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Wed Dec 29 16:07:37 PST 2004

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METHOD AND MADNESS
Dec 29th 2004  

The tragicomic destruction of Yukos, and its legacy

IN THE end it was a classic Russian combination of the astonishing and
the predictable and the predictably bad, and a fitting denouement to a
campaign that has been as chaotic as it has been capricious. Following
the forced auction of the main oil-production subsidiary of Yukos, the
Kremlin has extended its influence in Russia's energy sector. Besieged
for a year and a half, Yukos has finally and irrevocably been
eviscerated; Mikhail Khodorkovsky, its former boss, whose political
ambitions incurred the wrath of Vladimir Putin, Russia's president, is
still in prison and on trial. The astonishing part involved an American
court and a mystery shell company.

On December 19th, Yuganskneftegaz, which accounted for 60% of Yukos's
oil-production capacity, was sold by the government for $9.35 billion,
ostensibly to pay some of Yukos's huge tax bill. But the sale was not
to Gazprom, a state-run gas firm that had seemed the likely buyer.
Instead, Yugansk was bought by Baikal Finance Group, a hitherto unknown
firm whose registered address in the town of Tver reportedly houses a
grocery shop.

Big Russian corporate auctions are often brazen and bizarre, but the
identity of the successful buyer is generally not a surprise. Rumours
about the provenance of Baikal swirled around Moscow. Then, on December
22nd, Rosneft, a state-owned oil company, revealed that it had bought
Baikal (and thus Yugansk) for an undisclosed sum. The chairman of
Rosneft is Igor Sechin, a close confidant of Mr Putin. Thus the state
took back Mr Khodorkovsky's prime asset in a way not unlike that in
which he acquired his wealth in the first place. Mr Putin said that the
process had adhered to the best market standards. Andrei Illarionov,
the president's maverick economic adviser (at least for now),
reportedly called it the "swindle of the year".

Why Baikal and Rosneft, and not Gazprom? The most palatable explanation
is a last-minute injunction secured by Yukos in a court in Houston,
Texas, protecting the firm's assets while it filed for bankruptcy--part
of Yukos's strategy of trying to force the Kremlin into openly using
extra-judicial methods. The ruling, though questionable, scared off a
consortium of western banks financing Gazprom's bid. In the end, Baikal
was the only actual bidder. Rosneft, being state-owned, should enjoy
sovereign immunity, even in a Texan court. 

That is unlikely to stop Yukos and some of its shareholders suing it,
the Russian government, the owners of Baikal (if they can be found) and
Gazprom. Yet Yukos now looks comprehensively doomed. It once seemed
likely that the firm's alleged tax debts and the attendant penalties
would conveniently equal the government's valuation of Yugansk. After
the sale Yukos would have kept some assets to pacify minority
investors. But the tax bill dwarfs the discounted auction price, and
further expropriations now seem likely.

The Houston court has altered the fate of Yugansk only temporarily,
because Rosneft is merging with Gazprom in a deal that will give the
Russian government a controlling stake in the enlarged firm. The merger
will produce a global energy giant, and an even stronger foreign-policy
instrument for the government than Gazprom is now. However, the Yugansk
auction may delay the merger for a while, and with it the
liberalisation of Gazprom share ownership--to allow foreign investors
to buy ordinary shares--that is supposed to follow it. 

The anxiety induced by the Yukos affair has not been helped by another
of Mr Putin's remarks about the auction. It had, he said, put right a
wrong done in the privatisations of the 1990s--of which Mr Khodorkovsky
was not the only beneficiary. Roman Abramovich, an oil baron turned
soccer-club owner whose flamboyant lifestyle has helped to make him
vulnerable to crowd-pleasing penalties, has already sold some of his
Russian assets. There were rumours this week that Rosneft and a foreign
partner were planning to acquire Sibneft, the oil company in which Mr
Abramovich has a majority stake. Sibneft may yet face a back-tax bill
of its own.

 Investors who had hoped that the Yukos affair was a one-off vendetta
against a troublesome and hubristic oligarch had already been
distressed by new tax charges against Vimpelcom, a mobile phone
operator listed in New York. Vimpelcom is neither a privatised company
nor an energy firm, two of the factors that made attacking Yukos
attractive to the Kremlin. The fracas may owe something to a rumoured
spat between a government minister and a big Vimpelcom shareholder. Not
"another Yukos", then, but not an advert for investing in Russia,
either.

See this article with graphics and related items at http://www.economist.com/displaystory.cfm?story_id=3524905

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