The future of Yukos

From an Article of "the Economist" (July 29th 2004)

OUTRIGHT expropriation is ugly. It scares investors. But it would have been less ugly and less scary than the deliberate dismemberment of one of Russia's best-run firms behind a paper-thin veil of legal due process. Two weeks ago many businessmen in Russia still hoped for a deal between Yukos and the government. They now glumly accept that the embattled oil firm's likeliest fate is to be broken up and at least partly sold off—ostensibly to cover tax bills, but really as a way to put some of Russia's choicest oil-producing assets in state hands for next to nothing. “I told you so,” say those who claimed that was the plan all along.
What convinced the rest was the announcement earlier this month that Yuganskneftegaz, Yukos's main production subsidiary, would be sold to cover a $3.4 billion claim for back taxes for the year 2000. Having given Yukos virtually no time to pay, the government not only ignored its attempts to negotiate a payment schedule and an offer by its on-trial ex-boss Mikhail Khodorkovsky (pictured) to sell his stake to cover the debt: it chose to bite off the biggest, most efficient chunk of Yukos. Yuganskneftegaz is worth $30 billion, reckons the firm, and even in a heavily discounted quick auction it should fetch $12 billion-14 billion, more than all possible back tax claims combined.

Some hardy optimists had still hoped for a fair auction, open to all. But officials have not even bothered to claim that there will be one. And this week's naming of Igor Sechin, one of President Vladimir Putin's closest advisers, as chairman of the state oil firm, Rosneft, sent an unmistakable signal. “[This] presents the government with the perfect opportunity to catapult Rosneft from a mid-ranking oil producer to one of the world's major producers,” wrote Chris Weafer at Alfa Bank in Moscow.

Then came the coup de grace. This week, courts ordered that all the assets of Yukos's three production subsidiaries be frozen. The firm said that this meant it would have to stop pumping oil, a statement that panicked the oil markets into driving up world oil prices to a new high of $43 a barrel. Russian officials denied that the ruling meant that production should stop. There were suggestions that Yukos was scaremongering in a bid to embarrass the government (surely impossible) into doing a deal. Whatever the truth, the incident wiped out the little remaining value Yukos had on the stock market—which may now provide a perfect excuse to sell it for peanuts to the only firm willing to buy.
In the teeth of this assault, good news has continued to trickle out about Russian business. Germany's Siemens announced a joint venture with Russia's Interros for control of Power Machines, the country's biggest industrial machinery firm. The government put its remaining small stake in Lukoil, another oil firm, up for sale; America's ConocoPhillips is expected to buy it. France's BNP Paribas is buying 50% of a unit of Russian Standard Group, which controls one of Russia's top private banks. Such firms still seem to view Yukos's problems as something that only Yukos will face. But the ferocity of its destruction has shocked even the most bullish of Moscow's foreign investment analysts. And among the business elites the question still echoes: “Who might be next?”