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. Last Updated: 07/27/2016

Yukos Takes Its Case to Washington

APYukos CEO Steve Theede, right, leaving the Houston court for lunch on Wednesday.
Yukos and Group Menatep took their battle with the Kremlin to Washington on Thursday, blasting Russia's image at a U.S. Senate hearing as a court heard a crucial challenge to Yukos' Houston bankruptcy filing.

Yukos CEO Steven Theede and Menatep director Tim Osborne gave testimony Thursday before the Senate Foreign Affairs Committee hearing on "Democracy in Retreat in Russia."

Theede said that investors should be wary of doing business in Russia and that the Russian government's "ruthless" campaign to dismantle Yukos has dealt "an important economic blow" to "America's energy security," according to a copy of his remarks.

Osborne said Yukos and Menatep were "the victims of an illegal, politically motivated campaign" and questioned Russia's membership of the Group of Eight industrialized nations and the country's accession to the World Trade Organization.

The hearings came as Menatep and Yukos sought to escalate the public relations furor around the Kremlin's conflict with Menatep to the level of geopolitics by attacking Russia's image ahead of next week's summit in Slovakia between President Vladimir Putin and U.S. President George W. Bush.

As Osborne and Theede gave evidence, a Houston judge heard the second day of Deutsche Bank's challenge to Yukos' bankruptcy filing. The judge's decision will be crucial for the future of the Kremlin's plan to get formal control of Gazprom by merging Rosneft into the gas giant, a first step to liberalizing the market in Gazprom shares.

The Kremlin's battle with Yukos and Menatep has spiraled into chaos since the Houston bankruptcy case brought a host of legal threats to the state's controversial sale of Yuganskneftegaz, formerly Yukos' biggest asset, which was later purchased by Rosneft.

With Russian-U.S. relations already strained by disagreements over Ukraine, Russia's building of a nuclear reactor in Iran and potential arms sales to Syria, Menatep may get a sympathetic hearing from some politicians in Washington, analysts said.

Republican Indiana Senator Richard Lugar, the committee's chairman, presided at the hearing and criticized Russia in his opening remarks over its policy in Ukraine and Georgia and accused the Kremlin of stifling economic and political freedoms.

"In recent months, the Kremlin has taken action to stifle public dissent and political opposition," Lugar said. "Rival political parties have been suppressed, the election of regional governors was canceled, and most of the media has been brought under state control."

"This pattern of behavior has spilled into the Russian government's handling of the economy," Lugar said, before moving on to hammering the "campaign against Yukos and Mikhail Khodorkovsky," the main force behind Menatep, who has been in custody since October 2003 and is on trial for tax evasion, fraud and leading an organized criminal group.

Lugar called on Bush to raise the issues at his meeting with Putin, as did Osborne, while Theede played to U.S. concerns about energy supplies, a key foreign policy concern as Washington seeks to lessen dependence on Middle East oil.

"When Americans ask why we should care about all this, I could give a number of reasons but I will focus on the area I know best -- energy," Theede said, according to a copy of his speech released ahead of the hearing.

"As the world's largest oil consumer, clearly America's energy security and the strength of its economy depend in good measure on the stability and reliability of global oil supplies. Yukos had the potential to add significantly to the stability of the supply coming from Russia, making [Yukos'] dismantling an important economic blow."

As late as December 2003, The Wall Street Journal reported that ExxonMobil could be interested in buying a significant stake in Yukos. Now China and India are reported to be involved in the scramble for Russia's massive energy resources.

Finance Minister Alexei Kudrin said earlier this month that a consortium of Chinese banks lent Rosneft $6 billion, which Rosneft said was not connected with the purchase of Yugansk. India's Petroleum and Natural Gas Minister Mani Shankar will arrive in Moscow next week for talks about India's state-owned Oil and Natural Gas Corp. buying a stake in Yugansk, Indian media have reported.

Osborne said the Russian government had pursued a vendetta against Khodorkovsky because of his "political activities." The campaign developed into an asset grab, he said.

"What began as a vendetta brought by the Russian authorities against Mr. Khodorkovsky and his colleagues has now expanded to include intimidation and harassment of employees at all levels of Yukos," Osborne said, according to a copy of his speech released ahead of the hearing.

"Our objective is to protect Group Menatep's remaining assets, seek compensation for the losses Yukos shareholders have incurred and demonstrate to the world that Yukos, Group Menatep and its founders have been the victims of an illegal, politically motivated campaign designed to expropriate and renationalize Yukos with total disregard for the rights of all shareholders, the rule of law and generally accepted principles of international law," Osborne said.

A total of $35 billion has been wiped off Yukos' market value since Khodorkovsky's arrest in October 2003, leaving the company -- once the darling of the Russian stock market -- worth just $1.7 billion.

Osborne said U.S. state pension funds "such as that of the state of Ohio" have been hurt by the actions of the Russian state, with "losses to U.S. shareholders estimated in the region of approximately $6 billion."

Menatep and Yukos have some powerful public relations firms lobbying to get their case across. Yukos is working with Burson-Marsteller, one of the world's largest PR firms, while Menatep is using APCO Worldwide, which last year announced a strategic alliance with Kissinger Associates, the strategic consulting company headed by former U.S. Secretary of State Henry Kissinger.

Kissinger met with Putin in the Kremlin last Saturday in what was described as a private visit and said he had passed on Bush's "best wishes" to the Russian president.

"Menatep and Yukos are trying nuke Russia's reputation in the United States," said Eric Kraus, chief strategist for Sovlink Securities, by telephone Thursday. "They are now fighting the interests of the Russian state and are engaged in a scorched earth policy."

"If you look at the crimes they are accused of, they shouldn't get a hearing, but because of the diplomatic atmosphere at the moment they will get a very friendly hearing from certain elements in Washington who are seeking to damage relations with Russia. Certain neo-conservatives are happy to use Menatep and vice-versa."

Khodorkovsky's business associate Platon Lebedev has been in custody ever since his arrest in July 2003, while Alexander Pichugin, Yukos' internal and economic security chief, is on trial for murder. They deny the charges.

With the Yukos affair now playing out for a U.S. audience, investors were watching hearings at a bankruptcy court in Houston, where Deutsche Bank is challenging Yukos' right to file for Chapter 11 bankruptcy protection.

On Wednesday, Deutsche Bank lawyer Hugh Ray told the court that Yukos executives had backdated documents to help the chances of U.S. courts interceding, Reuters reported.

Yukos chief financial officer Bruce Misamore, who relocated to Houston in December, said under cross-examination from Deutsche Bank that Yukos had moved funds from subsidiaries to the United States to bolster its claims, Reuters said.

Misamore set up a subsidiary, Yukos U.S.A., and established two Texas bank accounts holding about $27 million to cover business costs and legal fees.

"We put it here to add additional substance in the United States," Misamore said.

Ray said Misamore had signed documents stating that funds were transferred on and around Dec. 14, when Yukos filed its Chapter 11 bankruptcy claim, even though those papers were drawn up weeks after that date.

Misamore admitted backdating the documents, but said the funds had been transferred on the dates listed, Reuters said.

Zack Clement, Yukos' lead lawyer, said Russian courts "haven't treated us fairly," and said Misamore's residence and the existence of the accounts made the Houston court a proper forum to hear the case, The Associated Press reported.