Putin Defends Takeover of YUKOS Assets

By Richard Ayton and Andrew Hurst
MOSCOW (Reuters) - Russian President Vladimir Putin on Thursday strongly defended the takeover by state oil firm Rosneft of stricken oil major YUKOS' key production unit, Yuganskneftegaz, calling it a legitimate business deal.

"Rosneft, which is de facto 100 percent state owned, bought Yuganskneftegaz. I think everything was done by market methods," Putin told a news conference.

In his most strident defense yet of the Kremlin's seizure of YUKOS' prize asset, which pumps one-10th of Russia's oil, Putin said: "Today the state is using absolutely legal and market mechanisms to serve its interests."

Rosneft on Thursday said it had bought 100 percent of unknown Baikal Finance Group, the surprise winner of Sunday's auction of Yugansk at a price of $9.4 billion. The purchase effectively nationalized Yugansk.

The Yugansk auction was the culmination of a Kremlin campaign to crush YUKOS' politically ambitious principal owner, Mikhail Khodorkovsky, and seize control of strategic sectors of the economy sold off in the chaotic privatisations of the 1990s.

Khodorkovsky himself is on trial for fraud and tax evasion.

Putin, while not referring to Khodorkovsky by name, said many businessmen had broken the law in order to buy state assets on the cheap after the Soviet Union's collapse.

"You all know very well how our privatization was carried out at the beginning of the 1990s. And how people were using different tricks, which included breaking laws then in force, in order to acquire ... state property," he said.

YUKOS CRUSHED

YUKOS has been left broken-backed, crushed under the burden of $27 billion in tax claims. The purchase of Yugansk will make Rosneft one of Russia's biggest oil firms with production of 1.45 million barrels per day, almost as much as OPEC member Libya.

Rosneft's chairman, Igor Sechin, has been a close associate of Putin since his days in St Petersburg's local administration. He doubles as deputy head of the Kremlin staff and is seen as one of the most powerful figures in Russia.

The move also confirms the ascendancy of hard-liners in the Kremlin, known as "siloviki," sworn to bringing to heel business "oligarchs" who own vast swathes of Russian industry.
One Western manager based in Russia and experienced in dealing with Kremlin insiders said the siloviki appeared to be heavy-handed and grasping, but he did not believe they were out to seize control of other private businesses.

"They are grabbing their piece of the pie but I do not see a mass asset grab," said the manager, who works for a prominent Russian business concern and asked not to be identified. Russia may be evolving toward an Asian pattern of economic development, where the state intervenes heavily in strategic industries but foreign investors are welcome if they seek government approval for their ventures, said one investor.

"If you are a big foreign investor you make your deal at the top," said Tim Ash, an emerging market strategist with Bear Stearns in London.

"There are a lot of similarities with China, but they (the Kremlin) need to reassure foreign investors that they have a role and to spell out what the economic model is."

LEGAL BATTLE

Rosneft is due to be merged with state gas monopoly Gazprom , which was itself the favorite to buy Yugansk but was barred by a U.S. court after YUKOS filed for bankruptcy protection in Houston, in a last-ditch move to save itself. The next hearing in the bankruptcy court was scheduled for Jan. 6.

Putin on Thursday said the U.S. court injunction was unacceptable from an international legal point of view.

Gazprom on Thursday said its planned merger, which is designed to open up trading in Gazprom's shares to foreigners, would not be affected by Rosneft's acquisition of the Yugansk assets.

YUKOS lawyers have argued that Gazprom illegally took part in the auction of Yugansk, even though it did not lodge a bid, and that it was in contempt of the Houston court's restraining order.

The Gazprom-Rosneft merger will bring Yugansk under Gazprom's control, as originally intended, but YUKOS said it would not be the end of its campaign to pursue Yugansk's owners through international courts. "YUKOS confirms that it will use all legal means to dispute this illegal deal in the interests of the tens of thousands of shareholders in the oil company," YUKOS spokesman Alexander Shadrin told Reuters.

Max Gutbrod, a partner at Baker and Mackenzie's Moscow office, said the Rosneft purchase may make it harder for lawyers acting for YUKOS and Menatep, the company controlling the stricken oil firm, to pursue litigation successfully.

"You cannot transgress the state's freedom to tax and enforce taxation on sovereign territory and that is what this case is all about," he said.

(Reuters, 23.12.2004)