Yukos Goes From Business Leader to Outcast

The oil giant Yukos went from Russia's most successful company to its worst tax offender in less than a year. Now, it's on the verge of bankruptcy after a court ruled it owes $3.4 billion from its 2000 tax bill.

Yukos endured another blow Thursday when the government announced a new claim of $3.3 billion in back taxes for 2001, according to Russian news reports. That came just hours after bailiffs served papers giving the company five days to pay the 2000 bill.


The oil giant could also face claims for the years 2002 and 2003. To ensure payment of the back taxes, a Moscow court upheld a freeze on the company's assets on Friday.


Yukos' ex-chief, billionaire Mikhail Khodorkovsky, and his partners may now have to either accept the company's ruin or make a deal to rescind control, which many analysts suggest is the company's only chance for survival.


Khodorkovsky, jailed since October, is facing trial on fraud and tax evasion charges together with an associate, and many believe that its outcome will depend on their docility.


Investors, meanwhile, fear the case might become a prelude for a broader Kremlin effort to reclaim the prized assets that were sold to a handful of privileged tycoons during the murky privatization of the 1990s.


Yevgeny Yasin, Russia's former economics minister, said the entire Yukos probe was conceived to take Yukos away from its owners in a "disgusting violation of property rights."


"It shows that Russia still has no property rights other than the czar's — the rest is merely a fief given in return for service," Yasin said.


When Khodorkovsky and his partners bought Yukos from the state in 1995 for about $370 million in one of the highly controversial privatization auctions of the period, it was burdened with massive debts and suffering from inefficiency.


Khodorkovsky quickly fired excessive staff and secured the return of seemingly hopeless debts. Through ingenious schemes, he pushed out U.S. minority shareholder Kenneth Dart, and later cold-shouldered Western banks that had sought a sizable share in Yukos after Khodorkovsky's bank defaulted on loans during the 1998 financial crisis.


Within a few years, Khodorkovsky transformed Yukos into Russia's largest — and most efficient — oil company, bringing Yukos' production costs per barrel down from $12 to $1.5 — the lowest level for the Russian oil industry and one of the world's best.


Yukos also has taken the lead in introducing western accounting standards to replace fuzzy Russian bookkeeping, opening the structure of its ownership and appointing Western executives to key positions. Yukos' stock grew steadily, bringing its capitalization to a peak of some $45 billion in spring 2003.


Yukos received honors at home and abroad as Russia's most open and efficient company, making Khodorkovsky the country's most visible tycoon. He has become involved in charity projects, financing nongovernment organizations, setting up children camps and schools and funding a literary prize.


As Yukos moved into the limelight, Russian media began speculating about his chances of becoming president. Khodorkovsky encouraged that notion by taking a more active stance on political issues. He criticized the Kremlin's opposition to the war in Iraq (news - web sites), defied the government on the sensitive issue of prospective export oil pipelines and declared his support for parties opposed to President Vladimir Putin.


The speculation about Khodorkovsky's political ambitions gained from Yukos' growing power and wealth. Its acquisition of another leading Russian oil company, Sibneft, was to create the world's fourth-largest oil company. Yukos reportedly discussed selling its stock to a major U.S. oil company.


When the official offensive against Yukos began, most observers said that Khodorkovsky's growing clout and ambitions and his plans to sell a big share in Yukos to the Americans all had angered the Kremlin.


The first ominous call came during a meeting between Putin and the nation's business leaders in February 2003, when Khodorkovsky chided the government for laxness in combating graft. Putin responded harshly, questioning the origins of Yukos' wealth and tying it to official corruption.

The authorities struck in July, arresting Platon Lebedev, the head of Group Menatep, Yukos' holding company. Khodorkovsky's lawyer, Yuri Schmidt, said that by arresting Lebedev the Kremlin appeared to be pushing Khodorkovsky to flee abroad.

Khodorkovsky was arrested at gunpoint in October within days of saying he would rather go to jail than emigrate. Yukos' assets were frozen and the Tax Ministry put forward its hefty claim.

There was no immediate reaction from Yukos to Friday's court decision upholding the freeze on assets. But earlier Yukos said it would be able to pay the back taxes if it could tap into its assets and stagger the payments.

Putin has sought to distance himself from the probe, depicting it as part of anti-corruption efforts, but observers in Russia and abroad scoff.

"The focus is on expropriating Yukos," said Robert Amsterdam, Khodorkovsky's Toronto-based lawyer.

While Putin has repeatedly pledged there will be no broad reversal of privatization results, he has also said other top Russian tycoons must bear responsibility for having broken the law, leading some to wonder who will be the next target.

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