Yukos Shareholders to Consider Bankruptcy

The precarious financial position of Russian oil producer Yukos is one of the reasons crude prices are higher than they ought to be. With constantly recurring tax bills, totaling about $17 billion at latest count, the government of President Putin is actively pursuing a policy of undermining the company for political reasons. Ultimately, this will result in de facto nationalization of Yukos. The only real question is how this will happen. Chief Executive Officer Steven Theede has said that the December 20 shareholders’ meeting will entertain discussion of bankruptcy. To salvage anything of their investment, it may be best to surrender on whatever terms can be managed.

Yukos is big. It accounts for 20% of Russia’s oil production, and Russia is the world’s second largest producer of oil after Saudi Arabia. The man who managed to get control of it after the collapse of communism, Mikhail Khodorkovsky, was the richest man in Russia – until President Putin decided that he needed to rein in the “oligarchs,” the name for those who controlled the Russian economy after the Soviet Union went into liquidation. Mr. Khodorkovsky was arrested just over a year ago for fraud, embezzlement and tax evasion. Yukos, though, remains a huge enterprise uncontrolled by the Kremlin.

On Monday, the company got a fresh tax bill for $10 billion, which it could only pay, according to industry analysts, by selling its main operating unit, Yuganskneftegas. This entity produces 60% of Yukos’ revenue. And if it were sold off, the likely buyer is the government. Lenin merely nationalized wealth without compensation. Mr. Putin’s approach seems to be hand over a huge tax demand, and let the market resolve the problem thus created.

The Yukos shareholders, then, are faced with a huge cut in the value of their wealth – effectively transferring 60% of it to the government. And it is doubtful whether the remaining operations could function as well thereafter. Paying 60-70 kopecks on the ruble to stay in business is poor management. Especially if the government decides a year from now that the bill wasn’t fully paid.

President Putin understands Russian history extremely well. As noted here before, he knows it was always the Tsar against the boyars, and this is just the latest example of it. In the end, the Tsar won, and Mr. Putin will eventually undermine the oligarchs, no matter what he has to do to investment confidence in the process. A graceful exit in December may allow investors to get out with part of their shirts.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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