Crisis Week For Yukos

The Yukos affair began on July 2, 2003, with the arrest of director Platon Lebedev. Exactly one year later, Russian police marked the anniversary with a dramatic raid on the company’s downtown Moscow headquarters. At 2:00 p.m. on Saturday July 3, some 50 police and procuracy officials descended on the building and spent the next seven hours rooting through the offices of top managers. They took away computer hard drives and boxes of documents, and considered, but decided against, carting away the company’s computer servers. Meanwhile, OMON riot police surrounded the building.

The investigators said they were looking for evidence of tax fraud in the Yukos subsidiary Samaraneftegaz. The dramatic police action may have been triggered by reports that the M-Reestr consultancy, which was preparing a list of Yukos shareholders, had on July 1 shifted responsibility to Yukos subsidiaries in Tomsk, Nefteyugansk, and Samara (Novaya gaezta, Gazeta, July 5)

On Thursday July 1, a Moscow court had given Yukos five days to come up with $3.4 billion to cover its 2000 tax bill, and on Friday it was presented with another $3.4 billion bill for 2001. The same day its bank accounts were frozen, making it virtually impossible for Yukos to meet the demands being made upon it. These blows caused Yukos shares to fall 17% on Friday, cutting its capitalization from $18.5 billion to $15 billion, and dragging the whole RTS market down 3.2% (Kommersant, July 5)

Viktor Gerashchenko, the former Central Bank head who was elected chair of the Yukos board of directors on June 24, tried desperately to strike a deal with the government to save the company. But he said that Kremlin chief of staff Dmitry Medvedev, Prime Minister Mikhail Fradkov, and Finance Minister Aleksei Kudrin were not returning his telephone calls. He told journalists on Friday that “the business activities of the company will soon be halted.” The most imminent threat of bankruptcy is from the foreign banks that hold $1 billion in loans to Yukos (Gazeta, Kommersant, July 5)

Observers were shocked by this turn of events, not least because President Vladimir Putin had said in Tashkent on June 17 that the government had no interest in bankrupting Yukos. Those words led to a 44% surge in Yukos shares: from $6.20 on June 16 to $9.25 on June 21, only to fall back to $6.50 at the close of business on July 2 (Novye izvestiya, July 5).

Putins words should have been more carefully parsed. Indeed, the government may not be interested in bankruptcy per se. But it clearly intends to transform the ownership of the company with or without messy bankruptcy proceedings. There is reportedly an internal debate over moderate versus radical breakup plans (Kommersant Vlast, June 28). The soft variant is to persuade Group Menatep to sell or dilute its controlling stake — perhaps in return for a shorter jail sentence for former Yukos chairman Mikhail Khodorkovsky. The hard variant is to raise the cash it owes by selling off choice Yukos subsidiaries.

Last week figures were released showing that Yukos was the number one Russian oil producer in the first quarter of this year. Yukos pumped 1.7 million barrels per day (more than Iraq!), edging out Lukoil at 1.66 mbd (Kommersant, July 5). It appears that the Yukos subsidiaries where production occurs will continue to operate even while the mother company is being dismantled.

The government’s actions at the end of last week exceeded the worst expectations of jaded Russia-watchers. The courts willingness to revoke tax shelters at the governments request, and the specter of armed men raiding the Yukos offices, make it clear that any and every company is vulnerable. Still, both Russian and foreign companies want to believe in business as usual. On Thursday, Putin met with 21 Russian businessmen. This meeting, twice postponed, was the first such gathering since November 2003. It was reportedly a frosty affair, with none of the dialog of earlier meetings (Moscow Times, July 5). Not a single oil company director was present.

Also on Friday, BP head John Brown was in Moscow giving a talk on “Global energy and Russia’s role.” Foreign companies understand from the Yukos affair that the Russian government wants to keep control over the countrys oil and gas development in the hands of state-controlled firms like Gazprom and Rosneft. But they do not know the terms of the deals they can make, and whether such deals will be honored. For business, unpredictability is worse than bad news, Vedomosti argued on July 5.