Malignant Tax-Payers

Yevgeny Kiselyov

Moskvoskie Novosti

Almost a year has passed since the then-Yukos CEO Mikhail Khodorkovsky was jailed. Meanwhile, the oil giant he founded is about to lose its core asset, Yuganskneftegaz, that produces 60 per cent of all its oil. The authorities are set to auction it off for a fraction of its fair value, to cover Yukos’ mounting tax debts. Yevgeny Kiselyov, chief editor of Moskvoskie Novosti, asked Viktor Gerashchenko, board chairman of Yukos, to shed light on the true state of affairs in and around the company.

The authorities are clearly in a great hurry to sell off Yuganskneftegaz. The tax authorities say that Yukos is too slow in paying off its tax debt and is failing to meet the set deadlines. How would you comment on that?
To begin with, this is not true. Yukos’ accounts have been seized and we have no right to use them. All that the court bailiffs allow us to spend money on is to cover the costs necessary for keeping the company afloat, such as operating costs, salary payments. Presently, $380 million is frozen in the seized accounts. The public is being deceived; they are trying to convince it that Yukos is not capable. This is not so. Add those $380 million to what has already been paid, i.e. $2.5 billion, and you will see that we are about to repay in full our 2000 tax debt to the budget, that is, $3.4 billion.
Secondly, what is there such a hurry? Mind you, those revenues were not included in the state budget. That means even if there had been a delay in transferring those funds to the budget, the government would not have had any problems with expenditures, as for instance, payment of salaries to public sector employees, pensions, benefits, etc.

But in addition to the $3.4 billion back tax claim for 2000, the company also faces similar claims for the years 2001 and 2003, and is quite likely to face the claim for 2003 soon. Is Yukos strong enough to pay off all the bills?
Indeed, it is very possible that we will be charged an additional $9-10 billion for the years 2001 to 2003. But as long as the oil prices remain at their current levels, we will be able to pay off all those debts by the end of 2005 or mid-2006. Look, the arithmetic is simple. Every month we sell oil for approximately $2 billion. We pay current taxes — $700-800 million a month. The court bailiffs allow us to spend money from the seized accounts to cover production costs, pay salaries, which approximately makes another $700 million What is left is enough to pay off the arrears every month. We are ready to pay off all the debts by July 2006 by slashing our own capital investments in the development of production and exploration to the minimum. The market demand is stable. We have no problems with the sale of oil, or honoring our contracts. Quite another matter is the fact that many things confuse us. For example, our undisputable debt stands at less than $4 billion.
Then why does the Justice Ministry seek to sell off Yuganskneftegaz, the main asset of the company, although its value is substantially higher? After all, there is Tomskneft, its value must be some $4 billion. There is Samaraneftegaz. Then there is a stake in Sibneft, 20 per cent, which has nothing to do with the recent merger followed by the divorce of the two companies. Yukos has held this stake for a while. The market value of that stake today is $4.2 billion. This is a highly liquid asset, which means it will not be a problem to sell it on the market. So, we say, take these shares to cover the debt. We are told, ’no, we won’t’. Why? ’We won’t, and that’s it.’ Nonetheless, the stake is seized, and we cannot sell it off ourselves so as to pay our tax debt.

As regards the valuation of Yuganskneftegaz, what do you think of the job done by the investment bank Dresdner Kleinwort Wasserstein (DrKW)?
Of course, in its work DrKW could scarcely ignore the political risks like, for instance, the risk that the Ministry for Natural Resources may withdraw Yuganskneftegaz’s license in three months. If it comes to an auction and there is a buyer, he will immediately demand guarantees from the government that the license will not be revoked. Or, he may buy the company only to learn that its license is being withdrawn. That just doesn’t happen.
Incidentally, even if someone buys Yuganks, the new owner will face plenty of other problems. For instance, a considerable part of the expensive oilfield equipment used by YNG belongs to Yukos, and the new owner will have to negotiate either the purchase or lease of that equipment. Yukos will still have a well-established network of refineries, a system of oil and oil product supplies, therefore, the new owner of Yugansk will also have to agree to the use of those facilities or to build everything on his own; it’s not necessary to explain how difficult that is. A deal like the sale of a company as large as Yuganskneftegaz should be concluded in a friendly atmosphere of cooperation between the old and new owners, which, alas, won’t be the case.
At any rate I have no grounds to doubt DrKW’s reputation, even if the Justice Ministry’s choice of that bank to carry out the valuation of Yugansk was guided by some personal motives. I do not think they [DrKW] could be downright biased. After all, they operate on the international market and cannot risk their good name. Look at what happened to Arthur Andersen, one of the world’s largest consulting and auditing firms. It went down after its reputation was dealt a disastrous blow in the Enron case, the scandalous bankruptcy of the US. energy firm.

By the way, some draw parallels between the Yukos affair and the Enron case…
That is absolutely wrong. [The Enron case] involved financial machinations, fraud, and barefaced deception. Yukos’ situation is absolutely different — the company sought legal ways of tax optimization, interpreting tax legislation in its own way, without making a secret of it, and paid taxes to the budget in accordance to its own interpretation. Incidentally, YUKOS was not the only oil company to openly do so. Sibneft began using tax optimization schemes much earlier. The tax authorities did not seem to object and earlier checks never revealed any violations in Yukos. Then they suddenly decided to recalculate anew, in a different way. The dispute was examined by the courts, and our courts, the most independent courts in the world, did not rule in our favor. Of course, inwardly we disagree, but we are law-abiding, we pay!

What will happen next?
Next a question arises, and this question, I believe, is of national importance. Is Yukos a large company? It is. Is it effective? Yes. Is it a leading company? Yes. Then the authorities must give it a chance to pay off its debts and to go on working. The authorities have a choice — either to continue collecting vast amounts of money for the budget, or to kill a hen that lays golden eggs.

What is your forecast?
What will the authorities opt for? So far I believe that they want to bring down the company’s value to as low as possible so that later someone can buy it at a bargain. But at times I see that all the decisions taken on the fate of Yukos are governed by the principle “Carthage must be destroyed”.

15.10.2004

(From Moscow News)