Business and government: YUKOS under the state’s thumb

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The topic of YUKOS, which hasn’t been out of the headlines of the national papers for months, has been the major topic over past few days as well. The decision to sell Yuganskneftegaz, the major oil-producing subsidiary of YUKOS, and the new charges brought against Leonid Nevzlin, co-owner of YUKOS and personal friend of Mikhail Khodorkovsky, show that matters are coming to a head, at least for the company itself. As for the fate of its owners, the facts indicate that unexpected turns for the public and them as well are possible in their fates yet.

Last Monday, reports the Kommersant newspaper, the Prosecutor General’s Office placed on its website a statement saying that this time, Nevzlin is accused of being involved in contract killings, rather than economic crimes. He’s charged with attempts on the lives of former YUKOS employee Olga Kostina, Sergei Kolesov formerly employed with Rosprom, and East Petroleum Handelsgas Manager Yevgeny Rybin. He’s also charged with involvement in the murder of Sergei and Olga Gorins, who had arranged all three attempts and were blackmailing Nevzlin and Alexei Pichugin, former manager of YUKOS security service the hearings on whose case are to start at the Moscow City Court within days. As reported by Gazeta, the only difference is that prosecutors view Pichugin as the executioner and Nevzlin as the mastermind.

According to the Prosecutor General’s Office, all these crimes have been arranged “with the purpose of eliminating the persons, dangerous for YUKOS or Nevzlin.”

Nevzlin’s defense declared the accusations to be provocative, aimed at “compromising the founders of YUKOS” and give the world to understand that the company had been founded by “bandits and murderers,” a Nevzlin’s lawyer told Kommersant.

As reported by Kommersant, the reiterative authorization for Nevzlin’s arrest (from January 2004 he has been on the wanted list on the indictment of failure to pay the income tax of 26.7 million rubles and appropriation of shares of Tomskneft and Achinsk oil refinery) was issued by judge Andrei Rasnovsky, who had formerly sanctioned arrests of Platon Lebedev and Mikhail Khodorkovsky.

“For the first time in the history of Russia a large businessman and owner of a multimillion fortune has been accused of being involved in murders,” says the Vedomosti newspaper.

Nevzlin’s lawyer Dmitry Kharitonov told Vedomosti that appearance of that serious charges is explained by the Prosecutor General’s Office (PGO) attempt of facilitating the procedure of extraditing Nevzlin to the Russian authorities.

As everyone knows, Israel doesn’t extradite its citizens, accused of committing economic crimes in other countries. However, exceptions are probable for dangerous special offenders: an informal agreement about possibility of extradition was reached between the Russian Interior Ministry and Israel in 2002. However, each similar case should be discussed separately and the convict will serve the sentence in an Israeli prison anyway.

The case of Gennadi Yagudayev, accused of abduction of a person, is a precedent; however, his guilt was evident for the Israeli court, an Interior Ministry’s source told Vedomosti.

The situation is complicated in the case of Nevzlin: his defense thinks the charges are indirect and unconfirmed. Renowned lawyer Henry Reznik is confident that an attack has been undertaken on Nevzlin to make the case of YUKOS more criminal. In the opinion of Reznik, the investigation bodies are regarding Nevzlin as peculiarly negative figure: “Because he took an uncompromising stance at the time when YUKOS was invited to simply hand over part of its assets. I don’t want to be any more specific, but there was such a time.”

Nevzlin has no doubts that “he’s wanted by the authorities only to get even with him.”

The investigation is certain that Khodorkovsky’s companion is guilty. As Izvestia were told at the Prosecutor General’s Office, there is direct evidence that Nevzlin had ordered Pichugin to arrange the murders.

Reportedly, the news of Nevzlin’s arrest has caused another drop in the share price of YUKOS.

“The company’s shares have fallen to the level of October 2001. Judging by the rate of collapse, this is not the limit. To assess the value of this stock, the investors may have to pass from dollars to cents, as in the remote year of 1999,” notes the Vremya Novostei newspaper. Investors seem to have completely lost hope of any good news regarding YUKOS.

The value of company’s shares could be fluctuating, but “the probability of events which may get it back to the historic maximum is tiny,” stresses the newspaper, whereas “achievement of historic minimums is becoming real as long as the script of YUKOS affair is getting clearer.”

According to Alexander Privalov of Expert magazine, on being “bitten out” the company’s central asset, YUKOS will actually cease to exist – “at any rate as a world-class company and a pillar of the domestic economy.”

Privalov says this outcome “is a deliberate murder of the company: YUKOS has plenty of assets which could be sold leaving the company able to function.” The author thinks it would be proper to start it by selling a stake in Sibneft. Formally, it’s easy to explain why this hasn’t been done: this stake has been “frozen yet.” However, says the magazine, similar explanations are evasive since “the shares were frozen by human beings, not creatures from Mars.”

The author says that if the end of YUKOS is clear, the “case of YUKOS” could have different endings.

However, says Expert, the majority of commentators have reached consent in the following forecast: Yuganskneftegaz will be sold “very cheaply to some of the figures pleasant for the authorities.”

In the opinion of Kommersant-Dengi magazine, Surgutneftegaz, with its major deposits situated in the vicinity of Nefteyugansk, is the most likely contender for Yuganskneftegaz. “Being openly supported by the state, the company has already acquired the Talakan deposit in Yakutia, which was factually controlled by YUKOS.”

As for other candidates for YUKOS assets, the situation is indefinite, notes Kommersant-Dengi. State-owned Gazprom and Rosneft have allegedly stated they have no intention to buy the assets of YUKOS. “Economic Development Minister German Gref has confirmed that.” As reported by the magazine, the structures close to Oleg Deripaska’s Basic Element showed concern in Samaraneftegaz in late July, “but the nature of this concern is unknown: it is not ruled out that the group is interested in the asset with the aim of reselling it afterwards.”

Besides, if Yuganskneftegaz, the core of YUKOS business, is unlikely to be traded openly, the rest of YUKOS assets which appear on the market “are interesting for any sound Russian investor – any new investment in the oil industry in the country are impossible for any foreign company. The state companies are unlikely to refuse to purchase a refinery of YUKOS, its regional sales networks, service divisions and foreign assets,” stresses Kommersant-Dengi.

After Surgutneftegaz, says Kommersant-Dengi, Sibneft looks the most solvent contender for the assets of the holding; by the moment of real sale of YUKOS it is supposed to end the procedure of “divorcing” from Mikhail Khodorkovsky. Moreover, “the availability of unsettled property relations with YUKOS may give the team of Sibneft’s CEO Yevgeny Shvidler to get advantages during the sale.”

If this is the outcome, says Expert, it’ll “give very bad lessons.”

President Putin has said of late that the authorities are not interested in the ruination of YUKOS. Thus, says Privalov, “we’ll have to choose between two explanations of the subsequent scenarios: either the president has insufficient control over the authorities or he has knowingly deluded the country. Which option do you like better? I like neither of them, but see no third option.”

If the company is sold for a trifling sum to the “insiders,” it becomes clear that nothing has actually changed since the era of the mortgage auctions of the 1990s – or, things have changed for the worse. That era “had few arguments spoken aloud in favor of distributing the juicy bits,” but the arguments were clear to everybody: “the necessity of forming large taxpayers, the need for making a platform for the presidential elections and, finally, the awful condition of the dainties.”

Nowadays the authorities have no reasons to account for the “non-mortgage auction on YUKOS,” says Privalov.

“If the regime announces its intention to nationalize the commodity industries (it is not necessary to say it, all we need is just a hint!), it would be different: not everybody would accept such a decision, but it would be clear; maneuvers of the regime would be logically predictable.” Nothing of the kind actually exists – “without any at least implied grounding the above maneuvers become an evident and the shocking arbitrary rule.”

Privalov says the Kremlin has chosen this style of behavior not in relation to the case of YUKOS alone: “the authorities have actually ceased its dialog with the public, stopped explaining its actions and plans – apparently they’ve ceased to regard it as a compulsory duty.”

In his article dealing with the freedom of speech in Russia, Denis Dragunski of Novoye Vremya magazine warns that our country may “lose its capacity for intra-national dialog.”

The symptoms of this disease are evident now, says Dragunski.

It is well-known that the party which won the parliamentary election hasn’t yet presented its program: “Support for the “given specific” president was the only thing announced.” However, the “given specific” president has failed to explain how he intends to rule the country. As a result, the “people voted in favor not knowing how to explain why.”

Moreover, even the Kremlin analysts prefer indefinite statements under complicated circumstances. Nearly the following has been said with regard to many significant events in the life of Russia (Dragunski gives the example of dismissing Kasianov and appointing Fradkov): “the president gives a sign regarding his future policy.”

“Why should signs be used for explanation if the Russian language is that powerful and vast?” exclaims the author.

On the other hand, when the authorities gives straightforward statements – as in the case of YUKOS, the bankruptcy of which is not envisaged as Putin said – the result is no better.

The ongoing events suggest that the president has merely lost control over his circle, says Yulia Latynina with Novaya Gazeta. “I don’t think the plan of splitting YUKOS had initially existed in the president’s circle,” speculates Latynina. In her opinion, most likely they only wanted to urge Khodorkovsky to order, make him manifest loyalty for the authorities. The initial plans could have no intentions of withdrawing his business.

Besides, says the author, now the authorities have no unambiguous plan of actions either: “In case this plan existed, it would be sufficient to accept any of the company’s offers,” for instance the offer of Khodorkovsky who was ready to give up a 44% stake.

However, notes Latynina, this offer had a considerable flaw: if adopted, somebody could get the entire YUKOS.

“Evidently, none of the parties surrounding the president is able to swallow the entire bit, but is capable of impeding any other party from taking this step,” says Latynina.

Other offers were announced. As everyone knows, YUKOS has sent 11 letters to the government. Maybe they all got lost in the mail, mocks Yulia Latynina. At any rate, no response followed, aside from the economic and political response of the West.

As reported by Vedomosti, after the news of selling Yuganskneftegaz emerged last week, CSFB and Brunswick UBS, two large Western investment banks, lowered their forecasts for the Russian market. The banks’ analysts say that the situation with YUKOS is developing under the worst scenario. In their opinion, the bankruptcy of YUKOS or the sale of its main asset to a friendly insider will seriously affect Russia’s investment image.

Besides, political assessments were made as well. According to Novaya Gazeta, U.S. Ambassador to Russia Alexander Vershbow has visited the headquarters of YUKOS lately, “just as U.S. diplomats used to visit the starving dissidents.”

Naturally, the Russian authorities are not interested in putting such stains on their reputation.

However, says Latynina, the president is unlikely capable of halting the process which has been launched: “no master can get the food out of a dog’s mouth without the risk of being bitten.”

Latynina has no doubts that Vladimir Putin had passed the initial decision of launching an attack against YUKOS. “What was it based on? On reports from the people, who had previously made their careers on exposing the dissidents and are now making careers on the exposure of oligarchs and division of their property between themselves.” These people are trying to prove the president that they are protecting him from enemies: “If no enemies exist, they are being created.”

Moreover, says Latynina, “dictatorship is always a political consequence when racketeers come to power: if you divide property with the aid of the power, you can only retain the property by being with the power.”

This ensues a sad result for Putin, who has become a hostage to his own inner circle: “They are to get YUKOS, but the president will no longer be invited to visit Bush’s ranch.”

“Uncertainty is rising in the rules of the game between business and government, and threatens to develop into real chaos,” says Profil magazine.

Nowadays, emphasizes the magazine, a crowd of “experts in redistribution” is following the Kremlin officials and rising to attack the oligarchs: “Seeking benefit under the cover of national interests and at the expense of others is their profession.”

The state of affairs in the business is getting more complicated. As a result of a recent government’s decision on raising the customs duty on oil exports the budget will receive an extra $2 billion with the price at $27 a barrel and $3.3 billion with the price at $30 a barrel or higher. “This has been awaited for a long time.”

Nevertheless, says Profil, the rise has been recognized “realistic, based on detailed calculations and a sheer consensus of the political and business elites.” Moreover, it is far from the shocking idea of expropriating the oil industry, on which the leftist parties, especially Sergei Glaziev and his supporters, are insisting.

However, everything is not that smooth. The sale of Yuganskneftegaz, the major oil-producing enterprise of YUKOS, for “trifling $1.75 billion” without a tender evidently casts doubt on the alleged consensus between the power and the business.

“If the tax claims against YUKOS are shifted to other companies, for 2000 and 2001 alone the oil industry will have to pay some $28-37 billion into the budget. This almost fits the scale of Glaziev,” says Profil.

Indeed, the Auditing Chamber has already charged Sibneft with tax evasion to a sum of over $3 billion and announced that it is prepared to audit LUKoil in the immediate future.

“At first glance, these are links in the same chain, However, has the president sensed these links? Which of them reflect the state, departmental, corporate and private interests?” says Profil.

In the opinion of Profil, virtually before our eyes “there has been formed a layer of people, starting from minor officials to reputed experts in arbitration trials, who are not only interested in the redistribution of assets, but are ready to make this process a standard, a lifestyle.” They are ready to prosecute “any person having money or resources, which could be converted into money.”

According to Profil, their actions and claims have nothing to do with the real politics of the power, “although they are proliferated on behalf of the power and interests of the nation.”

The magazine says this is an extremely hazardous tendency, which may impair both the oligarchs and almost anybody having any property.

The magazine is certain that the authorities has enough resource not to admit a similar development of events: “We only need rules, which could be tough and strange” and observation of these rules by all participants “in the big game of Russia.”

Kommersant-Vlast magazine shares the opinion that the authorities had no single plot of the ruination of YUKOS.

“To all appearances, various officials control each phase of the case of YUKOS differently. The general command is the only thing available: “To get YUKOS thumbed!”

The Ministry of Taxes and Levies interpreted this order as the ground for charging the aggregate amount of due taxes for YUKOS. The businessmen close to the power – as an opportunity to claim to the holding’s assets. The governmental officials from the liberal wing – as an opportunity of raising the budget tax revenues. Officials of the security structures – as an opportunity to nationalize the company. Agents of the Prosecutor General’s Office, the court bailiffs, etc. – as a plea for any tough actions against YUKOS. However, notes Kommersant-Vlast, the actions of all structures involved are permanently contradicting one another since no single plot exists.

According to the magazine, the process of ruining YUKOS could be protracted if the actions continue to lack coordination.

Even Viktor Gerashchenko, on dismissing whom from the post of company’s chairman of board of directors Khodorkovsky is insisting, still hopes “constructive talks are possible.” Moreover, his authority cannot be ceased earlier than August comes. A week ago Khodorkovsky announced his readiness to “rescue YUKOS at any cost” and that the rescue is still possible. As reported by Kommersant-Vlast, the government continues saying that the destruction of YUKOS, “the indispensable component of Russia’s economy” is inadmissible.

Moreover, Vladimir Putin’s statement that the authorities are not interested in the bankruptcy of YUKOS does not contradict the sale of company’s assets now being prepared: “A corpse cannot be shot dead; someone who’s already a beggar cannot be ruined; and someone who’s already naked cannot be undressed.”

In the opinion of Kommersant-Dengi magazine, the ruination of YUKOS may have as strong influence on the Russian oil industry “as creation of oil companies in mid-1990s”; the magazine says the effect is not peremptorily negative.

“YUKOS is the first vertically integrated oil company of those being founded under Boris Yeltsin’s decrees, which is leaving the scene,” says Kommersant-Dengi. At that period, the administrative rivalry used to be the main factor determining the competition in the creation of these companies.

In particular, Kommersant-Dengi notes, YUKOS “was founded via the efforts of hereditary oilman Sergei Muravlenko and Mikhail Khodorkovsky, a near-Cabinet lobbyist and banker.”

No other competition existed in Russia then.

However, no grounds exist to think that the competition in the oil industry will be representing “an almost entirely refined opposition between the experts in contacts with the governmental organizations,” as which the magazine regards all heads of vertically integrated oil companies without exception.

In the opinion of Kommersant-Dengi, the split of the largest of the companies may launch the competition mechanisms anew.

Undoubtedly, says Kommersant-Dengi, destroying the existing structure of the oil sector is extremely disadvantageous for the authorities: “all official, semi-official and unofficial methods of managing the oil industry, as well as sources of income for officials, are linked to it.” Nevertheless, there will be no stopping the changes if the redistribution of YUKOS is launched “they could only be guided.”

On the one hand, “results of the alterations in the oil industry will be in direct dependence of the ability of Russian government’s ‘reformers’ to administer the element of marauding.” On the other hand, real competition could only emerge in the Russian oil industry if the “private marauders” gain a victory over “state marauders.”

Transfer of YUKOS assets under the governance of state-controlled structures like Surgutneftegaz will only resume the policy of the 1990s, stresses Kommersant-Dengi.

Moreover, the Fradkov Cabinet “doesn’t seems to be the force which can prevent Sibneft, LUKoil, TNK-BP, dozens of banks and rich people in Russia from participating in the oil sale, which is most generous over the past decade.”

Therefore, Kommersant-Vlast promises, in the case of YUKOS spectators “will see many episodes of tragedy, comedy, and melodrama,” as well as detective stories.

One thing is clear – regardless of anything, the outcome of this matter is predetermined: YUKOS must be brought down.

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