Written evidence submitted by GML Limited
(a) GML Limited, formerly Group Menatep,
is the majority shareholder of Yukos Oil Company which has been
bankrupted and its assets expropriated by the Russian Federation.
The "Yukos affair" was a major strand in the Russian
Government's strategy to bring Russia's natural resources under
direct Kremlin control and to use those resources as a tool to
reassert control over Russia's former sphere of influence and
its Western colleagues whilst silencing any opposition to the
government regime. It marked a turning point in the Russian Federation's
commitment to the rule of law, property rights and energy security.
(b) The energy supply disputes with Ukraine
in January 2006 and with Belarus in January 2007 illustrate the
Russian Federation cannot be trusted to provide a reliable source
of energy, without regard to the prevailing political conditions.
(c) The Russian Federation needs to reform
its energy sector to encourage significant new investment and
attract foreign capital in order to ensure that it is able to
meet existing oil and gas supply commitments and future export
demand. That cannot happen until the Russian Government is prepared
to guarantee property rights and respect international treaties
aimed at protecting foreign investments from arbitrary re-nationalisation
and sudden termination.
(d) The Energy Charter Treaty ("ECT")
is the strongest existing legal framework governing investment
in the energy sectors of signatories. The Russian Federation is
fully legally bound by the Treaty despite its attempts to suggest
otherwise; the UK Government must insist that the Russian Federation
abide fully by its obligations under the Treaty, in spite of a
muted response from European leaders to Russia's aggressive energy
(e) No new Partnership and Cooperation Agreement
(PCA) with the Russian Federation can absolve Russia of its obligations
under the Energy Charter Treaty irrespective of whether or not
the "principles of the ECT" are included therein. Any
new PCA must have as its starting point the fact that the ECT
is today binding on, and enforceable against, the Russian Federation.
(f) The Russian Federation does not need
to ratify the ECT for it to be binding and enforceable. Russia
chose not to opt out of applying the Treaty pending ratification
when it signed it. If a country chooses not to apply the Treaty
provisionally (such as Australia, Iceland and Norway) they must
formally state their decision when signing the Treaty. The UK
Government should insist Russia acknowledge and abide by its ECT
obligations as well calling for the Russian Federation to ratify
the Treaty (to give greater protection going forward).
(g) The Russian Federation has systematically
broken the "energy principles" agreed under its stewardship
of the G8 group of industrialised nations. The Russian Government
has consolidated its grip over major energy projects in the Russian
Federation, restricting foreign ownership to minority stakes whilst,
at the same time, pursuing entry into Europe's downstream energy
markets. The UK Government must insist on true reciprocity of
investment, secured by the legally binding rules provided by the
(h) The politically-motivated attacks on
Yukos, the imprisonment of its executives and ultimate beneficial
owners, the subsequent dismantling and bankrupting of the company,
and the pursuit of legal action against over 45 individuals connected
to Yukos, shows that the Russian Federation has allowed its criminal
justice system to become infected with corruption and political
influence. The Russian Federation has pursued a coordinated campaign
of intimidation of western businesses and its prosecution of the
Yukos case demonstrates a worrying trend towards Russia's abuse
of its privileges under international extradition treaties and
the deterioration of the rule of law in the Russian Federation.
(i) The UK Government must call for the
Russian Federation fully to respect human rights, the rule of
law, and abide by its international treaty obligations. Until
that happens, the UK Government must call on European colleagues
to deny extradition requests from the Russian Federation. The
UK Government should review the Russian Federation's status as
a Category 2 Territory, under the Extradition Act 2003.
1. The Foreign Affairs Committee has requested
evidence on, amongst other issues:
(a) Whether the United Kingdom and European
Union are doing enough to ensure that Russia is a reliable energy
(b) The prospects that the EU-Russia Partnership
& Cooperation Agreement will be successfully concluded and
provide an effective framework for the pursuit of UK aims vis-a"-vis
(c) How the UK can ensure the energy principles
agreed under Russia's Presidency of the G8 can be applied consistently
to foreign investors in Russia's energy sector;
(d) How the UK and international community
can best promote human rights and the rule of law in Russia.
2. GML Limited ("GML") is a diversified
financial holding company established in 1997 by Mikhail Khodorkovsky,
the former CEO of Yukos Oil Company ("Yukos"), Platon
Lebedev and others. GML remains the majority owner of Yukos, holding
approximately 51% of Yukos equity capital through wholly owned
3. Yukos was once a leader in the field
of emerging Russian companies, driving new standards of corporate
governance and transparency. However, following huge manufactured
tax claims Yukos' core asset, the oil production facility Yuganskneftegaz
("Yugansk"), which once produced in excess of 1 million
barrels of oil per day, was seized by the Russian state. Even
though Yukos insisted Yugansk was worth at least US$30.4 billion
based on a valuation from leading consulting firm DeGolyer and
MacNaughton and had been valued between US$14.7-17.3 billion by
Russian Government-appointed auditors, Dresdner Kleinwort Wasserstein,
on 19 December 2004, Yugansk was sold at auction for $9 billion
to an unknown company called BaikalFinansGroup ("Baikal")
which was incorporated only a couple of days prior to the auction
itself. The Russian tax authorities seized and sold Yugansk, a
unit responsible for more than 60% of Yukos' total oil production,
despite Russian Federal law which states core assets should not
be sold to settle tax liabilities.
4. Baikal was soon purchased by state-owned
Rosneft Oil Company ("Rosneft"), which thereby acquired
Yugansk at a cost substantially below market value. President
Putin himself has acknowledged that Baikal was used to ensure
that future legal claims against this auction could not be levelled
"As regards Baikal everything is simple.
The issue was resolved within the legal, and not the repressive,
field. The future owners had to think about how they would work
and face possible suits brought against them in court. When Baikal
bought the relevant package, it became the owner. All that happened
later occurred on the secondary market. So the claims of those
who later bought property were practically reduced to zero."
5. This is a clear indication that the Russian
state and Rosneft were determined to seize Yugansk in a manner
designed to ensure that investors in Yukos were prevented from
bringing claims against the state or government-owned Rosneft
in attempts to protect their investments.
6. The Yugansk investment was subsequently
included, about 18 months after the auction, in Rosneft's Initial
Public Offering at a value of US$60 billion (over five times its
acquisition price) and Rosneft, on its own website, described
the acquisition of Yugansk as "the most monumental bargain
in Russia's modern history".
7. In August 2006 Yukos was declared bankrupt
even though assessments, backed up by UBS, clearly showed its
assets exceeded its liabilities. This expropriation (rather than
simple nationalisation) was all in pursuit of a vendetta against
Mr Khodorkovsky and Mr Lebedev, an action that has been roundly
criticised as politically motivated retribution for Khodorkovsky's
legitimate political activities and was designed to ensure that
the Yukos shareholders received nothing for their investment.
8. Yukos' assets are presently being auctioned
by the state controlled Russian Property Fund, at the direction
of the court-appointed receiver, Eduard Rebgun who has stated
he expects 90-95% of Yukos assets to be sold by August 2007. The
assets are being sold at a significant reduction to market value
according to Mr Rebgun, in order to speed up the auction process.
For example, Yukos former production facilities Tomskneft and
Samaraneftegaz and the Achinsk and Angarsk refineries were all
sold at a huge discount to market value
and all were picked up by state-owned oil monopoly Rosneft.
9. Although Yukos' assets are being sold
at a discount to market value, there has been no increase in competition
for the assets as Russian state-owned oil and gas monopolies,
Rosneft and Gazprom, carve up the assets between them behind the
scenes. Speaking on the Yukos auction process, former Russian
Prime Minister Mikhail Kasayanov has accused the Russian Federation
of setting up an ostensibly legal system but one which is accompanied
by backroom negotiations in which the Kremlin decides the fate
of the assets. "This is just an illusion, an imitation of
process," Kasyanov said.
Therefore, even when a non-Russian company wins an auction for
Yukos assets, they are more than likely to be acting for the state-owned
energy majors. For example, Italian energy majors Enel and Eni
managed to purchase Yukos gas assets at auction on 4 April 2007,
but only after months of talks with Gazprom, which had negotiated
an option to purchase the assets from the Italian companies at
a later date, according to news reports.
TNK-BP has also participated in certain of the auctions but has
to date not been allowed to purchase any assets.
10. To seek redress for the illegal expropriation
of Yukos' assets, GML is claiming compensation from the Russian
Federation under the terms of the ECT, discussed below, under
which the Russian Federation is legally bound.
11. The forced dismantling of Yukos was
a successful ploy to put key elements of the energy sector in
the hands of the state and marked a turning point in the Russian
Federation's commitment to both domestic property rights and international
energy security, not to mention the rule of law.
1. Is The Russian Federation A Reliable Energy
12. The Russian Federation is the world's
largest gas producer and exporter and is currently the second
largest oil producer. Imports from the Russian Federation currently
account for 45% of total gas imports (pipeline and LNG) into the
EU, equalling approximately 25% of total EU gas consumption. In
October 2004 the New York Times reported that Gazprom was the
sole supplier of gas to Estonia, Latvia, Lithuania and Slovakia
and provides 89% of Hungary's gas, 86% of Poland's and nearly
three quarters of the Czech Republic's. The article also added
that, according to data available from the Energy Information
Agency at the time, Gazprom supplies 36% of Germany's gas, 27%
of Italy's, 25% of France's, 67% of Turkey's, 65% of Austria's
and 100% of Finland's.
It is also thought that Gazprom supplies the majority of gas consumed
by Moldavia, Macedonia and Bosnia Herzegovina. Official DTI estimates
indicate that Britain will import 80% of its gas by 2020, with
the majority of supplies originating in Russia. The Russian Federation
currently supplies 27% of Europe's oil.
13. According to the DTI,
domestic energy production, after a long period of growth, has
begun to decline which is likely to lead Britain to be a net importer
of oil by 2010. By 2020, the UK is likely to be importing three
quarters of its primary energy needs. Further, the DTI predicts
that by then half the world's oil and gas will be coming from
"countries that are currently perceived as relatively unstable".
14. The EU gas supply-side is highly concentrated,
with the Russian Federation, Norway and Algeria accounting for
over 85% of total gas imports into the EU yet the European energy
market remains highly segmented and therefore uncompetitive and
vulnerable to monopolistic abuse. One of Russia's objectives has
been to ensure that it remains so. It has used its oil and gas
pipeline network to control energy distribution beyond its borders,
acquire infrastructure in other countries and prevent new supply
alternatives. Indeed the Russian Federation, leading the world's
biggest gas producing nations, has taken major steps towards drawing
those producers together into a cartel that Gazprom Chairman of
the Board of Directors (and First Deputy Prime Minister of Russia),
Alexander Medvedev, threatened last year would be "an alliance
of gas suppliers that will be more influential than OPEC".
The UK Government, in its Energy White Paper 2003, noted "The
development of a gas cartel amongst pipeline gas and LNG producers
could undermine long-term price security".
15. Despite increasing supply diversification
towards LNG, it is likely that the Russian Federation will remain
the single largest gas supplier to Europe. Russia is expected
considerably to grow its share of gas supplies in the EU in the
future. Some industry observers forecast that, by 2030, the EU
may depend on Russian imports for up to 80% of its total gas consumption.
16. The Russian Federation's dominance of
European energy supplies gives rise to the prospect that this
power can be leveraged for the political benefit of the Russian
Government. In January 2007, Russia dramatically raised the price
at which it sells gas to Belarus to around $200 per 1,000 cubic
metres, compared to the heavily subsidised price of $46 per 1,000
cubic metres at which the Russian Federation had formerly sold
gas to Belarus. Whilst this increase to market prices for former
Soviet states would normally have been welcomed, the suddenness
of the move demonstrated the Kremlin's willingness to use energy
as a political weapon.
17. In both examples, energy supplies were
cut off, dramatically affecting end-customers in Europe; Germany,
France, Poland and Hungary all experienced significant drops in
supplies during the disputes. Cliff Kupchan, former US State Department
official and director of the Eurasia Group was quoted in the Financial
Times on 14 March 2006, as saying: "there is a correlation
between the price at which Russia sells gas to its former satellites
and their political loyalty to the Kremlin."
18. The primary tool of Russia's dominance
over European energy supplies is Gazprom. Created in 1992 from
the former Soviet Ministry of Gas, Gazprom has established itself
as the single-export channel for gas originating in Russia, transporting
over 95% of Russian gas through its pipeline network. Gazprom's
monopoly was cemented by a law passed through the Russian Duma
in June 2006.
19. Gazprom is 51% owned by the Russian
state and onlookers have noted the high level of control exercised
by the Russian political establishment over the company, which
is now the world's third largest. The Institute for Energy Policy,
a Moscow-based think-tank, notes that "Putin effectively
controls the company and makes all the key decisions about its
strategy". Gazprom is ostensibly controlled by Dmitry Medvedev
and Alexei Miller, both of whom are close confidants of President
Putin and have presided over an increase in the Kremlin's shareholding
to a majority 51%.
20. The Ukraine crisis was not the first
time Russia has interrupted energy supplies as a way of exerting
political pressure on a foreign government, and Belarus is unlikely
to be the last. Russia cut energy supplies to the Baltic States
when they insisted on the withdrawal of Russian forces in the
early 1990s, to Ukraine during a dispute about the future of the
Black Sea Fleet in 1993-94 and to Belarus, Poland and Lithuania
in 2004. Georgia and Moldova have also experienced price rises
after signalling their political independence from Moscow.
21. The disputes with Ukraine and Belarus
are poignant reminders that the Russian Federation is unwilling
to adhere to international norms as an energy supplier. Europe
and the UK are now in a position where we must ensure that we
are either always on politically friendly terms with Moscow or
that there exist sufficient alternatives and safeguards to ensure
that supplies from Russia cannot be disrupted in the same way
as in Ukraine and Belarus.
22. The UK Government recognises that attempts
by the Russian Federation, and other major gas producing nations,
to form a gas-OPEC of major gas producing nations could undermine
long term price security. This prospect should be confronted at
an early stage to ensure it cannot become a reality; Europe must
ensure that it applies its anti-trust principles in equal measure
to Russian companies operating in Europe as it does to European
2. THE PARTNERSHIP
23. The European Union's response to Russia's
energy tactics has so far been muted.
24. On 16 January, the European Commission
launched its long awaited European Union Common Energy Policy,
the "Energy Package". Whilst the Energy Package is ambitious
in terms of environmental objectives (securing reductions in green
house gasses and emissions trading for instance) it does not constitute
a common external energy policy and in particular mentions nothing
about Europe's relationship with the Russian Federation.
25. In the debate around Europe's energy
policy, it is not unusual for some to suggest that Europe is so
dependent on Russian supplies that we must be wary of insisting
the Russian Federation abide by its energy obligations. We must,
however, also acknowledge that the Russian Federation/Gazprom
is equally dependant on Europe as the main end-purchaser of oil
and gas. This point was made in a French Parliamentary Report
on Energy and Geopolitics in November 2006:
"It is time to wring the neck of the notion
that the European Union would be controlled by an all-powerful
energy supplier against whom it would have its hands and feet
tied. Today indeed the relation between the European Union and
Russia is too much regarded as a unilateral dependency of the
former on the latterbut this analysis is not viable in
the long term."
26. Marko Mihkelson, Rapporteur on the Parliamentary
Assembly of the Council of Europe's ("COE") December
2006 Report, "The Perils of Using Energy as an Instrument
of Political Pressure", confirmed this by noting that energy
resources are "at the heart of the Russian Federation's economy
and its trade relationship with other European countries".
27. Foremost amongst Europe's failures to
hold the Russian Federation to accepted standards and norms of
behaviour is the EU's fundamentally weak position on the Russian
Federation's observance of the ECT. Eneko Landaburu, Director
of DG External Relations and Chief Negotiator of the new Partnership
and Cooperation Agreement ("PCA") with Russia, said
in February 2007: "it's obvious we're not going to be able
to convince the Russian authorities to agree with the ECT"
suggesting instead that the "key principles" of the
ECT should be incorporated into the new PCA.
28. This position is disturbing in that
it would essentially legitimise the Russian Federation's reneging
on commitments it has made to the 50 other signatories to this
international treaty. The European Union is not empowered to negotiate
on behalf of all the other signatories to the ECT but importantly,
if the Russian Federation will not abide by its obligations under
this Treaty, it is logical to assume that the Russian Federation
will only abide by new agreements that are weaker than those already
29. This position is also disturbing as
it ignores the fundamental truth that the Russian Federation is
legally bound by the ECT. No new PCA can change the Russian Federation's
status as a legally bound signatory to the ECT irrespective of
whether the PCA includes the "key principles" of the
ECT or not.
30. The UK Government has acknowledged the
importance of the ECT to the energy relationship between Russia
and Europe and continues in its efforts to encourage the Russian
Federation to ratify the ECT. The Government has stated
it is prepared to consider a new initiative with Russia, within
the framework of the new PCA, "only if it is based on fair
and reciprocal access to market infrastructure including third
party access, Russian ratification of the Energy Charter Treaty
and Transit Protocol."
31. The Department of Trade and Industry
acknowledges the Treaty's binding nature on all signatories, on
"The Energy Charter Treaty obliges Contracting
Parties to endeavour to accord non-discriminatory treatment to
Investors of other Contracting Parties as regards the Making of
Investments. This obligation is relevant for the 38 Contracting
Parties who have ratified the Treaty and for the five Signatories
applying the Treaty provisionally"
Russia is one of the countries that apply the
32. The ECT is a binding, multilateral treaty
dealing specifically with inter-governmental cooperation within
the energy sector and was developed following the signing of the
European Energy Charter (or the Energy Charter Declaration) in
December 1991. The fundamental aim of the Treaty is to strengthen
the rule of law on energy issues by creating a level playing field
of rules to be observed by all governments who are signatories
to the Treaty, thus minimising the risks associated with energy
related investments and trade.
33. The Russian Federation signed the Treaty
on 17 December 1994 and, pursuant to the provisions of the Treaty,
is legally bound thereby, notwithstanding the fact that the Treaty
has not, to date, been ratified by the Duma.
34. Article 45(1) of the Treaty states that:
"Each signatory agrees to apply this Treaty
provisionally pending its entry into force for such signatory
in accordance with Article 44 to the extent that such provisional
application is not inconsistent with its constitution, laws or
35. The Russian Federation chose not to
opt out of applying the Treaty pending ratification when it signed
it. If a country chooses not to apply the Treaty pending ratification
(such as Australia, Iceland and Norway) they must state their
decision when signing the Treaty. The ECT is thus binding on Russia.
36. One of the focal points of the Treaty
is the investment protection regime found in Part III of the Treaty.
The key provisions are Articles 10 (covering promotion, protection
and treatment of investments) and 13 (providing for the compensation
of investors whose investment has been the subject of nationalisation
37. Article 26 of the Treaty provides for
a binding international dispute resolution procedure in the event
that a signatory to the Treaty and an investor cannot resolve
a dispute amicably.
38. The Energy Charter Treaty is fully binding
on and enforceable against the Russian Federation. The UK Government
should encourage the Russian Federation both bilaterally and multilaterally,
through the European Commission, to acknowledge and abide by its
obligations under the ECT, in addition to ratifying the Treaty
(for greater protection of investors going forward).
39. Any new PCA with the Russian Federation
must have as its starting point the fact that the ECT is binding
on the Russian Federation and build an agreement from there. Any
other agreement will inherently be weaker and will allow the Russian
Federation to continue its aggressive dominance of Europe's energy
supply market. The ECT is the strongest legal protection available
and any replacement is likely to be weaker, given the now much
stronger negotiating position of Russia.
3. THE G8 ENERGY
40. Foremost amongst the Principles agreed
at the G8 Summit in St Petersburg in July 2006 was a commitment
"transparent, equitable, stable and effective
legal and regulatory frameworks, including the obligation to uphold
contracts, to generate sufficient, sustainable international investments
upstream and downstream;" and
"open, transparent, efficient and competitive
markets for energy production, supply, use, transmission and transit
services as a key to global energy security".
41. Notably, in the Plan of Action emerging
from the Summit, member states highlighted the importance of efforts
to "advance transparency; to deepen and spread the rule of
law; to establish and strengthen predictable, efficient fiscal
and regulatory regimes; and to encourage sound energy supply and
demand policies" in securing and maintaining global energy
42. However, at the Summit itself, Russian
authorities displayed their intransigence and unwillingness to
remove Gazprom's monopoly over gas export channels. Energy Minister
Viktor Khristenko denied the Russian Federation was ready to open
its gas pipelines to third parties, claiming: "When something
already belongs to somebody there can't be any free access to
43. The Yukos case demonstrates that, far
from abiding by stable legal frameworks, the Russian Federation
has pursued a systematic campaign of expropriation, culminating
in the bankrupting of the company, in contravention of the strongest,
legally binding framework in effect, the ECT. Further, since the
G8 Summit, Russian authorities have targeted other Western energy
majors in attempts to ensure that no major energy project in the
Russian Federation is free from Government participation, extending
the state's monopoly even further.
44. In September 2006, Shell's Sakhalin-2
project was criticised by Russia's Natural Resources Ministry
for cost overruns at the project, in the Russian Far-East. As
a Production-Sharing Agreement ("PSA"), the Russian
Government receives a share of production in lieu of taxes once
the project's costs have been recoveredan overrun of costs
meant a delay in the Government receiving its revenues.
45. Immediately prior to the statement by
the Natural Resources Ministry, news emerged that Rosprirodnadzor,
the Russian environmental watchdog agency, had launched a legal
case against Shell for alleged breaches of a key environmental
permit, specifically citing damage to the region's grey whale
and "Sakhalin salmon" populations and excessive logging.
This legal action followed a break-down in talks, related to the
increased cost estimates, between state-owned energy monopoly
Gazprom and Shell to sell Gazprom a stake in the project.
46. Shell was eventually forced to sell a 50%
plus one share stake in the project to Gazprom for $7.45 billion.
However, Shell is also now being forced to pay the Russian government
an annual dividend of $100 million to keep its remaining stake
in the project. The environmental pressure on Shell has since
subsided considerably and, perhaps unsurprisingly, many onlookers
suggest that environmental concerns were merely a red herring.
Some even drew a link with the Yukos case, in which supposed tax
evasion was cited as the reason for dismantling the company, jailing
its owners and re-nationalising its assets.
47. Christopher Hope noted in the Daily
"The move by the Putin administration was
seen by some as an attempt to tighten the Kremlin's grip on the
country's energy resources after the part re-nationalisation of
oil company Yukos".
48. Exxon's Sakhalin project, known as Sakhalin-1,
also ran into problems with the Russian Government, which refused
to expand the scope of Exxon's production license after Exxon
found the field stretched beyond its original permit boundaries.
RosPrirodNadzor is due to start checking Exxon's record at the
Sakhalin-1 field in May 2007 but it is notable also that Gazprom
is currently attempting to gain the exclusive right to buy and
export all of the natural gas produced at Sakhalin-1, in line
with its monopoly status and counter to Exxon's strategy (as agreed
in their PSA with the Russian Government) to build a short pipeline
to the massive energy market in China. Until the "negotiations"
are concluded, little of the gas from the field is being developed;
most is being pumped back into the ground.
49. BP's joint venture with Alfa Access/Renova
(TNK-BP) was not excluded from pressure from the Russian Government
nor was France's Total. The development of TNK-BP's Kovytka field
in Eastern Siberia, which could supply China was threatened, on
environmental grounds, by the region's natural resources agency
in a move apparently linked to Gazprom's negotiations to buy the
Russian half of the joint venture from the Alfa Access/Renova
group. Under licensing laws in Kovykta, the field must supply
additional gas to the local market which would involve TNK-BP
burning off superfluous gas. The project has until June to rectify
50. The Russian Government Accounting Office
has criticised Total for producing less oil than the target agreed
under Total's Production Sharing Agreement with the Russian Government
at its Kharyaga project in Siberia. An investigation was launched
by the Russian authorities in February 2007.
51. TNK-BP's participation in the first
auction of Yukos assets (a stake in Rosneft) on 27 March 2007
was widely regarded as an attempt to curry favour with the Kremlin
with an eye to the dispute over Kovykta. Under Russian law, at
least two parties must participate for the auction to be considered
legitimate. Rosneft eventually won the auction, paying below market
value for the asset. Gazprom is now expected to take a stake in
the Kovykta project.
52. Interestingly, the conflict at Sakhalin-1
came at a time when Exxon was discussing the possibility of building
a pipeline to supply China directly with oil from its Sakhalin
field, bypassing Gazprom.
The key factors linking each of these disputes, and the Yukos
affair, are Gazprom and the desire of the Russian Federation to
exert monopoly control over oil and gas exports.
53. These developments are occurring at
the same time that the Russian Government, through Gazprom, is
seeking footholds in Europe's downstream gas supply markets, including
those of Germany and the UK. In early 2006, Gazprom purchased
Pennine Natural Gas, a small gas distributor in Wilmslow; this
was Gazprom's first acquisition in the UK and followed speculation
that it was seeking a stake in Centrica, something that prompted
the Chancellor to say that "there are questions about politics
as well as economics" involved in such a takeover.
54. As the Russian state seeks to insert
itself in foreign energy markets, the Russian Government has simultaneously
sought to exclude foreign control over energy projects in the
Russian Federation. The latest draft of Russia's Subsoil Law prohibits
companies with foreign ownership of more than 49% to bid for strategic
assets and limits their participation in the development of major
energy projects to a minority stake. The draft also suggests that
if a foreign company discovers a strategic field, it should sell
at least half the interest in the project to a Russian entity
in order to receive rights to develop that field.
55. Amendments to the Bill are expected
to be agreed shortly and the Natural Resources Ministry is likely
to submit it to the Duma by the summer.
56. The Russian Federation should be encouraging
foreign investment to ensure gas keeps flowing, not just to Europe
but also internally and to its Far Eastern customers. In order
to do so, the Russian Federation must ensure it is fully committed
to international treaties aimed at protecting foreign investments
from arbitrary re-nationalisation and sudden termination. Further,
the Russian Federation should open up its gas transport network
to producers other than Gazprom in order to ensure diversification
and security of supplies to Russia's European customers.
57. The UK Government must insist that the
Russian Federation abide by its legal obligations under the Energy
Charter Treaty to ensure UK companies are able to invest in Russian
energy projects to the same degree that Russian companies are
able to invest in downstream energy assets in Europe and the UK.
Without the sound, legally binding rules-based system provided
under the ECT, foreign companies could not invest in Russian energy
projects without fear that their property could be arbitrarily
4. PROPERTY RIGHTS,
& BILATERAL RELATIONS
58. The politically motivated destruction
of Yukos and the imprisonment of its executives and ultimate beneficial
owners was a turning point in terms of the Russian Federation's
commitment to both domestic property rights and international
energy security. It is clearer now than ever that the Yukos affair
was only the first strand in a broader strategy to bring the Russian
Federation's natural resources under direct Kremlin control and
to use those resources as a tool to re-establish its position
as a regional hegemony and a world economic power worthy of G8
59. It has also become clear, since the
beginning of the Yukos affair, that the Russian Federation has
allowed its criminal justice system to become infected with corruption
and political influence. Its courts have become susceptible to
outside pressure and inducements to the extent that persecution
of political enemies of the state has been facilitated by judges.
In October 2004, the Chairman of the Russian Constitutional Court,
Valerii Zorkin, marked the 13th anniversary of Russia's judicial
reform by saying that the country's judicial system is in many
aspects worse now than it was in the Soviet era.
In July 2006 the state controlled oil company Rosneft accepted
"the possibility that certain judges may be susceptible to
economic, political or nationalistic influences".
60. Since the December 2004 auction of Yukos'
key production unit, Yugansk, the number of people targeted by
the Russian authorities in connection with Yukos has risen from
18 to 45 and now includes senior western managers of Yukos and
its remaining assets, and Tim Osborne, a director of GML. This
is the first time the Russian Prosecutors have targeted western
businessmen personally in the Yukos affair and is an alarming
escalation in the Russian Federation's vendetta against Yukos
and its shareholders.
61. As reported in The Times,
Mr Osborne and the Yukos officers (all US citizens) have received
no official communication of the accusations against them. The
accusations are groundless and were posted on the Russian Federal
Prosecutor's website straight after GML had won a ruling in The
Netherlands whereby the proceeds from any future sale of Yukos's
international assets would be handled by the Dutch Courts rather
than the Russian liquidator, something which would ensure that
legitimate Yukos creditors would be recognised. The accusations
limit Mr Osborne's ability to travel and discharge his fiduciary
duties to manage GML's claim under the ECT. They further damage
his personal and professional reputation and ability to carry
on his legal practice. The Foreign and Commonwealth Office have
sent a formal Demarche to the Russian Foreign Ministry complaining
about the treatment of Mr Osborne and Mr Osborne has offered to
be interviewed, in London, by the Russian Federal Prosecutor in
connection with this investigation. Mr Osborne has received no
reply to his offer.
62. The Russian authorities' prosecution
of the Yukos case demonstrates a worrying trend towards Russia's
abuse of its privileges under international extradition treaties
and the deterioration of the rule of law in the Russian Federation.
In two rulings in Bow Street Magistrates Court on extradition
requests for individuals connected to Yukos, Judge Timothy Workman
refused to allow extradition on the basis that the requests were
politically motivated and the defendants would not receive a fair
trial if deported. The Supreme Court in Lithuania made a similar
ruling in a separate case and government authorities in the Netherlands
and Luxembourg have refused to hand over Yukos-related documents
to the Russian Prosecutor.
63. In its pursuit of individuals connected
to Yukos, the Russian Federation has breached several international
treaties relating to extradition and mutual assistance, including:
The European Convention on Extradition
Article 3 prohibits extradition
concerning "political offences".
The Russian Federation has been found on three occasions to have
nonetheless made extradition requests for such offences, two to
the UK and one to Lithuania.
The European Convention on Mutual
Assistance in Criminal Matters 1959:
Article 2 prohibits seeking assistance
for political offences.
64. Under UK law, the Russian Federation
is designated as having Category 2 status under the Extradition
Act 2003. This status permits Russia, when seeking extradition
from the UK, to simply provide "particulars of information".
The previous requirement to produce admissible evidence making
out a prima facie case was removed. The political justification
for according Russia this status was that Russia respects fundamental
and due process rights in its criminal law.
65. The Russian Federation has systematically
breached these treaties in its prosecution of the Yukos case with
the approval and tacit support of the Russian Government therefore
no request for extradition to the Russian Federation of an individual
connected to the Yukos case can be seen as free from political
66. The Russian Federation's behaviour demonstrates
that now, more than ever, western governments must call on the
Russian Federation to abide by its international treaty obligations
and fully respect the principles of rule of law and property rights.
67. Until the Russian Federation lives up
to the international standards demanded of Council of Europe members
in respect of the rule of law, no member state should accede to
a Russian extradition request. Furthermore, the UK Government
should place under review, the Russian Federation's status under
the Extradition Act 2003.
Director, GML Limited
10 May 2007
1 Extradition shall not be granted
if the offence in respect of which it is requested is regarded
by the requested Party as a political offence or as an offence
connected with a political offence.
2 The same rule shall apply if the
requested Party has substantial grounds for believing that a request
for extradition for an ordinary criminal offence has been made
for the purpose of prosecuting or punishing a person on account
of his race, religion, nationality or political opinion, or that
that person's position may be prejudiced for any of these reasons.
3 According to Reuters, "Russia's fallen YUKOS-what's
up for grabs?", 26 March 2007. Back
"From the fumes of Yukos, Moscow builds a new oil giant",
International Herald Tribune, Steven Lee Myers and Andrew
E Kramer, 28 March 2007. Back
"Eni, Enel win YUKOS auction after Gazprom deal", Reuters,
Tanya Mosolova, 4 April 2007. Back
"Europe worried over Russia Gas Giant's Influence",
3 October, Judy Dempsey, retrieved from www.energybulletin.net/2389.html Back
"Peril of using energy as an instrument of political pressure",
Report of the Parliamentary Assembly of the Council of Europe,
Political Affairs Committee, Marko Mihkelson, 20 December 2006. Back
UK Government Energy White Paper 2003. Back
"Peril of using energy as an instrument of political pressure",
Report of the Parliamentary Assembly of the Council of Europe,
Political Affairs Committee, Marko Mihkelson, 20 December 2006. Back
Financial Times, 14 March 2006, Arkady Ostrovsky: "Energy
of the state: how Gazprom acts as a lever in Putin's power play". Back
Paul Quile"s and Jean-Jacques Guillet, Report of the French
Parliamentary Mission on Energy and Geopolitics, 29 November 2006,
p 290. Back
"Peril of using energy as an instrument of political pressure",
Report, Political Affairs Committee, Marko Mihkelson, 20 December
UK Response to the Commission Green Paper: A European Strategy
for Sustainable, Competitive and Secure Energy, Summary and Priority
Actions, 23 June 2006. Back
Department of Trade & Industry website, 9 May 2007, http://www.dti.gov.uk/europeandtrade/key-trade-issues/investment/page22718.html
Daily Telegraph, 20 September 2006: "It's time Russia
behaved like an adult". Back
Wall Street Journal, 7 May 2007, "Rough Patch: Exxon
Battles to Stay On Russia's Good Side", Gregory L White and
Jeffrey Ball. Back
Wall Street Journal Europe, 15 September, Greg Walters
and Gregory L White: "Russia pressures Shell, Exxon-Oil firms'
projects on Sakhalin attract scrutiny, complaints". Back
"Russia extends strategic reserves", Anna Shiryaevskaya,
26 March 2007, International Gas Report. Back
Izvestiya, 25 October 2004: see http://www.hri.org/news/balkans/rferl/2004/04-10-25.rferl.html11 Back
Rosneft Oil Company, IPO Prospectus to the London Stock Exchange,
p 52. Back
"British lawyer accused over collapse of Yukos", Frances
Gibb, The Times, 24 April 2007. Back
Article 3-Political offences: Back
Article 2: Assistance may be refused: a-if the request concerns
an offence which the requested Party considers a political offence,
an offence connected with a political offence, or a fiscal offence. Back