Yukos Oil heading for bankruptcy

Russian firm's assets frozen by government for nonpayment of taxes

July 23, 2004|By Douglas Birch | Douglas Birch,SUN FOREIGN STAFF

MOSCOW - Russia's real-life soap opera of oligarchs and oil may finally be approaching its climax.

Grim executives with the petroleum giant Yukos Oil told reporters yesterday that, by freezing bank accounts and seizing assets, tax authorities have made it impossible for the company to pay its bills.

"We will essentially run out of cash ... sometime during the first half of August," predicted Chief Executive Officer Steven Theede at Yukos' headquarters. "The future is very uncertain. The next three weeks are going to be very crucial to the company's future."

President Vladimir V. Putin said in mid-June his government was not interested in bankrupting Yukos. But political analyst Sergei Markov, a sympathetic follower of Putin's Kremlin, said in an interview yesterday that authorities have decided that bankruptcy is inevitable.

"Now the government is sure that it is ready to go through with this," Markov said.

It's not clear if putting Yukos out of business would interrupt its production or export of petroleum. If it did, the effects could be felt around the world.

Yukos is the largest exporter of crude oil from Russia. And Russia is the world's second-largest petroleum exporting nation, following only Saudi Arabia.

A Yukos collapse could also ripple through Russia's economy, affecting its 105,000 employees, as well as thousands of suppliers, customers, investors and creditors.

Company officials declined to talk in detail about what might happen if the company goes belly up. "To speculate on bankruptcy ... is something that we are just not willing to do today," said Bruce Misamore, the company's chief financial officer.

Court authorities began freezing Yukos' bank accounts after the July 7 deadline passed for payment of $3.4 billion in delinquent taxes and penalties. On Tuesday, the Ministry of Finance announced it was preparing to sell the jewel in the crown of the Yukos oil empire, a subsidiary called Yuganskneftegaz, to pay that claim.

Theede called the subsidiary, which controls two-thirds of Yukos' petroleum reserves, "essentially the backbone of our company."

Yuganskneftegaz has been valued at $30.4 billion, about nine times Yukos' overdue 2000 tax bill. But analysts predict the unit will be purchased by a state-owned company, or a private corporation with close ties to the Kremlin, for little more than what Yukos owes.

Company executives seem to share that view. "We're not expecting any change back," if Yuganskneftegaz is sold to settle the tax claim, Theede said.

The company still faces another $3.3 billion bill for its 2001 taxes, on hold pending appeal. And Russian tax authorities have said they expect auditors to find the company owes additional taxes for 2002 and 2003.

By the end of the month, Theede said, Yukos will have paid $1.3 billion of the $3.4 billion bill for 2000. But Yukos can't pay more, executives say, because they are cut off from corporate bank accounts. And no banks will lend the company money because of the government freeze on assets.

Yukos' financial crisis comes after a period of record profits because of high oil prices. "It's not a situation where the company does not have the assets to pay its bills," said Misamore, the chief financial officer.

Over the past six weeks, company officials have sent 11 letters to officials in the Ministry of Finance, Ministry of Justice and the presidential administration, proposing settlements and asking for guidance.

"Basically, we're totally flexible in terms of what we would be willing to do," Theede said. "Unfortunately, we have not received any formal responses to any of these 11 letters."

Hopes for a compromise dimmed July 3, when up to 60 police officers raided Yukos headquarters. Chairman of the Board Viktor V. Gerashchenko said he tried calling every government official he could think of but none called him back.

Yukos had earlier proposed a staggered $8 billion payment to cover all of the government's tax claims. But Gerashchenko said the government never responded. "Probably, we've got some very slow-thinking people in our government," he said.

Police first moved against Yukos executives last July, when they arrested shareholder Platon Lebedev, who is believed to be worth $1.8 billion. He was charged with theft of state property.

Former CEO Mikhail B. Khodorkovsky, who propelled Yukos onto the international stage in the 1990s and made billions in the process, was arrested by Russian special forces troops in Siberia in October. He was charged with fraud and tax evasion in connection with business deals that stretched back to the early 1990s.

The government had hoped to avoid dismantling Yukos, Markov said, but Khodorkovsky has balked at surrendering his stake in the company. "The government had to do it because Yukos' owners would not compromise," he said.

In an article in yesterday's Novaya Gazeta, Mikhail Delyagin, director of the Institute for Globalization Problems and a former adviser to Putin, had a darker view of the Kremlin's motives.

Russian bureaucrats, he said, feared Yukos because it operated like a European or U.S. company, with a degree of independence from the state. The bureaucrats saw the Western corporate style, Delyagin said, as "a threat to their existence."

The company's travails, he said, have damaged Russia's reputation with foreign investors and fueled capital flight. The year before Yukos' problems began last July, $2.2 billion flowed out of Russia. In the past year, that figure has soared to $11.6 billion.

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