The Moscow Times: 2 Years On, Yukos Faces Final Curtain

By Catherine Belton
Staff Writer

The net is starting to tighten around the remains of Mikhail Khodorkovsky's shattered Yukos empire as court marshals, foreign governments, banks and the Rosneft state oil company begin to close in for the kill.

Two years after Khodorkovsky, the company's CEO and majority shareholder, was arrested at gunpoint on a Siberian runway on Oct. 25, 2003, Yukos is in tatters. Once the nation's biggest crude exporter, it says it can no longer afford to export any oil at all, never mind make any payments toward its mammoth back tax bill.

The Federal Court Marshals Service is issuing new threats to break up the company for the first time since it auctioned off Yukos' main production unit, the 1 million-barrel-per-day Yuganskneftegaz, last December. On Oct. 14, court marshals warned they could sell off the remains of the company as payment for the $7 billion in back taxes Yukos still owes, possibly before year's end.

While court marshals move in, the Slovakian and Lithuanian governments are trying to sell off the remnants of Yukos' foreign oil assets. Meanwhile, foreign creditors seeking $475 million in debt payments are trying to make sure they are paid out of the proceeds of any sale.

Rosneft, the new owner of Yugansk, is also striking back in the asset chase, filing suit in the Netherlands to prevent Yukos from getting its hands on any cash from foreign sales, and in Russian courts, claiming up to $11 billion in debts from Yukos via Yugansk.

"Yukos is under attack from all sides," said a former Yukos executive who wished to remain anonymous, citing the sensitivity of the situation. "It's in conflict with the Lithuanian government. There's conflict between the main shareholder and the management on how to pay off its debt, ... and there's a potential conflict between the Russian and Lithuanian governments on whom to sell the assets to. Yukos is caught right in the middle."

In the meantime, the asset chase is speeding up again, after a long pause. "By the end of the year, it looks like the state will have one of the other production units," he said.

The trigger for the renewed fight could have been the sale of a controlling stake in Sibneft to Gazprom for $13 billion, announced last month, as Gazprom and Rosneft race to scoop up oil assets.

"The pressure has now resumed across the board," said Chris Weafer, chief strategist at Alfa Bank. "The attack has been held back for the last nine months while the government moved to start a peace process with big business and to give time for the negotiations on taking over Sibneft to proceed. Those shackles have now been taken off."

The race for the rest of Yukos could herald a new stage in the state's growing domination of the oil sector.

Gazprom's Sibneft buyout was the gas giant's first real move into the oil sector and could make it hungry for more, while Rosneft could be anxious to make sure it stays on top in the oil race by securing control over the rest of Yukos.

With little action against Yukos in recent months, even badly bitten Yukos investors had started to hope the rest of the company, which includes production units Samaraneftegaz and Tomskneft and produces 550,000 barrels per day -- still more than Qatar -- might be left in relative peace.

Shares even rose on hopes that the company in its reduced form would survive. But following raids on Yukos offices in Moscow and the Netherlands over money-laundering allegations and the court marshals' threat of breakup, they have since slumped to less than $1. Two years ago, before Khodorkovsky was arrested, they were worth more than $14.

Lithuania's moves to sell Yukos' majority share in the country's Mazeikiu refinery also sparked a new wave of legal action. Yukos is hoping to recoup up to $1 billion from a sale.

First, a consortium of foreign banks filed suit in the London High Court to try to secure payment on the $475 million outstanding on $1 billion loan to Yukos. The Moscow Arbitration Court on Sept. 29 upheld the London court's ruling, increasing the chances that the claim could be used to bankrupt Yukos.

Few, however, believe that foreign banks will initiate bankruptcy proceedings since, according to Russian law, they would be among the last creditors to be paid. Their move has been seen more as an attempt to ensure payment out of the proceeds of any sale abroad.

Just as Yukos' financial position appeared to be recovering with the prospect of more than $4 billion in cash via foreign asset sales and the potential sale of its 20 percent stake in Sibneft, Rosneft stepped back into the fray.

As Yugansk's new owner, Rosneft moved to block any foreign sales of Yukos assets. Through Yugansk, it filed suit in Amsterdam. The Dutch court on Oct. 6 ordered an asset freeze against the three firms that have held shares in Yukos' foreign interests. Saying it was seeking to uphold a ruling it obtained in Moscow in May on $2.2 billion it claims Yukos owes Yugansk from transfer pricing schemes, it won a 90-day freeze on the Dutch companies' assets. Rosneft said the action was necessary to prevent Yukos from illegally moving its foreign assets out of creditors' reach.

In its Dutch lawsuit, Yugansk cited a number of transfers of shares in Yukos' foreign assets between Yukos's 100 percent-owned Dutch subsidiary Yukos Finance BV, Yukos International BV, and a trust run by senior Yukos managers named Stichtung Administratiekantoor Yukos International.

"The unmistakable intention -- and consequence -- of this 'restructuring' was to take the assets of Yukos Finance out of the reach of Yukos' creditors (including Yuganskneftegaz)," said Yugansk's filing, a copy of which was obtained by The Moscow Times.

Yukos denies any wrongdoing in the case.

Even though it is unlikely to win a ruling in a Dutch court on the $2.2 billion Rosneft says Yukos owes it, the temporary freeze, which could be extended further after three months, could complicate the Lithuanian government's attempts to sell off Yukos's stake in Mazeikiu.

"This appears to be designed to stop the sale of Mazeikiu Nafta rather than anything else," said Tim Osborne, a director of Group Menatep, Yukos' majority shareholder. "This is just a blocking tactic."

"They take action anytime Yukos looks anywhere near like it might be able deal with its debt," Osborne said, citing growing prospects for a foreign sale and for Yukos's sale of its 20 percent stake in Sibneft.

"We'll either see Rosneft getting the production units in settlement of the claims Yugansk has filed against Yukos, or if the government has not yet decided who will get them, they will be sold off at auction as payment for the back tax bills," Osborne said. "Either way, it's looking pretty bleak for anyone who thinks Yukos might survive. Now it's a question of how and when, rather than if there will be a break-up."

"It looks like they're on the move."

Rosneft has taken multiple steps to secure its hold over Yukos. On Sept. 27, the Moscow Arbitration Court named the Menatep vehicle set up to hold shares in Yukos, the Cyprus-based Hulley Enterprises, as a co-defendant in Rosneft's transfer-pricing lawsuit against Yukos. Although hearings in that case have been postponed until April 2006, targeting other Menatep entities could be a fallback option for Rosneft, if it is unable to take over Yukos assets via back tax claims. Hulley currently owns 49 percent of Yukos, industry insiders said.

Either way, Rosneft appears to be setting its sights on gobbling up the rest of Yukos. Rosneft president Sergei Bogdanchikov has said his company does not want any more assets, just payment on Yukos's debts.

Rosneft declined to comment for this article despite repeated requests.

Other market players said Rosneft appeared to be after Yukos's foreign assets too.

Even though the Lithuanian government last week named TNK-BP, the joint venture between BP and Tyumen Oil, as its buyer of choice for the Mazeikiu sale, the Russian authorities could block the sale, said one trader who used to work with Mazeikiu.

"The Lithuanian government has the right of first refusal to buy the shares. But if they sell them to anyone the Russian government does not approve of, Moscow will say: Fine, but where is the oil coming from?" the trader said, speaking on condition of anonymity. They can stop Transneft from sending any oil to Mazeikiu, he said, adding that Moscow had used this tactic successfully in the past.

TNK-BP spokeswoman Marina Dracheva said the sale had been overly politicized. She said, however, that TNK-BP had been in talks with the Russian government over its Mazeikiu bid.

The Moscow Times, 10.25.2005