Axe Falls on Russian Oil Giant Yukos

Posted 03 August 2006 @ 10:58 am EET     Print     Reprint     E-Mail     Comments

MOSCOW (AP) - A Moscow court declared Russian oil group Yukos bankrupt after an unprecedented judicial campaign, seen by critics as vengeance directed from behind the scenes by the Kremlin.

The decision prepares the way for the sale of the company's remaining assets and analysts viewed the outcome as a sign of the renewed power of the Russian state in the energy sector. "The court declares Yukos bankrupt and initiates liquidation of the company," judge Pavel Markov said.

The ruling came after Yukos creditors, which include Russian tax authorities and the state-owned Rosneft oil group, last week rejected a rescue proposal from the troubled company's management. An appeal by Yukos lawyers to delay the hearing and the assertion by Yukos shareholders and management that the company is still solvent were rejected.

"This is a death sentence for the company," said Drew Holiner, a Yukos lawyer, adding: "I have little doubt that our management will appeal." It marked the end of a company that had become a virtual empire under ambitious former chief executive Mikhail Khodorkovsky, who is now languishing in a Siberian prison.

The court on Tuesday appointed Eduard Rebgun, who had been acting as administrator for the troubled oil giant, to oversee the receivership process. "All the assets will be sold," Rebgun told reporters after the court's decision. The arrest of Khodorkovsky in 2003 and the subsequent dismembering of Yukos by Russian authorities have been seen as a defining episode in President Vladimir Putin's rule.

The judicial campaign signalled to Russia's powerful business tycoons that they could only operate within strict limits set by the government or face the full weight of Russian justice. Commentators say that the Kremlin saw Khodorkovsky's influence in parliament and his rumoured presidential ambitions as a challenge to its authority that could not be tolerated.

Tuesday's hearing came after administrator Rebgun said Yukos had debts of 18.26 billion dollars (14.38 billion euros), while its assets were worth only 17.72 billion dollars and that the company was therefore insolvent. But the leadership-in-exile of Yukos, which fled Russia in 2004 fearing arrest, have disputed that claim.

"The company is solvent and it could not pay its debts because its assets were frozen. The value of its assets would allow creditors to be paid and the company to be rescued," said Alexander Morozov, another lawyer for Yukos. Yukos continues to extract around half a million barrels of oil per day.

Steven Theede, a former US oil executive who took over the helm after Khodorkovsky's arrest, slammed the bankruptcy proceedings earlier as a "sham" and said the company was worth at least 30 billion dollars. Analysts say Rosneft, which recently completed a record listing on the London and Moscow stock exchanges, is poised to scoop up Yukos assets and the company has already signalled its interests in buying up Yukos refineries.

Rosneft is now Russia's second largest oil producer thanks largely to the key Yukos production facility Yuganskneftegaz that it bought in 2004 as part of a sell-off to settle Yukos debts. Yukos' fall from grace resulted from massive back tax claims against it that eventually amounted to 28 billion dollars. The company has fought against the claims and said it operated under Russian laws at the time. Khodorkovsky, who bought a controlling stake in Yukos in 1995, led the company to become Russia's oil leader through muscular business methods and, later, Western accounting standards.

He became Russia's richest man in the process, until his arrest by security officers who stormed his jet in the Siberian city of Novosibirsk in 2003.

Khodorkovsky is now serving an eight-year prison sentence for financial crimes in the Siberian province of Chita, close to the Chinese border and the route of a planned oil pipeline that Yukos had wanted to build to China. The Yukos case has contributed to a cooling of relations between Moscow and the West.

Washington has frequently said that the case indicated weaknesses in the rule of law in Russia. Although Russia's oil-driven economy continues to grow, analysts say the case had a chilling effect on the still relatively modest levels of foreign direct investment.