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Analysis: The Dismantling Of Russian Oil Giant Yukos

Will the Kremlin reward state-owned natural-gas monopoly Gazprom for its loyalty with a murky $18 billion deal as a year-end bonus? Many financial analysts in Moscow are leaning toward that conclusion, as Russian officials appear bent on the dismemberment of integrated oil and gas giant Yukos.

Yukos has paid $3 billion of a $3.4 billion tax claim for 2000, according to "The Moscow Times" of 13 October, but the company faces a further $4.1 billion tax claim concerning 2001.

Complaining that Russian tax authorities "are not satisfied" over the speed with which Yukos is paying off its back taxes, however, the Justice Ministry on 12 October announced its plans to sell an unspecified stake in Yukos's main production unit, Yuganskneftegaz, as early as November, "The Moscow Times" reported the next day.

Western and Russian financial observers were quick to point out that the Justice Ministry's reported valuation of Yuganskneftegaz at $10.4 billion is about two-thirds of what they had expected.

Soon afterward, in a move that furthered fears that Yukos is being dismantled, Natural Resources Minister Yurii Trutnev said on 16 October that Yuganskneftegaz risks losing its licenses over what he termed "rather serious" technical violations, "The Moscow Times" reported.

"The Moscow Times" reported on 18 October that an inspection of Yukos licenses last year by the ministry "failed to turn up any serious violations. It was unclear Sunday what significant changes could have occurred since then." In November 2003, President Vladimir Putin said that recalling licenses from Yukos "would give the impression that the state was trying to shut down the company," the paper reported.
The sale of Yuganskneftegaz -- the core unit of Yukos that produces roughly two-thirds of its oil, equivalent to the output of Indonesia -- would mean the effective demise of Yukos in its current form.

One analyst at United Financial Group in Moscow reportedly told "The Wall Street Journal" of 13 October, "It's pretty ugly; the fact that Yukos is being broken up at all is a complete scandal."

Investment bank Dresdner Kleinwort Wasserstein estimated the upper limit of Yuganskneftegaz's value at $18 billion in work it carried out for the ministry, according to a number of local and international news reports. Representatives at Dresdner would not confirm those reports, and officials at the Natural Resources Ministry have declined to comment as well.

The sale of Yuganskneftegaz -- the core unit of Yukos that produces roughly two-thirds of its oil, equivalent to the output of Indonesia -- would mean the effective demise of Yukos in its current form.

Eric Kraus, chief strategist for Sovlink Securities, was quoted by "The Moscow Times" commenting that: "The game is proceeding according to plan -- the state intends to rip Yugansk out of Yukos and sell it, presumably to more Kremlin-friendly companies."

The most "Kremlin-friendly" energy companies in Russia are arguably Gazprom and Surgutneftegaz. Both have denied that they are interested in buying Yukos assets, but many analysts have countered that they are skeptical of those denials.

One Russian energy analyst told RFE/RL that he believes Yuganskneftegaz will be sold to Surgutneftegaz and that Gazprom will then take over Surgutneftegaz and form a single, giant Russian energy company that is effectively controlled by the Kremlin.

Lending credibility to this scenario is the fact that the Kremlin recently gave the green light for Gazprom to take over the state-owned oil company Rosneft, and Gazprom is preparing to create Gazpromneft, a wholly owned Gazprom oil subsidiary. This appears to jibe with Gazprom Chairman Aleksei Miller's strategy of transforming Gazprom into a diversified energy company involved in a range of activities beginning with oil and natural-gas extraction and continuing through electricity generation.

The takeover of Rosneft was significant in another aspect -- it increased the state's share in Gazprom from 38 percent to just over 50 percent.

Gazprom recently bought a 10 percent stake in Unified Energy Systems and, as Miller told NTV on 9 October, a "significant" stake in Mosenergo, the city of Moscow's electricity-generation company. Some reports placed the latter stake at 30 percent.

On 18 October, "The Moscow Times" quoted Federal Atomic Energy Inspectorate Director Andrei Malyshev as saying that a fully owned Gazprom subsidiary, Gazprombank, purchased a 50 percent stake in Atomstroieksport, Russia's key nuclear company. That company is involved in the ongoing construction of the controversial $1 billion Bushehr nuclear plant in Iran.

A vastly enlarged, state-owned Gazprom is bound to create consternation among the former Soviet republics as well as in Western Europe. Gazprom presently supplies about one-quarter of Western Europe's natural gas; it is the sole supplier to Estonia, Latvia, Lithuania, and Slovakia; it provides 91 percent of Hungary's gas imports, 79 percent of Poland's, and some 75 percent of the Czech Republic's.

This reliance has prompted the European Commission to call for Eastern European countries to diversify their gas suppliers. But by establishing a series of joint ventures and offshore trading companies with Eastern European companies -- in which it has invested $2.6 billion, according to the "International Herald Tribune" of 1 October -- Gazprom appears to have managed to control the entire chain of supply through investments and subsidiaries.

Gazprom's role in Russian foreign policy has also been of continuing concern to the West. By controlling the pipelines that deliver natural gas to Europe as well as to Ukraine and Belarus, Gazprom has arguably been in a position to exert pressure on these states to ensure they are more amenable to Moscow's policies. Europeans are reportedly concerned that this tendency might easily be extended to include them.

"Novaya gazeta" reported in October 2003 that President Putin told visiting German Chancellor Gerhard Schroeder: "The pipelines are our legacy from the Soviet Union. We intend to retain state control over the gas-transportation system and over Gazprom. We are not going to divide Gazprom. The European Commission had better forget about its illusions. As far as the gas is concerned, they will have to deal with the Russian state."

Commenting in the same article on the situation surrounding Yukos, "Novaya gazeta" made the following observation: "There is, for example, the opinion that the Kremlin put Yukos under pressure because of its financial relations with [opposition political party] Yabloko. This is not even laughable. When have parliamentary elections decided anything in Russia? What counts is that Yukos became a leader in the movement of oil companies toward construction of their own export pipelines independent of the state. This encroachment on the rules is what cannot be tolerated."

More recently, "Newsweek" on 2 August spells out the rationale behind the breakup of Yukos in somewhat different terms: "'A few billion extra dollars would come in handy right now,' says Nikolai Petrov of Moscow's Carnegie Center, laying out a scenario whereby Yukos's prize asset [Yuganskneftegaz] is sold at a deep Gazprom, the state-controlled gas monopoly. Yukos's oil could then be sold at a hefty profit for the benefit of the state, either to fund Putin's new cash subsidies directly or to defray government expenses elsewhere."

Despite Putin's public pledges not to break up Yukos as reported by "Newsweek," recent events suggest that such pledges will not be kept and that deliveries of natural gas are not the only things that will be placed under direct Kremlin control: Oil production and deliveries are likely to follow suit.