The last board chairman of Yukos names those who destroyed Russia’s biggest oil company and tells Novaya gazeta how they went about it

Former Central Bank chairman and Duma deputy Victor Gerashchenko was interviewed by Vitaly Yaroshevsky, Novaya gazeta, 10.07.2008

The Yukos affair began five years ago in June 2003 when Alexei Pichugin, a member of the company’s security staff, was arrested. Soon after Platon Lebedev was also detained. The authorities waited almost until the end of the year before tackling Mikhail Khodorkovsky, in the expectation that he would get the message, leave the country and allow them to dismember Yukos without a fuss.

Khodorkovsky did not leave Russia, however, and the imposed bankruptcy of Yukos, which more resembled expropriation, became the subject of an ongoing public scandal that has not died down until this day. The Russian State received more than $30 billion from selling off Yukos assets, which was not bad going. The assets carried more weight, even, than the President’s own words. It is not part of our plan, Putin said, to destroy the company — but they did. No one has counted how many billions of dollars it cost the reputation of the Russian authorities, Russian business and the economy as a whole. Sooner or later they will have to do so.

Interviewed by Novaya gazeta, Victor Gerashchenko, the company’s last chairman, warned us: “I have a great deal to say about Yukos.”

Victor Gerashchenko: When I was invited to stand for election to the board of directors it was already well known that Yukos faced serious tax demands. By then Mikhail Khodorkovsky had been seized in Novosibirsk which, incidentally, appeared extremely comical and silly — as though they could not have detained him in Moscow. Naturally, I was concerned about the tax claims and wondered if it was worth joining the board.

I knew that I would not get a direct answer from Yukos management, which had received the approval of shareholders before approaching me. So I took the advice of two people, Vladimir Panskov and Vladimir Petrov, who then held major posts in the Ministry of Finance. Both had impressive careers in public finance. Panskov worked in the government’s budget department before moving to the Ministry of Finance. Petrov was a first deputy minister of finance and knew all about budget formation. I approached them separately: I’ve been offered this job, I asked each in turn, should I accept or not?

Take it, they replied quite independently: all these tax demands are something Shatalov has dreamed up, evidently on orders from above. (Sergei Shatalov was then a deputy minister at the Finance Ministry and responsible for taxes.) They also told me that Yukos was far from being the only company to take advantage of loopholes in Russian legislation that permitted the use of the country’s internal “offshore” zones (in Mordovia, Kalmykia and elsewhere). Almost all the country’s major oil businesses had been doing the same. As a result, I accepted the Yukos management proposal.

At the time I was a Duma deputy for the Rodina party and was becoming very browned off. Though United Russia did not yet have a constitutional majority, the parliament even then resembled a strict regime penal colony: “A step to left or right is considered an attempt to escape (we shall shoot without warning)”. Even United Russia deputies complained to me about the stifling atmosphere. Now there was this new opportunity to work with Russia’s largest oil company, with an output in 2003 of 80 million tons of oil. The money wasn’t bad either: a director received $100,000 a year. In short, I accepted and on 24 June 2004, after the shareholders Annual General Meeting, I was elected board chairman.

A couple of days later the bailiffs appeared at our offices on Dubininskaya Street with a demand that we pay $3.4 billon in tax arrears for 2000. The head of our judicial department Dmitry Gololobov knew a great deal of what was going on: a very great deal, evidently, since he fled to London at the end of that year after endless summons to appear at the Prosecutor General's office. “Yukos owns Sibneft shares with a current market valued of $4 billion,” he told the bailiffs, “take them to pay what’s owing.” A lady from the tax ministry had arrived with the bailiffs and on hearing this suggestion she made a phone call. She then said that a decision was postponed until tomorrow. Two days later she and the bailiffs returned and announced that they would not accept the Sibneft shares. They did not explain why but froze Yukos’ bank accounts.

It was then I phoned Putin’s office. “I would like to make an appointment to see Vladimir Vladimirovich,” I said. You must go through Medvedev, they replied, Dmitry Medvedev is the head of the presidential administration. I rang Medvedev’s office. I would like, I said, with the assistance of Dmitry Anatolevich to arrange a meeting with Vladimir Putin. He’s in a meeting at the moment, they told me, ring later. I rang again, Medvedev had already left for his residence in Novoogaryovo. After a few days I rang again: he was busy. For a month I kept it up but, in the end, without any result.

By that time Khodorkovsky had made the following offer from his cell in the pre-trial detention centre. He and other Group Menatep owners would transfer their 60% shares in Yukos to the company’s management to be used to pay off the tax arrears. This proposal was immediately and resoundingly criticised by the official media. It was only a matter of days before we received the next demand: this time, if my memory serves me rightly, it was for tax arrears of $4.3 billion in 2001. Suddenly there were press reports that Yuganskneftegaz with its $30 billion worth of oil reserves was being put up for auction. This was quite improper, before the Sibneft shares had been sold and because Yugansk was a major productive asset. By then oil prices had begun to rise and we were counting on substantial income from Yuganskneftegaz, which produced 60 million tons of crude oil a year. And now it was being put up for sale! Why? We were given to understand that we might object, we might appeal, but the decision was final.

Did you try to find out who was responsible?

Who would tell me that? It was in those circumstances that we wrote a letter to Putin in July 2004. The size of the arrears is considerable, we wrote, and we cannot immediately clear the debt: give us a deadline and we shall pay. After that I received a phone call in the third week of July from the presidential administration. Putin’s aide Igor Shuvalov would like to meet you.

We met in the administration building [former Communist Party headquarters on central Moscow’s Old Square]. To begin with we chatted about everything and anything. Then Shuvalov suddenly says to me: Victor Vladimirovich, you were elected chairman of the board of directors at Yukos so get on with your work, why create this fuss? As to Khodorkovsky, we don’t trust the man. In reply I said to him: “What’s that got to do with it? He wants to hand over his shares in the company to the management. Then they can be put up for auction and the proceeds used to pay off our tax arrears. If that’s want you want, furthermore, the controlling block of shares could pass through auction to the State, to Rosneft itself.” In short, the problem can be solved lawfully and in a civilised fashion. Shuvalov again began to say, We don’t trust Khodorkovsky, he is offering his shares so as to get a lighter sentence but then he’ll start saying that he was unjustly treated, forced to act in this way, and so on. I tried to persuade him that such agreements are drawn up by lawyers. Then I repeated that the announced sale of Yuganskneftegaz was illegal. Nothing had any effect. At that we parted.

Soon Jean Chretien, Canadian prime minister from 1993 to 2003, came to Moscow. He was on private business since by then he was working for the law firm Trudeau & Partners. A little while after, the president of Yukos Stephen Theede informed me that Chretien had had an interesting conversation with the Russian president. If Theede is to be believed, and I have no grounds for not believing what he said, Putin asked Chretien to aid Russia to join the G7 as a fully-fledged eighth member. He had already discussed the matter with Chancellor Schroeder of Germany, Putin said, and he was in favour: Chretien could put in a word with Paul Martin, his own successor as Canadian prime minister, with UK Prime Minister Tony Blair and also the US President George W. Bush. Chretien agreed to Putin’s request and, there and then, made a request of his own: give Yukos two years in which to pay off its tax arrears and, if necessary, put up the shares belonging to Khodorkovsky and his colleagues for auction. Putin replied: let those in charge of Yukos write to Prime Minister Fradkov, and send a copy to Finance Minister Kudrin. We rapidly drew up this latest in a whole series of letters. We asked for two years in which the company would be able to pay off the debts by drawing on increased proceeds from rising oil sales, disposing of shares held outside the oil industry, and so on. A month went by without a reply, or even so much as an acknowledgement.

Chretien meanwhile left for Alma-Ata to attend some economic forum. On his return to Moscow he suggested, through Stephen Theede, that we meet at the Hotel Metropol. How were things going? he enquired. It was all very complicated, I said, the management are being pestered by summons to appear at the Prosecutor General's office. You probably know that I met the Russian president, Chretien said: he asked me, as a favour (which I carried out), to speak to Bush, Blair and Paul Martin ... The reaction was positive. Which could not be said, evidently, about the response to our letter to Fradkov and Kudrin. Chretien later made very critical public statements about the investment climate in Russia, incidentally, saying that foreign investors should be extremely cautious in their dealings with the Russian authorities because the latter’s behaviour was often disproportionate. Probably he was offended that his request to Putin was given no consideration.

Nevertheless, on 30 August 2004 we did receive a reply from the government to our letter. We were informed that, given the court-approved demands for unpaid taxes, no deferral could be admitted under present legislation. By then they had already rolled out tax demands for 2002 and 2003 as well. I suggested that we take the Federal Tax Service to court. What had they been up to when they signed off our tax declarations? Did it mean that they also were shifting their interpretation of Russian legislation concerning internal tax havens? And a strange, I would go so far as to say unattractive, aspect of the entire business was that although the principal claims on the company were for tax arrears the bankruptcy procedure in 2006 did not begin with the Ministry of Tax and Excise but, in essence, with Rosneft. It started in December 2004 when, operating through the BaikalfinansGroup shell company, Rosneft bought Yuganskneftegaz at a bargain price and then, quietly, bought Yukos liabilities of $473 million at a discount from a syndicate of Western banks.

The valuation of Yukos assets, include Yuganskneftegaz, was made by Dresdnerbank Kleinwort Wasserstein. The German bank was then headed by a man [NG footnote: Matthias Warnig] who had lived in the same block of flats as Vladimir Putin when the latter worked in East Germany. They were on friendly terms, it is said. Why not indeed? Colleagues can be friendly, can’t they? After the country’s reunification this same German voluntarily admitted to the security services that he had worked for the Stasi, the East German secret police. Nevertheless, he was allowed to remain at Dresdnerbank and, from 2000 onwards, he headed its Moscow branch. The Germans valued Yukos at $5 billion less than J.P. Morgan, the American bank we hired to do a valuation. Rosneft got Yuganskneftegaz on the cheap. Expropriation, to put it plainly.

Who in your view is personally responsible for the destruction of Yukos?

I consider than Igor Sechin bears the personal responsibility. One, he is board chairman of Rosneft. Two, combining that and his post as deputy head of Putin’s administration, Sechin exploited his position to the full. We know that behind the Kremlin walls there were not so much different approaches to dismembering Yukos as a clash of appetites. Gazprom, after all, also wanted a slice of the company which owned licences to develop gas fields. The Gazprom board was then headed by a man known today throughout Russia and the world, Dmitry Medvedev. His team and that of Sechin fought a hard battle over the assets of Yukos. Sechin emerged the victor. That was because, it seems, to me, he oversaw the whole process and would periodically report back to Putin on his latest achievements.

Putin, I consider, was guided by two ideas. Let me first provide a little background. One of the people behind the Kremlin project in setting up the Rodina party was Yury Skokov. He is a bright fellow. During the Yeltsin period, in the early 1990s, Skokov was secretary of the presidential Security Council and a candidate for the post of deputy premier. He left politics after the storming of the “White House” [held by the rebellious Supreme Soviet or parliament, in October 1993] and I think it was a matter of principle. Well, when Rodina was set up he was one of the main figures involved.

Rodina leaders Skokov, Rogozin and Sergei Glazyev often met together. Once Yury Skokov show me a ten-page report that he sent Putin in early 2003. Taking Russia’s geographical position, her natural resources and the condition of the economy into account, it said, the State must remain on top of the situation and keep various means at its disposal for regulating the development of the energy sector. The report also advised that the gas industry should not be run entirely by private companies. These were entirely reasonable suggestions, I think, given the stage Russia has reached in its development. Oil and gas in our climate and territory form the basis of Russia’s economic and social existence and underpin the cost price of our output.

The report was placed on Putin’s table. He kept hold of it and did not pass it over to be archived. The idea of turning Rosneft into the kind of company it is today was, in part, derived by Putin from that Rodina report. That is the first motive guiding Putin in the Yukos affair. There was a second. I would like to say, immediately, that I was told this part of the story by several people, i.e. I received the information from several sources, independent one from another.

In February 2003 the Union of Entrepreneurs and Industrialists held its regular meeting with the Russian president, as always in one of the Kremlin halls. Among other speakers Khodorkovsky said that the sale of Severnaya neft [Northern Oil, a company Yukos wanted to acquire, V.Ya] had not been exactly fair since not all were allowed to put in an offer. Putin responded to Khodorkovsky’s criticism by implying that Yukos was not spotless either, and faced problems with tax payments. (This episode was even shown on TV.) That was only the beginning, however. Khodorkovsky spoke again and appealed to Putin, asking for his approval to lay an oil pipeline to the western regions of China. It was a $3 billion project, to be financed by Yukos and Chinese companies. Agreement at the highest level was essential. Supplying oil to China via the pipeline would have cost Yukos (which was fulfilling a Russian-Chinese government agreement) two times less than transporting it by train.

Putin said, “No.” There was a plan to build a pipeline to the East, ending at the port of Nakhodka, said the president. It would cost $10 billion and that was the project that should be implemented. Khodorkovsky objected: that project involved State funds whereas Yukos intended to invest private capital that would make no demands on the budget — all the company needed was approval from the top. Putin repeated, “No.” Khodorkovsky should have kept quiet but (according to those who heard it with their own ears) he said: “Vladimir Vladimirovich, you do not understand the importance of establishing relations with China ...” And sat down.

After this meeting Khodorkovsky was told unequivocally to leave Russia. He would not budge an inch: What did I say that was wrong? he demanded.

Did the destruction of Yukos mark the end of the oils wars in Russia or are they still going on? What in this context do you make of the scandal concerning TNK-BP?

I don’t know all the details and, after all, I am not an oil man. I can only say that BP on arriving in Russia frequently modelled its business activities on the patterns of Russian companies. In other words, the management and its Russian advisers considered that they could act in a risky, and perhaps unlawful, way. It seems that has tripped them up.

But they were allowed to behave unlawfully for a long while. Why now?

I don’t know, perhaps someone wanted a share of the booty.

Putin says that the priority for his government is the fight against inflation. Does the cabinet of ministers have the means to fight against rising prices?

There are, essentially, two weapons. One, a reduction in unjustified budgetary expenditure. Two, the monetary and credit policy of the Central Bank. It should give banks facing liquidity problems its excess funds to support a variety of projects. The Bank of Russia is doing nothing of the kind, however. All it does is to carry out transactions on the currency markets to ensure that the rouble-dollar exchange rate keeps steady.

There is often talk these days about Russia catching the “Dutch disease”. This happens when a country is flooded with petro-dollars. No one mentions, for some reason, that the Netherlands though tiny comes fourth in the world for investment abroad. The Dutch economy is developing in a satisfactory way: it is no longer necessary to invest at home and so it invests abroad. We are doing the same with our currency earnings from abroad, buying up US Treasury bills. The government set up a Stabilisation Fund. Then they renamed it the Fund of Future Generations. Why the heck areon’t they repairing the roads then? What are they thinking about? For generations to come the future will depend on a developed infrastructure. First build your roads — a market is impossible without them.

In the 1990s you headed the Central Bank three times ...

Four times. After the August 1991 putsch I was sacked and, within a week, brought back.

During the last eight years you have been a Duma deputy and board chairman of the country’s largest oil company. Can you compare the previous decade to this, two periods in Russia’s recent history and in your own life?

The 1990s were unpredictable but very interesting. There was a feeling we were going somewhere, that the country was evolving although with definite leaps and zigzags. If we talk about this decade then I have no regrets about the three years when I worked for Yukos. They were extremely useful for me but, regrettably, extremely distressing as well. I encountered a lawlessness from the courts and from those enforcing the law ... excessively aggravated by — how should I put it? — the forces behind them. If someone makes a mistake (I have in mind, say, the Yukos affair) then it can be corrected, but let’s do it in a civilised fashion. In Russia it is someone wearing cavalry breeches, boots and a military cap who sets about correcting such “mistakes” — even if the uniform is not visible.

I think the blame for it all lies in a certain decline in standards of public service and the provincial attitudes of today’s officials. Hope lies with the rising young generation in business; they are very capable kids and learn quickly. These 30-40 years old are not given to groundless optimism. Their approach not just to business but to life in society is entirely rational. That is cheering and, to some degree, gives me hope.

Victor Gerashchenko (b. 1937) was appointed chairman of the Soviet Central Bank in 1989. Head of the Russian Central Bank in the early 1990s, he was again its chairman after the 1998 rouble devaluation and default. In 2002 he resigned and next year entered the Duma as a deputy of the Rodina (Motherland) party.