Houston Court Rejects Yukos Appeal

By Catherine Belton
Staff Writer
A Houston bankruptcy judge has dismissed Yukos' petition for bankruptcy protection in the United States, apparently lifting a major barrier in the Kremlin's drive to create a national energy champion via the merger of Gazprom with state-owned oil firm Rosneft.

The ruling, issued late Thursday and immediately disputed in an appeal filed by Yukos the next day, came after days of deliberation in an unprecedented case that sought to pit the U.S. legal system against the Russian government over its plans to break up Yukos over back taxes.

The proceedings had put the brakes on a Kremlin push to merge Gazprom with Rosneft -- which acquired Yukos' main production unit, Yuganskneftegaz, after a December auction -- over fears Rosneft could face legal action for being in breach of U.S. law.

But in what Judge Letitia Clark called the "largest bankruptcy case ever filed in the United States," she ruled that Yukos' "sheer size" and "impact on the entirety of the Russian economy weighs heavily in favor of allowing resolution in a forum in which participation of the Russian government is assured," according to a copy of her ruling.

The Russian government had not sent any representatives to participate in the Houston hearings and had reacted angrily to the case, claiming the Yukos affair was a matter for Russian courts to decide.


Before the Dec. 19 sale of Yuganskneftegaz as partial payment for $27.5 billion in back taxes, Yukos produced 20 percent of the nation's oil output. Thursday's ruling could signal the end for Yukos, opening the way for the rest of its assets to be sold off or taken over by the state in what has been an unprecedented legal campaign against the company and its shareholders. Yukos had argued the U.S. bankruptcy court was its last chance for protection against the Russian state, which, it said, had rejected all its overtures to restructure its debts and was set on "expropriating" its assets.

But Clark also found that Yukos' ability to carry out a restructuring plan under U.S. bankruptcy protection without the cooperation of the Russian government would be "extremely limited" -- a factor that, according to the ruling, was another reason for the dismissal.

Yukos immediately challenged the judgment. Its lawyers filed a motion late Friday that called for a new trial and for Clark to keep a stay protecting Yukos' assets in force until all its opportunities to contest the ruling had been exhausted.

"If there is no stay in place while Yukos pursues its post-judgment remedies, Yukos will likely suffer irreparable harm," Yukos' lead lawyer, Zack Clement, wrote in the appeal.

Clark issued an automatic stay against the sale of Yugansk after Yukos lodged an emergency petition for bankruptcy protection just days before the auction was to take place. The government sold off the unit anyway. But since then, it has backed off from taking action against Yukos' remaining assets, including production units Samaraneftegaz and Tomskneft, Clement said in his filing.

"Without the automatic stay, Yukos will be dismembered quickly through inappropriate processes," he said.

But even as Yukos pushes to keep its case in the U.S. bankruptcy system, analysts said Clark's initial ruling appeared to give little hope for the oil major. "It's really difficult to see after all the deliberations that any appeal will be successful," said Steven Dashevsky, head of research at Aton.

Dashevsky said that even though Gazprom will likely wait until the hearings were completely over before completing its merger with Rosneft, it will now probably speed up those plans.

Gazprom spokesman Sergei Kupriyanov said Friday that the ruling will ease the way for Gazprom to go ahead with the merger.

Gazprom local shares climbed to a 10-week high to close at 79.5 rubles (about $3) Friday on news of Yukos' setback. Gazprom's merger with Rosneft is also set to open the way for the lifting of barriers to greater foreign ownership in Gazprom, a long-expected watershed event for the market. By merging with Rosneft, the government aims to increase its stake in Gazprom to 51 percent, allowing for trade in the rest of its shares to be liberalized.

Yukos shares, however, plummeted 22 percent in the first three minutes of trading Friday on the MICEX.

Yukos' unexpected U.S. legal challenge in December dragged Rosneft into an intricate legal tangle that opened the way for growing opposition to the merger from within the company itself. Following its purchase of Baikal Finance Group, the mystery shell company that bought Yugansk for $9.3 billion on Dec. 19, Rosneft's assets tripled in size. The oil firm's management suddenly moved from running a mid-sized oil firm to being in charge of a company able to give the global majors a run for their money. Now many analysts believe the main opposition to Gazprom merging with Rosneft may come from within Rosneft itself.

The Kremlin, however, appears to be moving to scotch any Rosneft plans to hinder the deal. A scheme for Rosneft's subsidiaries, including its production units, to lend the parent company about $5.5 billon has now been called off indefinitely, Rosneft spokesman Vladimir Voyevoda said Friday. The deal was seen as helping finance the Yugansk acquisition.

The company said Friday that it has canceled plans to hold extraordinary shareholders meetings at its subsidiaries to vote on the debt issues to Rosneft.

If implemented, the plan could have torpedoed Gazprom's merger plans by potentially tainting Rosneft's major assets with the Yugansk acquisition.

"The boards of directors [at the subsidiaries] found that the question forwarded for the extraordinary shareholders meetings had not been thought out properly," Voyevoda said. He refused to say whether the cancellation had come as a result of Kremlin intervention.

Vedomosti reported earlier this month that the Kremlin had called Rosneft on hearing of the plan and ordered it to call the debt deal off.

Investors and analysts said the move looked like the Kremlin was taking the upper hand in making sure the merger powered through. "It looks like a strong sign that the individuals pursuing this plan have been trumped by the Kremlin's main objective to ensure the state gets control of Gazprom," said William Browder, CEO of Hermitage Capital Management, which has $1.6 billion in Russian stocks under management.

"The main assumption we have always been operating on is that next to making [Yukos core shareholder Mikhail] Khodorkovsky poor, the other strategic objective [President Vladimir] Putin has is getting control of Gazprom," he said. "They will raise the state's stake to 51 percent one way or another. Now after the Houston ruling they will get there faster. But even if Houston had gone wrong, they would have got there.

"The main question now is how you value Rosneft now that it has Yugansk," he said.

In a sign Rosneft could still be holding out for independence, it appears to be seeking to buy back its stakes in the vast Arctic fields it sold to Gazprom at the end of December for more than $1.7 billion in a deal widely seen as covering the cost of Baikal's deposit to take part in the auction. "The agreement included a buyback clause," Voyevoda said, refusing to comment further.

Government officials have said Rosneft could be merged with Gazprom without Yugansk -- potentially one way to keep hungry Rosneft officials happy if they were to manage Yugansk as a separate entity.

But Troika Dialog issued a report Friday that said it was becoming increasingly difficult to separate Yugansk from Rosneft as the two companies hammer out the details of their integration. It cast doubt on whether the merger would take place at all, citing continuing legal risk surrounding Rosneft because of a separate legal action launched by Yukos' main owner Group Menatep. Menatep said earlier this month that it was suing the Russian government for $28.3 billion in damages over the breakup of its company under the terms of the international energy charter treaty.

Tim Osborne, a Group Menatep director, said Friday that the Houston setback would not impact Menatep energy charter case. "Its a huge disappointment for Yukos in that it was its last hope of justice," he said. "But the Houston ruling does not make any difference to our case. In some ways it clarifies the situation. Yukos will now be left to the machinations of the Russian court system. I can't see how it can avoid bankruptcy."

Michael Goldberg, the lead lawyer for Gazpromneft, which was named as a defendant in Yukos' case, said Friday that he thought any appeal by Yukos would have little chance of success. "I am absolutely convinced there is no basis for an appeal," he said.

Yukos claimed Houston had jurisdiction for the filing because its CFO, Bruce Misamore, relocated there to open an office in December and because it transferred $21 million into a U.S. bank account to support the move. Clark's ruling did grant jurisdiction on this basis but found instead that Yukos was so significant to the Russian economy that she could not take the case.

(From The Moscow Times, 02.28.2005)