Has a deal been cut between embattled oil company Yukos and the Kremlin? Yukos’s management offered a deal in the second half of June and president Vladimir Putin, explicitly commenting on the woes of the oil company for the first time, suggested that it had been accepted in principle. But some analysts warn that despite Putin’s reassurances, Yukos remains in as much danger of being closed down and broken up as ever.
As Euromoney went to press, it appeared that negotiations were going badly. On July 1, the tax authorities gave Yukos five days to pay its tax bill, but Yukos has refused to pay more than a third of the demand. Unless a compromise can be found, the former darling of foreign investors will go into receivership.
Investing in Russia doesn’t get much more dramatic. With both Yukos and its former CEO, Mikhail Khodorkovsky, due to go on trial the chances that the company would be bankrupted (and Khodorkovsky jailed) looked high.
By mid-June, Yukos shares had already fallen to a two-year low of $5.80 and the leading RTS index had shed all of this year’s gains in a little less than a fortnight.
Yukos deputy board chairman Yury Beilin had attempted to halt the collapse by offering the Kremlin a deal. This offered a gradual buyout of the core stake held by Group Menatep, a restructuring of tax payments and negotiations on a sale of some Yukos assets to state-owned energy companies.
But the offer was rebuffed. Then Putin told reporters in Tashkent on June 17 that Yukos’s bankruptcy was not an option. “The Russian authorities, the government and the country's economic leaders are not interested in the bankruptcy of a company such as Yukos,” he said.
Yukos’s share price rebounded so fast that trading on both of Russia’s main exchanges had to be halted. The shares still closed up 34%, the largest one-day gain ever, before almost reaching $9 by the end of the month. But the July 1 news took them down 15% and trading in them was again suspended.
Was investors’ earlier relief at Putin’s assurances justified? James Fenkner, an analyst at Troika Dialog, points out that Putin had misled investors in the past. During the last bout of uncertainty, in September, Putin said: “The courts should not be hindered from fighting crime, although I am against using arm-twisting and jail cells to solve economic crimes.”
A nervous market rallied then as well. Two months later, Khodorkovsky was arrested and the RTS plummeted. This time, most analysts were happy to take Putin at his word. They assume that Yukos will survive, Khodorkovsky will go to jail and a hefty tax bill will have to be settled in return.
“Khodorkovsky will go to jail, but how long will he stay there, that is the question,” says Stephen O’Sullivan, head of research at United Financial Group. “Ten years would seem punitive to international investors whereas one year would seem too light domestically.”
But Putin was careful to distance himself from the key question of the size of Yukos’s tax bill, and how fast it will have to pay it. The company says that it has about $1 billion in cash on its balance sheet and it generates about $2 billion to $2.5 billion a year after capital expenditure.
The deal might be on the table but by July 1 the negotiations were going badly. Court bailiffs arrived in Yukos’s offices with a writ demanding R99 billion ($3.4 billion) of unpaid taxes from 2000 within five days – a demand Yukos could not possibly meet.
The same day, the tax ministry made a fresh claim for another R98 billion for unpaid 2001 taxes – about three times more than analysts were expecting. More bills could be forthcoming, as tax due for 2002 and 2003 is still being assessed.
The optimists had hoped that the tax bill – which includes penalties and interest – would be reduced and Yukos given ample time to pay. But by increasing the sum and setting a short deadline, the tax ministry assures the bankruptcy of what was Russia’s best-run company.
Fenkner argues that Putin’s comments were designed specifically to limit damage to the financial system.
“What he actually said [in Tashkent] speaks to both the pessimists and the optimists,” says Fenkner. “Putin holds all the cards, but he needs the market to work for other things like bank reform, the break-up of [energy utility] UES and privatization of [telecoms holding company] Svyazinvest.”
However, the new claims are not necessarily the end of the case against Yukos which has always been a means to an end. The Kremlin is turning the screws but neither side has blinked in this corporate game of nerve.