YUKOS BANKRUPTCY: THE BIG PICTURE

A court decision declaring Yukos — once Russia’s largest oil company — bankrupt has finally brought to an end the sad story of confrontation between private business and a powerful state. But the ruling also highlighted the unhealthy nature of the country’s raw-materials-based socio-economic system.

On August 1, the Moscow Arbitration Court ordered the bankruptcy and liquidation of Yukos, a decision that various commentators gloomily described as either a “death sentence” for the company or as its “funeral.” As was widely expected, the court upheld a vote one week earlier by Yukos’s creditors. The latter, led by Russia’s Federal Tax Service and the state-run company Rosneft, rejected the Yukos management’s restructuring plans and instead voted to break up the fallen giant and auction off the pieces. The court’s judge appointed a liquidation manager who is to oversee the sell-off of Yukos’s remaining assets within one year.

“Now, Yukos’s assets will be auctioned off,” Izvestiya said on August 2. “And there is a good deal to sell.”

Most Russian and international analysts suggested that Yukos’s assets would likely be valued well below market rates and sold to Kremlin-controlled companies. Rosneft and the gas monopoly Gazprom are widely seen as prospective buyers.

Rosneft and Gazprom, both firmly in the hands of the close-knit coterie associated with Russian President Vladimir Putin’s inner circle, are currently awash with cash: Rosneft just raised $10.4 billion through the London stock market and Gazprom reported on August 1 a doubling of first-half profits to 177.06 billion rubles.

After buying Yuganskneftegaz, Yukos’s main production unit, following a controversial December 2004 state-sponsored auction to recover part of Yukos’s tax bill, Rosneft is now eyeing the remaining choice chunks of Yukos’s former empire — in particular, its subsidiaries Tomskneft and Samaraneftgaz. Rosneft tripled output in 2005 after acquiring Yuganskneftegaz. If it gains more of Yukos’s one-time assets, Rosneft may overtake Lukoil and TNK-BP to become Russia’s biggest oil producer. For its part, Gazprom is seeking to buy Yukos’s 20% stake in GazpromNeft, formerly Sibneft.

Obviously, the court ruling that paved the way for the final carve-up of Yukos was, in the words of one commentary, “A very finite end to what has been an unhappy story.” But its significance goes far beyond the dismantling of what used to be Russia’s principal oil major. There are several conclusions to be drawn from the unfortunate Yukos affair regarding the “rules of the game” in Putin’s emerging “energy empire.”

First, political loyalty to the Kremlin appears to be the sine qua non of doing big business in Russia. As some experts point out, from a purely economic point of view, given the currently skyrocketing oil prices, the bankruptcy of an oil company of Yukos’s stature simply could not have happened. Even after losing Yuganskneftegaz, Yukos managed to pay the tax authorities $23 billion by the end of 2005. Yukos’s remaining units include oil fields able to pump 500,000 barrels a day of crude and Russia’s biggest refinery in terms of capacity. Within the framework of one restructuring plan, the company promised to pay off $18.2 billion of outstanding debts within 18 months. But the creditors rejected all the offers and opted to dismantle Yukos. Thus, “very special interests” needed to emerge to force Yukos to go bust, and these were clearly politically motivated.

Second, the Yukos saga graphically demonstrates how fragile private property is in today’s Russia, when it comes into direct confrontation with the interests of state-run companies and their Kremlin-connected managers. Following the Yukos debacle, “It is the state companies that have become the face of the Russian economy,” one commentator says. Another commentary put it even blunter: “Putin wants government control over the oil and gas industry because it is the nation’s most important sector,” one Kremlin pundit says. “The process of destroying Yukos has played a huge role in achieving that.”

Third, the outcome of the Yukos crisis has revealed the utter shortsightedness of Putin’s economic strategy, if any actually exists. Some experts argue that, legal and moral aspects of the affair aside, “It is probably possible to say that the distribution of Yukos’s last assets will benefit the growth of [Russia’s] GDP.” But the thing is that, long term, sustainable economic development hinges critically on the value system and legal principles dominating in a society. While some commentators do agree that the Yukos case in general has helped the state to introduce better tax discipline, almost all independent analysts concede that it has severely hurt the judicial process and the rule of law.

Fourth, the West has basically acquiesced to Yukos’s destruction and appears ready to play by the Kremlin’s rules. Rosneft’s successful IPO suggests that the bulk of Western investors have agreed that what happened to Yukos was perfectly legal.

(Kommersant, Gazeta, August 3; Vedomosti, Izvestiya, Moscow Times, August 2; Bloomberg News, August 1)