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Financial Times: Yukos finally expires, victim of its battle with the Kremlin

By Catherine Belton in Moscow
Published: May 10 2007 19:01 | Last updated: May 10 2007 19:01

The gavel will come down on Friday on the last asset belonging to former Russian oil giant Yukos, symbolically ending the company’s existence after a tortuous four-year legal battle with the Kremlin. In a bankruptcy auction, the shiny Moscow skyscraper built by Mikhail Khodorkovsky, Yukos’s jailed founder, will be sold in a final victory for Vladimir Putin’s increasingly autocratic presidency.

“This is the last rites,” says one western insider who once advised Mr Khodorkovsky. “It was inevitable once they attacked that the Kremlin would not stop until they got the lot.”

The collapse of what was once the country’s biggest oil major over $33bn (£16.6bn, €24.4bn) in back-tax demands, together with the jailing of Mr Khodorkovsky, has cowed any businessmen daring to stand against the Kremlin and has begun a creeping renationalisation of swaths of the economy. Largely as a result of the Yukos saga, the colourful “robber baron” era of the 1990s has passed into history.

“The slow murder of Yukos has been a watershed,” says Lilia Shevtsova, senior associate at the Carnegie Endowment for International Peace. As a result of the takeover, “Russia has made a U-turn” and “a new species” of bureaucratic capitalist has replaced the oligarchs of the Boris Yeltsin years.

The victor in the process was Rosneft, the state-controlled oil company chaired by Igor Sechin, Mr Putin’s deputy chief of staff and one of the Kremlin insiders Mr Khodorkovsky hinted at darkly in an interview four years ago, when he said: “There’s a group of officials in the Kremlin that want to take my company away from me.”

Rosneft’s sweep of all of Yukos’s production units and refineries has transformed the company from Russia’s number eight oil major, worth just $6bn, into the country’s biggest producer, with a market capitalisation of $90bn. It spent a mere net $2bn in the process.

For many, the Yukos saga has defined Mr Putin’s presidency. Critics charge that the Russian court system did the Kremlin’s bidding in bankrupting Yukos and jailing Mr Khodorkovsky for fraud and tax evasion. “This was a demonstrative turning point in the rule of law,” says Andrei Illarionov, Mr Putin’s former economic adviser. “This led to the destruction of the court as an independent institution. We used to have rule of law, now we have rule of thug.”

The Kremlin, however, portrays the campaign as a just fight against tax fraud and says that Yukos was made an example of to discourage future violators. Some believe Mr Khodorkovsky did indeed stick his neck out too far in minimising taxes. “Khodorkovsky was extremely aggressive on the tax front,” says Frank Kujilaars, head of global oil and gas at ABN Amro, which has led in financing Rosneft’s takeover of Yukos’s remains.

“He was trying to maximise the return in terms of using every loophole,” said Mr Kujilaars. “It wasn’t illegal but it was very much on the edge.”

Former Khodorkovsky partners and other observers say the key to the onslaught lay in the oil tycoon’s refusal to keep his nose out of politics – the latter financed several opposition parties and was making public calls for a parliamentary republic. “He was asked to drop it. Putin is not a person who asks three times,” says Mr Kujilaars.

As Yukos fell, Rosneft rose, and so did the state’s appetite for control of other assets. Since the case against Yukos began, state-controlled Gazprom has bought a controlling interest in the privately-owned Sibneft oil company, while the Kremlin has moved into other industries it sees as strategic. The state has acquired holdings in the aviation and shipbuilding sectors, as well as taking control of AvtoVAZ, Russia’s biggest carmaker, and VSMPO-Avisma, the titanium producer. Some observers believe the metals industry – and Norilsk Nickel, the world’s biggest nickel producer, in particular – might be next.

In place of the Yeltsin-era oligarchs, a new clan of bureaucratic capitalists has taken hold as Kremlin officials won appointments to chair these new state titans of industry. Among them is Mr Sechin, whose daughter is married to the son of Vladimir Ustinov, the prosecutor who led the legal attack against Yukos.

The attack on Yukos has also strengthened the notion of “selective justice”, the legal persecution of a particular company over violations considered widespread industry practice, critics say. Royal Dutch Shell’s $22bn Sakahlin-2 oil and gas venture has been singled out for such treatment, argues Vladimir Milov, a former deputy energy minister. Mr Milov says the charges of environmental violations against Shell’s venture were a repeat of similar charges made against Yuganskneftegaz, Yukos’s main production unit, ahead of its forced sale in 2004. While threats to revoke Yugansk’s license led to a considerable discount on its sale price, the similar charges against Shell may have led the company to sell control to Gazprom at a lower price, Mr Milov says.

Another legacy of the Yukos case is the consequences for foreign oil companies in Russia. Mr Khodorkovsky had been poised to sell a considerable stake in Yukos to either Chevron or ExxonMobil, potentially giving a western company direct access to nearly a quarter of Russia’s oil reserves. But now the Kremlin is firmly in the driving seat and foreign companies are restricted to a minority role in the development of all future projects under new rules.

Many argue that the seeds for the state’s current backlash were sown by oligarchs such as Mr Khodorkovsky in the free-for-all capitalism of the Yeltsin years. After all, Mr Khodorkovsky’s Menatep won Yukos for a mere $300m in the scandal-tainted “loans for shares” auction in 1995, in which it was the only bidder. Critics argue it was Yukos that perfected the art of using the court system for its own gain.

The sell-off on Friday of Yukos’s last major asset seals Rosneft’s climb to the top of Russia’s oil industry. But it also underlines a growing rift between rival clans in Mr Putin’s Kremlin that could have consequences for the handover of power when Mr Putin steps down as required by the constitution in 2008.

Gazprom stayed out of the Yukos takeover process because Dmitry Medvedev, its chairman, feared potential legal risks as a possible presidential candidate, bankers say. But Gazprom is eager to muscle in on Rosneft’s role. Mr Sechin, meanwhile, is believed to fear a new boss in the Kremlin because of the potential for a backlash over the risks his company took in taking over Yukos. “Mr Putin’s team has fractured as a result of this and we don’t know how this is going to play out,” says Ms Shevtsova.

Copyright The Financial Times Limited 2007

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