-- Government agents moved Wednesday to begin seizing assets of Yukos Oil Co. in a climactic confrontation that could carve up Russia's largest oil producer and further fuel doubts among investors about doing business here.
Court marshals raided a share registry office at the end of the business day to search for ownership documents, as Yukos failed to meet a court-ordered deadline to pay the first half of nearly $7 billion in back taxes demanded by the government. The raid was the first step toward confiscating assets for the state or selling them off to satisfy the tax claim.
In moving so decisively on the deadline day, the government was in effect issuing a public rejection of last-ditch efforts by the company's chief shareholder, Mikhail Khodorkovsky, to trade his stake in Yukos for the firm's survival.
Khodorkovsky, part of the young generation that first plunged into private enterprise in the late Soviet years, and who later became Russia's richest man, made his proposal to surrender his shares from the prison where for more than eight months he has awaited trial on fraud and tax evasion charges.
"He always had the position that he would do everything to avoid bankruptcy of the company," Khodorkovsky's lawyer, Anton Drel, said in an interview after meeting with his client behind bars. "This is the most he can do."
The government's actions sent tremors through an investor community already uncertain about Russia's commitment to private property rights and the rule of law under President Vladimir Putin. The legal campaign against Yukos is widely seen as Kremlin retribution for Khodorkovsky's political activities. It drew rebukes from the U.S. State Department, which expressed concern over "an appearance of lack of due process," and from the Paris-based Organization for Economic Cooperation and Development, which called it an example of Russia's "highly selective law enforcement."
The situation jeopardizes a company that pumps more oil than Libya and accounts for one-fifth of Russia's oil exports. For now, the company's 100,000 workers remain on the job producing 1.7 million barrels a day, and executives have said they can continue shipping crude through the third week of July.
"I'm very upset and frustrated, not as a lawyer for a big company but as a citizen of this country," said Sergei Pepelyayev, an attorney for Yukos. "This is not the usual way of doing business today. Of course everything shows that there's a political motive and a very strong one."
The government's tax case against Yukos stemmed from a decision to reopen old audits and apply a more restrictive interpretation of tax shelter law to the company's returns. Under the new audits, the state assessed the company $3.4 billion in back taxes, penalties and interest for 2000, a bill upheld by a Moscow court last week. On Monday, the government sent a nearly identical bill for 2001, and Russia's chief prosecutor on Tuesday suggested that further demands for 2002 and 2003 would follow.
The decision to raid the registry so fast took Yukos executives by surprise. Under their interpretation of the court ruling, they thought they had until midnight to pay the first $3.4 billion bill, although they have maintained for weeks that they could not because they do not have enough cash. Just minutes before the court marshals showed up late in the afternoon, a Yukos executive said he did not expect the government to take any action until Thursday.
But the government said time had expired for Yukos. "The debtor was given a five-day deadline for voluntary execution, after which the court bailiffs service of the city of Moscow began to enforce the court decision," the Justice Ministry said.
The ministry statement threatened a new criminal investigation and obstruction charges against officials at M-Reyestr, the firm holding the Yukos registry, for allegedly trying to avoid cooperating with the marshals. The statement did not explain the alleged obstruction, but Yukos said registry documents of its subsidiaries in Siberia and along the Volga River were transferred last week after the court ruling, apparently to those regions.
The government may find it hard to untangle Yukos's complicated ownership structure to seize assets. As a holding company, Yukos does not own many physical assets, according to executives, but it controls subsidiaries that own the refineries and pumping installations. Coming up with an inventory and figuring out which assets to take over could take weeks or months, analysts said.
That could still give the two sides time to craft a compromise, if the government decides it wants a deal. Al Breach, chief economist at the investment firm Brunswick UBS, said Khodorkovsky's last-minute offer of his own shares might yet be the key to reviving stalled negotiations. "His offer goes to the heart of the matter, the heart of the matter being that [the government] wants to ensure that Khodorkovsky is off these assets," Breach said.
Others saw less room for optimism. Christopher Weafer, chief strategist at Russia's Alfa Bank, said the outcome of the Yukos case remains "very much in the hands of the president."
"Just as the decision to take the case on so aggressively would have to be approved by the president, so we can't accept that he then left it to bureaucrats to do as they wish," he said.
Weafer said analysts have concluded that the final Yukos tax bill will be about $10 billion and that the case's resolution will depend on which assets the Russian government seizes to pay that bill and how it decides to value them.
"There are still two possible outcomes -- one, a very aggressive tax ministry grabs assets and values them arbitrarily at below-market value. Then you could end up with Yukos completely destroyed," Weafer said. The second outcome assumes that assets are taken and fairly priced, "then Yukos could survive, though much reduced," as a company pumping about 1 million barrels of oil a day.
Analysts have focused on the company's Eastern Oil Co. subsidiary or its 35 percent share in the rival Sibneft oil company as likely candidates for confiscation.