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Kommersant: Home Four-Year-Long Chess Match

Aug. 21, 2007

The last assets of YUKOS were sold last week to finish several months of sales of what was once Russia’s largest oil producer. Bankruptcy procedures for the company are to be over by November when it will be liquidated. It took roughly four years to wind up one of Russia’s biggest oil holdings. Mikhail Khodorkovsky’s empire was virtually handed over to state-run Rosneft. The state-controlled oil firm, which used to be a mediocre player in the YUKOS golden age, has snapped up most of its production units and refineries at knockdown prices to become the leader of the Russian market, in terms of capitalization, production, refining, the size of oil reserves and even the number of gas stations in the country. Rosneft now aspires to become a world leader, something that YUKOS was also aiming at.

YUKOS’s bankruptcy is formally over. Official receiver Eduard Rebgun still has to distribute money raised in the sales among YUKOS’s creditors, calculate taxes and finish an array of formalities. Mr. Rebgun has already vacated an office in YUKOS headquarters early August to move to the premises of his company, Business-Lotsia. Rosneft is now packing to move to Dubininskaya street although the YUKOS name plate is still above the front door. This is apparently the last thing left from the firm since YUKOS no longer exists as a company. Its last asset, Dutch-registered Yukos Finance, was sold last Wednesday, leaving YUKOS alive only on paper. Recent auctions have shaped the Russian oil industry in the post-YUKOS era after Rosneft took the complete sweep of the giant. Incidentally, Rosneft was a reason for the first row between Mikhail Khodorkovsky and the Kremlin several years ago.

The conflict between YUKOS and Russian officials, which ruined one of the largest and most successful Russian companies, began in mid-2003. However, tensions mounted a few months earlier in a public dialog between YUKOS Chief Executive Mikhail Khodorkovsky and President Vladimir Putin at a meeting of business leaders. Mr. Khodorkovsky said in his speech that Rosneft’s recent purchase of the Severnaya Neft oil company was “somewhat dubious.” Vladimir Putin replied that “Rosneft is a state-owned company which needs to increase its oil reserves.” “In the meantime, some companies such as YUKOS have surplus reserves, so here comes a question: how did it get them?” the president asked.

YUKOS was producing slightly less than 70 million tons of oil a year at that time, second only to Russia’s largest oil firm LUKOIL. Rosneft was at the bottom of the top 10 with some 16 million tons a year. With an eye to make YUKOS a market leader, Mikhail Khodorkovsky was also planning to merge his assets with Roman Abramovich’s Sibneft (now Gazprom Neft). The joint company YukosSibneft was to manage the largest amount of oil reserves among all publicly traded firms in the world. The deal was never completed after Mikhail Khodorkovsky was arrested. Nowadays, Rosneft strives to become the world’s oil leader. The company’s management is convinced that they would soon find a place the world top 3 now occupied by ExxonMobil, BP and Shell. Rosneft is planning to unveil its plans for the development of new acquisitions this fall.

Rosneft made first step on the path to the market domination in in December 2004 buying Yuganskneftgaz, YUKOS’s largest production unit which was put up for sale after YUKOS was hit with multi-billion-dollar tax demands. The acquisition increased the state firm’s production by an annual 50 million tons and sent it up to Russia’s top three oil producers. In the meantime, Rosneft executives succeeded in defending their independence and opposed a much-promoted merger with Gazprom. Instead of this, Russian authorities decided to make Rosneft a publicly traded company. Rosneft went public on Russian and Western trading floors in July 2006 attracting a large number of foreign investors who earlier rebuked Russian authorities and Rosneft for nationalizing Yuganskneftegaz. The IPO was as a success as securities with securities sold at the top price though federal authorities retained 75 percent in the company. The demand was also spurred up by expectations that YUKOS assets would soon go to Rosneft.

Rosneft was apparently hoping for the same. The state-run firm launched preparations for the YUKOS-fueled growth at the same time with the IPO run-up. In late 2005, oil producer acquired $482 million in debt that the troubled oil firm owed to Western banks. With this agreement in hands, Rosneft went to Russian courts asking to rule YUKOS bankrupt. The suit was upheld.

Bankruptcy procedures began in August 2006 to write the last page of YUKOS’s history. An official receiver started selling off YUKOS’s assets this March. Rosneft was a major beneficiary at most of the auctions. First, the oil firm bought back 9.44 percent of its shares that had been held by YUKOS. The bankrupt oil major received the stake in return for privileged shares in Yuganskneftegaz during Rosneft’s stock consolidation in the run-up to the IPO when its subsidiaries were merged into one unit. The state-owned oil producer also bought YUKOS’s service facilities and remaining production units, Tomskneftegaz and Samaraneftegaz, all refineries and a bulk of gas stations.

When the state-owned emerging giant showed interest in a YUKOS asset, competition was just nominal. Major companies would not take part in auctions and even if they did, they did try too hard bidding. LUKOIL-affiliated Promregion Holding, which was trying to buy YUKOS’s southern assets, won the auction but never completed the deal. The Federal Anti-Monopoly Service did not endorse the purchase citing formal reasons. The assets ended up in the hands of Rosneft, the second bidder. “If we had been asked not to bid, we would not have,” managers at Promregion Holding said off the record. “They should have thought about it themselves,” Rosneft employees said.

However, not all assets of YUKOS went to Rosneft so easily. For example, YUKOS headquarters on Dubininskaya Street were sold to an obscure Prana which offered 100 billion rubles against the starting price of 22 billion rubles. Ultimate beneficiaries of Prana are still unknown, but all clues lead to Gazprombank. In another example, Rosneft was not going to compete for YUKOS’s gas stations in Russian central regions. Oil giants TNK-BP and Shell were bidding for the asset but it went to an little-known Uniteks also linked with Gazprombank. In the end, Rosneft bought both assets from the low-profile firms.

Rosneft spent some 690 billion rubles, or $27 billion, on new acquisitions to become an undisputed leader in the industry. Its annual production jumped to 100 million tons a year, Russia’s largest. Its reserves are now the world’s largest for public companies and its capitalization is the highest in the Russian oil industry. However, Rosneft had to trade an opportunity to sweep most YUKOS’s assets for help to wrap YUKOS’s bankruptcy procedures. Russian authorities are apparently anxious to liquidate YUKOS as soon as possible. The YUKOS story is best to be forgotten ahead of parliamentary and presidential elections. The oil company’s bankruptcy became the fastest in Russia among large companies, according to those in receivership in other firms. They say that very few companies manage to complete the procedures within the law-stipulated 12 months, and six months’ time is normally added in most cases. When Eduard Rebgun asked to extend the firm’s bankruptcy period by six months, the court ordered as little as three months and ordered to wind up YUKOS by November. Rosneft helped to speed up the process by purchasing not only lucrative but also debt-laden assets. However, it preferred not to buy Dutch-registered Yukos Finance, the last and most troubled asset on offer.

Yukos Finances controls $1.492 billion in cash raised from the sale of 53.7 percent in Lithuanian refiner Mazeikiu nafta in 2006 and 49 percent in Slovakia’s Transpetrol pipeline company. But Eduard Rebgun never managed to extend control over the Dutch firm which is currently run by YUKOS top managers. Mr. Rebgun was vainly trying to topple Yukos Finance executive and YUKOS’s former employees, Bruce Misamore and David Godfrey. The matter is still pending in Russian and foreign courts. As a result, the company was put up for sale at book cost. Even Dutch lawyers who consult the official receiver admit that the litigations may drag on for years.

A company is called bankrupt only after all of its assets are sold. Two days before the last auction, Rosneft’s subsidiary Promneftstroi paid a deposit for bidding. Promneftstroi was reported shortly after the win to have been sold to Monte-Valle, set up by Steven Lynch, a U.S. citizen. The American will now have to settle the conflict around the troubled asset. Industry experts say that Rosneft or Gazprom might buy Yukos Finance or part of it from Monte-Valle in case the firm gets the upper hand in the dispute. Even though bankruptcy procedures are complete, the curve-up of YUKOS is not over yet, unofficial sources say. The government may still ask Rosneft to share some of the assets with gas monopolist Gazprom, though the oil producer has so far been reluctant to part with its acquisitions.

Denis Rebrov

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