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Arrested development: short of a last-minute compromise Mikhail Khodorkovsky?s trial looks set to run parallel with the dismantling of his Yukos energy empire by the Kremlin |
The high-stakes game of poker between jailed businessman Mikhail Khodorkovsky and Russian president Vladimir Putin entered its final round last month after bailiffs seized Yukos?s core production unit and threatened to sell it off at knockdown prices. Bailiffs seized Yukos?s Yuganskneftegaz production subsidiary on July 20 to pay off a $3.4 billion tax bill, relieving Russia?s second-biggest oil company of its main cash cow. The subsidiary accounts for 70% of Yukos?s oil reserves and 60% of production. It has also contributed most of Yukos?s double-digit production growth in recent years.
Analysts protested and Yukos?s management said that the company was now on the verge of bankruptcy. Yukos leaked a statement that claimed the court enforcers were planning to sell Yuganskneftegaz at its book value of $1.75 billion whereas independent estimates value it at closer to $16 billion ? far in excess of the outstanding tax bill.
The choice of Yuganskneftegaz is particularly galling as Yukos?s two other production units, Tomskneft and Samaraneftegaz, are valued at $3.6 billion and $5.9 billion respectively ? the sale of either would cover the bill and still leave Yukos largely intact.
?That the bailiffs are preparing to sell Yukos?s most valuable asset is a clear sign the authorities are going in for the kill,? says Peter Westin, an analyst at Aton in Moscow.
As Euromoney went to press several questions remained unresolved. The property ministry said the decision to sell was not final and a valuation had not yet been settled on. And it is not clear if all or just part of the company will be sold. Investors were still clinging to the hope that an eleventh-hour deal can be struck between the Kremlin and Khodorkovsky to save the company.
The Kremlin?s poker form is well known after it won similar games against businessmen Boris Berezovsky and Vladimir Gusinsky in 2000, both of whom were dispossessed and exiled. Putin started with all the cards ? control over the media, the prosecutors, the courts and tax ministry ? except the one that affects investor sentiment.
The rules of this game are odd. Putin began the first round showing Khodorkovsky his entire hand and warning the oligarch that he would lay these down one by one, starting with a deuce and leading slowly up to the ace ? a bankrupting of Yukos.
Criticism of Yukos emerged early in 1999 before the Kremlin played its first serious card, the arrest of Khodorkovsky?s partner, Platon Lebedev, later that year.
Khodorkovsky?s own arrest in October 2003 only strengthened the Kremlin?s hand and by the start of this year the authorities were beginning to lay down picture cards. A big tax bill for 2000 was telegraphed well ahead of time before charges were brought in April. And more tax bills for 2001-03 have also been hinted at (although they seem superfluous now).
At each stage the Kremlin made public threats well in advance of carrying them out.
The only card Khodorkovsky holds is his ability to damage Russia?s investment image and it is one he can play repeatedly. Rather than cut a quiet deal quickly with the Kremlin from his cell ? as Gusinsky did ? Khodorkovsky has chosen to stand in court and offer compromises in the most dramatic fashion possible.
Khodorkovsky has countered each of the Kremlin?s threats with some sort of compromise. However, as these always fall short of key demands, a fresh round of threats and compromises starts sending Yukos?s share price seesawing wildly and does ever more damage to the Kremlin?s image.
Putin tied his hands at the start by saying that Khodorkovsky?s arrest and the legal case against Yukos are a matter for the courts. There is little the Kremlin can do to neutralize Khodorkovsky?s ace.
As the end of the game draws near, the Kremlin made its first attempt to repair the damage by strongly hinting that it would sell its remaining 7.8% stake in oil major LUKoil to ConocoPhillips ? a deal that would have been front page news in quieter times. But analysts said it was too little too late.
?No doubt, Conoco?s entry will be a strong signal that Russia is still open for business but it is unlikely to be enough to compensate for the current and potential damage from the Yukos story,? says Alexander Kim, an oil analyst with Renaissance Capital.
