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CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE BRIEFING GUEST: MIKHAIL KHODORKOVSKY, CEO, YUKOS OIL COMPANY SUBJECT: CIVIL SOCIETY AND THE ROLE OF BUSINESS MODERATOR: JESSICA MATHEWS LOCATION: CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE, WASHINGTON, D.C. DATE: THURSDAY, OCTOBER 9, 2003 (C) COPYRIGHT 2003, FEDERAL NEWS SERVICE, INC., 1919 M ST. NW; SUITE 220; WASHINGTON, DC , USA. ALL RIGHTS RESERVED. ANY REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION IS EXPRESSLY PROHIBITED MS. MATHEWS: (In progress) -- raised productivity, lowered productions costs by two thirds, introduced western standards of corporate transparency, and as a result of all that, and more, is today being courted by Exxon-Mobil, Chevron-Texaco, avidly. At the same time, as everybody I think also does know, since last July, he has been in, one might say a cold war with President Putin, has had colleagues, business colleagues imprisoned, offices raided, including many philanthropies that he has founded and supported. And there are, I think, as many theories as to why and what's going on as maybe there are people in this room, and perhaps we'll get the scoop today on just what's going on. So, we have a great deal to hear about. It is truly a very great privilege for us to host him here at Carnegie, and hope we will be able to welcome him back many times in the future, and we welcome all of you as well. (Applause.) MR. KHODORKOVSKY: (Note: Remarks are through translator.) Thank you, ladies and gentlemen, for giving me this opportunity to speak before you today. Today, unlike my usual talk, here I am going to talk about the relationship between business and society. I'll say right off the bat that this is a topic that I often speak about in Russia. But usually when I'm abroad, my petroleum component seems to be of more interest. Today, I've been given a chance to speak to you about my social component, and it will give me great pleasure to do so. Russia, having been -- having received an investment grade rating is a very positive thing for our country, and we definitely deserve it, because the whole question of risks to private property ownership in Russia is something that has been dealt with and completely solved in Russia several years ago. And today, the number one question on the agenda for Russian society is an entirely different question. And the question is that of building a civil society in the country. I know that in Western countries big business is not what you think of immediately when you think of what the best friends of civil society are. But it took society a long time to get to that point. In Russia, business is one of the primary conducts of the very idea of a civil society. Let me explain why. Because big business was among the first in Russia to run up against the need to participate in global processes. We need integration with international companies, with the international business community. In order for this integration to be successful, we need to have comparable conditions in our respective societies -- an independent judiciary. This is the rule. This is the norm in Western society. It's something that is absolutely imperative for normal big business. Five, ten years ago, when our business wasn't trying to integrate, when we weren't transparent, an independent judiciary was not something that was all that important for us. We dealt with our problems in other ways. But then we discovered that if you want to make your company transparent, you need to have the infrastructure, external infrastructure. And the first building block of that is an independent judiciary. Questions of corruption -- it's not easy to reconcile yourself to corruption when your company is being audited by independent auditors, when your CFO, your controller, indeed, a large part of your management team are foreigners, for whom corruption is not a light issue to be dismissed easily when all your accounts are completely transparent. So when corruption for you becomes something problematic, you don't want others to have advantages because they can participate in corruption -- and so on, and so forth. And what's the result? It's clear you find yourself with facing a conflict. When, on the one hand you have big business that has moved forward towards the global society, comes up against the bureaucracy, a specific or -- yes, specifically the law enforcement bureaucracy, for whom the previous rules of the game were preferable. This is not to say that other parts of society haven't come across this conflict either. But in order to enter into the conflict, you have to feel yourself sufficiently independent. And here, there aren't all that many that can feel themselves sufficiently independent to do this. In this conflict, each of the sides uses whatever it feels it has at its disposal. We feel ourselves better protected when we discuss these issues in public. We feel ourselves more protected when these issues are discussed in open trial courtrooms. And perhaps the court may not be all that independent, but independent experts that are allowed to sit in on these sessions have an opportunity to express their opinions. The other side uses what it has at its disposal. My partner, Mr. Lebedev, has been in jail for the past three months. This, despite the fact that all of the reasons that the prosecutor gave for why he should not be granted bail have all proven themselves to be false. An employee of mine, Mr. Pechugan (sp), has been in jail for even more than three months, and we still don't know what evidence the -- (inaudible) -- has given of his guilt, because there have been five court hearings so far, preliminary hearings on the Lebedev and Pechugan (sp) cases, and each one of the five has been a closed session, while the defense lawyers have been forced to sign confidentiality agreements, gag orders. So, we don't know what evidence the prosecutor has, nor do we know even whether the prosecutor has any evidence. Today, the defense lawyer who defends Mr. Lebedev in court had his offices searched in a brutish fashion. The lawyers told me by telephone today in fact that there were no court orders allowing the searches to begin with. Furthermore, the lawyers were not allowed to be present during the searches. Now, all of this is against U.S. law, but it's also against Russian law. We are very worried that the evidence that is going to be presented in the cases will have been fabricated, because the measures that the prosecutor is taking right now -- for example, conducting searches in a children's boarding school -- it's subsidized by our company -- searches in the homes of people who have been locked up for the past three months. All of this tells us that the prosecutor doesn't have any case materials, and yet they promised the president that they would have some -- at least as, from what we can gather, from what Mr. President said in his public speeches on the subject. Put all that together and you have quite a dangerous situation. You may ask yourself Why is it that Yukos finds itself at the center of this conflict? There can be any number of explanations. There is no doubt that Yukos is something of an example for many Russian companies. Yukos is an example of openness. Yukos is an example of a Western oriented company. And yes, Yukos' shareholders are an example of independent behavior, independent of the bureaucracy, independent opinion, and of the actions that are being taken against Yukos are also an example. And I hope that our behavior in response to all of this also serves as an example -- an example of that fact that in our society today, despite all the obstacles, you can effectively resist the law enforcement bureaucracy. You have no doubt often heard that one of the reasons for all this happening in the first place may have been political activism. I propose to you that you view this subject in two separate parts. The first part is lobbying activity by Yukos as a corporation. Indeed, we, along with our business colleagues, together defend our interests before the parliament. We do this in public, we do this openly, and we feel this is a perfectly normal thing to do. And our activism in this area is still a far cry from what American corporations do with the Congress. We present our point of view, other sides present their point of view, and it's up to the parliament to decide. And I think this is exactly the way that issues of this sort should be decided in a civilized society. But, the company does not take part in political battles. We don't, as a company, support individual deputies in the parliament. We don't support political parties. As a company, we don't take any part in any election, and this is natural. At the same time, neither the shareholders of the company or I personally have never renounced our civil rights as citizens. And we do not demand that our employees renounce their rights as citizens. Some of our employees support some political parties, other support other political parties. Some of our shareholders support -- some of our shareholders are standing as candidates with the United Russia Party -- that's the pro-government party. Others of our shareholders are standing as candidates for the Communist Party. And it's entirely possible that together with the Communists they may vote for nationalization. But until the point that they make that decision, we're going to pay dividends to them. (Laughter.) And that's normal. So what is Yukos and what are the shareholders doing to create this civil society, the need for which I discussed earlier? We feel that the most important thing for them to be a civil society created in Russia is education. By education, we mean teaching people what their rights are, giving people the opportunity to feel themselves a part of the global world. By -- when I say we, by which I mean Yukos as a company and its shareholders, have created an organization called -- (inaudible Russian name) -- which translates as Open Russia. This is an organization whose professional activity is philanthropy. Their philanthropic projects budget exceeds $100 million a year. We are teaching tens of thousands of high school teachers how to use the Internet as an educational tool in their work. This is something we have been doing for several years already. Every year, tens of thousands of teachers go through this training. We found a program by the name of New Civilization. This is a program where school children take part in role-playing games to teach them how modern day society functions. One of our most recent programs is providing funding for the Russian State Humanities University. This is a hotbed of democratic thought in our country. This year, we created several regional branches of the School of Public Policy that was founded ten years by Yilyena Nimirobska (sp) and she's been running this school in Moscow with help from the European Union over the past decade. And the list goes on and on. In other words, we just don't talk about civil society. We're doing all we can to help it along. Maybe what we're doing is not all that much, but we're trying. Forecasts for further development. Russia has made its choice in the question between private ownership and state ownership of property, and the choice was private property. This choice has already been made, and nobody's questioning this choice. The question right now is a much more difficult choice. Are we going to become a democratic Russia for the first time in our thousand year history, or are we going to continue along our thousand year old path of authoritarianism? This is not a simple choice. But modern civilization gives Russia no hope of becoming a modern society in the economic sense without becoming the same in the democratic sense. Thank you. (Applause.) MS. MATHEWS: Let me ask you, in asking questions, to wait for a microphone. And as a courtesy to everyone, to please identify yourself, your name and your affiliation. The floor is open. Q I am Roger Pajak, formerly with the U.S. Treasury Department. (Speaks Russian.) Mr. Khodorkovsky, I'd like to ask you a general question. Some commentators have characterized the present political system in Russia as managed democracy. Others have used other terms. I'd like to ask you, how would you characterize the current state of your government, the current state of political conditions in your country. MR. KHODORKOVSKY: There is no doubt in my mind that what we have in our country today could not, in the Western sense of the term, be called a developed democracy. And there's also no doubt that society is right now faced with the choice -- whether now are we going to move in the direction of a normal democracy or a managed democracy. It's simpler to call that plain authoritarianism. MS. MATHEWS: (Inaudible) -- in front of you. Q (In Russian) -- with Moscow Times. MS. MATHEWS: Can you just let him translate? TRANSLATOR: Let me translate the first question. From the Moscow Times here. There are two other people who have been involved in this so-called cold war with the authorities -- Gusinsky and Berezovsky. Do you maintain contact with them? Is there any cooperation between you and them? Q And a follow-up question in English -- (laughter) -- TRANSLATOR: You didn't like my translation? (Laughter.) Q It's been reported that you've had some contacts with the White House, the Bush White House over the years, including a dinner with Condoleezza Rice. I was wondering if you could confirm that and talk a little bit about what your relationships are with them these days? And if you'd also name the members of your -- and you mentioned some people from your company who are -- (word in Russian.) MR. KHODORKOVSKY: (In Russian.) (Laughter.) Q Okay, I'll leave it at that. (Laughter.) MR. KHODORKOVSKY: First of all, I do not consider that I am in a cold war with the Kremlin. I don't want to name names, and I won't name names right now, but there's no doubt that the majority of the president's administration has democratic views about the development of the country. There's also no doubt that the prime minister has gone on the record about our situation, also from a very democratic standpoint. On the other hand, there are those people who take the opposite position. I am probably more of a pure businessman than my colleagues Gusinsky and Berezovsky were, though I see my job as doing my business, trying to help promote the development of civil society as I see it, and to use lawful methods to protect myself from the unlawful actions of the law enforcement agencies. As concerns my contacts with the White House, the American White House -- (laughter) -- I am glad to brief members of the U.S. government on those issues which interest them. Of course, the questions that interest them more are questions relating with my business. I don't have any secret, behind-the-scenes meetings with members of the U.S. government that aren't broadly known to the U.S. press. My one and only meeting with Condoleezza Rice was at a very large dinner event given by the Library of Congress. MS. MATHEWS: In the back, please. Q Mark Pomar from IREX. According to press reports, you are a very strong proponent of international exchanges, and have been quoted as supporting up to 50,000 exchanges from Russia to America. Could you comment on the importance of exchanges and to what extent is Open Russia committed to supporting them? TRANSLATOR: What was the last part of the question? I missed it? MS. MATHEWS: To what extent -- TRANSLATOR: The role of Open Russia -- sorry about that. MR. KHODORKOVSKY: We do indeed believe that people-to-people contacts are an important element in strengthening the relations between countries. Furthermore, we feel that opportunities for our country's young people to interact with their contemporaries in other countries gives them an opportunity to -- gives them an opportunity to experience civil society first hand. We're still far from 50,000. Senator Bradley's program had indeed covered 50,000, but we are only a small part of his big program. MS. MATHEWS: Yes, right here. Q Joanne Arnet (sp), PFC Energy. I was just curious, the picture you paint about the political environment in Russia makes it seem like it would be very difficult for U.S. companies looking to invest, particularly in the energy sector. And given what you've said about the problems that your company faces, how do you view then the risks that a foreign company would face investing in Russia? And secondly, do you have political ambitions for the presidency of your own? (Laughter.) MR. KHODORKOVSKY: Tell me, please, do you think that American oil companies produce the bulk of their oil in countries that would be called democratic? (Laughter.) Unfortunately, good business environment and democratic society are two separate issues. In the long run, these two issues do intersect, but that's already at the second stage. Large companies -- American ones, European ones -- can protect their interests at the level of intergovernmental discussions. In exactly the same way, nobody wants to violate the interests of investors. And in this regard, Russia's investment grade rating is well deserved. At the same time, though, movement towards the creation of a democratic society provides an environment where there's business opportunities for medium sized and small sized businesses as well, Russian and foreign. But at the beginning, it's always the big companies. That's the stage we're at right now. And now about my political ambitions. Nobody in Russia asks this question seriously at all. (Laughter.) When they do surveys, 70 percent of the population doesn't like Russian oligarchy, and another 20 percent more dislike than like. (Laughter.) MS. MATHEWS: But maybe you would like to run for governor of California. (Laughter.) In the back. The gentleman standing, and then we'll take you next. Q Jim Mapstafio (sp) with Bloomberg News, and I have a business question. There's a lot of concern here about the impact of energy prices on the economic recovery. Last month, OPEC announced that it would cut production for the winter by 900,000 barrels a day. They've also asked Russia and other non-opec producers to join in, restrain supplies, and to try to defend prices. Do you agree that Russia should cooperate with OPEC, should reduce supplies to defend prices? And is there a particular, you know, price level where you think that should work if you do agree? MR. KHODORKOVSKY: I'm all for high oil prices. (Laughter.) Excuse me. (Laughter.) But I feel that for Russia to consciously decide to reduce production, or more precisely to reduce exports, doesn't make sense, because the market we're in is a competitive market, and the place that we move out from is very quickly filled in by our colleagues from the Caspian region. There is another problem. Russian production is very dependent on transportation. Right now, we're not able to keep up with building enough pipeline capacity. And part of the oil -- the crude we produce, we need to ship by rail, and that's very expensive. If oil prices drop, it's possible that Russia will reduce production out of purely economic considerations. MS. MATHEWS: Yes. Q (Question in Russian.) MS. MATHEWS: Can you let the translator -- TRANSLATOR: The first question was, indeed, surveys show that 70 percent of Russians don't like oligarchies, and another survey showed that 60 percent of Russians, having heard about all this Yukos case, how does that affect you and the company? And the second question was you were recently quoted in the press as saying you will not become a political immigrant, and could you comment on that? MR. KHODORKOVSKY: As always, sociological surveys have two sides. When I found out from that same survey that 40 percent of my fellow citizens are keeping track of what's going on with Yukos and know about my company, that was very significant for me,
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