The timing couldn?t have been worse. The Yukos saga moved into its endgame as charges against both the oil company and its biggest shareholders went to court at the end of May. The bankruptcy of what was once Russia?s most valuable company now looks like a real possibility. Investors would have been unnerved anyway, but the start of the trials coincided with a string of bad news and Russia?s leading RTS index slipped, wiping out all of this year?s gains in a week.
Yukos?s share price has been seesawing for the past few months as rumours alternate that the company will shortly become bankrupt or that a rescue deal will be cut with the Kremlin. However, since the arrest in October of Mikhail Khodorkovsky, Russia?s richest man and Yukos?s former CEO, the company itself has been largely unaffected.
Likewise, after shares took a nasty tumble the day after Khodorkovsky?s arrest, investors took president Vladimir Putin at his word and shrugged off fears of a mass renationalization of oligarch-owned blue chips. The RTS resumed its steady growth quickly and went back to smashing all-time highs almost on a weekly basis within weeks of the arrest (see chart).
That all changed at the end of April when a Moscow court froze Yukos shares after the tax ministry formally accused the company of owing the government Rb99 billion ($3.4 billion) in back taxes, penalties and interest. A legal case was started that could lead to the bankruptcy of the company.
The lawsuit triggered a ?possible event of default? notice from Yukos?s creditors on two loans of $1 billion and $1.6 billion and the company?s share price tumbled; Yukos stock has now fallen from a 52-week high of $16.35 to a 52-week low of $8.75.
Following Khodorkovsky?s arrest, the RTS has largely ignored the ins and outs of the Yukos legal fencing, but this time the index dropped too, slipping from 781 to 576 in just over a week.
The tax ministry?s case was not unexpected but it is a serious escalation of the conflict. It is widely assumed that the Kremlin is not as interested in recovering taxes as in forcing Khodorkovsky and his partners out of the company and the country.
Turning the screws
?The Kremlin don?t want a long fight,? says one analyst. ?They want a deal and are turning the screws to get one. It is in the Kremlin?s interest to bring the big shareholders? cases first. We are expecting another postponement [of the company tax case] while the general prosecutor completes the other 17 tax audits. It would make sense to finish the shareholders? trials first and strike a deal, but more tax cases could come if none is forthcoming.?
Sure enough when the tax case got its first hearing on May 14, the court promptly delayed again, while the case of Platon Lebedev, whose arrest in July 3 2003 kicked off the Kremlin?s attack on the company, was brought forward.
What spooked the market was a considerable toughening of the Kremlin?s stance as until this point the tax authorities have always talked about the ?possibility? of a case. Investors were further shaken when the Kremlin threatened that even more tax bills could appear, when finance minister Alexei Kudrin said investigations had only ?just begun?.
?If we're talking about the tax-related part of the Yukos case, we've just begun the process of bringing the claims forward,? Kudrin told Russian daily Kommersant in the middle of May.
The Rb99 billion bill relates to taxes paid in 2000 and although the tax ministry has suggested there are no problems with taxes from 2001 to 2003, analysts assume in the worst case Yukos could be hit with another $2.8 billion of tax bills for this period.
Analysts believe the market has overreacted and that Yukos is now worth more dead than alive: if the company is broken up in an orderly way its assets should be worth about $13.50 a share, according to Troika Dialog.
Yukos?s troubles are writ large over the RTS performance but after ignoring much of the company?s troubles this year the RTS fell rapidly in the last week of May. The Yukos tax case triggered the sell-off, but other bad news added momentum.
Heady cocktail
A heady cocktail of external factors has been driving the rise in the RTS for the past two years: petrodollars have been flooding into Russia on the back of $30-plus oil prices and China?s insatiable demand for raw materials has pushed up commodity prices. Breaking records weekly, foreign portfolio investors ? especially hedge funds? have followed Russians into the stock market and analysts were already warning of a bubble last summer.
?Yukos sparked the sell-off, but what hit home was a sudden shift in global liquidity flows,? says Eric Kraus, chief strategist at Sovlink in Moscow. ?The US is about to hike interest rates and the Central Bank of Russia started to do something about the rouble?s appreciation ? taken together, and both domestic and foreign liquidity dried up.?
Russia?s underlying economic recovery remains intact (and oil prices are still high) but with only a dozen blue chips to buy, the excess liquidity has been the RTS?s engine. By mid-May the RTS had fallen to 576.63, the lowest level this year, tumbling by 205 points, or 26%, since its April 12 all-time high and wiping out all this year?s gains.
?The market will recover as really nothing has changed, but everyone was facing the same direction and when they wanted to leave found there was only one door,? says Kraus.
?They will come back, but they will be a little more cautious next time.?