Kremlin seen ignoring critics in YUKOS sale

The Kremlin is likely to ignore mounting criticism in the west and potential legal risks to go ahead and sell key YUKOS (YUKO.RTS) assets cheaply to insiders so it can create a state energy giant, say analysts.
State-controlled gas monopoly Gazprom (GAZPq.L) is seen as the main contender for the oil major's Siberian unit Yuganskneftegaz, which accounts for 60 percent of YUKOS's oil output and one of every nine barrels produced by Russia.

"We believe the YUKOS subsidiary is likely to be sold for a very low price and Gazprom could benefit hugely from the acquisition," said Steven Dashevsky from Aton brokerage. "The government has been giving clear signals that it wants to boost control over the oil and gas sector by creating an oil unit at Gazprom and it does not come as a surprise that Yugansk now appears likely to end up under government control," he said.

"We seem to be building towards a situation in which Gazprom will see a much enhanced role in the country's oil sector, whether through acquisition of YUKOS assets directly, or via the State Property Fund," said Matthew Thomas from Alfa Bank.

The United States, which has long pushed for closer ties to Russia's oil business, warned this week that selling off Yugansk cheaply could hurt investor confidence in Russia.

"If sales are not made in the open market at fair market value, one has to assume there's an element of favouritism and that affects people's view of the business climate," state Department spokesman Richard Boucher told reporters on Tuesday.

But to sell Yuganskneftegaz the Russian government has picked the worst scenario price from an investment bank it hired to value the unit, choosing $10.4 billion instead of a recommended $14-$17 billion.

Yugansk is now due to be put up for auction on Nov.22 to raise the cash needed to pay off a huge bill for tax arrears.

The back-tax claims, for some $8 billion for 2000 and 2001 alone, are widely seen as part of a broader campaign being conducted by the Kremlin to crush the political ambitions of YUKOS's main shareholder, Mikhail Khodorkovsky. He is currently on trial for fraud and tax evasion.

Khodorkovsky and his allies have a controlling stake in YUKOS, but 25 percent is owned by a multitude of investors, including U.S. pension funds.

YUKOS shares have lost three quarters of their market value since April and these investors now fear that the enforced sale of Yugansk will slash the value further.

WILL E.ON BID?

Market players have long named Gazprom, run by a close ally of President Vladimir Putin, Alexei Miller, as the likely buyer of Yugansk, which produces 1 million barrels per day.

Deputy Economic Minister Andrei Sharonov confirmed that expectation on Tuesday when he said Gazprom may bid via an affiliate, while Russia's Interfax news agency quoted a government source saying Gazprom might team up for the purchase with its largest German customer and 6-percent shareholder, E.ON (EONG.DE).

"The development may raise some short-term market optimism as participation of a foreign bidder in the Yugansk sale might give rise to hope for a transparent auction," said Caius Rapanu from Nikoil brokerage.

"But given the high possibility that Yugansk's purchaser will face a lawsuit from YUKOS due to the low auction price tag, we believe E.ON will be reluctant to participate in the auction".

Raiffeisenbank said in a research note that E.ON could help indebted Gazprom raise cash and would be interested at a later stage in raising its stake in Gazprom.

"But buying into Yugansk, E.ON will also be buying into a whole lot of future litigation, especially if Yugansk is sold at a knockdown price. Never mind the fact that such a deal could be damaging to the reputation," it said.

Adam Landes from Renaissance Capital agreed that it would be surprising to see E.ON bidding: "The government would be best served by having no-one bid at the auction for Yugansk and take the asset in exchange for YUKOS' tax debts."

(From Putin.ru, 21.10.2004)