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Russia Plans to Seize, Sell Oil Giant's Key Subsidiary

Move Would Strip Yukos of Most Reserves, Daily Production

By Peter Baker
Washington Post Foreign Service
Wednesday, July 21, 2004; Page A13

MOSCOW, July 20 -- The government announced Tuesday that it planned to seize and sell off the core Yukos Oil Co. production unit in a move that would cripple Russia's largest oil producer after a year-long, politically charged campaign against the firm and its owners.

The confiscation of the company's Yuganskneftegaz subsidiary to satisfy a disputed back-tax claim would strip Yukos of two-thirds of its petroleum reserves and about 60 percent of its daily production. The firm that once aspired to challenge the Western oil giants would be left a broken, second-tier player in the Russian market.

Former Yukos chief executive Mikhail Khodorkovsky listens from behind customary courtroom bars during his trial in Moscow on fraud charges. (Alexander Zemlianichenko -- AP)

_____Special Report_____
Putin and the Oligarchs

The decision to target the heart of the Yukos empire stunned many investors, triggering a new sell-off of the company's already depressed stock. Financial market analysts said the move was their worst-case scenario come true, saying it could undermine the country's international image as a place to do business and lead investors to move money abroad.

The seizure of Yuganskneftegaz would be the first time the Russian government has wrested such a large and lucrative asset from a private owner since it began transferring state property into private hands after the fall of the Soviet Union.

There were conflicting reports as to how the sale would proceed. But analysts said the takeover of the Siberian oil wells seemed to be a reverse of the often-corrupt privatizations of the 1990s. In this case, they said, the state appears to be taking a valuable property away from an owner who is out of favor with the Kremlin at a bargain rate instead of its actual worth. The government could then either transfer it to a state energy firm or sell it to a political insider at far below market price.

"If what they plan to do is a quick sale here at a fraction of its value, that would be extremely damaging not only to Yukos but to Russia's perception internationally," said Harvey Sawikin, a principal at Firebird Management, a New York fund that invests in Russia. "After working on this for a year, if this is the best they can do, an overnight fire sale, they'll just look really bad and incompetent."

In the day's sell-off, Yukos stock fell 13 percent on the main RTS market and 15 percent on the ruble-denominated MICEX market. Brokerages, taken aback that the state had chosen seizure of the company's core asset rather than less damaging means to collect the back taxes, rushed out alarming notices to clients.

"It's going to be a huge opportunity cost for the state . . . because it will result in increased capital flight," said Alexander Kim, a former adviser to the Kremlin economic team who now works as an analyst at Moscow's Renaissance Capital investment firm.

In a telephone interview Tuesday evening, Kim said he had just emerged from a meeting with potential investors in which the Yukos affair loomed large. "One of the major questions is whether Yukos is going to be an isolated case or whether there are going to be more Yukoses," he said.

Announcement of the seizure plans came as prosecutors began presenting the heart of their case at the fraud and tax evasion trial of Yukos's chief shareholder, Mikhail Khodorkovsky, and his partner, Platon Lebedev.

The parallel attacks on Khodorkovsky and his company have been widely interpreted as a political crackdown by President Vladimir Putin's Kremlin against Russia's richest man.

But some analysts say they believe the pending seizure of the main Yukos subsidiary exposes another aspect of the case -- an attempt by Kremlin insiders to secure quick riches in the way that Khodorkovsky and other tycoons known as oligarchs did in the 1990s.

Yuganskneftegaz is one of the prize assets of the Russian oil industry, whose comeback in recent years has put this country in close competition with Saudi Arabia to be the world's largest petroleum producer. Yuganskneftegaz pumps 1 million barrels of crude a day, roughly the same produced by the entire North Slope of Alaska.

The Justice Ministry said in a statement Tuesday that it had seized shares and ownership documents for the subsidiary as well as for two other major Yukos production units, Samaraneftegaz and Tomskneft. But it singled out Yuganskneftegaz for sale, saying it had created a working group that had selected appraisers to determine a price.

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