YUKOS ASSET SEIZURE YET ANOTHER BLOW TO INVESTOR CONFIDENCE

As the remaining assets of the oil giant Yukos were seized last week, the fate of Russia’s former leading oil company and its subsidiaries has come to symbolize the country’s investment climate.

The Moscow Arbitration Court agreed on April 19 to freeze the remaining key assets of the troubled oil and petrochemicals firm. The ruling, which follows earlier court decisions to impound Yukos assets, was made following a 163-billion ruble ($5.8 billion) claim by Russia’s state-owned oil firm Rosneft on behalf of Yuganskneftegaz, the former Yukos oil production company it acquired recently. Yuganskneftegaz’s total claims against Yukos are estimated at 367 billion rubles.

The court banned all transactions involving Yukos shares in petrochemical and refinery companies. This includes Angarsk Petrochemical, the Achinsk refinery, Tomskneft, Samarneftegaz, the Syzran refinery, Irkutsknefteprodukt, and Tambovnefteprodukt.

In July 2004, court marshals seized Yukos’ majority stakes in its 24 subsidiaries following the Russian government’s tax claims against the company.

The seizure of Yukos assets is considered a prelude to their subsequent sell-off. Sergei Oganesyan, head of Russia’s Energy Agency, announced on February 1 that a decision on selling Yukos’ remaining assets, Samarneftegaz and Tomskneftegaz, would be taken without delay. Now the Yukos subsidiaries are moving closer to the auction block.

The assets seizure could have immediate repercussions for the oil and gas game in Siberia and the Russian Far East. Notably, Angarsk Petrochemical Company (APC), the major Yukos petrochemical outlet, produces nearly 10% of Russia’s total ethylene, propylene, and styrene output. The Russian authorities insist that APC owes 100 million rubles (roughly $3 million) in tax arrears for 2001 and 2002.

APC has denied that it was affected by Yukos’ troubles. But last December APC was reportedly petitioning the federal government in Moscow for guaranteed crude oil supplies. APC claims its crude oil supplies decreased from 725,000 tons in December 2004 to 650,000 tons in January 2005. Moreover, APC is now losing important clients. Sayanskhimplast, the leading Russian polyvinylchloride producer, has decided to build a natural-gas processing plant in order to become independent of APC ethylene supplies.

APC, which employs 15,000 people, provides roughly one-tenth of overall tax revenues in the Irkutsk region in Eastern Siberia. In November 2004, Irkutsk governor Boris Govorin revealed that APC had been forced to delay several investment projects.

Meanwhile, Russia’s Kommersant daily has speculated that Rosneft plans to bankrupt Yukos after the court confirms the Yuganskneftegaz claims. The current management of Yukos is allegedly cooperating with Rosneft in order to dismember remaining Yukos assets more efficiently (Kommersant, April 20).

Yukos used to be a driving force behind plans to increase Russia’s crude oil supplies to China by rail. But now Russia’s plans to deliver record volumes of crude oil to China may collapse due to bottlenecks at Russian oil terminals that were built for far smaller volumes than those envisaged in Russian-Chinese contracts. Russian Railways plans to funnel 10 million metric tons of oil to China this year, and 15 million tons in 2006, but terminal managers reportedly concede that the existing capacities cannot handle even 10 million tons because there is not enough capacity to pump oil from the pipeline into rail tanks (Gazeta.ru, April 21).

In the meantime, maneuvering over the proposed merger between Gazprom and Rosneft, as well the fate of Yuganskneftegaz, continues amid reports that a full merger between Gazprom and Rosneft has been questioned. Reportedly, Yuganskneftegaz will not be spun off as initially planned and instead would be integrated into Rosneft, leaving it likely that Gazprom could only take a minority stake in the greater Rosneft-Yugansk entity. Under the original deal, Gazprom was to have gained full control over Rosneft, with Yuganskneftegaz remaining a separate entity. The terms of the merger were reportedly still far from decided and the wrangling over Yuganskneftegaz could drag on for some time (Moscow Times, April 22).

In practical terms, the Yukos affair set off a wave of tax probes at other companies. Notably, the jointly owned TNK-BP has received a back-tax bill for nearly $1 billion. BP has been burned in Russia before. After investing some $500 million dollars in the Sidanco oil group in 1997, it wrote off half of the original investment and threatened to pull out of Russia altogether when Sidanco was stripped of its main production asset in an apparently rigged bankruptcy auction in 1999.

Russian President Vladimir Putin told Britain’s BP chairman Lord Browne on April 22 that Russia was right to offer government support to the BP-TNK merger and that BP’s $6.9 billion investment in the country is safe (RIA-Novosti, April 22). Putin also told Browne he expected BP’s business in Russia to grow, but the back-tax claim was not discussed in the meeting.

In August 2003, TNK-BP signed an $8 billion deal in the presence of President Putin and Prime Minister Tony Blair. But now TNK-BP faces Russian government threats to revoke the company’s license to develop the huge Kovykta oilfield in Siberia. Earlier this year, Russia’s Natural Resources Minister Yuri Trutnev announced that no foreign-controlled companies would be able to participate in the auctions of “strategically important” oil fields. BP’s unsuccessful attempt to win government approval for work in the Kovykta field has raised questions over Moscow’s willingness to share Russian hydrocarbon riches with foreign oil majors.