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Russian Reversal Pushes Yukos Closer to Shutdown

By Peter Baker
Washington Post Foreign Service
Friday, August 6, 2004; Page A16

MOSCOW, Aug. 5 -- The Russian government on Thursday abruptly rescinded permission for Yukos Oil Co. to use its bank accounts to continue operating, reversing a decision made just 24 hours earlier and fueling concern that the country's largest oil producer will be forced to begin shutting down wells next week.

The decision, announced by the Justice Ministry, seemed to leave Yukos little maneuvering room as it seeks to keep producing. With its assets and many bank accounts frozen in a dispute over back taxes, the company has said it soon will no longer have enough cash to pay oil-shipping costs. Yukos pumps 1.7 million barrels a day, roughly the same as Libya and about 2 percent of the world's oil supply.

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Yukos stock fell and world crude oil prices rose after the latest development, which exacerbated uncertainty about Russia's exports and sowed further confusion over the government's handling of the politically charged situation. While the government's actions appear to be driving Yukos toward shutting down its wells, many analysts say that would not be in Russia's interest, even if the government wants to seize control of the company's assets.

"There's no way they're going to allow any disruptions to the operations," said Christopher Granville, chief strategist at United Financial Group, a brokerage house based in Moscow. "If they had any PR sense at all, they'd be more explicit."

The government froze Yukos's assets and accounts last month in a bid to recover $3.4 billion in back taxes it claims the company owes from 2000. Yukos has since paid about a fifth of that amount but says it needs more time to raise funds to pay off the rest. The company has sent the government 11 settlement proposals but has not received a public response. The tax service has instead claimed that Yukos owes another $3.4 billion from 2001 and this week reopened audits for 2002.

The company has tried to maintain production during the crisis and sought permission from the Court Bailiffs Service, the Justice Ministry agency charged with collecting the back taxes, to use frozen bank accounts to pay operating costs. The bailiffs service informed Yukos on Wednesday that it could use those accounts to make monthly payments, Yukos officials said.

But the Justice Ministry revoked that decision on Thursday, saying it was "not based on the law and has therefore been withdrawn," according to a ministry statement.

"Court bailiffs did not make decisions allowing Yukos to make monthly payments or ensure its current operations," the ministry said. "All finances that have been transferred and will be transferred to the company's accounts will be seized by the Court Bailiffs Service and transferred to the budget to clear debt." The ministry chided Yukos for announcing the earlier decision, calling it an attempt to "blackmail government agencies to obstruct the enforcement of a court ruling on recovering its tax debts."

Yukos said last week that the first of the company's operations to be affected would be rail shipments to China, accounting for roughly 25 percent of the oil it produces. Those shipments could stop as early as Tuesday, according to a Yukos spokesman. Shipments through the state-owned pipeline system could stop by mid-August, the company has said.

The state-owned Transneft pipeline company has vowed to find replacement supplies for Yukos exports, which represent about a fifth of all Russian foreign sales, but Transneft has not explained where it will secure the substitute crude.

The Justice Ministry's about-face on Thursday was the latest example of conflicting signals sent by the government as the Yukos case drags on. Last month the bailiffs service sent a notice to three Yukos subsidiaries that appeared to order them to halt oil sales, but the agency retracted the writ a day after it was made public. Last week the head of the bailiffs service was quoted by a news agency as giving Yukos an extra month to pay its tax debt but then denied that report to another news agency.

"Even under the same roof they can't get their act together," Granville said.


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