Settle Yukos

The Russian authorities are moving in for the kill in their pursuit of Yukos, the oil group, and its founder Mikhail Khodorkovsky. Last week's news that the tax office is claiming an extra $10bn in unpaid taxes, on top of the $7.5bn already sought, increases the financial pressure on Yukos to breaking point. Meanwhile, Mr Khodorkovsky's lawyer disclosed his client faced up to 25 years in prison if he were convicted of multiple frauds with which he is charged.


The next few weeks are crucial. Yukos has called an extraordinary general meeting for next month to consider filing for bankruptcy; the verdict in Mr Khodorkovsky's fraud case is expected in late January; in the meantime, Yukos shareholders are launching international legal action against the Russian authorities.

It now seems beyond doubt that the Kremlin is not interested in seeing Yukos pay its taxes over time and survive. The authorities want to break the group and grab its assets, headed by Yuganskneftegaz, the key oil producer. It is surely no coincidence that the total $17.5bn tax claim roughly equals Yuganskneftegaz's estimated value.

Kremlin officials have said they see a greater state role in running the commanding heights of the economy, especially energy. The stage has been set for the transfer of Yukos's assets to Gazprom, or another state-controlled company.

Mr Khodorkovsky's personal fate is - grimly - far less clear. If he is very lucky, he will be exiled. If not, he will face long years in jail.

The authorities had good reasons for the prosecution and the tax investigation. Mr Khodorkovsky amassed vast wealth in murky circumstances and paid little tax. But so did other oligarchs. Mr Khodorkovsky was chosen because he was the richest and politically the most outspoken. That decision was arbitrary and immoral.

Russia today is a different country from 15 months ago, when the attack on Yukos began. After the awful tragedy of Beslan, the Kremlin is exploiting the climate of fear to brand its enemies as terrorists. It is most unlikely Mr Putin could now drop the Yukos case.

But, even at this late stage, he should look for compromises - on the treatment of minority shareholders, or the timing of tax payments. He may not care about the damage done to Russia's reputation for human rights or the rule of law. But he does care about the harm done to Russia's investment climate. Russian business oligarchs, who were starting to repatriate capital before Mr Khodorkovsky's arrest, are sending funds abroad again. International investors have been investing in oil and gas. But the prices paid would be much higher without the fears generated by the Yukos affair. A show of leniency now would not cancel out the wrongs done to the company or to Mr Khodorkovsky but it would limit the damage done to the economy. Otherwise, the international lawsuits alone could take years to resolve.

(From The Financial Times, 8.11.2004)