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What now for Russia? Part three

Russian economy | What now for Russia? Part three Anthony Harrington

On December 15, a few days after this blog was penned, a judge appointed by the Kremlin and sitting alone is expected to pronounce a verdict in the second trial of Mikhail Khodorkovsky and Platon Lebedev, the former directors of the one time flagship Russian company Yukos Oil.

The two are accused of stealing all the oil ever produced by Yukos, a blatantly absurd charge, and of acting as an organised group to launder the money resulting from the embezzlement. The “organised group” charge is a carefully crafted addition since it allows an even stiffer sentence to be passed.

If the judge confounds his critics and delivers the innocent verdict that any just court would render, it is safe to say his remaining days on the bench, and possibly even his days as a free man, would be few indeed. He is, after all, the Kremlin’s appointed man, hand picked for the job, and this is part two of the Kremlin’s set piece show trial of the century. So far, the trial has done a fantastic amount of damage to Russia’s reputation and has outraged people across the civilized world through the prosecution’s enthusiasm for bringing absurd charges and for its blatant disregard of due process and proper court procedure.

Imagine, for example, that you run a major oil company and are charged with embezzling, say, $24 billion worth of crude oil, virtually every drop your company’s subsidiaries have produced since you took over six years earlier. You would smile with amusement and reach for the accounting books, since you run a very orderly operation with world class accounting-to-US-GAAP standards. Imagine your shock when the prosecution waves your books away and rules them inadmissible in court. It couldn’t happen, you say? It could and it did in the Khodorkovsky trial.

So, you discover that the prosecutors don’t want to know what your accounts say about the sale of the oil.  That’s not relevant, they say, because you embezzled it… You scratch your head and say, “That is an absolutely enormous amount of oil. How could I possibly have embezzled it? And if I did, how come my operation didn’t go bust years ago with no cash coming back into it?” “That’s for you to tell us,” they say smugly. It will begin to dawn on you that if you can’t change the rules of this game, you are oh so screwed… Which, of course, is the point of a show trial. “We’re going to give you a fair trial boy, and then we’re going to hang you…”

This kind of thing does not go down well anywhere where the rule of law operates. Here, for example, is Senator Roger Wicker speaking in the House of Representatives. He makes it clear that the Khodorkovsky trial is about more than the two men involved. It raises questions as to whether there actually are truly functioning independent institutions in Russia that are not the private property, so to speak, of whichever gang is running the Kremlin.

"A guilty verdict on December 15 would show that when Russian authorities want to, they can act above the law, as they did in the first trial. It would also underscore that property rights in Russia are meaningless and would send a chilling message to investors and businesses alike, both domestically in Russia and internationally. Thankfully, it is becoming increasingly difficult for the Russian authorities to hide the illegitimacy of the charges and the process. This case is symbolic of broader and disturbing trends in Russia.”

Here too, is the recent presidential candidate and US Senator, John McCain:

“… then there is the sad, ongoing saga of Mikhail Khodorkovsky, whose company was stolen from him, and who has languished in jail for seven years. When his sentence expired recently, new charges were manufactured against him. He is not being tried by a jury, just a single judge, and the political fix has been in for a long time. He could now face up to 12 more years in prison. If ever there were a case of ‘legal nihilism' - of an affront to the very values of equal justice that we hold dear - the case of Khodorkovsky is it.”

QFINANCE has an excellent Viewpoint by the former Yukos Oil CFO Bruce Misamore, entitled "Lessons from Russia", in which Misamore sets out eloquently what Khodorkovsky’s contribution was to Russian corporate governance, and why he accepted the post of CFO at Yukos in the first place.

“During my initial conversations with the CEO of Yukos, Mikhail Khodorkovsky, he made it clear that he wanted Yukos to become a transparent stakeholder-focused company. His aspiration was, in fact, to set the agenda for other Russian companies and oil companies globally, making Yukos a world leader for operational excellence, corporate governance, financial reporting, and investor relations. It seemed like a place where I would be able to make a major positive contribution, not just to the company itself, but also to the wider Russian economy.

"Russian accounting had not really evolved since the Soviet era. It was primarily cash accounting, and they had no such thing as consolidation accounting. This meant that each individual legal entity was treated as a separate accounting entity and had to report to the government as such. This made it impossible to create a consolidated financial statement, which in turn caused a lack of sensible financial reporting and other practical problems. Michel Soublin, Yukos’ former CFO, and Khodorkovsky had already recognized that Russian accounting standards were inappropriate for a company like Yukos and had made a choice between International Financial Reporting Standards or US GAAP. Before I arrived, they had chosen the latter, in view of their plan to seek a listing for Yukos on a US stock exchange."


Does this sound like someone who is setting up an enterprise to embezzle all the oil his company produces? Or even a part of it? What Misamore’s account shows is the incredibly backward nature of Russia’s corporate governance and reporting structure as the country moved into the 21st century. One of the huge problems he and Yukos, and by extension all other Russian mining, production, and exploration companies face, is that it is actually illegal in Russia to disclose reserves of strategic materials, because – well – they’re strategic, you see?

Oil company accounting in a modern context is all about enabling readers of your accounts to understand how fast you are depleting your reserves and how well you are doing at adding to them – since an oil company that is running out of reserves and failing to replenish those reserves is one that is going to have its stock marked as a “sell”, or even as a “save-yourself-get-out-now” sell, by every market analyst across the globe. Yet in dear old Russia, proper reporting is a criminal act. Oh my oh my …. Fancy a punt on some Russian stocks, anyone?

Further reading on the Russian economy and emerging economies:

Tags: corporate governance , financial reporting , justice , khodorkovsky , Kremlin , McCain , Platon Lebedev , Yukos
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  1. AnthonyHarrington says:
    Wed Dec 15 17:04:06 GMT 2010

    The Judge's verdict has been delayed until 27th December, according to a note posted at the Khodorkovsky and Lebvedev Communications Centre. The delay was announced via a note posted on the courtroom door on the day the verdict was to be delivered. Sounds like the Judge decided to go fishing...

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