Putin holds key to fate of Yukos

By Rhys Blakely, Times Online

The founder and chief executive of the largest private equity fund in Russia has said that the fate of Yukos stands entirely at the whim of President Vladimir Putin, but that the Kremlin's objective is to destroy Mikhail Khodorkovsky and not the cash-strapped oil giant.

William Browder, who launched the $1.5 billion Hermitage Fund in 1996, told Times Online that the Kremlin would "offer Yukos the opportunity to co-operate and to follow its line".

A more sympathetic attitude towards Yukos, which has been ordered to pay billions of dollars in back-taxes, was hinted at yesterday when a senior Russian official supported the idea that the company could avoid the disposal of prime assets.

"I hope the company will be able to settle its tax problems before a forced assets sale," Igor Shuvalov, an aide to President Putin, said.

Speaking from his office in Moscow, Mr Browder said that Yukos would be given a choice on its future by the Kremlin but that "only Putin really knows what is going to happen to the company in the long term".

Mr Khodorkovsky, Yukos's former chief executive, was arrested at gunpoint in his private jet on a runway in Siberia a year ago and has remained in his Moscow prison cell since. It is widely thought that the action taken against him for fraud and tax offences was prompted by his support for opposition political parties.

The company he once led as a model of new Russian commercialism moved a step closer to bankruptcy today when a Moscow arbitration court dismissed its appeal against a $200 million bailiff charge for 2001.

The decision heightened speculation over Yukos's Yuganskneftegaz plant, the company's prize asset, which accounts for 60 per cent of the company's oil output. The fate of the plant is seen as key to the future of Yukos and the face of Russia as a place for western corporations to do business.

Yesterday, reports suggested that a proposed firesale of Yuganskneftegaz could be delayed or called off after Yukos said that it would pay off a $3.4 billion tax bill for 2000 within days following the freeing of its assets by Russian tax authorities.

It had been feared that the plant, which was valued at up to $14 billion by Dresdner Kleinwort Wasserstein, the investment bank, would be sold for a fraction of its value.

But the situation was mired in confusion today in the absence of confirmation that Yukos had been allowed access to its accounts or any other information on the fate of Yuganskneftegaz.

"The most important piece of information is what we are not hearing," said Mr Browder.

"There have been no terms or date announced for the proposed sale of Yuganskneftegaz. We had heard that the sale would commence on November 22 and the bidding would start at $4 billion. We are now a week overdue for that timescale to be implemented.

"This failure to move is consistent with previous threats made. Russia does not work like most countries. What is said by Government officials here doesn't always happen.

"We have seen, for example, past instances where the Prime Minister signs a decree only for Putin to withhold his approval. The Kremlin will have the last say on the fate of Yuganskneftegaz, no matter what the Ministry of Justice or others decide.

Mr Browder's stance on corporate governance in Russia has made him a activist for shareholder rights and improved practises. He has been credited for a number of breakthroughs in improving standards at companies including Unified Energy Systems and Gazprom.

"The Kremlin wants to destoy Mikhail Khodorkovsky, not Yukos. It will offer Yukos the opportunity to co-operate and to follow its line," he said.

"Shares in Yukos are for gamblers. Only Putin really knows what is going to happen to the company in the long term."

Analysts were quick to point out that if Yukos does pay the balance of its 2000 tax bill, the company still faces tax demands of a further $5 billion.

Andrew Neff, a Russian energy sector expert who works for Global Insight in Washington, said: "The situation around Yukos has led to a whole new game of Kremlinology, everybody is trying to figure out what will happen, nobody can be sure."

Mr Neff believes that Yukos is in a no-win situation and that Yuganskneftegaz will fall into the hands of Gazprom, the energy giant in which the Russian state owns a majority stake.

"If Yukos pays off the full 2000 tax bill, it is only forestalling the inevitable - Yuganskneftegaz being stripped and forcibly sold at an auction destined to see the Yukos production unit end up in Gazprom's hands, either by Gazprom winning the auction, or a lack of bidders," he said.

"The only positive that Yukos actually gets in paying its tax bills is the hope that, after Yuganskneftegaz is forcibly stripped and sold, perhaps a rump Yukos can still exist if it manages to pay off the remaining tax debts so that the other two main production subsidiaries, Tomskneft and Samaraneftegaz, don't suffer the same fate," he added.

(From The Times, 29.10.2004)

Moscow Arbitration overruled YUKOS claim to invalidate bailiffs' decision to recover 5.5 bln rbl due

MOSCOW - Moscow Arbitration has overruled the claim of YUKOS oil company to invalidate the Bailiffs Service decision of Sept. 20, 2004, to recover executive due of 5.5 bln rbl, i.e. 7% of 2001 back taxes and penalties (79.4 bln rbl), AK&M learnt in the Arbitration.

The decision to initiate executive proceedings was made on September 9, 2004. Under the laws, YUKOS could pay off 79.4 bln rbl debt within five days. However YUKOS says such redemption was impossible as any and all bank operations with YUKOS accounts were terminated.

(From The Russia Journal, 29.10.2004)

YUKOS shares spur growth on stock market

RBC, 29.10.2004, Moscow 11:35:58.

The trading session on the Moscow Interbank Currency Exchange opened with a general increase in prices. The growth was led by YUKOS shares, whose price rose by over 5 percent at the opening. Prices of other highly liquid shares grew by 0.5 percent on average. In the opinion of analysts, a record rise in the Central Bank's gold and foreign currency reserves, high oil prices and excessive ruble liquidity will still be supporting the Russian stock market.

(From RBC, 29.10.2004)

Experts see positive signs in YUKOS case

RBC, 29.10.2004, Moscow 18:54:48.
YUKOS' advance on the stock market is due to positive signs, which have appeared in the YUKOS case, analysts say. YUKOS gained 10.25 percent on the MICEX exchange by 6:12 p.m. On the RTS exchange it jumped 11.47 percent by this time. Experts believe that the auction on Yuganskneftegaz will unlikely be held in November as there were no official announcements on it. This shows Ronsneft's and Gazprom's interest in buying YUKOS' oil producing subsidiary. But this acquirement will be made after the proposed merger between Gazprom and Rosneft. Analysts believe, that this deal will not be accomplished before 2005 and therefore YUKOS will unlikely be split into pieces. They hope that the beleaguered oil giant will settle claims of overdue taxes for 2000-2001 by this time.
The announcement made by Presidential Assistant Igor Shuvalov may also be the reason for YUKOS' gains on the stock market. Shuvalov expressed his hope that the oil company would recover after repaying back taxes and it the sale of Yuganskneftegaz and other assets would become unnecessary.

(From RBC, 29.10.2004)

Shuvalov: Yukos Case Not the Last

By Guy Faulconbridge
Staff Writer The unrelenting legal assault on Yukos is no exception, and other oil majors should expect tax probes, too, a top aide to President Vladimir Putin said Thursday.

"We must probe everyone, everyone. And if I was responsible for tax discipline -- against the background of Yukos -- I would probe all the other oil companies, too," the head of the presidential Expert Department, Igor Shuvalov, said on the sidelines of an investors' conference.

"This is only the start of the road in relation to other taxpayers. Many oil companies used schemes that they call 'tax optimization.' Where it was illegal they will have to pay in full," he told investors.

The onslaught against Yukos has tarnished Russia's investment image, helped send oil prices soaring and shaken confidence, as officials put out chaotic signals about the future of the country's biggest oil exporter.

Shuvalov said that multinational oil companies are scrambling to sink big money into the country, despite the Yukos affair. Still, a widening of probes against other oil majors has been a nightmare scenario for investors since the government launched its multibillion dollar tax case against Yukos last year.

Shares in leading oil companies -- LUKoil, Surgut and Sibneft -- fell on Thursday. Sibneft took the biggest hit, dropping 3.6 percent on the MICEX, while Yukos stock rose 1.4 percent.

Some investors were unfazed.

"I think there will be changes in the way companies pay taxes but I don't see another Yukos. It is logical for a senior official to say that everyone should pay taxes and that this is not all about one company -- Yukos," said Jacques von Polier, who manages $200 million in Russian shares at Atria Advisors.

"Other oligarch groups have changed and I don't think there is going to be another Yukos. A lot of the problem with Yukos is that [former CEO Mikhail] Khodorkovsky didn't negotiate."

Yukos says it is teetering on the brink of bankruptcy following a freeze on its accounts and towering demands for back taxes and penalties.

The company is straddled with claims for taxes and fines totaling $7.5 billion for 2000 and 2001.

The Federal Tax Service is considering claims for 2002 and may announce them soon, a Yukos official said Thursday, speaking on the condition of anonymity.

Yukos had paid about $2.8 billion of the 2000 bill by Oct. 26, the source said. Another $300 million in cash has been freed up after some accounts were unfrozen, the official said, and could be used to pay for 2000.

The full 2000 claim will be paid off in the next few weeks, the official said, and $400 million has already gone toward paying off the 2001 bill.

The Court Marshals Service, however, has said it wants the government to auction off shares in Yukos' core production unit, Yuganskneftegaz, to retrieve unpaid taxes. Media have reported that the starting price could be as low as $4 billion, less than half of the lowest valuation of the unit made by international investment bank Dresdner Kleinwort Wasserstein.

Presidential economic adviser Andrei Illarionov told the same conference, organized by Interfax and Chatham House, that Yugansk should not be sold for less than the annual value of its production, or $17 billion, Interfax reported.

Shuvalov said that Yukos must pay the tax claims and that the Kremlin position was "to preserve the company as a corporation." He said it was not a fact that Yugansk will be sold but that if it comes to an auction, Yugansk should be sold in a transparent way.

Shuvalov said he has not had any discussions about Gazprom buying Yugansk and that Gazprom should complete its planned merger with state-owned Rosneft before considering the Yukos unit.

As the pressure mounts on the oil major, bankruptcy may be the best thing for the company, Yukos CFO Bruce Misamore said in an interview with Le Monde on Thursday.

"In order to ensure the future of the company, bankruptcy is perhaps the best solution, in the sense that it would allow the involvement of all the group's creditors in an ordered and fair fashion," Misamore said, the paper reported.

"Yukos is trying to find a solution with the authorities. We talk, they listen, but they never respond to our proposals to try and resolve this crisis. The attack against Yukos is 100 percent political."

Misamore said other companies had optimized taxes. Yukos is accused of selling oil through affiliated companies to reduce its taxes.

"Other oil companies have utilized fiscal optimization schemes identical to ours without having any problems," Misamore said. In a presentation Misamore made during the summer, he claimed that from 2001 to 2003, Yukos had paid more tax per ton of crude than the industry average.

In response to reporters' questions, Shuvalov said that one company that paid its taxes properly during the 1990s was gas giant Gazprom.

The gas giant is being built up to play a major global role, Shuvalov said.

"We have a massive company -- the biggest in the country -- which could become one of the leading corporations in the world energy sector," he said.

"It is time to compete on a world level. The merger of Gazprom and Rosneft is seen as the creation of a player that can compete on a world level."

Shuvalov said that the merger with Rosneft should be concluded before other assets are added to Gazprom and that the energy behemoth should obey anti-monopoly rules.

"There is the Yukos affair and everyone -- politicians and investors -- is looking at it to see how it will end," Shuvalov said. "One of my colleagues said to me not long ago: However it ends, nothing positive will have come of it. We understand that."

Staff Writer Catherine Belton contributed to this report.

(From The Moscow Times, 29.10.2004)

Offtopic. Gov’t considers private jails

MOSCOW - The Russian Economy Ministry is considering the possibility of constructing private jails in Russia. According to Mr. Gref, this could be part of a dialog between the government and the business community, the Novye Izvestia newspaper reports. Mr. Gref expressed this idea on Thursday. In his opinion, it is necessary to improve the effectiveness of some services currently offered by the government.

In particular, he said private schools and medical institutions could be established in Russia. “We also consider the idea of partnership between the business community and the government through the construction of private jails. This measure would help significantly improve Russia’s penitentiary system,” the Economy Minister added.

It is unclear how the government and businessmen will cooperate in this area. Perhaps, the Economy Ministry will use the experience of the United States, the UK and Australia, where separate services were privatized. According to experts, private prisons could be a profitable business in Russia, where the flow of ‘clients’ who need these specific services, continues unabated. Russia, where 810 out of 100,000 people are in prison, remains the world’s leader in terms of jail inmates. It is followed by the United States, Belarus, Kazakhstan and Chili.

Russia’s penitentiary system needs an estimated $9bn in investments. This money is needed for the renovation and modernization of jail facilities. Supporters of private prisons say the government’s permit for the conduct of such business would relieve government institutions, and bring profits to the government.

Today, one can buy almost everything in prisons, including a separate prison cell and a TV set. But such commercial activities are usually part of the black market.

For his part, Russian Justice Minister Yury Chaika is against private jails in Russia. According to him, the country is not ready for private jails, and there would be “more abuses” there.

From The Russia Journal, 29.10.2004)
________
Is it Russian humor ? If you want to be detained in good conditions, the better is to build the prison yourself...

CEOs Shed Light on a Dark Subject

Most chief executives of major Russian companies think "Russian business" has a bad reputation -- and rightly so.

Unethical and often illegal business practices and "black" PR campaigns continue to thrive while good corporate governance remains elusive, a survey of some of the most influential business leaders in the country has found.

Unfortunately, according to the organizers of the survey, 80 percent of the 148 CEOs of large Russian companies said the negative image of Russian business at home and abroad did not apply to their firm.

"It's time for a reality check," said Peter Necarsulmer, chairman and CEO of the PBN consulting firm, which conducted the poll with Interactive Research Group. "People in glass houses should not throw stones," he said at a presentation of the survey Wednesday.

The survey, which included local leaders of 27 multinationals, found that aside from "negative operational results," the biggest threat to a Russian company's reputation is biased media coverage, followed by conflicts with government officials and the relentless legal assault on the oil giant Yukos.

"Given the existing tension [between business and government], this is an expected result," said Yulia Kochetygova, head of corporate governance for Russia at international ratings agency Standard and Poor's. "In the current environment, even a small spark or a tiny amount of bad press can have an immense effect," she said.

In a case widely viewed as a high-profile sparring match between rival tycoons, Mikhail Fridman's Alfa Bank, the nation's largest private lender, successfully sued Boris Berezovsky's newspaper Kommersant for reporting "serious problems" at Alfa during this summer's mini banking crisis. A Moscow court ordered Kommersant to pay the bank $11 million in damages.

"Business understands the media game, which really only has one rule -- anything is possible for money," said Alexei Pankin, editor of Sreda, a magazine for media professionals.

It is well known that zakazukha, or bought stories in the media, are commonplace in Russia, but the practice presents a polarized threat, since it is not always clear who is behind each press attack, or which media channel will be the next to attack, Pankin said.

"This may give businesspeople reason to fear the state slightly less than the media," since the state constitutes a single player, Pankin said.

Foreign media outlets, too, are often accused of tarnishing Russia's image for their perceived bias. But as the survey found, most CEOs say other Russian businesses -- but not their own -- are mainly to blame. Nearly all the executives polled said "Russian business" has a negative image both at home and abroad, and more than half, or 54 percent, said that image is "very close" to reality.

A large part of the reason for this is that so much of business is conducted in the shadows, S&P's Kochetygova said. "When transparency is lacking, companies don't trust each other," she said.

The majority of chief executives said they had either already undertaken image-enhancing initiatives or plan to in the next two years. But relatively few plan to adopt internationally accepted practices widely regarded as reputation-enhancing. Just over a third of executives said they plan to implement international accounting standards, and only 30 percent said they plan to recruit independent directors for their boards.

"The largest companies ... have clear programs for improving their reputations that are being implemented successfully," said Oleg Rumyantsev, vice director of the Russian Association for the Protection of Investor Rights.

Only two in 10 of the companies surveyed are publicly traded, which may explain their reluctance to adopt international corporate standards. "Private companies are less interested in increasing transparency because unlike public companies, they are not focused on attracting financing on the stock market," Kochetygova said.

Another thing most CEOs agree on is that the crackdown on Yukos and its jailed founder, Mikhail Khodorkovsky, is hitting everyone hard. It has soured Russia's business climate and made managers fearful of coming into conflict with the government, the survey found.

"The Yukos affair is Sept. 11 for Russian business," said Oleg Kiselyov, president and chairman of Renaissance Capital, which co-sponsored the survey with Taylor Rafferty, an investor relations firm. "All the ramifications are still unclear," he said.

Oddly, while more than two-thirds of executives said the "demonization" of Khodorkovsky is hindering the development of the economy, nearly as many said Russia's richest businessmen "fairly deserve much of the criticism from the state and population."

Nonetheless, two-thirds of CEOs agreed to the statement, "Things in Russia are generally heading in the right direction."

The 175 companies that participated in the survey had combined revenues in Russia last year of more than $100 billion. Foreign firms included Coca-Cola, Microsoft and IKEA. Domestic firms include such giants as Alfa, Basic Element, Gazprom, Norilsk Nickel, Sistema, Wimm-Bill-Dann and Yukos.

PBN and IRG, the authors of the survey, said they plan to do another poll next year.

"[We want to make this] an annual benchmark against which to measure the progress of corporate reputation management practices in Russia," they said in a statement.

(From The Moscow Times, 28.10.2004)

Most Russians Approve Authorities’ Position in YUKOS Case — Poll

As many as 69 per cent of Russian citizens have heard about the so-called ’YUKOS affair’, but only 21 per cent watch the developments in and around the embattled oil company and the fate of its former CEO closely, the Public Opinion Foundation said.

Surveys held by the foundation on 26 June and 23 October revealed that almost half of 1,500 respondents, or 47 per cent, polled in October, shared the Kremlin’s position in that case while in June only 36 per cent supported the authorities’ campaign against one of the country’s leading oil companies and its core shareholders.

In October only 7 per cent of respondents expressed sympathy for YUKOS, against 8 per cent in June. Most of those who sided with the authorities in October, had voted for the Motherland (Rodina) bloc in the parliamentary elections (69 per cent) and Communists (54 per cent).

YUKOS has support of voters of Yabloko (24 per cent) and Vladimir Zhirinovsky’s LDPR party (15 per cent). Respondents polled a year after Mikhail Khodorkovsky’s arrest were also asked if, in their opinion, that event had serious consequences for Russia.

Almost half — 46 per cent — of respondents were undecided. One-third assumed that Khodorkovsky’s event had no serious consequences, while 13 per cent said that those consequences were largely negative; 9 per cent said it had positive consequences.

(From Moscow News, 28.10.2004)

Putin's economic aide warns other oil companies may face back tax bill following Yukos

VLADIMIR ISACHENKOV, Associated Press Writer

The Russian government would force all Russian oil companies to pay off back taxes following the example of the beleaguered Yukos oil company, a senior adviser to President Vladimir Putin said Thursday.

Igor Shuvalov, Putin's top economic adviser, said that the Yukos probe was just the beginning of a government effort to collect back taxes and urged oil executives to look back at what they had done to lower their tax bills.

"If they were legal, we will ask the parliament to close those loopholes, and if they were illegal, I would recommend (the oil companies) start looking into their tax histories right now and check how things stood with regards to tax payments," Shuvalov told an investors' conference, according to the Interfax news agency.

He voiced hope that Yukos would be able to settle its tax debt without selling its production assets. If it fails to do so, "these assets will be sold openly and publicly," he said.

Since the summer, Russia's No. 1 oil producer has been fending off government demands for $7 billion in back tax claims for 2000-2001. The company says the back tax bill would bankrupt it and the legal onslaught against it and its jailed former CEO Mikhail Khodorkovsky is widely seen as punishment for the tycoon's political ambitions.

Shuvalov insisted Thursday that the probe was part of efforts to combat tax evasion.

"The Yukos affair is connected primarily with taxes, and this is just the start of a process during which we will demonstrate to all -- corporations and selected individuals alike -- that taxes must be paid in their entirety," Shuvalov was quoted as saying.

Yuganskneftegaz -- Yukos' key unit which produces 60 percent of its oil output -- is expected to be sold to cover the tax bill, and analysts fear that authorities will sell it at a fraction of its value to state-affiliated companies.

Russian Economics Minister German Gref said Thursday on a trip to Germany that "there is no talk about Yukos' bankruptcy," adding that if any of the company's assets are sold, it will be done in a transparent and market-based way, Interfax reported.

Fears of production interruptions at Yukos, which pumps 2 percent of the world's oil, have helped send world oil prices soaring to record highs in recent months.

The state-controlled natural gas giant Gazprom was seen as the most likely buyer of Yuganskneftegaz. Under a deal announced last month, Gazprom would swap 10.7 percent of its shares for the state oil company Rosneft -- enough to give the state a controlling stake.

Shuvalov said Thursday that Gazprom would be able to buy new assets only after it completes the merger with Rosneft. He said that the state would like to complete the merger before year's end, but added that it would be unlikely.

He denied allegations that the merger was intended to ensure full state control over the energy sector.

"We aren't trying to take full control over the fuel and energy industries, not least because it is impossible to do so," Shuvalov said.

(From San Francisco Gate, 28.10.2004)

Yukos receives separate evaluation of core production unit: report

MOSCOW (AFP) - US investment bank JP Morgan Chase has reportedly carried out an assessment of the value of the core production unit of Russian oil giant Yukos and sent its conclusions to the embattled firm.

The Interfax news agency report quoted an unnamed informed source as saying that Yukos had received the assessment, which it commissioned itself, but did not state what value JP Morgan Chase had placed on the unit, Yuganskneftegaz.

A Yukos spokesman would neither confirm nor deny the report.

Russian authorities have announced plans to sell the unit to secure payment of back taxes and penalties for a four-year period that could run as high as 14 billion dollars that the government asserts are owed by Yukos.

A separate evaluation of Yuganskneftegaz commissioned by the government and carried out by investment bank Dresdner Kleinwort Wasserstein concluded that the unit was worth between 14.7 and 17.3 billion dollars at present.

The independent evaluations of the unit came amid concerns that the Russian government might massively undervalue Yuganskneftegaz in order to place it within the financial reach of Russian companies.

At present, no single Russian company has the cash to secure Yuganskneftegaz.

The lowest value for Yuganskneftegaz contained in the Dresdner report was 10.4 billion dollars -- a "worst-case scenario" pricetag based partly on the contingency that the government could revoke valuable licenses to pump oil.

But it was that value that authorities attached to Yuganskneftegaz, and report afterwards suggested the government could still find ways to drive the unit's value down further before selling it.

Most experts say the unit is worth around 16 billion dollars at present, though Yukos management has asserted that its real value is around 30 billion dollars.

(From Reuter via Yahoo! News, 28.10.2004)

The State Hasn't Become Any Stronger By De-politicizing the Oligarchs

A report from the National Strategy Council last year is widely viewed as having foreshadowed the attack on YUKOS. Now the National Strategy Council is releasing a new report, with a focus on relations between business and government.

A report entitled "The State and the Oligarchy," which the National Strategy Council (NSC) headed by Stanislav Belkovsky prepared in May 2003, seemed to become one of the most notorious documents of the year. It added a new term - "oligarchic coup" - to the vocabulary of the political beau monde; and it named YUKOS President Mikhail Khodorkovsky as the chief ideologue behind this coup. After Khodorkovsky's arrest, precisely a year ago, the elite started wondering whether the report just happened to coincide with the Kremlin's moods, or whether it actually provoked the regime to take extreme measures against Khodorkovsky and his oil company.

The NSC is about to release a new report, and we have obtained a copy of it.

The major conclusion of the document composed in the "post-YUKOS" period is sensational: the state has indeed escaped the "oligarchic threat." Had this been done properly, Khodorkovsky would have been at large now.

Two sharp changes are evident after the first perusal of the document entitled Economy of Russia: the State and the Business: in the style and the subject of survey. As for the style, it is not that "shocking," but the tone is totally different: "The victory over oligarchs is unleashing the hands for bureaucratic autocracy," the authors immediately baffle the reader, though they previously proposed that big business should be eliminated as soon as possible. Given below are other distinctions of their standing: "legitimizing big business," "recognizing the rights of existing owners," "renouncing the bankruptcy of large companies," "conducting independent appraisal of the sold assets."

Let's cite an excerpt from the last year's document: "Since, in opinion of the ruling elite, the institution of presidency has accomplished its historic mission and is therefore redundant anymore (in the future it is more likely to be dangerous due to extensively broad formal powers of the president, which potentially enable him to change the basic philosophy and techniques of government) and since as individuals the oligarchs have no public political resource to win in the direct nationwide election, the key subject of the ruling elite has decided to limit the presidential powers in Russia and have it transformed from a presidential republic into a presidential-parliamentary republic (the quasi-French pattern). President of YUKOS (YukosSibneft) oil company Mikhail Khodorkovsky acts as the ideologue of this transformation; other key figures of the pool of oligarchs (Roman Abramovich, Oleg Deripaska, Mikhail Fridman) are supporting him openly and implicitly." Disclosed then is the covert scheme, using which "Khodorkovsky and Co." intends to seize power in Russia. The Constitution must be amended first; this will be done by the controllable Duma, the majority in which will be given to the "oligarchic" proteges. This parliament will form the controllable government, which Mikhail Khodorkovsky will lead. This, in fact, will be followed by the "oligarchic coup."

At first glance authors of the report entitled Economy of Russia: the State and the Business could be suspected of their wish to evidently "repent" of making the first report an impulse for a broad state attack on YUKOS. However, Iosif Diskin, one of the authors of both reports, told us that this viewpoint is extremely erroneous: "In our first report we spoke about the oligarchs and the state; that to conduct a dialog with business the state needed to change the concept of conducing a dialog as such. What has actually happened? In our new report we say that the state broke political influence of oligarchs, but failed to implement the demands which are evidently required to raise its effectiveness."

In this sense, he says, the second report is not the continuation of the first by content, but also an analysis of the present situation. The new document says that a victory over oligarchs is an achievement. However, the state has not become the conceptual leader, it is not building up new ideas or conducting a vigorous policy. "The state administration has no strategy and goals, the institutions for state regulation of the economy are weak. Conceptual leadership of the state and targeted adjustment of the economy do not support suppression of political claims of the oligarchs. The business has responsible partners in the face of the state. Contradictions of the economic policy: a new economic and industrial policy inspired by the prime minister is being undermined by actions of the key ministries" - this is the verdict the experts announce on the current status of the state "which has defeated the oligarchs."

According to Diskin, the first report also contained demands that the state "be strengthened." It is just that... "nobody has seen that." "Nobody has seen our appeal that the content of the state must be changed in the fight against oligarchs. Everybody has only paid attention to the scandal. Conceptual alterations of the state are required and the new report is focused on what hasn't been done for that. The state has managed to deprive the oligarchs of their shadow political role, which we upheld. However, we warned: hopefully, the state avoids entering the path of ruining the large business. Unfortunately, the state has nothing to offer the business as far as the aspect of content is concerned, the political analyst concludes.

The practice of liberal reforms is among the causes of the state's weakness. By conducting them, in the majority of cases the state "self-eliminates," authors of the report say. As a result, this gives rise to the creation of the institution of "pseudo-fair tenders," arranged for the sake of "rewards." The reforms needs to be toughly administered by the state; otherwise such approaches as "the market determines everything" cause deceleration in the adjustment of the key economic problems. "Slow resolution of the problem of route selection for eastern and western oil pipelines, chaos in determining the structure of the aircraft industry and selection of promising samples of military and civil aircraft," the report says.

The document outlines a new threat: "pure monopolism," which substitutes oligarchy. The absence of political claims is the main distinction between the above two threats. "Pure monopolism is when a number of industries are in the power of a couple of companies. They hold absolute economic monopoly despite the absence of any political claims. Unfortunately, the state offers no response to that as yet," Diskin explains.

Finally, relations between business and government are a key topic of the report. In addition to proposing consideration of such a "pillar" as the "second-echelon business" (the enterprises which are in the second hundred in the rankings by the scale but are far ahead of the giants by the growth rates), in 18 months after publishing the first report the experts advance proposals concerning the large business. "Legitimizing the large capital: recognizing the rights of current owners, who 'gained' the assets under the legislation of those days; recognizing a considerable underestimation of the state appraisal of assets during the sales of 1993-1997; conducting independent appraisal of the value of assets sold, audit and tax examinations, which finish the transition period; renouncing bankruptcy of large enterprises, giving them an opportunity to repay the surfacing "new" debts on agreement with tax bodies" - this is the proposed recipe for the irrevocable legalization of the Russian large business.

Besides, it is important to pass a political decision and assess the real contribution of the large business into the Russian economy, Diskin adds. He is evidently hinting at "pardon" for large businessmen, who had made up their fortunes in the 1990s.

At any rate, according to experts should the state applied the measures offered before Khodorkovsky was arrested, YUKOS president would have been at large now. We supported giving the chance to ransom the company and pay the taxes. This has nothing to do with the struggle against shadow policy of oligarchs. And, after Khodorkovsky would have denied any political claims, it would have been proper to leave him at large by applying the pre-trial settlement in all lawsuits," Iosif Diskin says. This must be applied to all large companies without exception, authors of the report conclude.

The last theses of the document contain advise for the regime. "Steady, impartial, trusted institutes I an indispensable condition for healthy economy... Passing "correct" laws alone won't be sufficient here. Required is the intelligent analysis of real (formal and especially informal) institutional regulators, an active search for ways of strengthening the institutional environment. Alliance of the state, the judicial power and civil society in the struggle for fair and independent court is the first step." An answer is available for question on how the state, which is weakened now, be made strong: "Renovated state:" understanding of the mission, acquisition of leadership, a strategic alliance with nationally and socially responsible business; renovation of the state's economic role is an indispensable condition for raising the speed and quality of growth. Responsibility of the state under the constitution requires conceptual leadership in forming the economic policy. The mission of the modern state is to encourage a broad nationwide dialog regarding the targets, tasks and priorities in the economic development, responsibility for implementation of its results... An alliance with responsible Russian business, based on the community of their targets, aspirations for mighty and just fair Russia, is a part of the state's revised role."

(From Putin.ru, 27.10.2004)

The Boss Behind Bars

It is a Year Since Mikhail Khodorkovsky, the Billionaire Head of Russian Oil Giant Yukos, Was Arrested at Gunpoint at a Siberian Airport.

YOU ARE on remand in a hellish jail, being tried in an illegal court for breaking a law that does not exist. The prosecution is as shambolic as your defence is watertight, but you will be convicted anyway. The only question is the length of your prison sentence - five to 10 years, probably.
That, says his defence team, is the predicament of Mikhail Khodorkovsky, the oil tycoon on trial in Moscow on charges of large- scale fraud and tax evasion.

You are the richest of Russia's loathed oligarchs. You made yourself a multibillionaire by buying up State assets on the cheap in dodgy privatisations while the rest of the population, which should be benefiting from that wealth, wallows in poverty. The authorities are right to prosecute you and you should go to prison. That is the view of many Russians.

Khodorkovsky has a knack of polarising opinion. For the Kremlin, he is a political irritant and a springboard to greater popularity - by taking a tough line with the oligarch, President Vladimir Putin has boosted his own ratings. For many Western businessmen, he is a pioneer of good corporate governance in Russia, a clear-thinking entrepreneur who has fallen foul of the jealousies of an autocratic political system.

True, Westerners are wary of the origins of his fortune, but they find the apparently personally targeted and politically motivated nature of his prosecution more troubling.

Critics say he is a fool. He funded opposition parties, criticised creeping authoritarianism, cosied up to foreign politicians and made pronouncements on sensitive policy issues - reckless and hubristic challenges to Kremlin authority. Among colleagues, he elicits fierce loyalty. Former employees - at least those never on the receiving end of his alleged ruthless streak - describe him as attentive, polite, a competent manager and natural leader, as well as more down to earth than many less successful executives.

He is also renowned for self-control. A Western oilman recalls a recreational weekend with Yukos leaders in the wilds of Siberia. Away from the media, Khodorkovsky had a rare opportunity to relax, and got drunk.

Someone ushered one of the beautiful local girls making up the numbers towards him: "As soon as she invaded his personal space, he made a gesture to one of his security guards and she vanished. He never, never loses control."

IINTERVIEWED Khodorkovsky in 2001 when he was well on the road to making Yukos Russia's largest oil producer, a position it recently ceded to Lukoil.

He was feted for revolutionising corporate governance and for achieving a 3000% rise in Yukos shares in two years, and oil executives, politicians and journalists hung on his every word. He was immaculately turned out and extremely courteous. His image seemed to have been meticulously devised to convey calm, thoughtful authority - weighing each word, he spoke very quietly, knowing that he did not have to raise his voice to make himself heard.

Just as Khodorkovsky polarises opinion, his character itself is full of polarities. He jealously guards his privacy yet relishes being in the public eye and influencing Russian life. So who is the real Khodorkovsky?

Born on 26 June 1963, Mikhail Borisovich Khodorkovsky grew up in a two-room communal Moscow apartment. He made his fortune buying Yukos at a bargain-basement State auction in 1995 through Menatep, the bank he founded in 1989. His wealth has been estimated at between $8 billion (Pounds 4.4 billion) and $11 billion, but since most of it is tied up in Yukos stock some has been wiped out by the firm's share-price slump.

Khodorkovsky, who until last October lived in a mansion outside Moscow with his wife and four children, is being prosecuted over alleged irregularities in the 1994 privatisation of fertiliser maker Apatit. The trial had been expected to end this month, but the "pre- trial detention" of Menatep colleague Platon Lebedev, who is being prosecuted simultaneously, has been extended to 26 December, suggesting the case will take longer.

Khodorkovsky's defence team says the charges are bogus but has no illusions about convincing the judge of that. "There was never a prospect of the defence succeeding," says Robert Amsterdam, his international lawyer. "This is a political case."

Amsterdam claims the treatment of his client goes beyond the removal of a political threat - demobilising and discrediting its charismatic figurehead have facilitated attacks on Yukos.

Khodorkovsky's plight is a cautionary tale for other oligarchs - a reminder of where real power lies, of the central role the State plans to play in the strategic oil industry and of Putin's determination to foster a taxpaying culture.

It seems to have worked.

Business leaders are falling over themselves to be seen as good corporate citizens. And, with US oil giant Conoco-Phillips forking out almost $2 billion for a 7.59% stake in Lukoil last month, neither do foreign firms seem to have been put off by apparent political interference in judicial matters.

Meanwhile, Khodorkovsky has spent a year behind bars. One associate suggests he is able to cope with his grim everyday reality because he "lives in the future, not in the present".

His declared dream, which supporters say is genuine and not tactical posturing, is to see "civil society" established in Russia within his lifetime, and that is where his mental energies are directed. He adds that Khodorkovsky is not necessarily interested in holding political office but sees himself exerting influence to achieve that end in the mould of George Soros.

Soon after his dramatic gunpoint arrest on the night of 25 October 2003, Khodorkovsky quit as boss of Yukos, pledging to continue his work as chairman of Open Russia, an organisation with the lofty aim of building an open and "truly democratic" society in Russia by supporting educational and civic initiatives.

CYNICS find the shift from capitalist heavyweight to philanthropist and social reformer hard to swallow. But his supporters point out that he has been making charitable donations for years. In addition, at the time of his arrest, he is said to have been planning to sell down his Yukos holdings in order to focus on his social programmes and was deep in negotiations with various foreign buyers, including ExxonMobil and ChevronTexaco.

"He has an internal drive to accomplish the impossible," says one former colleague.

"Having turned round a dinosaur oil corporation into a dynamic company, he has turned his attention to saving the country."

This messianic - some say Quixotic - crusade has drawn both admiration and scathing criticism, with detractors dismissing his aspirations as manifestations of a Christ complex. But the martyrdom of prison may yet help him get his message across. One associate says Khodorkovsky believes he needs to go through some sort of "purgatory" to make himself more acceptable to the public. And although he remains unpopular, partly because of anti-Semitism (he is Jewish by birth), there are signs his incarceration is softening up opinion.

Nonetheless, even if he is remembered in a decade, for a 40-year- old man in a country where the average life expectancy for men is under 59, 10 years in prison might prove too long to make a difference.

No privileges and sharing a cell with four others

CONDITIONS are generally appalling in Russian prisons, and northern Moscow's Matrosskaya Tishina jail is no exception. Sources claim Khodorkovsky has not been able to buy privileges but he is said to be bearing up well under difficult circumstances.

Access to him is tightly controlled and it is impossible to get a message to or from him without official sanction. Conference rooms are bugged. Even in court, his hard-of-hearing Russian lawyer must keep at least one metre away from Khodorkovsky's cage, making private conversation difficult.

A typical prisoner would be in a cell about five metres square - designed for six people but inhabited by 20, sleeping in shifts. Sources say Khodorkovsky has escaped such conditions and shares a cell with about four others. The special treatment is thought to be a way of encouraging him to drop his guard and confide in his cellmates, who monitor him.


TOM NICHOLLS
(From Evening Standard, reprint ConocoPhillips 2004-10-22)

Khodorkovsky marks first year in jail

MOSCOW - A year ago, on October 25, 2003, Mikhail Khodorkovsky, Chief Executive Officer and a key shareholder in the oil company YUKOS, was arrested.

A lot has happened since that time. Shortly after he was arrested, Mr. Khodorkovsky resigned as the company’s CEO. Criminal proceedings were initiated against another two key shareholders of the company. Sibneft scrapped its planned merger with YUKOS, and the embattled oil company faced huge tax claims. Most analysts are convinced that YUKOS will cease to exist in its present form before the end of 2004, and they do not expect Mr. Khodorkovsly to be released over the next 1-2 years.

The YUKOS case is unfolding gradually, and it becomes increasingly complicated. First came the arrest of Khodorkovsky’s close associate Platon Lebedev, the head of the MENATEP company and one of YUKOS’s largest shareholders. He was accused of stealing a 20 percent stake in the state-owned fertilizer company Apatit back in 1994. At that time, YUKOS security official Alexey Pichugin was arrested. This was followed by raids of YUKOS’ business center in Korallovo, in the Moscow region.

After those events, Mikhail Khodorkovsky held a news conference. He told reporters he was not going to leave the country and become a political emigrant. “If they want to push me out of the country or jail me, let them jail me,” Mr. Khodorkovsky said.

His words were taken literally. Three weeks after the press conference, Russia’s richest man found himself in prison. At the beginning of the YUKOS affair, this seemed impossible. But further events made it clear that the authorities were trying many new methods, and they seemed to work.

A huge tax claim of $3.4bn for 2000 was brought against the company only at the end of 2003, after the statute of limitations expired. The oil company faced an unprecedented tax claim of over $7bn for 2000-2001. There is little doubt that the tax authorities would make similar demands for 2002-2003.

It seems the government and law enforcement agencies are competing with each other in making claims against YUKOS. Freezing the assets of the oil company and its subsidiaries, threats by the Natural Resources Ministry to revoke oilfield licenses from YUKOS’s subsidiaries, issuing international arrest warrants for nearly all of YUKOS’s key shareholders… This list can be continued.

YUKOS, which positioned itself as Russia’s “most transparent” company, is far from ideal. The company indeed used tax optimization schemes. YUKOS’s affiliates took part in privatization tenders and, given the imperfection of Russia’s laws at that time, they could have used the situation. The company’s so-called “transparency and openness” is dubious – so, minority shareholders are not represented on the Board of Directors.

But such claims can be made against most of Russia’s largest businesses. What happened to YUKOS, analysts say, is due to several factors, including Mr. Khodorkovsky’s political activity.

He was the first Russian businessman to openly support two liberal political parties – the Union of Right Forces and Yabloko. In fact, YUKOS shareholders sponsored various political parties, from the Communist Party to the pro-Kremlin United Russia. The former YUKOS CEO is also accused of lobbying the State Duma to push through laws favorable to the company. Though, such activities are not outlawed in Russia, and Mr. Khodorkovsky was arrested on other charges, not related to his political activity.

The main aim achieved by the authorities in the YUKOS case is the predictability of Russia’s large businesses. Not a single oligarch came out openly against the government’s policy on YUKOS. It is almost impossible to imagine that a large businessman might criticize the government’s campaign or refuse to consult with government official on an important deal.

It is difficult to say how events around YUKOS and Mikhail Khodorkovsky will develop. The company might save its face – Russian President Vladimir Putin repeatedly said that the government was not interested in the bankruptcy of YUKOS. But YUKOS will not manage to save its oil assets, with its main production subsidiary Yuganskneftegaz likely to be auctioned at the end of November.

Gazprom, a state-owned gas giant, is seen as the most likely buyer of Yuganskneftegaz, though the company’s CEO Alexey Miller said Gazprom was not interested in buying YUKOS’s assets.

In the opinion of Mr. Khodorkovsky’s and Mr. Lebedev’s lawyers, the trial against the two business partners could early next year. If the government wanted to neutralize Mikhail Khodorkovsky as a political figure, it produced the opposite result. A year ago, Mr. Khodorkovsky’s name was known mostly to politicians, businessmen, reporters and the residents of oil-rich regions. Today, he is a household name in Russia.

(From The Russia Journal, 26.10.2004)

How Did the Khodorkovsky's Case Change Russia?

WE FEARED THAT THE STATE WOULD BE TOO WEAK TO FIGHT OLIGARCHS: IT HAPPENED

Iosif Diskin, Co-Chairman of the National Strategy Council, one of the authors of the report "The State and Oligarchy" (2003): In fact, we showed that Russia entered the model of development we called "oligarchic modernization" even before "The State and Oligarchy". The main flaw of the oligarchic modernization is well-known. It generates weak states and weak state institutions.
We feared then that the state would be too weak to fight oligarchs. It happened. On the one hand, the YUKOS affair was correct: tax evasion, eagerness to take over the Duma and other state institutions, essentially to change the arrangement of forces in the country. All of that is very dangerous. Putting this
problem into the center of political dialogue and political struggle prevented it. From this point of view, our report accomplished its mission.
In our new report titled "Russian Economy, State, and Business" we make an emphasis on the failure of the state - when it did away with oligarchs - to draw the necessary conclusions. It did not become the conceptual leader, it ran the YUKOS affair in the manner that did not win it businesses' trust, that did not up the role of the law or trust in it. It merely left most businesses disoriented and confused and scared. And scared businesses are not a reliable partner for the state.

Yevgeny Yasin of the Supreme School of Economics: Opinions differ of course but the YUKOS affair did change the relations between the state and businesses. No matter how often we are told that this is an isolated episode, all businessmen regard it as a conflict. I'm not saying of course that businesses will call it a
conflict in public. It is not their style. Businesses will fade into the grey zone, keep away from the spotlight. It means a change in the trajectory of development of the national economy.

Liliya Shevtsova of the Moscow Carnegie Center: The YUKOS affair became a crossroads that determined the relations between businesses and the regime and, more importantly, direction of evolution of Russian regime. There were no doubts that oligarchic capitalism should be left behind. It was necessary to set up restrictions for development of the market and for businesses' attempts to privatize the state. And yet, the problem should have been solved through betterment of courts or development of civil society or else through transformation of the executive branch of the government into an arbiter setting the rules of the game. The regime chose laws of the underworld to supremacy of the law.
The blow at YUKOS neutralized business community as a political force an encouraged super centralization of power. Abolition of gubernatorial elections and the weakening of federalism were expected steps. The problem is as follows: the
more resources the leader concentrates, the more he has to share with his inner circle increasing his dependence on it. Moreover, the president is forced to waste his influence into covering up shortcomings and mistakes of the power vertical he himself built.
It follows that the stronger centralization is, the weaker the leadership becomes. The more omnipotent the regime is, the weaker it becomes.
The anti-oligarchic revolution put into motion by the YUKOS affair does not lead to elimination of the oligarchic vector at all. This is another paradox. In fact, the connection between the state apparatus and capitals becomes stronger - hence representatives of the presidential administration in the top management of the leading companies. The process leads to appearance of oligarchic bureaucrats who are not responsible for any assets but who control finances. Like Berezovsky who made use of assets without being their owner. But the oligarchic bureaucracy generates the logic that will work against it: undermining the already weak institution of private property, it helps the future ruling team to consolidate its positions to do away with the existing class of bureaucratic owners. The blow at
YUKOS became the first chord in the process of redistribution and self-reproduction of the political regime. There is only one conclusion: the presidential power is a cover for appearance of a system of oligarchic-bureaucratic dominance that dooms the country to stagnation and restricts the president's own modernization potential.

Igor Yurgens, Vice President of the Russian Union of Businessmen and Entrepreneurs: The events in the country have developed fast indeed since Mikhail Khodorkovsky's arrest. Russia began a rapid transformation from liberal democracy into state capitalism. I do not know what it will lead to but I know that using the slogans of protection of the poor, war on terrorism, and fortification of the power vertical the state is actually changing the country. Even though it does not admit it. Take the conflict in the government, for example. Liberal ministers Herman Gref and Aleksei Kudrin on the one hand and "conservative" Prime Minister Mikhail Fradkov are in a conflict...

Translated by A. Ignatkin

(Russian original from Izvestia, English text taken from The Johnson's Russia List, 26.10.2004)

Russia 's Prisoner

Editorial

It's been one year since the arrest of Russia 's wealthiest oligarch, and the resulting economic damage is growing in line with the Kremlin's steady descent into its old statist ways.

The jailing of Mikhail Khodorkovsky and the imminent dismembering of his oil giant Yukos for a pittance have perked eyebrows in Europe and the U.S. But there are few signs so far that Western concerns are forcing Russian President Vladimir Putin to change course. Perhaps he will be influenced more by his slipping popularity at home. Russians are growing less sanguine as well, judging from reports of new capital flight, to the tune of $12 billion this year, and slowing capital investment.

The fallout for Russia and its investors, both domestic and foreign, is already measurable in the tens of billions of dollars, according to some estimates. That includes lost revenue for Yukos, which until recently was having trouble making oil deliveries to China because of the turmoil wrought by the investigation.

Then there's the fire sale of its subsidiary, Yuganskneftegaz, for as little as a quarter (if not less) of its estimated worth to pay the nearly $4 billion in back taxes Russia says Yukos owes the government. The odds-on favorites to end up with Yuganskneftegaz? The state-owned giant Gazprom or Kremlin-friendly Surgutneftegaz, of course.

If world leaders aren't watching the situation closely enough, their nations' investors certainly are. Foreign companies are clearly on the outside looking in when it comes to Yuganskneftegaz -- many of them could easily outbid Gazprom if allowed. They'll be loath to plunk down cash in other sectors of Russia 's economy if they fear similar governmental takeovers in the future. Aside from the export of natural resources, Russia 's economic development was sluggish even before the Yukos affair.

So why is Mr. Putin apparently so oblivious to the risks he is running? Mr. Khodorkovsky's attorney, Yuri Schmidt, has two theories. First, the Kremlin has a "present from the devil" in oil prices now hovering around record highs -- masking weaknesses throughout the rest of Russia 's economy. Second, he says, Russian politicians have a long tradition of placing personal interests above the good of the nation, "and for money to be no object when gaining political advantage."

Yukos of course isn't the only example of the Kremlin's slide back toward old Soviet habits. Mr. Putin's response to the tragedy in Beslan -- ending the direct election of regional governors and members of the Duma -- is another reverse for Russia 's attempt to turn itself into a democracy with a truly representative government. Mr. Putin hasn't even bothered to explain how consolidating power into an administration incapable of preventing Beslan in the first place is going to make the country any safer from terrorism.

A man of Mr. Khodorkovsky's wealth and connections probably could arrange a relatively comfortable plea bargain. As with other oligarchs, his past record is not entirely spotless, notwithstanding his admirable latter-day attempts to turn Yukos into a Western-style company with transparent accounting and fair treatment of minority shareholders. But Mr. Schmidt doubts that his client would go that route, giving up any chance to play a future role in Russian politics. According to his attorneys, his real crime was political -- the support of opposition parties in Russia . He's "a strong man with strong convictions," says his lawyer.

Judging from the visit of his legal team to the U.S. last week, one of his tactics now is to attract more international attention to his plight and the general course that Putin's Russia is taking. He's having some success. Although George W. Bush has attempted to maintain good relations with Mr. Putin, the mood in Washington is souring. Last week, the U.S. State Department issued its sternest statement yet on the Khodorkovsky case, accusing Russia of "coercion" and a "forced sale" with Yuganskneftegaz. The Khodorkovsky case, State says, doesn't bode well for the perception of Russia 's human-rights record.

Government chiefs at next month's EU-Russia summit at The Hague are expected to discuss relations between the two without moving to strengthen them, which will perhaps be a disappointment for Mr. Putin's hopes to become a more important player in European affairs. To that end, he joined with Germany and France in opposing the U.S. invasion of Iraq last year. But being on good terms with those two countries is not quite the same as enjoying the good opinion of Europe as a whole. If Cold War suspicions are still alive in Russia , they haven't been put entirely to rest in Western Europe either.

Mr. Schmidt, a Russian with a long record in dealing with civil rights cases, says that Russian leaders are more sensitive to world opinion than they sometimes seem to be. We'd guess he's right about that. For that reason, Western nations are correct in showing their concern and displeasure about the steps Mr. Putin has taken to turn back the clock. If he heeds those cautions, he will be doing everyone a favor, including the Russian people, and especially himself.

(From The Wall Street Journal, 26.10.2004)

What End to the Endgame?

By Christopher Weafer

Twelve months after the arrest of Mikhail Khodorkovsky triggered an escalation in the investigation of Yukos by the Tax Ministry and the launching of several criminal cases against Menatep shareholders, there is still no clear understanding of how or when they will end.

Uncertainty surrounding the likely resolution of the Yukos/Menatep case continues to be the major cause of stock market volatility and is regarded by many as the true reason why several credit rating agencies continue to withhold investment-grade status for Russian sovereign debt. More broadly, the case has also provoked a lively debate as to the residual effect it will have on the credibility of Russia as an "attractive investment location," an ideal that President Vladimir Putin has frequently made reference to over the past few years. This has been a crucial element of his declared strategy to eventually create a more diversified economic base with greater wealth distribution across the population.

The evidence from the stock market and the recent price trend of Russian debt suggests that investors are bored with the issue and now simply want the uncertainty to end so that an assumed major obstacle to increased local and foreign institutional portfolio investment in Russia can be removed. The optimistic perspective is supported by the fact that, despite well-publicized concerns over the legal protection of property rights, major multinational groups, such as Total and Conoco, are continuing to make investment commitments to Russia.

There is plenty of evidence to support the view that the actions against Yukos and its controlling shareholder, Menatep, are a "one-off" and therefore will not be repeated -- or, at least, not in such an aggressive way -- against other business groups.

This case could actually be considered a necessary part of the Kremlin's strategy for regaining control over the strategically important oil industry, as well as economic planning generally.

Putin has made it very clear that he regards the breakdown of the former Soviet control structure in the 1990s as the main reason for almost all of the problems that he inherited from Boris Yeltsin in early 2000, and while restoring strong political control has been an obvious priority during his first term, he also made it clear that his vision of a "state-private enterprise partnership" is one where the state sets the broad directional growth parameters and private enterprise is expected to adjust investment strategies to help achieve the state's goals.

The Yukos/Menatep case presented a very neat opportunity for Putin both to recover a big slice of the state's former control in the country's main strategic industry and also to teach a lesson to in the consequences of challenging the state's declared economic priorities the business community. In early 2003, Mikhail Khodorkovsky lobbied very actively to try to force the government to change its declared strategy of creating a three-year gap in adding new oil export capacity, so as to allow the Finance Ministry the opportunity to increase the tax take from the oil companies to fund budgetary mechanisms that would help boost growth in manufacturing industries.

Such a window was also considered necessary to help mobilize political and public support behind the proposed reform package. That did not suit Khodorkovsky's ambitions for increased exports to the United States and China, and he tried to force a change in government policy.

On a practical level, one of the immediate consequences of this action has been a significant broadening of the tax base in Russia and a sizable increase in the amount of tax raised. Tax collection over the first half of this year, for example, showed an increase equal to 1.1 percent of GDP over the same period in 2003.

Eventually this case will have to end and when it does, there will be a strong relief rally on the stock market -- the abundance of liquidity in the hands of local investors will ensure that. This whole case has dragged on for far too long, and often aggressive or inconsistent actions on the part of the state agencies involved suggests that while the decision to pursue this case must have been made at a senior government level, there was no thought given to the mechanisms for realizing it in practice. This is something that we have seen in other important areas, such as in the slow progress on reforms, and raises concerns among long-term investors that while Putin may remain committed to the ideal of an "attractive investment case" and the broad economic and structural reform program, he simply does not have the administrative support infrastructure to realize them. The Yukos affair highlights the apparent inability of government agencies to complete the relatively simple task of quickly raising a tax bill to approximately the net valuation of the targeted asset.

Without progress in advancing the reform package, investment growth will likely remain narrowly based, raising concerns that inward investment will either be directed toward natural resources or more speculative areas such as real estate. While that strategy will likely sustain growth over the medium term, the economy will ultimately become even more dependent on the commodity price cycle.

That leads us to the next concern which is that should headline growth slow due to a decline in commodity prices, the government might become even more interventionist and embark on another "one-off" like the Yukos/Menatep case?

On the other hand, with the country's foreign exchange reserves recently topping $100 billion and the stabilization fund rapidly heading toward $20 billion, Russia has effectively zero net foreign debt. Russia also has considerable potential to increase oil and gas production and exports. Those simple facts will be enough to allow the Yukos/Menatep case to be conveniently swept aside by the stock market and some strategic investors. The potential to make money is simply too good to dwell on the negative implications of the case.

As for the endgame, there can no longer be any doubt that, at the very least, the government intends to gain control of Yukos' largest production unit, Yuganskneftegaz. The only question is whether it will proceed to confiscate the remaining production units as well, effectively destroying Yukos. The key to that is what happens to Menatep's controlling stake in the oil major. There is no way that Putin will allow Khodorkovsky to walk out of jail with any residual holding in Yukos. If Menatep's equity stake is successfully confiscated by court action or voluntarily handed over as part of some plea bargaining, then Putin will not need to destroy Yukos.

It would then effectively become a state-controlled company and eventually be absorbed into Russia's version of Saudi Arabia's Aramco -- which most probably will be centered around Gazprom.


Christopher Weafer, chief strategist at Alfa Bank, contributed this comment to The Moscow Times.

(From The Moscow Times, 26.10.2004)
____________
Mmm... Chief strategist at Alfa Bank... Remembering the last declarations of his boss Fridman... Anyway, he is rather interested in showing that is all is safe for Alfa business partners. The show must go on...

LUKoil Mulls a Bid for Yugansk

By Catherine Belton
Staff Writer

The nation's No. 1 oil major, LUKoil, said Monday it could consider taking part in a sell-off of Yukos' main production unit, Yuganskneftegaz, if the sale was conducted via an open tender.
"If the tender is open, then it is our duty to our shareholders to consider any possibilities, including this one," LUKoil vice president Leonid Fedun told reporters, Interfax reported.
He added that, even though he was personally against it, other members of the LUKoil board could be considering a bid for Yugansk, which is being sold as part of the controversial legal onslaught against Yukos to cover outstanding back tax debts, currently totaling about $3.75 billion.
"I think it is better for us not to spend a lot of money on Yukos if it is sold, but to invest in other projects," Fedun said. "This is my personal opinion. But there are the opinions of other shareholders, other managers and other board members that could differ from my own."
He said LUKoil would make a final decision on whether to take part in the sell-off after the sale terms are disclosed.
Fedun's comments came exactly one year after the arrest at gunpoint of then-Yukos CEO Mikhail Khodorkovsky at a Siberian airport in the early hours of Oct. 25, 2003.
Khodorkovsky's arrest came amid an escalating conflict with the Kremlin as he appeared to challenge President Vladimir Putin's power base and refused to back down, even after the arrest of one of his closest associates, Platon Lebedev, last July.
Over the year that he has been held in Matrosskaya Tishina prison on charges of heading an organized crime group involved in large-scale fraud and tax evasion, the state's legal onslaught against Khodorkovsky, his associates and Yukos has heralded a massive shift toward greater state dominance over the economy and has proved the linchpin for increasing Kremlin control over political life.
Once the darling of Western financial markets, Yukos' market capitalization has plummeted from $32.3 billion just before Khodorkovsky's arrest to $7.7 billion now.
As Yukos nears breakup under the weight of growing back tax claims and a company-wide accounts freeze, state-controlled gas giant Gazprom has gained in power, moving aggressively into the oil sector by merging with state-owned Rosneft. The combined force of Gazprom and Rosneft is considered the main contender for Yugansk, which produces more than 60 percent of Yukos' total output.
Even though Gazprom CEO Alexei Miller has said Gazprom does not intend to take part in the sale, which is planned for around the end of November, Deputy Economic Development and Trade Minister Andrei Sharonov has said companies affiliated to the gas giant could bid.
If its bid succeeds, Gazprom would not only be the world's biggest gas producer, but would also be in control of about 2 percent of global oil output.
The market was still waiting Monday for an announcement by the Federal Property Fund on the terms of the sale. In a sign of continued infighting over the sale terms, an expected announcement on the sale Friday was postponed. Federal Property Fund spokesman Vladimir Zelentsov said Monday he had no information on when it could be announced.
The Justice Ministry has said Dresdner Kleinwort Wasserstein valued Yugansk as being worth $10.4 billion. But the investment bank later released copies of its full report, showing that it considered that sum "overly conservative" and that it valued the unit at between $14.7 billion and $17.3 billion. But two recent Interfax reports, citing different unnamed officials, put the government's price tag as being even lower, at $3.75 billion and $4 billion, roughly equal to Yukos' outstanding tax debts and raising investors' worst fears of a fire sale to insiders.
LUKoil spokeswoman Olga Sergeyeva said Monday she considered it a done deal that the unit would be sold off for about $4 billion. "They've already said the price is going to be equivalent to its tax debts," she said. LUKoil's new partner, ConocoPhillips, which this month bought a 7.6 percent stake in LUKoil, would not be involved in any decision to take part in the Yugansk sell-off because it does not yet have the 10 percent stake required for a seat on the board, she said. Conoco declined to comment.
Analysts doubted, however, that LUKoil would risk its reputation by bidding for the unit. "LUKoil takes its goal of being an international oil company with a high rating very seriously and dealing in stolen goods would not support that," said Adam Landes, oil and gas analyst at Renaissance Capital, adding that he did not think LUKoil had enough funds to take part in the sale if it was conducted openly.
Yukos' owner, Group Menatep, has threatened that any buyer of Yugansk would face "a lifetime of litigation" in international courts for purchasing what it says would be illegally expropriated property.
As jockeying ahead of Yukos' breakup mounted, a further blow was dealt to the company's former status as the darling of Western financial markets on Friday when the CEO of oil field services giant Schlumberger, the company that helped Yukos acquire this reputation, said his firm was withdrawing equipment it provided to Yukos because he feared it would be unable to sustain activity.
A Yukos spokesman said Monday that Schlumberger had removed part of the equipment it provided to Yugansk. He said the company had been unable to pay any of its service providers for the past two months due to mounting back tax payments and the accounts freeze.
Schlumberger has largely been credited with providing the technology that fueled Yukos' massive annual surges in production of 10 percent and more since it was hired in 2000. Yukos' output growth blazed a trail for other Russian oil majors to follow suit in hiring Western oil technology, as the nation's overall output boomed.
Now, Yukos says, without the equipment Schlumberger provided, it will be unable to continue its growth. It will, however, be able to maintain production at current levels for several months to come, Yukos spokesman Hugo Erikssen said.
For Yukos to maintain current production levels from its existing wells at 1.7 million barrels per day, the company just needs to continue receiving electricity. The equipment removed by Schlumberger was used for so-called "fracturing" processes aimed at triggering intensive production hikes, a Yukos source said.
Yukos' cash crunch has also forced it to cut back exports by rail to China due to its inability to pay transportation costs. The company announced at the end of September that it had to cut back exports to CNPC. The Chinese oil giant said Monday it was demanding compensation for losses incurred by the supply cuts. Yukos transport and logistics official Alexander Sapronov told Interfax the company had been forced to stop trading with CNPC because the delivery route was inefficient.

(From The Moscow Times, 26.10.2004)

Putin Ally to Head Court Marshals

By Guy Faulconbridge Staff Writer
President Vladimir Putin has appointed an ally from St. Petersburg to head the Court Marshals Service, a key instrument in the Kremlin's legal battle with Yukos.
Putin appointed Nikolai Vinichenko as head of the Court Marshals Service last week after dismissing Arkady Melnikov, 65, the Kremlin said in a statement. Melnikov had headed the service since November 1999.
Vinichenko, 39, was prosecutor of St. Petersburg until September this year.
The Court Marshals Service, an arm of the Justice Ministry, has left investors gasping by parading contradictory decisions and statements on the fate of Yukos assets as the Kremlin steps up its campaign to wrest control of the company from its core shareholder, Group Menatep.
"The replacement of the retirement-age [court marshals] head with a younger and probably more ambitious St. Petersburg prosecutor may result in a more aggressive stance from the [court marshals] service towards Yukos," said Steven Dashevsky, head of research at Aton brokerage.
Mikhail Khodorkovsky, who controls Menatep, has been in jail for more than a year and is standing trial for tax evasion, fraud and leading an organized criminal group, charges he denies.
The confrontation between Khodorkovsky and Putin has placed Yukos' assets under threat after court marshals froze shares in Yuganskneftegaz, Yukos' main unit, and reportedly asked the Federal Property Fund to sell off those shares for about $4 billion, less than half of the lowest valuation of the Siberian oil producer.
Those actions have helped make Yukos shares the most volatile in the country, spike world oil prices and provoke suspicions that some officials might be playing the Yukos share market with insider information.
"On the higher levels there may have been some unhappiness with how badly some of the attacks on Yukos were carried out," said Yevgeny Volk, director of the Heritage Foundation Moscow office.
"There is also a question about allegations of insider trading, with big share price movements following different announcements by the Court Marshals Service."
Just like the president, Vinichenko, studied law at Leningrad State University. After graduation in 1987, twelve years after Putin, Vinichenko worked his way up in the office of the city prosecutor, finally monitoring investigations carried out by the special services.
He was made deputy prosecutor of St. Petersburg in 1997 and in 2001 was made federal inspector for the city under Northwest Region Governor General Viktor Cherkesov, who studied with Putin and is now the head of the Federal Drug Control Service.
Vinichenko was made prosecutor for St. Petersburg in April 2003 but resigned in September amid speculation that he was in conflict with Prosecutor General Vladimir Ustinov and perhaps even with deputy chief of the presidential administration Igor Sechin.
Russian newspapers have reported Vinichenko is a long-term acquaintance of Dmitry Medvedev, Putin's chief of staff, and Dmitry Kozak, Putin's envoy in southern Russia. Both men are also St. Petersburg lawyers.
"He may know Putin, as they both worked in St. Petersburg and they certainly had similar acquaintances. Putin is putting someone he knows he can trust in this position," said Vladimir Pribylovsky, president of the Panorama think tank.
"He is a lawyer by education but he is probably closer to the St. Petersburg Chekist group, though these groups are of course very fluid."

(From The Moscow Times, 26.10.2004)

Khodorkovsky Would Never Leave Russia — Mother

A year after Mikhail Khodorkovsky’s arrest, his mother Marina Khodorkovskaya told the Izvestia daily that over the past twelve months her son had not changed very much, “except that he has lost some weight”.

More than a year ago, when Khodorkvosky’s colleague Platon Lebedev was arrested in the framework of the Yukos affair, many said that it would be better for the company’s CEO to leave the country. “He wouldn’t even hear of that,” Marina Khodorkovskaya told Izvestia.

She said, she had learnt of his arrest from a relative and waited for several weeks before she was allowed to see her son in prison. “I worried very much, prepared a long list of questions,” she said. “A woman — a female ward in Matrosskaya Tishina [prison] saw that list and said: ”Let me answer those questions for you, so that you don’t waste time, when you see him.“

”And so, while I waited, she told me about his meals and conditions in the cell. I was very much afraid of seeing Misha despondent, broken. But when I looked him in the eye, I knew, everything was fine. He said, mom, I feel fine, don’t you worry. But, of course, I understand that the first days were the hardest for him.“

Marina Khodorkovskaya said that her son has not changed over the past months. His daughter Nastya, 12, misses him very much and visited him several times in prison. Her younger brothers are too small to understand what is happening.

According to Khodorkovskaya, most of her family’s friends and acquaintances have not changed their attitude towards them after Mikhail’s arrest, instead showing understanding and compassion for them, which cannot be said of some of his former partners.

”Most interestingly, those, whom Misha had considered his good friends, whom he had often met, suddenly stopped calling. At the same time, those who had not been as close began calling, offering help,“ she said. ”Misha understands that this is life, and not all people are perfect.“

Khodorkovskaya complained that the prison building is rather cold and dilapidated, but that the prison employees are quite polite. Not all the letters reach the detainees. ”But Misha once told me that things were worse in the pioneer camp. The freedom of movement was just as restricted, but we did not receive parcels twice a week, he said.“

Mikhail told her he tries to move a lot, even though the cell is small. His cell mates spend most of the time on their beds, and that is why he has enough space.

According to Khodorkovskaya, her son understands that it makes no sense to make any predictions about the future. Even the hearings into his case are somewhat unpredictable.

”Many witnesses of the prosecution make statements the defense team could not even dream about. On Thursday, for example, the former deputy director of Apatit, Vladimir Seryogin, testified. And he said how bad things were before Misha came, and how the situation improved afterwards. [Prosecutor] Shokhin says, ’But he fired you!’ And he [Seryogin] says, ’And that was right, they are all young and for us it was time to retire anyway.’ Misha told me once that he leaves each session in a good mood.“

Izvestia noted that while Khodorkovsky was in prison, Putin won the presidential election with the support of the majority of voters. Khodorkovskaya says her son’s attitude towards that is ”highly philosophical“.

”He understands that Putin will remain in power as long as the people want it. And he understands that people like himself will be divested of their property and thrown in prison as long as this is what the majority wants. He understands that he is not the last. He sees the authorities making grave mistakes, but understands that it happens because the people want that to happen,“ she says.

When he is discharged he will no longer engage in business, she says. Nor will he go into politics. Mikhail has always told me that he would like to devote himself to charitable and educational activities, she said.

(From Moscow News, 25.10.2004)

"The Khodorkovsky Project is finished"

An interview with Gleb Pavlovsky, president of the Effective Politics
Foundation
Author: Boris Pasternak

[YUKOS oil company President Mikhail Khodorkovsky was detained and placed under arrest exactly a year ago, on October 25, 2003. We discuss the prospects of the YUKOS case with Gleb Pavlovsky, president of the Effective Politics Foundation.]

YUKOS oil company President Mikhail Khodorkovsky was detained and placed under arrest exactly a year ago, on October 25, 2003. We discuss the prospects of the YUKOS case with Gleb Pavlovsky, president of the Effective Politics Foundation.

Question: Khodorkovsky said in one of his interviews that exposed to the attack are the people, rather than the company, and his saw no intention of the authorities to ruin the business but efforts of the rivals to oust some figures from the business. Do you detach the case of Khodorkovsky from the case of YUKOS?

Gleb Pavlovsky: I think this all began with an attack on definite people. However, this is common in politics that somebody turns a large-scale conflict into a mechanism for personal elevation. From some moment, everybody started opening one's own front and many "cases of YUKOS" have appeared. Undoubtedly, the near-bottom layer flared up. However, this layer hadn't accumulated by itself; it has been upheld by the politics of the 1990s. Some had been allowed to act and other had been cut from political and economic resources, and those second were waiting.

Question: Do you think that vengeance is present in the case of YUKOS and similar cases?

Gleb Pavlovsky: Russia undoubtedly has a huge build-up of vengeance; it posed a real threat to our country in late 1990s. The entire public and political project, led by Putin, had been constructed as a dam before a deluge of social vengeance, on which the opposed nomenclature had staked. It turned out later that this vengeance couldn't be stopped with the election alone. It is easy to stop a head-on attack of the street, but it is impossible to stop a social request for generally recognized structure of property which everybody admits as fair. The state must present it to the public in the form which the majority of the population thinks is right.

Question: Is there a long way to achieve that?

Gleb Pavlovsky: A long way; in my opinion, transformation of capital assets into state-owned assets is becoming the main method of morally legalizing the system of ownership; i.e. a certain bent for state capitalism is inevitable. We'll try to preserve the personal freedom in this process.

Question: Do you think nationalization of property is a forced measure for the state, rather than attempt of some lobbyist groups to nationalize the property to suit their own interests?

Gleb Pavlovsky: It is politically. Lobbyism bites something on the edges, as usual. However, an attempt of permitting lobbyism in the prior issue of legalizing the property is equal to suicide of the state. The incumbent authorities won't accept that. The people must give the mandate for property to the state.

Question: I've looked through results of public opinion polls with regard to the case of YUKOS. The majority holds the ground that YUKOS be given an opportunity to pay all taxes and its owners are punished for fraud. Only 20% demand that the company be nationalized. However, we are now observing attempts of ruining the company, deprive it of the business...What is being attempted now: nationalization, deprivation or ruination?

These are different notions. A giant financial and industrial complex is implied under the word YUKOS; a wish is available to disintegrate it. The question is: what fate afterwards expects fragments of this business? Who will supervise them? The case of YUKOS is in this very phase now. The state has to act openly here, otherwise we'll see a pig in a river of piranhas. This cannot be allowed for many reasons. The state will have to enter the scene and offer at least a certain scheme.

Question: Do you think these questions are now being discussed with Khodorkovsky or he's merely sitting and something is happening outside the jail?

Gleb Pavlovsky: Some discussions probably take place, but they don't have a proper language. Even when Khodorkovsky is trying to speak of the generation, for some reason he's switching to liberalism. I can say for certain that nobody in the Kremlin will heed theories about liberalism - simply because the people there use a different language to discuss the same issues.

Translated by Andrei Ryabochkin

( Russian Text - rather different! - from Vremya Novostey, translation from The Johnson's Russia List)

One Year Later, Yukos Near Destruction

By ALEX NICHOLSON
October 24, 2004

MOSCOW (AP) - One year after Mikhail Khodorkovsky's arrest at gunpoint on a
Siberian airport runway, the politically charged face-off between
authorities, Russia's richest man and the Yukos oil giant has left the
nation's No.1 oil company a hair's-breadth from destruction.

As arguably the biggest trial in Russia's post-communist history lumbers on
in a cramped Moscow courtroom, the public gallery - all three benches of it
- is almost empty. Many observers regard the proceedings as a Soviet-style
show trial, and Khodorkovsky's lawyers say they have little doubt he'll be
convicted of the tax and fraud charges against him.

The fate of Yukos, which supplies 2 percent of the world's oil, appears
equally dim.

Its major production subsidiary is expected to be sold off by the state
next month to meet some of Yukos' more than $7 billion bill for back taxes.
Yukos is likely to face further tax claims as well, possibly setting the
stage for a forced sell-off of other pieces of the company.

``People are starting to realize that Yukos will cease to exist as a
company,'' said Peter Kizenko, head of trading at investment bank Brunswick
UBS in Moscow.

Analysts widely see the tax cases against Yukos and the separate tax and
fraud charges on which Khodorkovsky is jailed as a Kremlin-driven pincers
move to destroy the tycoon's political clout and punish him for funding
opposition parties.

These days, the man once considered the wealthiest and most cunning of
Russia's business titans spends his days hunched in a courtroom cage and
his nights in a jail cell.

Although Khodorkovsky had become the darling of Western portfolio investors
for his efforts to introduce transparent corporate governance, he built his
empire as a master of Russia's murky and often-violent business world of
the early 1990s. One deal from that period is the one for which
Khodorkovsky and partner Platon Lebedev are on trial.

In 1994, the state auctioned off a 20-percent stake in Apatit, which makes
a fertilizer component. The day after the auction, the top three bidders
declined to close the deal and the shares went to the lowest bidder -
representing Khodorkovsky's bank Menatep - which paid the nominal price of
$210,000; the highest bid had been for $1 billion.

Such deals, in which state assets were sold off for a fraction of their
apparent worth, brewed intense resentment among most Russians, who saw a
handful of people getting rich while millions of others plunged into
poverty after the Soviet Union collapsed.

The legal offensive against Yukos and Khodorkovsky thus targeted figures
who did not have wide public sympathy, and company officials see Yukos as
the victim of a Kremlin attempt to gain support by playing to populist
sentiments.

``This case is 100 percent political,'' said Yukos chief financial officer
Bruce Misamore.

Misamore, an American who has worked at Yukos for more than three years,
denies that the company's books were cooked and says Khodorkovsky was
within his rights to take a strong political stance.

Yukos shares have plunged some 80 percent since Khodorkovsky's arrest.

Ironically, observers expect Yukos' pumping subsidiary Yuganskneftegaz to
be sold off for as little as a quarter of the $18 billion value at which
investment bank Dresdner Kleinwort Wasserstein recently assessed it - an
echo of the questionable deals that created the Russian oligarchs.

The Yukos and Khodorkovsky affairs have raised wide concern among foreign
investors and governments about Russia's willingness to follow the rule of
law and protect shareholder rights.

``The status of the legal environment has been compromised,'' said
Alexander Branis, a director at Prosperity Capital. ``This changes the
outlook for investors - in some circumstances you can't rely on the law.''

But Russian officials impatiently brushed off Western governments'
expressions of concern and foreign investors have been heartened recently
by a slew of big-ticket deals that apparently have the Kremlin's blessing.

In September, U.S. oil giant ConocoPhillips paid nearly $2 billion for the
government's stake in No. 2 oil producer Lukoil, while the merger of
natural gas giant Gazprom and state-controlled oil company Rosneft paved
the way for investors to fill their portfolios with stock in the world's
biggest natural gas exporter.

Yukos' troubles also have raised fears of supply interruptions that
contributed to the soaring price of world oil - and that has only helped
Russia's oil-based economy, said William Browder of the Heritage Capital
investment firm.

``It has made such an enormous contribution to the economy that all of
Khodorkovsky's dire predictions about investors abandoning Russia turned
out to be wrong,'' he said.

(From Johnson's Russia List, 25.10.2004)

Russian oil company problems likely to affect global oil prices

The World Today - Monday, 25 October , 2004 12:22:00
Reporter: Emma Griffiths

ELEANOR HALL: The high price of oil is already threatening global economic growth, but that price could yet be pushed higher by events in Russia.

One year ago the future of the Russian oil giant, Yukos, was thrown into question when its owner, Russia's richest man Mikhail Khodorkovsky, was arrested at gunpoint on charges of tax evasion and fraud.

Mr Khodorkovsky's case is still meandering its way through the Russian courts, but it now appears that his company is set to be dismembered and sold off by the end of the year to pay off its massive tax debts.

As our Moscow Correspondent Emma Griffiths reports, analysts say the sale is highly likely to disrupt Russia's oil supply and put pressure on the world price.

EMMA GRIFFITHS: The Russian market is full of rumours, and its most talked-about topic for more than a year now has been the oil giant, Yukos. The company is Russia's largest oil producer – it accounts for 1 in every 5 barrels of oil.

It's been accused of using offshore zones to avoid taxes. The tax department has served it with a multi-billion dollar bill. Authorities have frozen the company's accounts and are now threatening to auction off its largest production unit – Yuganskneftegaz – or Yugansk.

It accounts for two thirds of the company. And there are persistent rumours that the state is planning to auction it off at a far lower price than its true value, to state-owned gas company Gazprom.

Oil and gas analyst for Brunswick UBS, Paul Collison, says if that happens it would amount to renationalisation of a huge part of Russia's oil industry.

PAUL COLLISON: It would be very negative for Russia's image, and there'd be the perception that the Putin administration is basically taking an asset from a private company and in a sense renationalising that part of the company. So there will definitely be costs, and it's not just an image issue, the market will react and Russia as a country will pay for it.

EMMA GRIFFITHS: Oil and gas analyst Paul Collison says the sale of the key production unit, Yugansk, could disrupt supply from Russia – the world's second largest producer of oil.

PAUL COLLISON: Yugansk is a big company by any global standards. Just that one entity produces over a million barrels a day. And it's not only about producing the oil, they also have to transport that oil, they have to refine it, they have to market it and sell it.

All of that to this moment is being done by Yukos management, Yukos production people. And if all of a sudden it now belongs to Gazprom then there's a big risk that there'll be disruption. There are all sorts of questions that, you know, down the road there could be interruption to the oil sector. So they still haven't seen the damage yet.

EMMA GRIFFITHS: The full damage to Yukos' former chief, Mikhail Khodorkovsky, still hasn't been felt, either. The multi-billionaire has been in jail for one year and could face a sentence of ten more. Kremlin-watchers believe there's little chance he'll be set free.

Analyst Paul Collison again.

PAUL COLLISON: The likelihood is that he's gonna spend at least a couple of more years in prison, if not more than that. You know, he and his company, they're still very, very wealthy.

So, you know Putin and Khodorkovsky hate each other, and they are bitter rivals at this point. And probably the more time Khodorkovsky spends in jail the more bitter he becomes. So if he's let out of jail he's probably a) pretty upset, and b) he's still going to be very wealthy, and seems like that would be a threat to Putin. So it looks bad for him.

EMMA GRIFFITHS: The trial of Mikhail Khodorkovsky is barely half-way through, there's been a parade of more than seventy prosecution witnesses so far, they still have another 60 listed to call.

And then his defence lawyers get their turn, in what they've described as a "sham" trial.
They predict the case might wind up in January, but no sooner.

This is Emma Griffiths in Moscow for The World Today.

(From ABC, 25.10.2004)