Yukos Hit By Perfect Storm

The mood among western observers of the Yukos oil company has shifted decisively over the past week. They now see the company as a lost cause. The embattled Russian oil major has been slowly sinking since the arrest of its president Mikhail Khodorkovsky last October. However, most analysts could not believe that President Vladimir Putin would take down Russia’s most successful private company. It was assumed that a deal would be struck, under which the government would get some unpaid taxes, and possibly a bloc of shares, while Khodorkovsky would get his freedom and a one-way ticket out of Russia. Khodorkovsky seemed to be reaching out for a deal, publishing a penitent open letter calling Putin “more liberal and democratic than 70 percent of the population of our country” (Vedomosti, March 29).

This would essentially be a reprise of the settlement that gained media oligarch Vladimir Gusinsky his freedom in summer 2000. By coincidence, on May 19 the European Court of Human Rights in Strasburg ruled that the government’s treatment of Gusinsky violated his human rights, and ordered the Russian government to pay his legal fees. This might be bad timing, since it makes a Khodorkovsky deal even less likely. In any event, government officials have given no hint that such a deal is in the offing.

The mood has darkened over the past week, as Yukos is battered by prosecutorial attack from three directions. Most recently, on May 31 the Moscow Arbitration Court confirmed a prior court ruling that annulled the merger of Yukos with Sibneft. That merger was completed just weeks before Khodorkovsky’s arrest. At the request of Sibneft’s former owners, the court annulled the share issue which Yukos had used to buy 58 percent of Sibneft shares, leaving it with the 34 percent stake in Sibneft which was acquired for US$3 billion in cash and equity (Vedomosti, Moscow Times, June 1).

On May 28, criminal trials of Khodorkovsky and fellow director Platon Lebedev began. Khodorkovsky is accused of fraud for hiding revenue through a web of offshore transactions. Proceedings were postponed until June 8, after prosecutors submitted an 800-page indictment with some missing pages. (Gazeta.ru, May 28) The judge did not rule on a defense request to combine the Khodorkovsky and Lebedev cases. Now that the court process has begun, it would be politically embarrassing for the government to release Khodorkovsky.

In addition, on May 26 the Moscow court confirmed a US$3.4 billion bill that the tax ministry has slapped on the company for unpaid taxes from the year 2000. Yukos seems to have reduced its tax liability by channeling revenue through regions such as Kalmykia, which gave legal tax incentives to companies promising to invest locally. Despite these tax breaks, Yukos paid taxes of US$1.9 billion in 2000, making the company the third-largest taxpayer after Gazprom and LUKoil (Itar-Tass, May 27).

Yukos is not able to pay the overdue taxes. Although the company earned US$15 billion in 2003 and has US$800 million in cash, its non-liquid assets were frozen in April due to the Khodorkovsky indictment. Consequently, those assets cannot be liquidated to pay the tax bill. Additional tax bills can be expected for the years 2001-2003.

Yukos’ share price fell significantly over the past week. On June 1, shares closed at US$7.83, down from a peak of US$16 last October before Khodorkovsky’s arrest. Most analysts now assume that the government will not rest until it has gained control of the 42 percent stake in Yukos held by Khodorkovsky and his associates via the Menatep group (Moscow Times, May 31).

The question is no longer whether Yukos will fall, but what will be left once the Kremlin has taken over the company. The annual shareholders meeting will take place on June 24, and it is expected that the Kremlin-friendly former Central Bank chief Viktor Gerashchenko will be appointed chairman.

Inevitably, speculation is mounting over whether other oligarchs will be targeted for the Yukos treatment. The Kremlin presumably hopes that the Khodorkovsky example will be sufficient to bring the others into line. Also, the government might act if other business leaders follow the path taken by Roman Abramovich, who has been selling off his assets and withdrawing from Russia.