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Tuesday, March 01, 2005

OPI UPDATE: THE END OF THE END FOR YUKOS

In perhaps the final nail in the Yukos coffin, Russian officials said today in Moscow that criminal proceedings have begun against Sergey Shimkevich, general director of Russian oil and gas company Tomskneft. The company, a fully-owned subsidiary of beleaguered oil major Yukos, is the largest of only three primary production assets still owned by the once powerful parent.


While the method and timing of the madness remains to be seen, we can expect to see happen here what happened with Yukos’ primary production asset Yunkangsneftegas after Yukos’ CEO Mikhail Khodorkovsky was jailed. Tomskneft, Samaraneftegaz and Vostsibneftegaz, Yukos’ three remaining production assets, will be auctioned off by the state to pay government imposesed penalties. But this time not only Putin and the Russian government will benefit. China and India are likely to be primary beneficiaries as well.

Russian authorities claim that Tomskneft, under Shimkvich’s leadership, violated oil-field license agreements in 2003 by overproducing crude oil in the Kargasoksk and Alexandrovsk regions, generating more than $256 million in surplus revenues. Although $256 million is a large sum –and one can imagine the hefty fine that might go along with such an offense- the company may also face tax claims similar to those which landed former Yukos CEO in jail. If the government once again pursues tax claims against the company –Tomskneft already paid $82 million to settle 2002 tax claims—Yukos will no doubt be unable to pay, and the government can auction off its remaining assets for payment.

The move against Tomskneft comes just days after a Houston judge threw out Yukos’ attempt to seek bankruptcy in a U.S. court. That ruling no doubt emboldened the government to act against the first of the next of Yukos production assets. Putin would like the whole Yukos affair to be over with and to begin consolidating Russia’s powerful energy industry in Yuganskneftegaz’s new parent company, government owned Gazprom.

Ironically, the U.S. court action also received a favorable review by the international investment community. While some have considered the Russian government’s destruction of Yukos to be a threat to foreign investment in the country, Both Fitch and Moody’s raised Gazprom’s credit rating. Moody upgraded Gazprom’s ratings to the investment level, up from Ba2 to Baa3. Fitch noted that foreign banks and investors now face less risk in investing in Russia than before the ruling.

The question now is in whose hands Tomskneft, Samaraneftegaz, and Vostsibneftegaz will end up. While Putin might ideally have the assets end up in the government hands, those hands are most likely too full at the moment to hold them. Gazprom has enough of a task cut out for it in the integration of state run oil company Rosneft, which it purchased immediately after the latter took control of the recently auctioned-off Yuganskneftegaz. Furthermore, the Yuganskneftegaz dealings have already left Gazprom cash-strapped for the moment.

Putin will thus have two primary concerns in relocating. First, Putin will want to make sure that the assets stay, at least in majority, in Russian hands. Russia’s is a close second to Saudi Arabia in world oil production and may someday become a swing proudcer similar to the Middle Eastern state, with enough excess capacity to exert control over oil prices. It will certainly not give up this possibility by letting some of its key production potential fall into foreign hands.

Second, Putin will want to make sure that the assets do not go somewhere where they might form a power base for a politically overly-ambitious oligarch like Khodorkovsky. It is unlikely, therefore, that they will be kept together, either under Yukos’ umbrella, or with any other single Russian company. We can thus expect the three primary production assets to be separated among Russian oil producers, most likely Lukoil,

We can thus expect to see the production units end up with several of Russia’s current oil companies, most likely Lukoil, Surgutneftgas, Sibneft. These companies will be able quickly to integrate the production assets without at the same time become too powerful.

However, will also likely see large stakes of those assets sold to foreign investors, most notably China and India. Indian India's petroleum and natural gas minister, Mani Shankar Aiyar, concluded his talks in Russia last with a promise to invest $25 billion in the Russian economy. It was widely rumored that he sought to purchase a 15 percent equity stake in Yuganskneftegaz for some $2 billion. Even if such a deal with Gazprom/Rosneft is concluded, that would still leave India over $20 billion with which to shop.

Indeed, Tomsk Region Governor Viktor Kress said yesterday that India has recently displayed interest in “a whole number of large and promising oil projects in Russia.” While those projects remained unspecified, it is not long a leap to surmise that the Tomsk Governor was referring to Tomkneft.

China too has expressed interest in investing in Russia’s vast energy sector. The second largest oil consumer in the world behind the U.S., China has sought in the past several years to secure its crude supply by purchasing foreign assets as opposed to simply relying on the sometimes chaotic world crude markets. Late last year a subsidiary of China National Petroleum Corporation (CNCP) applied to the Russian Federal Anti-Monopoly Service seeking a sanction to purchase 100 percent of Tomskneft. While there is no way such an outright purchase will be approved –a federal law was recently passed in Russia banning even majority ownership of companies in strategically important Russian industries—China’s interest was made clear. They may now find that at least pieces of the Yukos pie will become available to them.

Regardless of where the pieces finally land, the end of the end of Yukos seems to be near. A watershed event in the post-Soviet history of Russian democratic capitalism, Yukos’ dissolution –helped along by $45 dollar oil that seems here to stay—may indeed mark the beginning of a more centralized and energy-centric Russia. In the short run, at least, and perhaps for longer, this appears to be a very good thing for Russia’s newest energy allies, India and China.

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