from russia to the eu

Partnership for

modernisation

Merry Christm

as

Russian Federation

Russian Federation

From

To

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European Union

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COMMITTEE FOR RUSSIAN ECOMOMY FREEDOMwww.russianeconomicfreedom.org

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The Partnership for Modernisation focuses on reform and competitiveness, yet Russia remainsa dangerous place in which to invest.

While the current government of President Medvedev and Vladimir Putin speaks repeatedlyabout modernization, it has a poor record in implementing modernization objectives: Russia’seducation system lies in ruins; foreign investors are fleeing the country and respect for the ruleof law is arbitrary. The judicial, social and economic pillars on which a modern Russia shouldstand are inexistent.

Moreover, corruption is omnipresent. According to Transparency International’s CorruptionPerception Index, Russia is far more corrupt than the other BRIC states of Brazil, India andChina. Compared to these countries, Russia also rates poorly on the Heritage Foundation’sIndex of Economic Freedom.

From IKEA to Royal Dutch Shell to Yukos, many, mainly foreign, companies that invested inRussia have experienced rule of law violations, when trying to defend their legitimate businessundertakings. The most prominent cases are set out in this paper.

Today the Russian Federation’s economy is almost solely based on the export of oil and gas bycompanies which are controlled by the Russian Government. Russia’s manufacturing industryhas fallen victim to the lack of innovation and corruption while development of cutting edgetechnologies is absent.

So this paper is designed to show that despite the objectives of the EU-Russia Partnership forModernisation to promote technological cooperation and increase foreign investment, doingbusiness in today’s Russia remains a high-risk venture.

HEALTH WARNING


COMMITTEE FOR RUSSIAN ECOMOMY FREEDOM

RISK FACTORS ASSOCIATED WITH DOING BUSINESS IN RUSSIA

www.russianeconomicfreedom.org

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On the heels of the $2.2 billion Rusal IPO on the Hong Kong Stock Exchange in January2010, Russian firms are planning another $20 billion of stock sales in the next 12 to 18months. In a Wall Street Journal analysis1, the performance of 19 Russian IPOs or follow-upofferings over $500 million since 2005 would be -7.2% if one purchased a 1% stake in eachand reinvested the dividends. Russian offerings typically only provide shareholders withminority stakes, which prevents foreign investors from impacting corporate governance andtransparency issues. Overall, Russian capital raisings have had a poor track record, fallingbehind the RTS index by 16% on average.

Restricting shareholder ownership and keeping a tight rein over state-owned companies andcompanies run by political associates demand a high cost on the Russian economy. It is estimatedthat since 2000 when Putin came to power, $200 billion to $300 billion a year has been skimmedfrom the economy through corrupt actions.2 Foreign direct investment or capitalization by foreigninvestors would help Russian firms increase transparency and corporate governance rules andin the process make the firms more attractive to a larger pool of investors.

The arrest, conviction and mistreatment of Mikhail Khodorkovsky, former CEO of Yukos thelargest publicly owned Russian oil company to be expropriated by the state, raised concernsabout due process and the rule of law, including property rights, judicial independence and thelack of a predictable tax regime. Add a conflicting, self-dealing and rapidly changing legal andregulatory structure, and Russia stands out as one of the most dangerous and unpredictableplaces to do business. Among BRIC countries, Russia ranks lowest in Heritage Foundation’sIndex of Economic Freedom and is lower than world and regional averages.3 The report notedan overdependence on oil and gas for development, a sector that is notoriously volatile increasinga country’s risk profile. Additionally the report notes:

State involvement in economic activity remains extensive. Non-tariff barriers significantly increase the cost of trade.Monetary stability is weak, and prices are heavily controlled and influenced by the government. Deterrents to foreign investment include bureaucratic inconsistency, corruption, and restrictions in lucrative sectors like energy. Corruption weakensthe rule of law and increases the fragility of property rights.4

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1 Denning, Liam, “The Pitfalls of Buying a Stake in the Russian Dream,” Wall Street Journal, March 5, 2010.http://online.wsj.com/article/SB10001424052748704187204575101591978296022.html?

2 Matthews, Owen and Anna Nemtsova, “Moscow’s Phony Liberal,” BusinessWeek, February 26, 2010.http://www.newsweek.com/id/234264/page/1

3 Heritage Foundation’s Index of Economic Freedom: Ranking the Countries. http://www.heritage.org/index/ranking.aspx4 Heritage Foundation’s Index of Economic Freedom: Russia. http://www.heritage.org/index/Country/Russia

0ne Year % Change of BRIC Countries and S&P 50030

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S&P 500 (-43%)

China (-46%)

Russia (-68%)

India (-43%)

Brazil (-36%)

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An academic paper5 found that judicial independence is a precondition for economic growth.The study analyzed both de jure (matter of law) judicial independence and de facto (matter offact) judicial independence and found that de facto judicial independence positively influencesreal GDP growth per capita in a sample of 62 countries. In this study, Russia ranked very highly at7th in the de jure index, but held the second lowest, ranking 60th. This reflects both the passageof the Criminal Procedure Code in 2001 and pervasive corruption and government influence inthe private sector despite existing laws, a factor that’s also reflected in Russia’s low ranking inthe Index of Economic Freedom.

The results in this study corresponds to the US State Department’s most recent Human RightsReport6 for Russia that “corruption in law enforcement remained a serious problem, and manyobservers, including some judges and law enforcement personnel, asserted that the executivebranch influenced judicial decisions in some high-profile cases.”

In addition to the lack of judicial independence, the Russian police force functions as an exten-sion of the state, harassing citizens, expropriating businesses and skirting the rule of law. Thepolice are feared and distrusted by two-thirds of the country, but there is little recourse forthose who have been aggrieved. As corruption spreads from the top down, police officers offerprotection to the highest bidder. The police are at the direction of the Federal Security Service(FSB), KGB’s successor and a segment of the government comprised of a ruling political elitethat is above reproach. Although kidnappings by police have escalated, it often goes unreport-ed and the victim just pays the ransom demand.

In the latest corruption indexes by Transparency International and the Heritage Foundation,Russia ranks in the bottom quintile, barely above governments such as Zimbabwe andVenezuela.7 These indexes consistently report Russia as moving towards a repressive governmentand an economy that is detrimental to foreign investment and international capital marketsparticipation. According to a 2005 study8, while low levels of corruption appear to have slightlybeneficial effects for economic growth, whether because corruption promotes economic activityotherwise hindered by government regulations or that the increased resources required tocombat low levels of corruption are not adequate tradeoffs, corruption at such high levels isdetrimental for economic growth.

The recent World Economic Forum’s Global Competitiveness Report9 noted,

Russia falls 12 places this year to 63rd, the only BRIC economyto see a decline in performance. Russia’s main strengths are itslarge market size and reasonable macroeconomic stability(although this has been partly the result of windfall oil revenuesand might not prove sustainable in the longer term). However, to improve its competitiveness further, the country must tackle a number of structural weaknesses. Of major concern are aperceived lack of governmental efficiency (110th), little judicialindependence in meting out justice (116th), a lack of propertyrights (119th), and more general concerns about governmentalfavoritism in its dealings with the private sector. Private institutionsalso got poor marks, with corporate ethics in the country placingRussia 110th overall on this indicator. The drop in overall rank ismainly attributable to a weaker assessment of the functioning offactor markets, with, in particular, goods markets (ranked 108th)and financial markets (ranked 119th) getting poor marks.

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In 2009, Russia was the BRIC country to see the largest drop in GDP with a 10% decrease. Brazilsuffered a smaller decline, while India and China’s GDPs grew by 6.5% and 8.3% respectively.China’s enviable foreign reserves and its move up the value chain through its higher innovationrating (up two to 26th) and higher overall rating at 29th. India improved one spot to 49th withadvanced rankings in complex business and innovation categories, however, its infrastructure,low education rate and low penetration rates for technology, prevent it from advancing further.Brazil gained eight places to surpass Russia for the first time at 56th. Brazil’s large and dynamicdomestic market and sophisticated business sector makes it a competitive country to do business.

Among industry analysts, Russia is known to have investment challenges, including bureaucraticinconsistency, corruption and restrictions on lucrative sectors like energy. Corruption weakensthe rule of law and decreases market efficiency. In 2010, Konstantin Sonin, a professor at theNew Economic School in Moscow,10 wrote that Russian economic development policy falls shortbecause even government officials recognize that corruption prevents them from implement-ing sound economic recommendations in the face of a global financial crisis. Providing theexample of the sale of fourth-generation radio networks in Russia, Professor Sonin writes,“After all, everybody knows that participants reach secret agreements beforehand, eliminatingthe competitive aspect of the bidding.”

The case for avoiding investment in Russia must be seriously considered given the evidenceprovided above and in the “Legal Matters” section starting on page 11. Russia’s industries andcompanies are in a period of greater government influence in order to maintain a bureaucracythat funnels $200 billion to 300 billion a year out of the Russian economy into the private coffersof Kremlin associates. Measures that would help increase transparency and corporate governancesuch as increasing foreign ownership of state companies and encouraging outside auditors andoversight are at odds with the Russian government’s aim at enriching itself and associates atthe expense of the Russian people. Russia brings to the global economic community advantagesof a highly educated work force, a population that would benefit from more jobs, and revenue fromcommodities that can buffer extreme market movements. But the arbitrary nature of governmentintervention keeps the risk and cost of doing business in Russia high and reduces global confidencein its companies, management and infrastructure.

Transparency International’s Corruption Perception Index

Heritage Foundation’s Index of Economic Freedom

Political Rights Index by Freedom House

Committee for Russian Economic Freedom

Institute of Modern Russia

Historical and Market Data

Underwriting

5 Feld, Lars and Stefan Voigt, “Economic Growth and Judicial Independence: Cross Country Evidence Using a New Set of Indicators,” April 2003. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=395403

6 US State Department, “2009 Human Rights Report: Russia,” March 11, 2010. http://www.state.gov/g/drl/rls/hrrpt/2009/eur/136054.htm7 Russia ranks 146th out of 180 countries in Transparency International’s 2009 Corruption Perception Index. In Heritage Foundation’s 2010

Index Economic Freedom, Russia ranks 143rd out of 179 countries.8 Mendez, Fabio and Facundo Sepulveda, “Corruption, growth and political regimes: cross country evidence,” April 5, 2005.

http://econrsss.anu.edu.au/~facundo/corruption%20EJPE%20final.pdf9 World Economic Forum, “The Global Competitiveness Report 2009-2010: Country Profile Highlights”

http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm10 Sonin, Konstantin, “Sell 4G in Closed-Bid Auction,” The Moscow Times, September 9, 2010.

http://www.themoscowtimes.com/opinion/article/sell-4g-in-closed-bid-auction/415321.html


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Legal Matters

Russia entered the Council of Europe in 1996 and ratified the European Convention in May1998. The European Court of Human Rights (ECHR), established by the Convention, hasbecome an agent for affecting change in societies where there is a weak tradition of humanrights or ineffectual courts and rule of law. In 2009, the ECHR reached its 50th anniversary anddespite only joining the Convention in 1998, Russian applications constituted 18% of all applicationssince 1959. In 2009 Russians filed more complaints with the ECHR than people from any ofthe other 46 member countries that make up the Council of Europe with 13,666 applications.11

Most of the complaints are not heard by the Court, but of the 862 considered, almost all havegone against Russia.

Russia’s judicial branch is not independent and often bends to the will of the executive branchin cases concerning local elections and charges against journalists. Additionally, despitechanges to the Criminal Procedural Code in 2002, the Russian judicial system strongly prejudicialagainst defendants and provides few avenues for average citizens to resolves issues with powerfulopponents such as the state or police.

The institutional reasoning behind Russia’s political system was discussed by the Foreign AffairsCommittee of the House of Representatives. An expert on the US-Russian relationshipdescribed the situation as:

By any measure, Russia is more liberal than the Soviet Union,but it is also totally lawless and the absence of secure rights is notan accident. It exists because it's necessary to assure the power ofa kleptocratic elite which puts its interests ahead of those of thenation. This creates a parallel with what existed under the SovietUnion. Like the Soviet authorities, the present Russian leaders use a supposed foreign menace to divert the attention of thepopulation from their “right-less” situation.12

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12 Testimony of David Satter, Senior Fellow of the Hudson Institute, before a Joint Hearing of the Europe Subcommittee and the Terrorism,Nonproliferation and Trade Subcommittee of the House Foreign Affairs Committee, April 27, 2010.



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Selected Cases of Rule of Law Violations in Russia

AbitareFebruary 2005

U.S. businessman Frank Neuman, who owned a furniture chain, Abitare, was denied entry toRussia; shortly thereafter armed gangs forcibly closed his stores; business is re-registered tonew owners upon forced "sale."

BP Plc2004 to present

BP Plc has faced numerous regulatory and legal issues in Moscow since forming its joint venturewith Russian oil company TNK, including back tax claims, espionage allegations, immigrationdisputes and licensing fights. In March 2008, armed police raided the Moscow offices of BPand its local joint venture, TNK-BP in an attempt to persuade TNK-BP's Russian shareholdersto sell their 50% stake in the company. The Kremlin has ratcheted up pressure on foreign energycompanies in recent years as part of its effort to consolidate control over the country's largestand most important hydrocarbon deposits. Robert Dudley, BP’s current CEO and former CEOof TNK-BP after it was formed in 2003, left Russia in July 2008 citing “sustained harassment”amid court battles and labor and tax inspections.

CarrefourOctober 2009

Citing an absence of growth prospects in the short- and medium-term, the world’s secondlargest retailer after Wal-Mart withdraws from Russia, just months after opening its first storein June 2009.

ConocoPhillipsJuly 2010

ConocoPhillips, one of the largest oil and gas companies, sells its entire 20% stake in Lukoil,Russia’s largest state-owned oil and gas companies. ConocoPhillips’s entry into Russia in 2004was widely seen as a signal that western companies can do business in Russia. ConocoPhillipsinvested over $7.5 billion since 2004, but under Prime Minister Vladimir Putin, Russia continuesto exercise increasing controls over strategic state assets such as the oil and gas sector.

DeBeersJanuary 2009

De Beers, the world’s largest diamond company, withdrew from a mining joint venture aftertalks with the Federal Anti-Monopoly Service.

Hermitage Capital2005 to present

In 2007, Russia's Interior Ministry raided the corporate offices of Hermitage CapitalManagement, one of the largest portfolio investors in Russia, and stole documents that allowedthem to install new executives. The new executives forged contracts that allowed them to createnearly $1 billion in liabilities, which cleared the way for them to apply for the $230 million infraudulent tax refunds. In July 2009, a U.S. judge ordered that attorneys for Hermitage maysubpoena JP Morgan Chase Bank and Citibank NA for testimony and records relating to wiretransfers that Hermitage said will aid its four pending cases in Russia. Hermitage contends incourt documents that other Western investors in Russia had colluded with the authorities tosteal the money through the tax refunds and then launder it through New York banks. Russianauthorities had stopped Hermitage's chief executive, William Browder, at a Moscow airport in2005 and deported him on national security grounds.


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Sergei Magnitsky, a lawyer for Hermitage who helped expose the $230 million tax fraud carriedout by Russian officials, was accused of corruption himself and jailed. In November 2009,Magnitsky died in a prison medical isolation unit warning the prison staff that someone was tryingto murder him. Subsequent events indicate that he accurately foretold his fate.

Hewlett-PackardApril 2010

In April, it emerged that US and German authorities were investigating whether HP employeesin a German subsidiary had engaged in a bribery scheme involving a 35 million euro ($44.5 million)contract to provide IT equipment to the Chief Public Prosecutor's Office of the RussianFederation.The bribery investigation has broadened to include more deals dating back to 2000and more transactions than the one with the Russian prosecutor's office.

IKEAJune 2009

In 2004, building licenses and construction permits were disputed by the Moscow authorities,delaying opening of stores and increasing project costs; IKEA's Russia head said that he feared forhis life after refusing to pay bribes to local authorities. In June 2009, IKEA declared a moratoriumon investment in Russia.

MechelJuly 2010

One of Russia’s largest steel companies, Mechel lost almost $6 billion in market capitalism asPrime Minister Putin admonished its CEO Igor Zyuzin at an industry conference. By selling steelto overseas firms at half the price of Russian buyers, Zyuzin was effectively denying Putin hiscut of the company’s profits through taxes. With memory of corporate raiding and expropriationfresh on investors’ minds, Mechel’s shares (traded on the New York Stock Exchange asAmerican depository receipts) suffered as investors factored in the political risk in their valuationof the company.

MicrosoftSeptember 2010

After a New York Times article, Microsoft made the decision to stop helping Russian authoritiesuse claims of software piracy to harass and silence dissenters. To counter the Kremlin’s intimidationstrategy, Microsoft announced that it is barring its lawyers from taking part in such cases andwill provide a blanket software license to advocacy groups and news media outlets in Russia,undercutting the Kremlin’s tactic.

Motorola2006

Between March and April 2006, Motorola shipped 167,500 mobile phones to Moscow. Uponleaving customs they were immediately seized by Moscow Interior Ministry officials as "contraband."In another incident that year, RussGPS, a small high tech company supplying the Russian military,persuaded the Interior Ministry to bring a claim for patent infringements against Motorola inRussia, circumventing the normal procedure of protecting intellectual property via courts.

Open Society Institute/George SorosNovember 2003

George Soros' Open Society Institute’s Moscow office was raided at midnight by private securityforces. The cause of the raid was not clear, but suspicion is that it was retaliation for Soros'criticism of the arrest of Mr. Khodorkovsky.




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Peter Hambro Mining2006

Oleg Mitvol, Deputy Head of Rosprirodnadzor, asserted breaches of license agreement againstPeter Hambro Mining and threatened asset seizure and penalties, effectively wiping £300 millionfrom the market capitalization of the company.

PriceWaterhouse Coopers2007

Russia’s Interior Ministry raided the firm’s offices allegedly in connection with the YUKOS affair;the Interior Ministry opened a tax evasion case against PwC, widely seen as a deliberate effortto discourage PwC from supporting the defense of the new charges brought against MikhailKhodorkovsky. Ultimately in June 2007, PwC announced the withdrawal of all of its YUKOSaudited financial statements. Two days after PwC announced its withdrawal of the YUKOSaudited financial statements, the General Procurator’s Office advised PwC that it found no evidenceof wrongdoing by PwC in its audits of YUKOS. Less than two weeks later, an appellate courtoverturned a lower court’s judgment against PwC for tax evasion and returned the matter tothe lower court for reconsideration on nearly the entire assessment.

RIGroupJuly 2008

Janna Bullock formed RIGroup, a New York-based real estate company, in 1998. Three yearslater, Ms. Bullock expanded into Russia, acquiring tracts around Moscow to develop malls andhomes, and eventually formed a partnership with a government corporation managed by theMoscow finance department where her husband Aleksei Kuznetsov served as director from2000 to July 2008. At the market’s peak, RIGroup was worth $2 billion.

Mr. Kuznetsov was pressured to resign in July 2008 by senior government officials. At the sametime, federal auditors began an investigation into Ms. Bullock’s company. After Mr. Kuznetsov’sresignation, RIGroup was taken over by rival company ORSI, which has close Kremlin connections,including a 25 percent stake held by Putin’s former judo coach. The company is now in bankruptcy.

Royal Dutch Shell2006

Gazprom, the Russian energy monopoly, seized control of the world's largest combined oil andnatural gas development after a highly publicized campaign of pressure on its foreign operator,Royal Dutch Shell. Before the seizure, Shell came under pressure for alleged cost overruns,delays and environmental violations at its Sakhalin-2 project. Shell was forced to sell half itsstake in the Sakhalin-2 project to Gazprom for $7.45 billion, far below its value and the Shellinvestment. Relations between Shell and the Russian government have thawed, with Putinwelcoming Shell to participate in two upcoming natural gas projects in Russia in June 2009.Shell partnered with Russian gas giant OAO Gazprom to launch Russia's first liquefied natural-gasplant in February 2009.

Starbucks2002 to 2005

Starbucks trademark was appropriated by Russian squatter, delaying market entry by threeyears and after extensive legal fights. Starbucks prevailed in Russian court; the victory was seenas a sign that Moscow may realize that defending intellectual property rights must be recognized.Starbucks opened its first store in Russia in September 2007.

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YUKOS/Mikhail Khodorkovsky2003 to present

A circle of businessmen and politicians, headed by then-President Putin himself, initiated legalproceedings against the oil mogul Mikhail Khodorkovsky and his partner Platon Lebedev basedupon alleged illegality in connection with Group Menatep Limited’s acquisition of assets duringprivatization and the subsequent alleged abuse of these entities and tax evasion. Lebedev andKhodorkovsky were arrested and convicted in a show trial. YUKOS was systematically dismantledthrough, first, a sham tax auction wherein its largest asset was auctioned off at a fraction of itsmarket value to an ad-hoc shell company which promptly transferred its assets to state-ownedRosneft. Second, there was a contrived bankruptcy wherein YUKOS’s remaining assets weresold at deflated prices to, among others, Rosneft and state-dominated Gazprom. Since then,YUKOS former shareholders have filed claims for damages worth more than $100 billion as a resultof the Russian government's expropriation of their investments. Meanwhile, U.S. shareholdershave lost from $4 billion to $6 billion as a result of the Russian government's attack on YUKOSand Khodorkovsky. Today, Khodorkovsky and Lebedev are on trial on criminal charges, interalia, of embezzling all of the oil produced by the YUKOS production subsidiaries and moneylaundering that widely regarded as baseless.

Many in business and academia have come out against Khodorkovsky’s trial and point out thepolitical nature of his persecution. Speaking at the public hearings in the Sakharov Centre inMoscow in October 2009, Yevgeny Yasin, Director of Research at the Higher School ofEconomics noted, “As an economist I can assure you that everything that is happening at theKhodkorkovsky-Lebedev trial is utter nonsense. I have the feeling that there is a certain agreementwhereby Putin retains control of YUKOS and Khodorkovsky and President Dmitry Medvedevmust not enter that territory.” And Kenneth Roth, head of Human Rights Watch said,“Impressions amount that doing business in Russia is insecure. There is no independent judiciary,no rule of law, no respect of the fundamental rights and freedoms. All see the examples likethe Khodorkovsky case and think: how can I do business in Russia, when authorities can seizemy assets, put me in prison or apply force, if I get in their way.”

Zoloto Resources2008

Zoloto Resources, a Canadian gold exploration company stopped investing in Russia after thestrategic deposit legislation designed to protect domestic producers became law.


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Some of this prospectus may contain forward-looking statements that reflect our current viewswith respect to, among other things, future events. For the most part, words such as “outlook,”“believes,” “expects,” “potential,” “continues,” “may,” “should,” “seeks,” “approximately,”“predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those wordsor other comparable words all relate to our hope and firm belief that free markets, free people andfree ideas will take root and blossom in Russia. The inclusion of this forward-looking informationshould not be regarded as a representation by us or any other person that the future plans,estimates or expectations contemplated by us will be achieved given the ruthless actions of theself-dealing regime. Nevertheless, respected lawmakers, jurists and elected leaders throughoutthe world have uniformly concluded that the fate of a free and economically healthy Russia in largepart hinges on respect for human rights, property rights and the release of political prisoners suchas Mikhail Khodorkovsky. Our data, estimates and forecasts are based upon information obtainedfrom such sources including:

EUROPEParliamentary Assembly of the Council of EuropeA comprehensive study of the original Khodorkovsky-Lebedev proceedings in the November 2004report of the Parliamentary Assembly of the Council of Europe concluded that “the circumstancesof the arrest and prosecution of leading YUKOS executives suggest that the interest of theState’s action in these cases goes beyond the mere pursuit of criminal justice, to include suchelements as to weaken an outspoken political opponent, to intimidate other wealthy individualsand to regain control of strategic economic assets.”

In June 2009, a report of the Parliamentary Assembly of the Council of Europe examined“politically-motivated abuses of the criminal justice system in Council of Europe memberstates”, with a heavy emphasis on Russia and the Khodorkovsky case in particular. SabineLeutheusser-Schnarrenberger, a former German minister of justice who as rapporteur led theresearch and writing for this report, highlighted the YUKOS affair as “emblematic” of the risksfaced by investors who come up against state authorities. The report describes the newcharges against Khodorkovsky as “bizarre” and “contradictory,” and asserts that Russianauthorities are waging an “unrelenting campaign” against YUKOS and its executives. Thereport also describes many of the inconsistencies in the prosecutors’ arguments as “perplexing.”

The European ParliamentIn 2008, Mr Hans-Gert Pöttering, former President of the European Parliament, expressed hisconcern over the second trial of Mikhail Khodorkovsky:

Special Note Regarding Forward-Looking Statements

I would also like to take this opportunity to strongly appeal to the authorities of the Russian Federation, particularly in thistime when the negotiations on the Partnership and CooperationAgreement have been resumed with the European Union, totake seriously their commitment to respect the law in theircountry. The fate of political prisoners is indeed of highestimportance for the European Union.

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In April 2009, the European Parliament Foreign Affairs Committee adopted its 2008 AnnualReport on Human Rights in the World. The Committee strongly criticized the Russian governmentand expressed concern about the wider negative impact of the mistreatment of Khodorkovsky,Lebedev and Vasily Alexanyan; and the lack of an independent judiciary in Russia. In the report,the Committee said it: “regrets that the European Union has not succeeded in bringing aboutany change of policy in Russia, particularly with regard to impunity and the independence ofthe judiciary, the treatment of human rights defenders and political prisoners including MikhailKhodorkovsky” and “expresses further concern, in line with the Amnesty International Reportof 2008, as to the ongoing failure of the Office of the Prosecutor to respect the right of MikhailKhodorkovsky and his associate Platon Lebedev to a fair trial in accordance with internationalstandards, and deeply regrets the treatment of former YUKOS vice-president Vasily Aleksanian,whose refusal to provide false testimony against Mikhail Khodorkovsky led the Russian authoritiesto allow his medical condition to deteriorate to a terminal state.”

GERMANYGerman Chancellor & German ParliamentOn March 8, 2008, German Chancellor Angela Merkel stated that Germany “would welcome”the release of Khodorkovsky from prison. Chancellor Merkel again expressed concerns aboutKhodorkovsky during President Medvedev’s visit to Berlin on June 5, 2008.

In July 2009, the German Bundestag approved a resolution calling for constitutional reform inRussia. The cross-party resolution cites several trials of concern, including that of Khodorkovsky.The resolution notes that there is fear that Khodorkovsky's trial was "a means to pursue politicalgoals" and that it represents a test case for President Medvedev's commitment to the credibilityof Russian justice. Commenting on the trial in July 2009, MP Markus Meckel, SPD ForeignAffairs Spokesman, said: “The second trial currently underway is all the more a test case to seewhether the Russian justice system will make the grade. There are many signs to indicate thatthe new trial is also politically motivated. The charges seem absurd alone from the supposedamount of embezzled crude oil, which was enough that if it were filled into train cars and linedup, the line would circle the earth three times."

German Industry Association On March 4, 2008, Frankfurter Allgemeine Zeitung quoted Klaus Mangold, chair of theCommittee on Eastern European Economic Relations of the German Industry Association, whoappealed to President Medvedev to ease Khodorkovsky’s conditions of incarceration, stating“this would be a visible and significant sign for the handling of human rights.”

ITALYItalian ParliamentOn April 28, 2009, the International Christian Democrat Party voted unanimously in favor of amotion asking President Medvedev to assure a just and fair trial for Khodorkovsky. PresidentPier Ferdinando Casini addressed Italian Prime Minister Silvio Berlusconi and Foreign AffairsMinister Franco Frattini on the Khodorkovsky case in an open letter. The Italian parliamentsubsequently voted by a wide margin in favor of a motion urging the Italian Government "toactivate all diplomatic channels, together with other European partners, to guarantee therespect for human rights and the right of defense for Mikhail Khodorkovsky and PlatonLebedev and for all Russian citizens.”


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SPAINSpanish Congress of DeputiesOn March 1, 2005, the Committee of Foreign Affairs of the Spanish Congress of Deputies passeda motion supporting the release of Mikhail Khodorkovsky (file number 161/1408), publishedin the "BOCG. Congreso de los Diputados" Series D, Volume 325 1st February 2006, to callupon Russian authorities to respect Resolutions 1418 (2005) and 1692 (2005) of theParliamentary Assembly of Council of Europe in relation to Khodorkovsky and other YUKOSexecutives, in reference to infringements of the rule of law; and to request the immediate transferof Khodorkovsky to a detention center with conditions of incarceration to which he is legallyentitled as is any prisoner, and which is in proximity to his immediate family.

FRANCEHervé Mariton, Deputy of the French National AssemblyHervé Mariton, Deputy of the French National Assembly and Head of the France-Russia parliamentgroup, observed the current trial in April 2009; in an interview with Journal du Dimanche,Mariton said there was a feeling of “quiet oppression” in the courtroom. He also concludedthat Khodorkovsky has “no possibility to defend himself correctly” and that the way he is beingtreated is “arbitrary and inhuman.” Mariton said, “this trial seems Kafkaian, Khodorkovskynever had a chance to defend himself in a fair trial; his rights as a human are not respected.”

Leading French Philosopher André GlucksmannIn an article published October 26, 2007 in Le Monde, under the headline “Sakharov andKhodorkovsky: The Same Battle,” French philosopher André Glucksmann, citing Elena Bonnerand Anna Politkovskaya, described Khodorkovsky’s ongoing imprisonment as retribution for hisexpression of political values inconsistent with those of the regime.

UNITED STATESUS Congress

In November 2005, then-Senator Barack Obama with then-Senator Joe Biden and Senator JohnMcCain co-sponsored Senate Resolution 322, stating that “the trial, sentencing, and imprisonmentof Mikhail Khodorkovsky and Platon Lebedev have raised troubling questions about the impartialityand integrity of the judicial system in Russia.”

In June 2009, key members of the US House and Senate introduced two resolutions 588 and189 condemning the current trial of Khodorkovsky and Lebedev. US Reps. James McGovern (D-MA),chairman of the Tom Lantos Human Rights Commission, and Robert Wexler (D-FL.), chairmanof the Foreign Affairs Subcommittee on Europe, introduced a resolution in the US House ofRepresentatives stating that the trial constitutes a politically-motivated case of selective arrestand prosecution that serves as a test of the rule of law and independence of Russia’s judicialsystem.

In April 2010, Rep. Elton Gallegly (R-Ca.) stated before a Joint Hearing of the EuropeSubcommittee and the Terrorism, Nonproliferation and Trade Subcommittee of the HouseForeign Affairs Committee that the most notable impediment to improved U.S. Russian tradeis “the failure of Russian authorities to adequately enforce intellectual property rights.”

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The US Helsinki Commission, also known as the Commission on Security and Cooperation inEurope, and the Tom Lantos Human Rights Commission, introduced bills in the Senate and theHouse of Representatives on September 29, 2010 that would freeze assets of and block visasto individuals responsible for the 2009 death of Russian anti-corruption lawyer SergeiMagnitsky and a related $234 million tax fraud scheme against Hermitage Capital. SenatorBenjamin L. Cardin (D-MD) and U.S. Representative James P. McGovern (D-MA) sponsored thebill in their respective legislative chambers.

US State DepartmentOn February 5, 2007, when the new allegations against Khodorkovsky and Lebedev emerged,the US State Department issued the following comment:

As we have commented in connection with the original trial,the continued prosecution of Mikhail Khodorkovsky and the dismantlement of YUKOS raise serious questions about the ruleof law in Russia. Khodorkovsky and his associate, PlatonLebedev, would have been eligible to apply for parole this year, having served half of their terms. These new chargeswould likely preclude their early release. Many of the actions in the case against Khodorkovsky and YUKOS have raisedserious concerns about the independence of courts, sanctity ofcontracts and property rights, and the lack of a predictable taxregime. The conduct of Russian authorities in the KhodorkovskyYUKOS affair has eroded Russia’s reputation and confidencein Russian legal and judicial institutions. Such actions as this and other cases raise questions about Russia’s commitment to the responsibilities which all democratic, free market economies countries embrace.

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