Curtain is coming down on Yukos

MOSCOW Disregarding a U.S. court ruling, Russia on Sunday plans to auction the jewel of what used to be its most profitable, high-profile and well-run private company, the oil giant Yukos. And if the auction takes place, the winner most likely will be the government-run natural gas behemoth Gazprom.
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Practically overnight, Russia and its president, Vladimir Putin, would create an energy company that not only controls about 20 percent of the nation's oil exports but also has some of the world's largest energy reserves.
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A Kremlin campaign that unfolded over the past year will have succeeded in dismembering the country's foremost private oil company, and it will send a signal to Russia's business elite that the state is back in business, literally.
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Yukos was created under questionable circumstances from the remains of state oil assets in the early and mid-1990s. On its face, the Russian government is trying to sell Yukos's largest production unit, Yuganskneftegaz, to pay back a tax claim of more than $27 billion. But the startlingly low opening bid of $8.65 billion, which the government set, is expected to tip the scales toward a state-friendly bidder like Gazprom.
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A U.S. Bankruptcy Court judge in Houston on Thursday ordered a 10-day delay in the sale, but officials in Moscow organizing the sale rejected the ruling.
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Gazprom said Friday that it would not withdraw its bid, which could open it to legal action in the U.S. courts, despite a last-minute decision by Deutsche Bank and other banks to pull out of a loan reported to be up to €10 billion, or $13 billion.
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Alexander Stepanenko, a spokesman for Gazprom's oil unit, said Gazprom had made the necessary deposit of $1.7 billion to take part, despite the decision by Deutsche Bank and others to delaying financing. "Gazprom will participate" in the auction, Stepanenko told the Rossiya television channel.
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The U.S. judge, Letitia Clark, issued a temporary restraining order intended to block the participation of lenders and Gazprom. The banks, analysts said, have extensive operations in the United States, and violating the ruling could put them in contempt. Clark's ruling did not apply to the government of Russia.
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The management of Yukos, in a statement late Thursday, said that while it was heartened by the ruling and would continue its fight in the American courts, it remained doubtful about its immediate effect.
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Russian government officials, meanwhile, lashed out at the court decision. Russia's foreign minister, Sergei Lavrov, insisted on state television that the Yukos affair would be decided "under Russian law."
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Although two other largely unknown companies have submitted bids for Yukos, their presence was seen as purely an effort to make the auction seem valid. Foreign suitors, including companies from China, India and other energy investors, have been discouraged from participating in the bidding process.
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If the auction is completed on Sunday, Yukos will essentially die that day - a casualty of efforts by Russian prosecutors that came with the tacit blessing of Putin. The founder of Yukos is now jailed and on trial on tax and fraud charges, the company's American executives are in self-imposed exile, and its shareholders are out billions of dollars. Russia's actions have set foreign and domestic investors on edge, prompted a capital flight and raised questions about the rule of law and how businesses will fare.
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Whether the Kremlin intended to dismantle Yukos, or to make an example of it to private business, is unclear. In similar fashion, officials have hit Russia's No.2 mobile phone company Vimpel-Communications with a second claim for back taxes, this time for 9 billion rubles, or $323 million, the Prime-Tass news agency reported Friday, according to Reuters. VimpelCom already faces a $158 million preliminary tax bill for 2001.
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A result of the policy, Fiona Hill of the Brookings Institution said, is "not outright nationalization but creeping nationalization." Putin makes no secret of the fact that he views Russia's oil and gas, diamonds and precious metals as strategic natural resources - important weapons in the nation's fight to regain its global economic status.
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For Putin, oil may also be more than just a strategic asset. It is a symbol of power and a resource that helped support the Soviet government, especially during troubled economic times.
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It is also Putin's best hope of restoring Russian ambitions and presenting a facade of security.
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Only months ago, Yukos was the darling of Western investors and was poised to become an international oil giant with influence far beyond Russia's borders. Gazprom is the largest natural gas company in the world, with a quarter of all gas reserves. Adding Yukos's oil assets would turn it into one of the largest energy companies in the world, as measured by reserves.
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"The state wants control of the commanding heights," Hill said. "This is how Russia positions itself as a superpower."
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With a bulked-up Gazprom, Putin would be taking a cue from China, Japan and South Korea, where governments worked hand in hand to champion certain industries and build successful corporate leaders. Putin was probably paying close attention when China's high-technology giant, Lenovo Group, bought the personal computer business of International Business Machines this month.
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The Kremlin hopes to create huge world-class corporations in important sectors. Sergei Bogdanchikov, who would lead Gazprom's oil and gas business, said Gazprom wanted to compete with giants like Exxon Mobil, Royal Dutch/Shell and BP.
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For American consumers and investors, the obituary of Yukos would be a symbol of what Russia can do to companies that have come into such riches that even the Kremlin is envious.
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Mikhail Khodorkovsky, a little-known banker, took oil assets won at a controversial state auction in 1993 and developed Yukos into the country's most prominent and profitable commercial enterprise, worth nearly $40 billion a few months ago; it is now worth only $2 billion.
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Yukos's value soared, and Khodorkovsky even sought a merger with a smaller rival, Sibneft, and then a sale of his combined company to Exxon Mobil or ChevronTexaco.
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The expected demise of Yukos has rattled even the world's biggest oil companies.
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Lee Raymond, the chief executive at Exxon Mobil, said this month that he was re-evaluating whether it was the right time to invest in Russia.
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All along, the Russian government has argued that Yukos was merely a tax cheat and that auctioning off Yuganskneftegaz, which pumps a million barrels a day of oil, was meant simply to cover the tax bill.
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But the sheer mountain of taxes that the government claims seems to undermine that argument. Yukos now owes more than $27 billion for 2000 through 2003 - more than its entire revenue in some years.

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Erin E. Arvedlund reported from Moscow and Simon Romero from Houston.

(International Herald Tribune, 12.18.2004)