Back to the Future for Yukos?

Investors cheered Putin's assurance that the oil giant won't be bankrupted, but if it's nationalized, there won't be much to celebrate

By Jason Bush

Russian President Vladimir V. Putin is a man of few words and never more so than when discussing the fate of Yukos (YUKOY ), the giant oil company whose conflict with the authorities has dominated Russian politics and business for the past year. So it was on June 17, when, at a press conference at an economic summit in Tashkent, Putin briefly answered a simple question about Yukos. "The Russian government has no interest in the bankruptcy of a company like Yukos," he said.

The impact of Putin's brief words has been dramatic. Russia's stock market registered its biggest one-day rally since Putin became President. Yukos shares shot up by some 34% before trading was suspended an hour or so later. Russia's benchmark RTS index also jumped, rising 10% by the close of trading. The President's statement was the main headline for all the Russian news agencies and Friday's newspapers.


  Why such a sensation? Because ever since May 26, when a Moscow court ruled that Yukos was liable to pay $3.4 billion in back taxes and fines demanded by the Tax Ministry, Russia's stock market has been plummeting on fears that the government was out to bankrupt Yukos.

These worries were largely fueled by Yukos itself, which warned that it had just $800 million in cash -- not nearly enough to pay the $3.4 billion. Although court appeals were set to rumble on for a few more weeks, Yukos and its investors were already preparing for the worst, convinced that the courts were under pressure from Moscow to rule against it.

The scare became so intense that it even overshadowed the trial of Yukos' former CEO and major shareholder Mikhail Khodorkovsky, which opened on June 16 (only to be adjourned for a week because one of the lawyers was sick). Khodorkovsky, an outspoken critic of Putin, is accused of privatization fraud and tax evasion, although it's widely perceived that he's actually being punished for meddling in politics.

However, most foreign investors have long since lost interest in Khodorkovsky. It's the fate of his company that concerns them. Around 30% of Yukos is owned by minority shareholders, many of them Western investment funds, which have invested some $10 billion in its stock in recent years. "Certainly this is a huge test for the investment case for Russia," says Chris Weafer, head of research at Russia's Alfa Bank.


  Hence the collective sigh of relief after Putin's statement. It means the government's dispute with Yukos will probably end through a process of negotiation, not through bankruptcy and a forcible government seizure of Yukos's assets, as many investors had feared.

In fact, those worries were probably overblown from the start. Although it's likely that Yukos will face an even larger back-tax bill (the $3.4 billion demanded so far represents taxes for just one year, 2000, and more claims are pending for later years), the total is unlikely to exceed $6 billion to $7 billion, say analysts. That's not an insuperable burden for a business with annual profits of $5 billion and assets reckoned to be worth some $30 billion.

Still, just as the panic over Yukos' potential bankruptcy was exaggerated, the euphoria following Putin's statement also seems excessive. Signs are emerging that as part of a deal with the government to avoid bankruptcy, Yukos will give shares to Moscow in lieu of tax payments. Such a negotiated renationalization of Khodorkovsky's shares in Yukos would maintain a sense of decorum -- but it still wouldn't be much to celebrate. Any transfer of shares is taking place under duress, and the government will probably get a bargain price.


  That's why cynics will still claim that the tax case against Yukos was trumped up to justify a government seizure of Khodorkovsky's assets. "A lot of people are saying that the state wants control of a fully functioning oil company, so of course they don't want to bankrupt it," says Weafer. As the leading Russian daily Kommersant put it in its headline the next day: "The President has ordered Yukos to be taken alive."

It's a sign of how low investors' expectations had sunk that even this scenario is being greeted so positively. At least, by avoiding bankruptcy, the government has respected the immediate interests of minority shareholders.

True, the property rights of Khodorkovsky and his partners may not count for much -- but many aren't too disturbed. After all, Khodorkovsky's acquisition of that property through the murky privatizations of the 1990s wasn't exactly a model of fair play, either. And Yukos' minority shareholders now regard the disgraced oligarch as a liability, blaming him in large measure for provoking the government's attacks.


  In the long run, though, even a "voluntary" renationalization of Yukos carries big risks. The tax claims are legally questionable, so using them to renationalize Khodorkovsky's shares looks cynical -- and a worry for what it implies about property rights in general.

It will look even worse if, instead of reprivatizing these shares, Moscow decides to hang onto them -- perhaps merging them with one of the existing state energy concerns, Rosneft or Gazprom. "They'll probably create a humungous state-owned oil company," says Adam Landes, oil analyst at Renaissance Capital, a Moscow-based investment bank. Unlike Yukos, one of Russia's best-managed private concerns, these state-owned energy concerns are notoriously inefficient.

How will the affair end? Even a dream ending -- the sale of Khodorkovsky's stake in Yukos to a foreign investor -- still seems possible. Intriguingly, an anonymous government source, quoted in the Russian business daily Vedomost on June 18, implied that Moscow would welcome such a sale. "For Yukos there's now only one possibility to escape bankruptcy: The sale of a large stake to a foreign investor or to one of the state structures," he said. That suggests the government doesn't really care who ends up owning Yukos. Anyone will do. Just as long as it isn't Khodorkovsky.

Bush is BusinessWeek's Moscow bureau chief

Edited by Douglas Harbrecht

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