House of Commons - Foreign Affairs

Select Committee on Foreign Affairs Written Evidence

Written evidence submitted by GML Limited

EXECUTIVE SUMMARY

(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 tactics.

(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 ECT.

(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.

INTRODUCTION

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 partner;

(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 Russia;

(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 subsidiaries.

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 against Rosneft:

"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[3] 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.[4] 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.[5] 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 Partner?

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.[6] 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.[7]

13. According to the DTI,[8] 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.[9]

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."[10]

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 companies.

2. THE PARTNERSHIP AND COOPERATION AGREEMENT

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:[11]

"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 latter—but 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".[12]

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 in existence.

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[13] 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 its website:[14]

"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 Treaty provisionally.

ABOUT THE ECT

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 regulations."

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 or expropriation).

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 PRINCIPLES—ENSURING RECIPROCITY OF INVESTMENT

40. Foremost amongst the Principles agreed at the G8 Summit in St Petersburg in July 2006 was a commitment to:

"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 security.

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 it."

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 recovered—an 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 Telegraph:[15]

"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.[16]

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 the problem.

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.[17] 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.[18]

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 expropriated.

4. PROPERTY RIGHTS, HUMAN 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 status.

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.[19] In July 2006 the state controlled oil company Rosneft accepted "the possibility that certain judges may be susceptible to economic, political or nationalistic influences".[20]

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,[21] 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 1957:

— The European Convention on Mutual Assistance in Criminal Matters 1959:

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 motivations.

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.

Tim Osborne

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

4 "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

5 "Eni, Enel win YUKOS auction after Gazprom deal", Reuters, Tanya Mosolova, 4 April 2007. Back

6 "Europe worried over Russia Gas Giant's Influence", 3 October, Judy Dempsey, retrieved from www.energybulletin.net/2389.html Back

7 "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

8 UK Government Energy White Paper 2003. Back

9 "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

10 Financial Times, 14 March 2006, Arkady Ostrovsky: "Energy of the state: how Gazprom acts as a lever in Putin's power play". Back

11 Paul Quile"s and Jean-Jacques Guillet, Report of the French Parliamentary Mission on Energy and Geopolitics, 29 November 2006, p 290. Back

12 "Peril of using energy as an instrument of political pressure", Report, Political Affairs Committee, Marko Mihkelson, 20 December 2006. Back

13 UK Response to the Commission Green Paper: A European Strategy for Sustainable, Competitive and Secure Energy, Summary and Priority Actions, 23 June 2006. Back

14 Department of Trade & Industry website, 9 May 2007, http://www.dti.gov.uk/europeandtrade/key-trade-issues/investment/page22718.html . Back