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Russia: Will Government Make A Deal Or Act To Bankrupt Yukos?
By Mark Baker
Copyright (c) 2004. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036. www.rferl.org

The fate of Russian oil giant Yukos hangs in the balance. The government is reportedly weighing an offer by Yukos to pay some $7 billion in tax arrears but to extend payments over time to avoid bankruptcy. Yesterday, the former head of Yukos, Mikhail Khodorkovskii, said leading shareholders could release their shares to pay the tax bill. There's been no official reaction, but the world is watching. Yukos is one of Russia's biggest companies, and investors see Yukos as a test case for how future investments in Russia will be treated.

Prague, 13 July 2004 (RFE/RL) -- Oil giant Yukos is no ordinary Russian company.

It's responsible for around one-fifth of Russia's oil exports at a time of rising world demand. It's also Russia's best-known and most widely held company. What happens to Yukos affects tens of thousands of people around the world who own its shares directly or indirectly through investment or pension funds.

And it's viewed as a bellwether to gauge President Vladimir Putin's respect for the rule of law when billions of dollars and vital assets are at stake.

So interest is keen this week to see whether the government will accept a deal by Yukos to pay around $7.5 billion in tax arrears, but to stagger the payments over three years to avoid bankruptcy. Negotiations are ongoing, and the outcome is not certain.

Ronald Smith, an analyst at Moscow's Renaissance Capital, said chances are about equal the government could act to bankrupt Yukos. "There's about a 50-50 chance that [either] the company is going to be broken by the government -- either bankrupted or liquidated, etc. That's our worst case," he said. "[Or] there's about a 50 percent chance that some kind of deal will be struck between [leading Yukos] shareholders and the company and the government to basically turn over control of the company to the government."

Tax authorities have presented Yukos with a bill for around $7 billion for arrears in 2000 and 2001, claiming Yukos abused tax laws at the time. The authorities are expected to claim another $3 billion in back taxes for 2002 and 2003. The government has frozen Yukos's assets in lieu of the payment.

Putin has portrayed the Yukos case as part of his efforts to tackle economic crime. But critics cite Khodorkovskii's links to opposition parties to argue that the case is politically motivated.

Yukos officials, for their part, deny any tax abuse, but say they're willing to make a deal. They say, however, that with the company's assets frozen, they cannot make the payments and that the company could go bankrupt.

The result has been near-panic selling of Yukos shares on the Moscow stock exchange and widespread concern that what happens to Yukos could happen to other Russian companies in the future. The company's stock has lost about half its value in the past three months.

Smith told RFE/RL he's never seen anything like it. "Absolutely, [Yukos] is the most nervous stock I've ever watched," he said. "I mean it [rises or falls] 8 to 10 percent on the least bit of news during the trading day. [There likely are only two outcomes]: if they reach an agreement, [the value of Yukos shares is] going to go through the roof, or at least relative to where it is now. This [stock] price won't for years get back to where it was a few months ago. So, A) it will go through the roof or, B) it will go through the floor."

Part of the money used to pay back the arrears could come in the form of Yukos shares contributed by major shareholders, such as former chief executive Mikhail Khodorkovskii and others. Khodorkovskii this week repeated an offer to give up about 44 percent of Yukos shares that could be sold off or given to the government.

Smith said the value of the shareholdings comes to around $6 billion or $7 billion -- or about the same as the 2000 and 2001 tax bill. Any further tax arrears -- for 2002 and 2003 -- he says could be covered by the sale of a 35 percent stake that Yukos owns in rival energy company Sibneft.

This would be an ideal solution for the company and its smaller shareholders. It would cover the tax arrears and leave Yukos's core assets intact. It may not, however, satisfy the government's demand for greater control over the company.

Smith said the opposite outcome, a Yukos bankruptcy, would be a disaster. "If they break Yukos, all bets are off,” he said. “We will have to wait and see how it shakes out, and then we'll also have to see if it's a one-off. Because I'm sure the government is going to try to say this is a one-off and try to reassure investors that this is Yukos only. But we'll see if the market believes it or not."

Khodorkovskii and another leading Yukos executive, Platon Lebedev, remain in prison without bail on charges of fraud and tax abuse related to Russia's controversial privatization drive of the 1990s. The two appeared in court this week, with a judge dismissing a request by Lebedev for bail on grounds of ill health. The two face up to 10 years in jail.