy things with it and obviously they may be coming our way 

to which to buy things. I think it’s important that we settle old disputes before we enter into new negotiations with the former Soviet 

Union today, Russia. And so your testimony has been wonderfully 

enlightening to all of us, and I thank you so much. 

I want to note that some members may have additional questions 

for this panel, which they may wish to submit in writing. Without 

objection, the hearing record will remain open for 30 days for memVerDate 0ct 09 2002 16:51 Jan 11, 2008 Jkt 039909 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\39909.TXT HFIN PsN: TERRIE
21

bers to submit written question to these witnesses and to replace 

their responses in the record. 

This hearing is adjourned. Thank you. 

[Whereupon, at 3:15 p.m., the hearing was adjourned.] 

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A P P E N D I X

October 17, 2007

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