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Ruling Blocks Seizure of Yukos Oil Unit

By Peter Baker
Washington Post Foreign Service
Saturday, August 7, 2004; Page A14

MOSCOW, Aug. 6 -- A Moscow court Friday overruled the Russian government's seizure of the core production unit of embattled Yukos Oil Co., the first major ruling won by the company and its chief shareholders since the government began pressing multiple civil and criminal cases against them more than a year ago.

The Moscow Arbitration Court concluded that the government acted illegally in taking Yukos's shares in its subsidiary, Yuganskneftegaz, apparently in preparation for a fire sale to settle back-tax claims. The subsidiary produces 60 percent of Yukos's oil, and without it, the company has said it would be forced into bankruptcy.


The fate of Yukos Oil remained uncertain despite an arbitration court's decision that the government had illegally seized shares in its subsidiary. (Misha Japaridze -- AP)


"We are satisfied with the decision of the court, and this ruling should be executed immediately," Yukos spokesman Alexander Shadrin said. But the decision, which can be appealed, left the long-term fate of Yukos even more in doubt. In a country where the court system is influenced by the state, analysts said the ruling might have rested on a technicality and could be overturned quickly.

Some analysts speculated that the Kremlin might have ordered the court ruling as a way of retreating from the Yuganskneftegaz sale, which generated negative reactions among investors, business leaders and foreign governments.

"Frankly, I feel the whole thing is a puppet show for us, and we're the puppets being bounced around," said Al Breach, chief economist at the Brunswick UBS brokerage office in Moscow. "The whole thing is they're going to do what they want to do. The question is what do they want to do. The rest is just us trying to extrapolate what they want to do."

The court decision capped off a topsy-turvy week. The government suggested Yukos would be given extra time to pay $3.4 billion in back taxes, then it threatened additional audits and tax bills. The government agreed to let the company use its frozen bank accounts to keep day-to-day operations going, only to rescind the decision a day later. "It's absolute comedy," Breach said.

The confusing indicators helped propel international crude oil prices to a record high on Thursday, and Yukos stock closed down another 12 percent on Russian markets Friday before the court decision was announced.

Even if the Yuganskneftegaz sale has been halted for now, Yukos still faces a possible production shutdown starting next week when its cash runs out.

The battle for the future of Yukos has been intertwined with the political struggle between President Vladimir Putin and the company's billionaire chief owner, Mikhail Khodorkovsky, now on trial in another Moscow courthouse on charges of tax evasion and fraud.

While prosecutors have leveled charges at Khodorkovsky and all of his major partners, the tax service has gone after the company, hitting it with a $3.4 billion tax bill for 2000 that has been upheld in court and is now past due, and another $3.4 billion tax bill for 2001 that is still being adjudicated. Yukos has said it cannot pay the first bill right away but has offered several settlement ideas for spacing out payments, only to be rejected by the government.

The government chose last month to go after the heart of the Yukos empire. Yuganskneftegaz controls two-thirds of Yukos oil reserves -- a portion valued at $30 billion -- and pumps 1 million barrels a day.


© 2004 The Washington Post Company