Written evidence from GML (FSP0009)

About the author

1. GML[i], via its wholly-owned subsidiaries, Yukos Universal and Hulley Enterprises, was the majority shareholder of the former Yukos Oil Company (‘Yukos’). 

2. In February 2003, Yukos CEO, Mikhail Khodorkovsky, appeared on Russian television with other business leaders in a meeting with President Putin, and called for action against state corruption[ii]. In October that year, Mr Khodorkovsky was seized at gunpoint, detained on trumped-up charges of tax fraud, and jailed with his colleague, Platon Lebedev. Both men spent ten years in prison.

3. In 2014, an independent Arbitral Tribunal in The Hague ruled unanimously[iii] that Yukos was illegally expropriated by the Russian Federation in a political move to eliminate Mr Khodorkovsky. The Tribunal described in detail how state-controlled Rosneft illegally acquired Yukos assets, including its largest oil facility, Yuganskneftegaz. In 2004, Russian authorities sold off Yuganskneftegaz in a sham auction. The winning bid came from Baikal Finance Group, a company which, only days before, had been registered with a capital of $358. Baikal won with a bid of over $9 billion and was then bought by Rosneft a few days later. The Hague Tribunal awarded compensation of $50 billion to former Yukos shareholders, which Russia refuses to pay.

4. Rosneft has since become Russia’s biggest oil company and the second-largest state-controlled entity. Since 2006, Rosneft has been listed on the London Stock Exchange.

5. GML is submitting evidence to the House of Commons Foreign Affairs Select Committee since both the illegal expropriation of Yukos and Rosneft’s subsequent listing on the London Stock Exchange show how the Kremlin’s kleptocracy exploits British financial institutions for its own geopolitical ends. We hope to inform the Committee’s Inquiry on the future of the UK sanctions regime.

A major loophole in EU and US sanctions against Russia: the flotation on the London Stock Exchange of sanctioned companies

6. We salute the Government’s broad approach in the Sanctions and Anti-Money Laundering Act. The new law will enable the UK, post Brexit, to protect human rights and the rule of law by imposing sanctions on individual abusers.

In the meantime, the Committee will be aware that the UK remains committed to the EU sanctions regime. EU sectoral sanctions were reinforced in September 2014, following Russia’s illegal annexation of Crimea and invasion of Ukraine. They target five Russian banks, three defence companies, and three energy companies, including Rosneft. While this policy is certainly right, the UK’s new sanctions regime gives the Government an opportunity, following the chemical-weapons attack in Salisbury, to begin the work of cleaning London of dirty Russian money. It should first close a harmful loophole in the current regime that allows companies, such as Rosneft, which are run by sanctioned individuals with close ties to the Kremlin, to raise money on the London Stock Exchange and enjoy all the prestige this brings. When Britain’s financial institutions launder the reputation of kleptocrats, they damage the country’s reputation at home and abroad.

7. Last year’s London listing of Russian company EN+ brought new urgency to this question. At the time of its launch, the energy group held a controlling stake in Rusal, a major Russian supplier to the military. Despite EU sanctions on Russian defence, the listing of EN+ raised not a single objection from the UK’s Financial Conduct Authority (FCA). Worse still, EN+ held a loan of almost $1 billion from VTB – a bank already under sanctions. Thanks to its listing, which raised £1.5bn on the London Stock Exchange, EN+ was able to repay a loan to a company under sanctions. When Oleg Deripaska, head of EN+, was himself sanctioned by the US Treasury in April 2018, the London Stock Exchange announced that it would suspend trading of EN+, only to backtrack later, when the US Treasury gave investors more time to divest from the company.

8. Following these events, Stephen Kinnock MP called on the Financial Conduct Authority[iv] to reconsider Rosneft’s listing. When the company launched on the London Stock Exchange in 2006, the Financial Services Authority declared itself satisfied that the prospectus set out the various risks to investors. However, the Authority’s legal advice saw that Rosneft’s unlawful acquisition of Yukos might breach the Proceeds of Crime Act[v]. A High Court judge said the London Exchange might come to resemble a “thieves’ bazaar”[vi]. Today, 700 million Rosneft shares are traded in London, representing over 6% of the total and a value of $3.9 billion[vii].

9. The London Stock Exchange and the FCA are powerless to delist Rosneft or any other sanctioned company. In its response to Stephen Kinnock MP, attached to this submission[viii], the Financial Conduct Authority explained: “We have a power to refuse an application for listing, but this can only be exercised if we are satisfied granting listing would be detrimental to the interest of investors. We cannot exercise these powers solely on the basis of the national security interest or on the basis of foreign policy concerns.”

10. Rosneft’s role in Kremlin foreign policy and the particular status of its CEO, Igor Sechin, are well known. Mr Sechin has been Vladimir Putin’s closest confidant for almost thirty years. In a profile published in March this year, the Financial Times referred to Mr Sechin as the “epitome of the group of all-powerful businessmen whose deep political influence and control over the country’s national resources depend on their proximity to President Putin. They are widely perceived in Russian society to be above the law and answerable only to the Kremlin.”[ix] Therefore, we welcome reports that British intelligence has placed Igor Sechin on a list of Russian oligarchs most closely connected to the Kremlin. We understand that the Government has approved this list, and is considering imposing sanctions.

11. In the words of the New York Times[x], the Kremlin uses Rosneft to build influence in places where the United States has stumbled or where power is up for grabs. Over the last year, Rosneft has signed cooperation deals with Cuba and Venezuela, given financial support to Kurdistan, sold shares to a Chinese energy trader, and launched new projects in Egypt, Vietnam and Brazil.

12. Since 2014, Rosneft has been under US and EU sanctions. In July 2014, following Russia’s illegal annexation of Crimea, the US imposed sectoral sanctions on Rosneft. They limit Rosneft’s ability to do business with US persons and companies. Since September 2014, EU companies can no longer provide Rosneft with anything other than short-term loans (shorter than 30 days) or deal in new shares or bonds from those companies. EU companies are also banned from collaborating with any new oil exploration and production projects in Russia. Any breaches of these sanctions can lead to criminal charges in all EU Member States. The US also imposed sanctions on Igor Sechin: his assets in the US are now frozen, and any business with him or his companies is illegal.

13. Future UK sanctions should close the harmful loophole which today allows a company such as Rosneft – run by an internationally sanctioned individual and used as an agent of Kremlin foreign policy – to raise money on the London Stock Exchange. As the United Kingdom renews its ambition to shape global affairs, its message to the Kremlin must be clear: those who attack human rights and the rule of law, and who seek to undermine our democracy, have no place in our City. 

14. The story of Yukos and its brutal destruction is a case study in kleptocracy. We salute this House’s adoption of a Magnitsky amendment to the Sanctions and Anti Money Laundering Act – Yukos features in the original US Magnitsky Act of 2012. Shortly after he publicly challenged Vladimir Putin, Mikhail Khodorkovsky was seized at gunpoint, detained on trumped-up charges, and thrown in jail alongside his colleague, Platon Lebedev. Both men spent 10 years in prison. The European Court of Human Rights condemned their trials and those of two other Yukos colleagues, Alexei Pichugin and Vasily Aleksanyan. Mr Aleksanyan later died because Russian authorities denied him urgent medical treatment when he refused to sign false testimony against his former colleagues. Mr Pichugin remains in jail to this day, Russia’s longest-serving political prisoner. In 2014, the European Court of Human Rights awarded €1.9 billion in compensation[xi] to Yukos shareholders, which Russia refuses to pay.

The lesson for this House is clear: if we fail to enforce the rule of law, protect human rights and punish kleptocracy, we put our own democracy at risk.

December 2018

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