Corruption Watch: November 3, 2003

By Roman Kupchinsky

Was there a plot to assassinate Russian President Vladimir Putin? "The Sunday Times" of 19 October claimed that there was -- and that Scotland Yard has arrested a rogue Russian intelligence officer and his alleged accomplice. According to the Russian website flb.ru, the arrests took place on 12 October. After holding the men for five days, Scotland Yard reportedly released them on condition that they leave the country and return to Russia.

The detained men, according to flb.ru, are a former KGB major whom the website identifies as being a trained hit man, Andrei Ponkin, along with an alleged accomplice.

"The Sunday Times" reported that the bizarre plot began when Ponkin telephoned Aleksandr Litvinenko, a former Russian Security Service (FSB) officer who defected to the United Kingdom three years ago, and outlined the plot in a series of conversations. According to a 10-page affidavit "drawn up in the presence of two senior British lawyers," according to the "Sunday Times," Ponkin and Litvinenko also met at a prearranged spot on a bench outside a noodle restaurant in Leicester Square to discuss the plot.

Ponkin is alleged to have told Litvinenko that Putin needed to be killed and that he knew a senior FSB officer who could provide advance information on Putin's route when he was abroad. Having this knowledge, Ponkin suggested that a Chechen fighter could carry out the assassination by shooting Putin with a sniper's rifle, according to the report.

Litvinenko also reportedly claimed that Ponkin wanted him to set up a meeting for the former with Boris Berezovskii, the exiled Russian tycoon who was recently granted political asylum in the United Kingdom, so that Berezovskii might be asked to finance the plot.

Fearing that he might be drawn into a plot for the purpose of being set up, Berezovskii apparently went to the police. He was told by Scotland Yard that they had detained two men and that one of them had admitted to being involved in a plot to kill Putin, according to "The Sunday Times."

In an interview with the Russian paper "Gazeta" of 20 October, Berezovskii said the men were released because the Russian Embassy in London refused to cooperate with Scotland Yard in the investigation.

Adding to speculation that the plot might have been genuine, RIA-Novosti news agency reported on 22 October that Mikhail Trepashkin, a former FSB colonel, was detained near Moscow on suspicion of illegal possession of a weapon. According to RIA-Novosti, Trepashkin was reputedly a member of a group of FSB agents who planned to assassinate Berezovskii in 1998 and was a friend of Ponkin's.

"All must be equal before law. Otherwise we will never be able to solve the problem of creating an economically effective and socially adjusted tax system.... We will never repress organized crime and corruption." So stated Russian President Vladimir Putin on 27 October, two days after the arrest of oil giant Yukos's president, Mikhail Khodorkovskii, when his jet landed for a refueling stop in Novosibirsk. A few weeks earlier, Putin had suggested the case against Yukos was "only about murder," but apparently that had changed.

Prior to his arrest, Khodorkovskii had refused to obey an order from the Prosecutor-General's Office to allow himself to be interrogated and had made a number of disparaging remarks about Russian law-enforcement agencies.

The 40-year-old multibillionaire was incarcerated in the Matrosskaya Tishina pretrial-detention facility in Moscow, an 18th-century tsarist prison that once held assassins, Bolshevik revolutionaries, and, later, victims of Stalin's purges. During the 1960s, Francis Gary Powers, the pilot of the U-2 shot down over the Soviet Union in 1962, was sentenced to 10 years in the same facility. Some early reports in the media stated that Khodorkovskii had been placed in a cell along with four other prisoners; but that had not been confirmed. According to "The Moscow Times" and other media, the prosecutor-general said Khodorkovskii might remain in prison until the end of December. The possibility of Khodorkovskii's release on bail was not mentioned.

And while Khodorkovskii's arrest was not totally unexpected, the Russian stock market nevertheless took a serious hit that day, falling 10 percent, with Yukos shares falling some 15.4 percent. Yukos, Reuters pointed out, is responsible for 30 percent of the Russian stock market's turnover. Only a few weeks earlier, Moody's Investment Service had given Russia an unprecedented investment-grade rating. Financial analysts commented on 27 October that Moody's would now be forced to either retract its rating or be faced with a serious credibility problem. Reuters reported on 27 October that Bulat Karimov of Aton Brokerage said, "There will be a dramatic stock decline, not just a correction." Yevgenii Yasin, a former economy minister, told Ekho Moskvy radio, "No agency will give us another investment rating."

Anatolii Chubais -- the head of Unified Energy Systems (EES) and a man often accused of having played a key role in the "sale of the century" when Khodorkovskii and other future billionaires privatized Russian state energy companies at a fraction of their worth -- was quoted by "The Moscow Times" as saying, "There will be a conflict of such an extent that it will bring in the entire society, and it could turn out to be uncontrollable."

Appearing on Ekho Moskvy earlier this year, Putin economic adviser Andrei Illarionov accused EES of "stealing" $750 million from the state. "But the Prosecutor-Generals Office has done nothing about it," he told listeners.

U.S. State Department spokesman Richard Boucher told reporters on 27 October, "Recent events do raise questions as to whether the law is being applied selectively, and naturally, these events raise doubts on the part of companies doing business in Russia and among potential investors."

Writing in "The Moscow Times" of 27 October, Catherine Belton stated that after a televised meeting held in the Kremlin in January -- during which Khodorkovskii angered Putin by accusing the state-owned oil company Rosneft of corrupt dealings in acquiring Severnaya Neft -- "huge intelligence resources have been thrown at the company, and all the top managers movements are being monitored." Khodorkovskii, according to other sources, was also involved in a dispute with the Kremlin over the right to build private oil and gas pipelines and obtain a part of Gazprom, the state gas monopoly that has also been accused of corruption and mismanagement but remains untouched by the Prosecutor-General's Office.

When news of the arrest was announced, many analysts speculated as to the future of the TexacoChevron deal with Yukos. That same day, a spokesman for British Petroleum (BP), Peter Renshaw, told "The Wall Street Journal" that BP's deal with Tyumen Oil Company (TNK) had not been hurt: "It's not affecting our overall confidence in the investment we've made." (See "Russia's Energy Sector -- The Tyumen Oil Company" in "RFE/RL Organized Crime and Corruption Watch," 27 October 2003 and below.)

It would appear that the Yukos case has opened up a Pandora's box in Russia. Putin's statements seem to have little if any relevance to the real situation in the country, as what looks to be the selective prosecution of Yukos-related executives rolls on unchecked. Speaking in front of television cameras during a meeting of the government on 27 October, Putin commanded his countrymen and the government "to stop discussions and speculations about this matter." RK

RUSSIA'S ENERGY SECTOR -- THE TYUMEN OIL COMPANY (Part II)

By Roman Kupchinsky

When British Petroleum (BP) and the Russian Tyumen Oil Company (TNK) merged in June, to form BP-TNK, the third-largest oil company in Russia, some observers recalled a past BP-TNK dispute. BP spokesmen were quick to reassure the market that this was history and matters were proceeding on course in this mega-deal. However, there were other outstanding complaints regarding TNK and parent company Alfa Group that had not been resolved and were awaiting their day in court in the United States.

BP vs. TNK/Alfa Group

The row between BP and TNK/Alfa Group in 1999 concerned bankruptcy proceedings against the Sidanco oil company (a TNK competitor) and its subsidiary, Chernogorneft, into which BP had invested considerable sums of money. TNK had long sought to acquire Chernogorneft, and was thought to have gone about it by orchestrating bankruptcy proceedings that BP has alleged were fraudulent.

In a complaint alleging fraud and filed with a U.S. district court in February 2002 (see "RFE/RL Organized Crime and Terrorism Watch," 24 October 2003) by Canadian oil company Norex, a number of important documents are cited among "exhibits to the Declaration of Philip Murray" that provide insight into the matter. Among these documents is a letter from 22 July 1999 by BP CEO Lord Browne sent a letter to Russia's then-prime minister, Sergei Stepashin, in which he wrote: "The Sidanco bankruptcy case is seen by international investors as a critical litmus test of investment prospects in the Russian Federation."

Lord Browne's letter included an "Information note on BP in Russia" which stated: "On 27th May 1999, the external manager [of Chernogorneft] was removed against the wishes of the overwhelming majority of creditors by a decision of the Federal Arbitration Court of the West Siberian Okrug (Cassation Instance) in Tyumen. The minority creditors who supported this action appear to be linked to the Tyumen Oil Company (TNK). TNK is a competitor of Sidanco and has openly declared its intention to acquire the Chernogorneft subsidiary.... Crude produced by [the Kondpetroleum] subsidiary...has been diverted by the external manager to companies associated with Tyumen Oil Company and the Alfa Group.... The Sidanco holding company is the largest non-State creditor of Kondpetroleum. However, the courts have systematically excluded Sidanco from its legitimate rights as a creditor and thus from any influence over the bankruptcy process.... It should also be clear that such abuse of bankruptcy proceedings has a damaging impact on broader investor confidence."

But Stepashin, who was on his way out, failed to move on the case.

Then on 7 September 1999, British Prime Minister Tony Blair sent a letter to the new Russian prime minister at the time, Vladimir Putin. It included the following, according to the Norex filing: "I am writing to you concerning...BP Amoco's investment in Sidanco.... I am taking a close personal interest.... I understand that Chernogorneft creditors are due to meet on 10 September to discuss the way forward. BP Amoco fear that what and could be a healthy and profitable company will be manipulated into bankruptcy and collapse. They believe that...Sidanco and its subsidiaries should be saved from a bankruptcy which if allowed to proceed would only benefit individual interests.... Retaining Chernogorneft is essential to BP Amoco's investment in Sidanco. The case is being closely followed by other major investors in Russia."

A letter dated 22 October 1999 from the European Bank for Reconstruction and Development (EBRD) First Vice President Charles Frank to Putin was explicit, according to a copy of the letter cited in the Norex complaint: "To date EBRD is very disturbed about mismanagement of the situation. Unless the Russian Authorities become directly involved, we are concerned that this mismanagement will continue.... Manipulation of the process has continued. This bankruptcy cannot be justified on economic grounds. The bankruptcy process is being used by interested parties to achieve well-publicized goals that completely ignore the interests of bona fide creditors and shareholders for fairness and transparency."

TNK was successful in its takeover of Sidanco, and eventually settled with BP. But this settlement did not appear to satisfy those who still regarded TNK/Alfa Group as guilty of dubious, if not illegal, practices.

On 6 January 2000, U.S. Ambassador-at-Large to the CIS Stephen Sestanovich sent a briefing memorandum to Under Secretary of State Alan Larson, saying: "As a result of this settlement, BP Amoco no longer opposes Ex-Im [U.S. Export-Import Bank] loans, but questions about TNK's prior conduct remain unanswered."

Questions And Libel

Some of the questions about TNK soon turned to seemingly unfounded accusations against the company and its parent organization: Alfa Group, headed by Mikhail Fridman and Petr Avens. In 1999 and 2000, journalist Oleg Lurie wrote in the newspaper "Versiya" that the Alfa Group was connected to international criminal organizations. Alfa took "Versiya" to court, and on 10 July 2003 a Moscow appellate court ruled that the information in the two articles was unsubstantiated and ordered the paper to pay 3 million rubles ($99,000) in damages to Alfa and 170,000 British pounds ($282,000) to Kroll Associates for damaging its reputation. Kroll had been hired by Alfa in early 2002 to investigate charges being leveled against Alfa in the media (see "RFE/RL Organized Crime and Corruption Watch," 27 October 2003).

But by October, new and different questions were being raised about the BP-TNK deal; and these made the City of London take notice. On 19 October, "The Observer" wrote that by getting into a joint venture with TNK, BP had accepted "that it would be operating in one of the worst polluted and environmentally damaged oil producing areas on the planet."

Describing the condition of the Samotlor oil field in Western Siberia, "The Observer" quoted from a study done by independent consultancy IWACO for Greenpeace in 2001 that claimed that some 840,000 hectares of land had been polluted by oil and that rivers and underground aquifers were polluted at "up to 50 times Russian safety standards." Pipelines in the region are leaking 500 liters of oil every second, according to the report. The study found 97 percent of river samples of drinking water taken over a span of five years to be polluted with oil.

The story in "The Observer" pointed to comments made by Commerzbank analysts in February suggesting they were concerned that BP, which had sought to portray itself "as an ethical and responsible operator," would have to work within "TNK/Sidanco and obligations accruing from previous activities may prove to be onerous." BP CEO Lord Browne estimated that the costs of cleanup might run as high as $1 billion over the next 10 years, but he said those costs were included in estimates of the value of TNK.

"The Observer" wrote: "TNK's record is chequered. When the IWACO findings were published, it blamed them on the exploitation of the Soviet era �- and stressed that as a company formed out of the privatizations in the 1990's, it was not responsible."

BP-TNK vs. The United States

For the BP-TNK partnership to begin making money, it needs to transport its oil to the market. And in order for it to get there, the oil has to enter into a pipeline system headed southward, to the Black Sea. The best available pipeline that for that purpose is arguably the recently completed -- but empty -- Odesa-Brody pipeline in Ukraine. The problem is that Odesa-Brody was built to transport oil from the Caspian, northward, to Poland and from there on to Western Europe. This was part of a strategy adopted by the United States in order to diversify the transit of Caspian oil and not leave it all in the hands of the Russian pipeline system, which was operated by Transneft, a Russian state-owned company.

The danger of allowing all Caspian oil to go via Transneft's pipes was the possibility that Moscow might simply cut it off whenever it suited Russia. The other consideration was that the Bosphorus was already crowded, and Russian or British oil tankers would clog the straits even further -- not to mention the increased possibility of a major oil spill in that region, which would doubtless result in ecological disaster.

Prior to the merger with BP, TNK had purchased one of the largest Ukrainian oil refineries, in Lisichansk, and was positioning itself to enter the Ukrainian market in a major way. Through its ownership of the refinery, it had considerable leverage to use during negotiations with Ukrainian Ukrtransnafta, the state-owned oil-pipeline manager. But another important consideration for BP-TNK, as well as for Ukrtransnafta, was that Odesa-Brody was not being utilized. Western oil companies involved in the Caspian consortium had not signed a contract with Ukrtransnafta to ship oil through Odesa-Brody, and the Ukrainian side was getting nervous.

At this juncture, BP-TNK approached the Ukrainians to run Odesa-Brody in reverse. This, of course, suited Russian interests; and the groundwork was laid for a confrontation between pro-Western forces in Ukraine who were defending the U.S. stance and the pro-Russian lobby, which wanted to cut a deal with BP-TNK.

This confrontation also placed BP in the unenviable position of effectively having to take the Russian side in the geopolitical dispute. British Prime Minister Blair, who had lobbied hard with Putin for the BP merger with TNK to go through, had been maneuvered into opposing his U.S. allies.

In early October, Ukrtransnafta's board of directors agreed to run the Odesa-Brody in reverse (the BP-TNK proposal), and this immediately created a storm of protest in Kyiv. Soon afterward, Ukrainian Prime Minister Viktor Yanukovych announced that the decision by Ukrtransnafta was not final and that the cabinet would make the ultimate decision in January. He then went to Washington, where he reportedly secured a pledge from Vice President Dick Cheney that the vice president would talk to the American member of the Caspian consortium (ChevronTexaco) about making a commitment to use Odesa-Brody to transport Caspian oil.

Two weeks later, the U.S. Embassy in Kyiv announced that ChevronTexaco was ready to sign such an agreement, provided that transportation costs were agreed and the Ukrainian side made a binding decision on who was to represent Ukrtransnafta during negotiations with ChevronTexaco. The U.S. oil company was concerned that the Ukrainian side might be playing games by having the head of Ukrtransnafta, Stanislav Vasylenko, reportedly an avowed supporter of the BP-TNK strategy, taking its side while his government professed the pro-U.S. position.

Outstanding Questions

The most oft-asked question about the BP-TNK merger is: Will it unravel in the near future? With the ongoing investigation of Yukos culminating in the recent arrest of Mikhail Khodorkovskii (see item above), are there any guarantees that Putin's prosecutors will not turn their investigators loose on TNK and Alfa? If prosecutors go after TNK or Alfa, the risk of the merger with BP might evaporate. If they do not, the legal system in Russia might be accused of selective prosecution: Why limit the current investigation to Yukos if TNK is suspected of having committed similar acts over the years?