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)