Yukos --The Death Of A Private Russian Company

Russia's Bailiff Service on Tuesday issued a statement of its intention to sell Yuganskneftegaz, Yukos' largest subsidiary, to settle part of the oil giant's huge $3.4 billion tax obligation. This statement signals the rapid end of the "Yukos affair" and the complete transformation and ownership of what was Russia's largest privately owned company.

Having seized Yukos' crown jewel and declared its pending sale, the Kremlin has essentially gutted the company. Yuganskneftegaz, with oil reserves of 10.8 billion barrels of oil and annual production of 1 million barrels per day, accounts for 70 percent of Yukos' total reserves and 60 percent of its output. According to the Moscow-based brokerage Aton Capital, this subsidiary's "share in Yukos's value is perhaps even greater as Yuganskneftegaz is developing the flagship Priobskoye field, which has been the key source of Yukos' production growth in recent years."

The Bailiff Service's interest in Yuganskneftegaz is not surprising and very political. Yuganskneftegaz' separation from Yukos proper will make the latter a much smaller entity and even create the possibility that the company's smaller subsidiaries may eventually fall into the hands of Russia's other oil giants. If the Bailiff Service had only been interested in settling Yukos' 2000 back tax obligations, it most likely would have focused it efforts to seize Yukos' Tomskneft and Samaraneftegaz subsidiaries, whose valuations range from $3.6 billion to $5.9 billion -- more than enough to cover what the tax authorities currently demanded of Yukos.

The next step to erase Yukos from the corporate map will be the sale of Yuganskneftegaz. According to the Bailiff Service, an expert group from the Federal Property Management Agency, representatives of Justice Ministry's Bailiff Service and the Federal Service on Financial Markets will appraise Yuganskneftegaz. A source at Yukos commented that the sale could take place as early as next month.

What worries many analysts is how Yuganskneftegaz will be appraised. According to Yukos, the Bailiff Service's tentative estimation of Yuganskneftegaz worth is $1.75 billion -- a ridiculously low figure. This figure may be very political in of itself -- the sum is not enough to cover Yukos' 2000 tax bill, not to mention expected tax obligations to be leveled against Yukos for 2001-2003. If the Bailiff Service stands by its appraisal of Yuganskneftegaz, other Yukos assets are expected to be targeted for seizure and later sale.

However, past state auctions of oil assets may indicate what will happen to Yuganskneftegaz and other Yukos subsidiaries. When the state sold off the oil the companies Slavneft and Onaco, both companies were purchased at unrealistic discounts of their real value. According to Aton Capital, the amounts were so low that buyers of the companies were able to achieve up to triple-digit returns on their investment over the course of a few years. Thus, while Yukos continues to be torn apart, the smart money has started to consider who will pick up the Yukos pieces for pennies on the dollar.

Who stands to inherit what was Russia's sterling "blue chip" company -- the empire built by jailed oligarch Mikhail Khodorkovsky, in prison awaiting trial for tax evasion and other charges? All of Russia's majors in the oil patch may express interest; the closer the major is to the Kremlin, the greater chance to benefiting from Yukos' demise.

Oil giant Surgutneftegaz, run by "bolshevik capitalist" Vladimir Bogdanov, is believed to be the favorite to capture Yuganskneftegaz. State-owned Gazprom has expressed interest in getting into the oil business as well. If Gazprom wins the tender, it would be a clear indication that the Kremlin itself is interested in operating one of the country's largest oil fields. Other contenders are Rosneft, Lukoil and Tyumen Oil -- a British Petroleum consortium.

Breaking up Yukos has been the Kremlin's goal all along. It will not tolerate such vast and wealthy companies to operate beyond its control. Mikhail Khodorkovsky wanted to run his own show, believing he knew best for Yukos. Maybe he did, but what was best for Yukos didn't fit into Vladimir Putin's economic goals for Russia.

Yukos -- broken up into smaller and manageable pieces and owned by those friendly to the Kremlin -- is the kind of economic reordering Putin is pursuing for th chaotic privatizations during the 1990s. Yukos most likely is not the last target of this goal.

For some observing the Kremlin's assault on Yukos, there is a grave sense of irony. Yukos was built out of chaos and lawlessness. State assets were repeatedly stolen, bought and sold to create most of Russia's current business empires. Now, the process has gone in reverse. Yukos will be re-privatized and re-sold. However, the difference this time is that the state will make sure those who benefit from the "Khodorkovsky inheritance" will be forever grateful to the man in the Kremlin.



HERE