Yukos vs. Moscow: Who'll Blink First?

Demands for huge tax payments within days could bankrupt the energy giant, and its imprisoned main shareholder refuses to deal

By Jason Bush

The long-running saga of Russia's embattled energy giant, Yukos, may finally be heading toward a showdown. In the last few days, the company has been hit by one crushing blow after another, and investors will shortly know whether Yukos is headed for bankruptcy.

On June 29, a Moscow court ruled that Yukos must pay $3.4 billion in back taxes and fines. Russia's Taxation Ministry says the company dodged the taxes by using onshore havens in 2000. In contrast to previous court rulings, the authorities can go ahead and start executing this decision without waiting for the appeal. So, Yukos must finally cough up.


  Many observers had hoped that Yukos would reach an amicable settlement with the tax man. Investors had earlier cheered when President Vladimir Putin remarked on June 17 that the government had no interest in bankrupting Yukos. But such optimism now seems premature. Two days after the court ruling, bailiffs appeared at Yukos headquarters. They went away -- but only after telling Yukos that it had just five days to pay the bill voluntarily. Yukos has already made clear it doesn't have the cash to do this.

Adding to Yukos' miseries, Tax Ministry officials revealed later that evening that they had sent another huge bill to the outfit, this time for unpaid taxes in 2001. The amount is virtually identical to the claim for 2000, also $3.4 billion. This is a lot higher than market analysts had been expecting, prompting a rapid sell-off in Yukos shares.

To cap it all, later on July 1 authorities announced a freeze on Yukos' bank accounts. The oil giant has said this could eventually mean it has to stop paying its workers and suppliers and halt production.


  Does this mean curtains for Yukos? Once the five days are up, the government will be able to take the company's assets and sell them to make up the claim. This doesn't necessarily mean declaring Yukos bankrupt. But as far as Yukos investors are concerned, the difference may be immaterial. Forced sales of $10 billion worth of assets would leave little behind for existing shareholders.

It still may not come to that, though. The government is clearly hoping for a deal with Yukos' major shareholder, imprisoned tycoon Mikhail Khodorkovsky. The leading daily Kommersant reported on July 2 that the government favors a plan under which Khodorkovsky would give his stake in Yukos temporarily to the government as collateral for all the tax payments, which would be rescheduled over several years.

Most analysts believe the government would prefer this "temporary renationalization" to forcible seizure of Yukos assets. The latter would hurt minority investors as well as Khodorkovsky -- and badly tarnish Russia's image in the West. Temporary renationalization "fits Putin's statement -- that the government wants to avoid bankruptcy -- like a glove," says Christopher Granville, chief strategist at Moscow investment bank United Financial Group.


  It would suit minority investors, too. "At this point that would be the best alternative," says Paul Collison, oil and gas analyst at Moscow investment bank Brunswick UBS. "Investors would be delighted to get Khodorkovsky out of the company."

The snag is that Khodorkovsky won't budge. He has so far held out against any solution that involves surrendering control over his shares.

But it appears the government is now going in for the kill. By threatening to begin seizing and selling off Yukos assets at bargain-basement prices, the Kremlin is playing a game of brinkmanship. So is Khodorkovsky, however, whose main card is the threat to bring the house down. Khodorkovsky knows Putin is loath to destroy the company -- and is daring him to do just that.

Maybe both he and the government are bluffing. A deal would seem to be the most rational solution for everybody. But in this dangerous game, everyone is now getting very close to the edge.

Bush is a correspondent for BusinessWeek in Moscow

Edited by Beth Belton

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