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Jun 17, 2004 | 23:41 GMT

4 mins read

Putin: Bringing Yukos to Heel, Not to Destruction

Summary
Russian President Vladimir Putin sparked a frenzied grab for the stock of beleaguered Russian oil major Yukos on June 17 by saying the firm's collapse was not in the country's interest. The statement sets the stage for the continued existence of Yukos in a smaller form more amenable to the Kremlin's diktats.
On June 17, Russian President Vladimir Putin attempted to allay fears over the collapse of oil firm Yukos, even as his government continued its campaign against the company. "Russian authorities, the government and economic authorities are not interested in the bankruptcy of such a company as Yukos," Putin said. "The government will do its best to prevent the collapse of the company." Putin's statement sparked a grab for the stock of the beleaguered Russian oil major and set the stage for Yukos to continue to exist in a smaller — and more amenable to the Kremlin — form. Yukos is Russia's largest oil firm. Its founder and former CEO, Mikhail Khodorkovsky —one of Russia's notorious oligarchs — is currently standing trial for fraud and theft of state property. When Putin assumed the leadership of Russia in late 1999 and early 2000, he made a deal with the country's oligarchs — a group of men who robbed the state in rigged privatization auctions in the aftermath of the Soviet collapse. Putin told them that they could keep their ill-gotten gains as long as they stayed out of politics. In Putin's mind, Khodorkovsky violated that agreement in early 2003 when he attempted to revamp Russia's tax laws in his favor and announced that he was considering a run for the presidency. Putin proceeded to make it clear who was in charge — and who would continue to be president — when the government began a pogrom against Yukos last July. So far, the campaign has culminated in the arrest of Khodorkovsky and the levying of a $3.4 billion assessment against his firm for back taxes — a bill that the company cannot pay because its assets are frozen. The markets fear that the Russian government plans to shatter the company after hurling it into bankruptcy — not an agreeable prospect to those eyeing Russia as an investment opportunity. While Kremlin sources indicate that the bankruptcy scenario is possible, it is not very likely. The Kremlin has thus far decided on only two things: Yukos will never again be controlled by Khodorkovsky, and it will never again be used to launch a political career. Putin's June 17 statement points to another scenario taking shape — a move to directly swap Yukos' tax bill for some of its assets. This would not be a one-off exchange, as the $3.4 billion bill is only for back taxes dating from the year 2000. The Tax Ministry is still rifling through three more years of records. Yukos may end up handing over more than half of its assets in an effort to make peace with the Kremlin. These assets would likely be divvied up among interested industry players via predetermined "auctions." A STRATFOR source within the Energy Ministry indicates that the biggest winner would be the state-owned natural gas monopoly Gazprom, with foreign firms picking up the scraps that are not earmarked for other Russian firms. With approximately 10 percent of Russia's oil production, this stripped-down Yukos would be the country's fifth-largest oil firm — a position that would still allow it to influence Russian politics. The Kremlin has a possible solution for that problem in its advanced negotiations with Boris Jordan, an American investment banker of Russian ancestry who has become the de facto spokesman for Yukos' minority shareholders. Jordan is proposing to take over management of the company after it is stripped of Khodorkovsky and his allies. Such an arrangement would prevent the wholesale destruction of Yukos — an appealing prospect to foreign investors — while putting the firm in hands that the Kremlin more or less trusts. Jordan's American background also fits nicely with the Kremlin's plans. Once Yukos is slimmed down, it would make a more digestible acquisition for any of the global energy majors. In its current form it could be a takeover target for only one of the big three: ExxonMobil, Royal Dutch/Shell or BP. (BP has already merged with one Russian oil major, TNK). A slimmed-down Yukos, however, would be an attractive buy for a wider array of firms, including France's Total or the U.S. firm ChevronTexaco. Such competition would raise the asking price and could help redeem Russia in the minds of investors.

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