Russia: Eulogy for Yukos?
July 20, 2004
Summary
stratfor.com
The Russian Justice Ministry announced July 20 it would soon offer up the core of Yukos Oil Co. for sale, signaling the end of the company as an integrated oil firm. This heralds a period of international disinterest in the Russian economy -- and demonstrates how far Russian President Vladimir Putin is willing to go to preserve his grip on power.
Analysis
In a statement released July 20, the Russian Justice Ministry said: "After valuation, the share stake in Yuganskneftegaz will be handed over to a special organization for sale." Yuganskneftegaz is the core asset of beleaguered Russian oil major Yukos Oil Co.
The sale marks the final chapter of a year-long saga that determines the future of Russia. Russian President Vladimir Putin has prevailed, but his victory was difficult and costly. He has destroyed Russia's most powerful oligarch, but at the price of making Russia an international financial pariah in the near term.
The Yukos story began July 2, 2003, with the arrest of Platon Lebedev, an oligarch affiliated with Yukos, on charges of cheating a privatization auction and therefore defrauding the state. The real target was Yukos CEO Mikhail Khodorkovsky, Russia's richest oligarch and an aspirant to the Russian presidency.
Khodorkovsky, like Russia's other oligarchs, made his fortune by stripping state assets after the downfall of the Soviet Union. His political ambitions clashed with an informal deal Putin struck with the oligarchs in early 2000: Stay out of politics and pay your taxes, and the Kremlin will let you keep your ill-gotten gains. Within months of Lebedev's arrest, Khodorkovsky joined Lebedev in jail -- both are on trial -- and Yukos came under relentless government prosecution for back taxes. Its tax bill is some $6.8 billion and will almost certainly top $10 billion before all is said and done. Russian courts already have authorized the government to chop up Yukos assets for sale.
Siberian-based Yuganskneftegaz is the heart of Yukos and produces half the company's 2-million-barrel-per-day output. Without it, Yukos' assets are scattered far and wide and simply cannot function as a unified company. In effect, selling Yuganskneftegaz destroys Yukos as a firm.
The Kremlin's original goal was to strip Yukos from Khodorkovsky, reduce it until it was no longer a potential political springboard and then sell it to someone more pliable. The hope was, and remains, that the process would not be so disruptive as to frighten foreign investors away.
That is no longer possible, partly because of Khodorkovsky himself. The Kremlin's thinking has always been that the oligarch would eventually capitulate to the government's demands and allow Yukos to be transferred to a new ownership, but Khodorkovsky has proven defiant to the end. The end result -- for Putin to achieve his goals -- now necessitates the annihilation of Yukos. A Stratfor source within the Moscow law enforcement community indicates the Yuganskneftegaz sale is not yet finalized, but barring a final change of heart from Khodorkovsky, Yukos' destruction is all but assured.
That change is not likely to happen. A source in Yukos' middle management indicates the senior management is even now forcing the Putin government to make the process as ugly as possible. When the Justice Ministry's announcement was made, Yukos leaked that the government would sell Yuganskneftegaz -- which has been audited at some $30 billion -- for a mere $1.75 billion.
Such a number is ridiculous; even at the most cut-rate fire sale the subsidiary should net at least $7 billion. The source indicates that Yukos managers are trying to wring every cent they can out of the company before it ceases to be. After the Yukos leak, the company's shares plunged so far that the RTS index suspended trading in them for the rest of the day. The source also said that Yukos senior management snapped up the devalued shares so that they could resell them when the stock rebounds, as it must when a saner sale price for Yuganskneftegaz is made public.
Such a course of events -- the government's insistence on bringing Khodorkovsky to his knees and Khodorkovsky's insistence on making the process as painful as possible -- will bring about a state of affairs that Putin had hoped to avoid: the destruction of Khodorkovsky's property rights in the eyes of foreign investors.
In fact, the damage has already been done. On the surface, foreign direct investment into Russia hit a post-Soviet high of $6.8 billion in 2003. However, $5 billion of that money is from Cyprus, a traditional offshore haven for Russian money that has fled the country. As part of its efforts to join the European Union (which it acceded to May 1), Cyprus had to shut down many of its financial centers that were used for money laundering. That $5 billion is not only a one-off "investment," it is also Russian money and so not exactly "foreign."
The situation is actually even worse. BP poured $3.6 billion in cash and shares into Russia to purchase half of Russian oil major TNK in what was a deal guaranteed by Putin personally. With adjustments for the repatriation of Russian money and the Putin-brokered BP investment, Russia actually suffered an FDI deficit in 2003.
A source in the Russian Energy Ministry indicates that the government still hopes the foreign firms will be willing to buy up chunks of Yukos -- or perhaps purchase shares in Russian oil firms that do -- but this is extremely unlikely. One, no foreigners trust the Russian government sufficiently to take the plunge into Russia until the waters settle; and two, Yuganskneftegaz is simply too big for anyone to buy up on short notice.
The end result will be that a Russian oil firm will happily dance away with Yuganskneftegaz. The lucky winner will probably be Vladimir Bogdanov's Surgutneftegaz, which has been much maligned by foreigners for simply sitting on its income for the past four years. That has left them the only company in Russia with sufficient cash reserves to buy Yuganskneftegaz in a single gulp. Barring a Surgutneftegaz purchase, Yuganskneftegaz would have to be jointly purchased by two or more Russian oil majors and then later split up through some sort of backroom negotiation.
For foreigners, this represents the worst Russia has to offer: backroom deals, rigged auctions, ignored property rights and heavy-handed courts with predetermined verdicts. As a result, direct investment of foreign money in Russian equipment, companies and infrastructure is stalled and will not return until the government re-creates a sense of stability for the foreign investment community.
After the 1998 default, that process took about three years; the time frame for this recovery in investment will not be much faster. Just as before, foreign money will first flow back into transitory investments, such as stocks. These are instruments that can be liquidated quickly at the first sign of trouble. Only later, after the government has re-established a sense of normality, will this "hot money" eventually pave the way for the joint projects and direct investments that Russia needs so badly to set its economy on sounder footing.
For Putin, this is a price worth paying. The president's plan for resurrecting Russia involves a road to the West so that Western techniques and technology can remake his country from the ground up. That requires money -- Western money -- and a lot of it. The fight with Khodorkovsky has set Putin's plans back a couple of years, but had Putin not imprisoned the oligarch and shut down Yukos he would instead be fighting the oligarchs for political control of Russia, with no hope of steering the country's economic future.
This situation might not be pretty, but for Putin it is the only way he can create the future he wants for Russia.
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