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Moscow Times
October 19, 2004
Yugansk Could Be Sold for $3.75 Bln
By Valeria Korchagina
Staff Writer

Yukos' main production unit, Yuganskneftegaz, could be sold off in a single-bid, closed auction in just over a month's time, a spokesman for the Federal Property Fund said Monday.

Fears of a fire sale of Yugansk were compounded by an Interfax report putting the likely starting price as low as $3.75 billion, spreading further gloom among industry analysts.

Such a closed auction, to be determined by single sealed-envelope bids, would likely dash any remaining hopes that the production unit would be sold for anywhere near its market value.

"The auction could take place on Nov. 22," said Vladimir Zelentsov, spokesman for the fund. "At least, this date has been mentioned in various documents circulating between the fund and the [Justice Ministry's] Court Marshals Service."

There were "no signs so far indicating that foreigners would not be able to take part in the auction," Zelentsov said. "But there have been no formal inquiries on behalf of any potential foreign buyers."

Zelentsov said that the fund would have to give one month's notice of the sale by Friday for the auction to go ahead on Nov. 22. The fund would also first have to sign a formal agreement with the Court Marshals Service, which in charge of collecting Yukos' multibillion-dollar back tax debt. Zelentsov said Monday afternoon that no agreement had yet been signed.

Yugansk has been earmarked for sale by the Justice Ministry to collect some $7.5 billion in back taxes and penalties levied against Yukos for 2000 and 2001. Yukos has reportedly paid between $2.5 billion and $3 billion toward the bill.

Alexander Buksman, the head of the Justice Ministry's Moscow directorate, said last week that the government has yet to receive $3.75 billion from Yukos.

The $3.75 billion figure could well be the starting price on the pending auction, Interfax reported Monday, citing an unnamed government official familiar with the situation, who said that the existing tax debt would be used as the base point for the sale. The report came on the back of another unsourced Interfax report last Friday, which put the likely starting price at about $4 billion.

Zelentsov said Monday that he was not aware of any starting price being fixed yet.

A Yukos spokesman said Monday that the company was not commenting on reports about the auction.

The pricing of Yugansk has been one of the hottest issues in recent weeks. While independent assessor Dresdner Kleinwort Wasserstein valued Yugansk at between $14.7 billion and $17.3 billion, Buksman said last week the state was going to base the starting price on the lowest possible valuation provided by Dresdner, $10.4 billion.

The pricing of Yugansk has been widely seen as a key indicator of how the state is aiming to resolve its yearlong legal onslaught against Yukos. Even with a $10.4 billion price tag, Yugansk would be too expensive for any domestic buyer.

Meanwhile, taking Yugansk from Yukos and its key shareholders through a fire sale would carve in stone the widespread conviction that the entire affair has had little to do with tax collection, but instead was aimed at taking Yukos away from its majority shareholder, Group Menatep, and its politically ambitious former CEO, Mikhail Khodorkovsky.

Next Monday, Khodorkovsky will have spent exactly one year in prison. He and his business partner Platon Lebedev are being tried on massive fraud and tax evasion charges separate from the Yukos back tax demands. If convicted, both men face up to 10 years in jail.

Running the sale through a closed auction would further reduce the chances that the proceeds would cover Yukos' existing back tax debts for 2000 and 2001, and would open the way for further back tax charges for 2002 and 2003 to strip Yukos of its two smaller production units, Tomskneft and Samaraneftegaz, analysts said Monday.

"It matches the expectation that the company's main asset would be sold for the amount barely exceeding the 2000 and 2001 debts," said Steven Dashevsky, head of research at Aton brokerage. "To get to this point a whole set of manipulations is needed, and having a closed auction is just another step in maximizing the efforts to prevent the selling price from getting anywhere near the market value.

"So it is just another addition to an already gloomy picture," he said.

Yet despite the overly negative outlook for Yukos, which has dominated analysts' reports for some time, there is apparently still some space for observers to be amused over how the whole affair is being handled by the state.

"A lot of people are surprised at how cavalier the approach to valuation actually is," said Steven O'Sullivan, co-head of research at United Financial Group.

O'Sullivan said the whole chain of events, from hiring a high-profile Western company to come up with a market valuation, then picking the assessor's lowest figure and immediately slashing it to the size of Yukos' unpaid debts, had proved to be an interesting example of how the initial valuation had no impact whatsoever on the price.

O'Sullivan said that investors could become even more disappointed if Yugansk is sold for no more than the existing tax debts, even though they had "assumed that the worst-case scenario would prove to be the right one with Yukos."

"If only the 2000 and 2001 tax debt is settled through this sale, then Tomskneft and Samaraneftegaz could also be taken away through tax claims for 2002 and 2003," O'Sullivan said.

Another investment banker, who asked not to be named, was even more pessimistic, saying that nothing could change the fundamentally negative prospects for Yukos.

"This whole story is like a man who is destined to die soon. But then people come and start saying that he is going to be decapitated. And if that's not enough, his head is going to be cut off by a guillotine, and furthermore the guillotine will have a silver blade that is going to have gold-plated edges. ... Does it all really matter?"

But whatever the details of the sale, separating Yugansk from Yukos could prove to be a very difficult task for the state, Dresdner concluded, Vedomosti reported Monday after obtaining a copy of the 150-page valuation.

The new owner could face a range of problems related to oil sales and the financial risks associated with Yugansk being the main guarantor of $2 billion in long-term loans to Yukos.

Oil sales from Yugansk are likely to be obstructed by a number of factors, starting from the unit lacking its own marketing system and spreading to the potentially huge problems related to exports. Yugansk currently exports 52 percent of its output, compared to an industry average of 35 percent.

Russian law prevents oil companies from exporting more than about one-third of their output. Yugansk gets to export more than half of its oil only because the crude is counted as part of Yukos' overall quota.

The new owner also faces potential tax claims, since the freeze on Yugansk accounts prevents the unit from paying its current taxes. Another threat comes from Yukos' owners, who have said they would launch a legal challenge to the sale, which could result in the buyer being held liable together with the state.

O'Sullivan said that these problems would likely further reduce the likelihood of any foreign company trying to grab an otherwise highly attractive asset. "There are going to be very few bidders for Yugansk, and anyone who buys it would have to have the full support of the government," he said.

Yukos shares on the RTS closed unchanged Monday at $4.25.