In a Double Bind - Russian News - News From Russia

The situation surrounding YUKOS has moved to a new level of relevance, but there is still no end in sight. Two main characters are usually referred to, namely President Putin and former Chairman of the YUKOS Board, Mikhail Khodorkovsky. These are not the only characters on stage, but they are the tragic heroes of this drama. It’s not for nothing that a favorite recent premise on the website vladimir.vladimirivich.ru has been Putin and Khodorkovsky playing checkers together in prison.
These two figures are united by two circumstances. They both played, and played hard. They both, as is clear today, wound up at a dead end. Khodorkovsky without a doubt lost more but the president also ended up in a tough situation. YUKOS has been backed into a corner, but what should the government do with the company now? With each passing day, it becomes more and more obvious that the authorities don’t have an answer.

Recent events

Back two weeks ago, negotiations of some kind were apparently held regarding the Tax Ministry’s claims against YUKOS for 2000 and 2001. The well-known Russian banker Viktor Graschenko acted as negotiator in the process. It seemed that even the president had put aside his anger at YUKOS when he stated that a bankrupt YUKOS was not in Russia’s interest. However, to all appearances, the two parties could not come to a mutually agreeable solution. The president is keeping quiet, while the tax authorities have presented another claim for around $3 billion for 2002. YUKOS will not be able to settle its debt using Sibneft stock, as the government refuses to accept it. Geraschenko is trying to get something done, but the big bosses’ secretaries merely take a message. His calls are not returned.
The question arises as to why the noticeable warming of relations between YUKOS and the government has changed to artic cold? What is it that the two conflicting parties can’t agree on?

Interest groups

The battle between different groups of interests sparked by this extended conflict with its troubling consequences began long ago. Moreover, the state had more or less managed to win this battle and achieve a plethora of goals, for the most part political, and not economic. For instance, Alexei Zudin, head of the Political Science Department at the Center for Political Technologies, comments that: “The initial coalition of players that fought YUKOS was much broader than the current one. By challenging the state which was beginning to consolidate, YUKOS united too many of the `folks from Petersburg,’ despite the waffling in their ranks, and part of the old Yeltsin elite against it. Now a self-perpetuating phenomenon, YUKOS Affairs have become turning points in Russian political history. The Yeltsin era also ended with a YUKOS Affair. From the government’s point of view, this affair is an example of a complex solution of several pressing problems at once. It knocked down the leader of the business elite and put him in his place when he didn’t show much desire to fit into to the mono-centric state system. It transformed the Family Clique in the government into a purely technical group. It won the parliamentary and presidential elections with a landslide and achieved political distance from the Yeltsin era.”
All of these aims were achieved brilliantly and we can easily state that YUKOS has lost all of its political protectors. Everyone who said something in direct support of YUKOS last autumn is no longer a big name in politics. This is naturally not only connected with the YUKOS Affair, but is the tail end of a political epoch that Yeltsin era politicians could not find a way to carry on.
However, having solved these political aims vis-à-vis YUKOS, the state has not only failed to create a way to address the economic issues, but has even failed to come up with the issues themselves. What does the state need? To get money from YUKOS? It already has a lovely budget surplus. To get control over Russia’s biggest oil company? Would it operate so efficiently in state hands? If the state decides to hand it over to someone, who can be trusted? Whoever this may be, will they be comfortable taking over the victim of high-level politics? Perhaps these are the types of issues the authorities are trying to address at the moment. These should have been addressed in advance, however, because today pressure on the Russian government, coming mostly from outside interested parties, is increasing with each passing day.

Scenarios

What will happen to YUKOS in the near future? What are the general development scenarios? At present, three possibilities are apparent. The first: YUKOS is given a chance to pay for its sins before the state if it agrees to accept fully the new rules of the game. The second: bankruptcy proceedings begin, which will be very difficult from a legal standpoint and which are fraught with unpleasant consequences for the government. The third: additional shares are issued that will be handed over to the state to pay off the company’s debt, which will turn Khodorkovsky and company into mere minority shareholders and the state into the real owner. Let’s take a closer look at these three possibilities.
Scenario number one. YUKOS is permitted to get out of its crisis situation and begins to sell off its non-core subsidiaries in order to pay off its debts to the government. This will clearly not be enough, but if the company manages to come to an agreement about debt restructuring, then the main companies, Samaranefteorgsintez and Yuganskneftegaz, will remain in the hands of their present owners. However, the current owners annoy Russia’s leaders to such an extent that at the moment, the likelihood of this scenario is approaching zero. At least for the time being, until the state finally understands that it has reached a dead end.
Scenario number two. Bankruptcy in its most common form. The company is sold off in parts, usually by a bankruptcy commissioner. However, bankruptcy means that neither the government nor its trusted friends will be first in line. Yakov Pappe, a leading research associate at the Institute of Economic Forecasting, takes the view that “In bankruptcy, a temporary manager will be appointed. He will have broad powers. The state will have to unfreeze all the company’s accounts. The manager will sell off the subsidiaries and Sibneft stock. Thus, YUKOS’s bankruptcy will not mean production stoppages. It will simply be the transfer of the company and its parts to new owners. This is technically possible. Though, of course, only a fool would kill the hen that lays golden eggs. At the same time, the company’s owners, in particular its minority shareholders, foreign banks, and the Menatep Group, by law will be ahead of the government in line for YUKOS property. If the tax authorities were the main creditors, this would have been done long ago.”
Thus, it is obviously not in the authorities’ interest for YUKOS to declare bankruptcy. Even if the bankruptcy procedure were to start in the next few days, according to current law it is highly unlikely that bankruptcy itself would led to the division of YUKOS’s property.
Only the third scenario is left, additional stock issues to pay off debts. First of all, this will mean abandoning minority shareholders. Second of all, issuing more stock will be difficult with the current low quotes for YUKOS shares. “Issuing more stock while defaulting is just too unfavorable an option,” believes Valery Nesterov, an analyst at Troika Dialog Investment Company. “They would have to issue a large number of shares, which means stock prices will fall and it will be basically impossible to pay their debts.”

The illogical end

There is no reason to think that the YUKOS story is drawing to an end. Even if in the next few days bankruptcy proceedings begin, both state authorities and Menatep shareholders have forty days to come to some kind of peaceful agreement. No one can say what kind of agreement this would be. But the consequences of the form this peaceful agreement takes could be very serious. The current bank crisis is merely the first clear sign that the extremely difficult political crisis in Russia will continue. “Until recently, the Kremlin always succeeded and the dividends clearly outweigh any negative sides,” says Alexei Zudin. “It cannot be excluded that the negative is starting to equal the political dividends. I mean the figures of capital outflow from Russia. It is important to understand that this matter has a great political inertia and a substantial, though not completely evident influence on the political climate. It helped change the political status of big business in relation to the Kremlin. Big business went from junior partner to dependent player and participant in the mono-centric system. But the longer the `YUKOS effect’ hangs on, the more significant the attitudes, forces, and institutions become, without which it would basically be impossible to double the GDP. In getting out of the YUKOS Affair, the Kremlin has to decide whether it agrees to let events develop by inertia, or in other words let the country move toward the state capitalism model. With this model, the law enforcement clique gains too much clout and large-scale, highly undefined interference can be assumed.” Should the opposite occur, we can say for ourselves that it will nonetheless be necessary to turn around, back to a private capital economy. Whether the current government is capable of such a turnaround is completely unclear.




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