Kremlin is lowering the curtain on Yukos

Posted in Russia | 27-Mar-07 | Author: Steven Lee Myers and Andrew Kr| Source: International Herald Tribune

The flag of the YUKOS oil firm flies at the Yuganskneftegaz oil processing facility outside the Siberian town of Nefteyugansk in this December 17, 2004 file picture.

MOSCOW: Only a few visible traces of Yukos Oil remain in Nefteyugansk, a remote Siberian town so inseparable from Russian energy wealth that it has neft, or oil, in its name. Here and there, workers' barracks, trucks and some aging equipment are still painted yellow and green, the color of Yukos's logo.

The rest of what was once the most valuable subsidiary of the richest Russian company have new colors - black and gold - and a new owner, Rosneft.

President Vladimir Putin's Kremlin has turned Rosneft, the once-forlorn state oil company, into an energy giant almost entirely, as it were, by giving Yukos's assets a new coat of paint. On Tuesday, a new phase in that effort begins with the auction of the company's remaining assets after a declaration of bankruptcy forced by Rosneft.

First on the block, ironically, is Yukos's nearly 10 percent share in Rosneft, with a sharply discounted starting price of $7.5 billion, roughly 12 percent below its market value. And the winner is universally expected to be Rosneft, despite a late entry by BP through a Russian joint venture.

In a process that has revived questions about the fairness of Putin's policies of imposing state control over Russia's natural resources, Rosneft is an organizer of the auction, as well as a bidder and the chief creditor, aside from the state, which appears to be looking out for the interests of Rosneft. Even the man liquidating Yukos's assets, Eduard Rebgun, has applied to join Rosneft's board this month.

The auctions signal the final end of Yukos Oil, which is a few months - and a thin layer of paint - from disappearing into Russia's state energy industry, following a prosecutorial campaign that began nearly four years ago.

A former Russian prime minister, Mikhail Kasyanov, said in an interview that the last Yukos auctions fit a pattern of recent deals involving the Kremlin, in which a formal public process is accompanied by more secretive negotiations behind the scenes, likely deflating the prices.

"This is just an illusion, an imitation of process," he said.

The first auction is planned Tuesday in Yukos's headquarters, a nearly abandoned glass and stone high-rise overlooking the Paveletsky train station in Moscow where Mikhail Khodorkovsky, the former chairman who is now serving an eight-year prison sentence for fraud, had an office on the 17th floor.

A Moscow court last August ordered Yukos to liquidate but has little oversight over the process of unwinding an oil company that once controlled audited reserves on a par with those of Exxon Mobil.

Yukos, though diminished, still has license to 2.3 billion barrels of oil reserves. It pumps about 400,000 barrels of oil a day and owns five refineries and a network of gasoline stations and large stakes in Russian state energy companies, obtained through share swaps before the bankruptcy. The rump of Yukos's assets is estimated to be worth more than $22 billion, or about what the state and the company's creditors say they are owed.

The Tax Ministry is the largest creditor, followed by Rosneft, which is claiming damages from Yukos on behalf of a former Yukos subsidiary, suggesting the tangle of business relationships in the process. Two current Yukos subsidiaries, Tomskneft and Samarneftegaz, are also creditors.

Officials have described the process as legal and fair, despite the criticisms. Rebgun has said the Yukos assets will be sold at as much as 30 percent below their appraised value because they are distressed, in part because of the constraints of a court-ordered timeline to liquidate the property, the outstanding tax claims and environmental complaints raised by the state.

The starting price of $7.5 billion for the 9.44 percent of Rosneft on sale Tuesday, for example, is 12 percent below the closing market price Friday of Rosneft, according to a research note by Deutsche UFG. In the auction, bidders will raise the price in increments of $10 million.

Christopher Weafer, chief analyst at Alfa Bank, said the only way to prove that the price had not been deflated to benefit Rosneft would be to hold "an open, fully transparent auction."

"But we know that is not going to happen," he said. Instead, Weafer said, the auction is shaping up as a repeat of the wildly rigged auctions in the 1990s that tycoons like Khodorkovsky used to buy up state property and create companies like Yukos.

"They have managed to restrict it to those whom they want to win," Weafer said. "It is a tried and trusted mechanism that Yukos developed and wielded itself."

Khodorkovsky's bank, Bank Menatep, bought Yukos for $300 million in an auction in 1996. The auction, one of a series of so-called loans for shares auctions that are at the center of criticism of the privatization process in the Russia in the 1990s, was organized by Bank Menatep.

Rosneft became what it is today after acquiring 76.69 percent of Yuganskneftegaz in a murky auction after the state's prosecution of Yukos for tax evasion. That sale was once described by one of Putin's advisors, now retired, as "the theft of the century."

The tax authorities seized it in lieu of back taxes against Yukos and auctioned it in December 2004 to a previously and since unknown company, Baikal Finans Group, for $9.35 billion, far below its market value, which was estimated at the time to be $14 billion to $22 billion.

Rosneft in turn bought the subsidiary three days later. Today, at the height of world energy prices, it is worth far more, perhaps more than $60 billion, according to energy analysts. The Siberian field supplies refineries now owned by Yukos; if Rosneft wins a bid for these assets, as expected, most of the former Yukos will be reunited under state control.

Few doubt that Rosneft will win. Referring to the Yukos refineries, a highly coveted asset, a director of Russian operations for an international oil company, who spoke on condition of anonymity because of fear of commercial retribution, said, "It's predestined who will walk away with it."

In Russia's politically supercharged energy industry, any other company wanting to bid would need a nod from the Kremlin first, the executive said.

Just on Friday, the chief executive of BP, John Browne, and his designated successor at the company, Tony Hayward, met with Putin at the president's summer home near Moscow.

Browne also met with the Rosneft chief executive, Sergei Bogdanchikov. It was not clear whether the executives of the two main bidders for the Yukos shares of Rosneft had discussed the options. A spokesman for BP, Robert Wine, said Monday that the meetings had been arranged for Browne to introduce Hayward to Russian officials. He said he could not say whether the auction Tuesday was on the agenda.

On a recent excursion to Nefteyugansk, organized by the company, Rosneft executives defended their management of the asset and the role of the state in business generally.

"We try to make sure our shareholders get the best dividends and value," Sergei Kudryashov, the Rosneft first vice president, said at a briefing for reporters. "There is no difference between us and any private companies like BP or Exxon."

He and others in Nefteyugansk highlighted the company's investments since 2005 in a field that produces 1.1 million barrels a day and portrayed themselves as good corporate citizens compared with Yukos, paying taxes and spending money on buildings and facilities like a swimming pool for a city, with a population of 114,000, that has few other public amenities.

In the days after the auction in 2004, the company brought in one of its own executives, Vladimir Bulba, 38. In an interview he complained that Yukos had made no long-term investments.

Asked about the role of the state in energy companies, he said he did not think it was a universal solution but that it was a necessity in cases where private companies had neglected to invest or pay taxes, suggesting that Yukos and Khodorkovsky had done neither. "If that does not happen, then the state should step in," Bulba said.