YUKOS awaits US ruling on break-up order

Thu Dec 16, 2004 11:33 AM ET
By Douglas Busvine

MOSCOW, Dec 16 (Reuters) - Embattled Russian oil major YUKOS (YUKO.RTS: Quote, Profile, Research) should hear later on Thursday whether a U.S. bankruptcy court will back its last-ditch attempt to halt the sale of its main production unit due on Sunday.

But lawyers and analysts expect Moscow to go ahead and auction off Yuganskneftegaz even if judge Letitia Clark issues a restraining order at the hearing scheduled on Thursday into a YUKOS filing for Chapter 11 bankruptcy protection.

"We view YUKOS filing for U.S. bankruptcy as merely a futile effort to delay the state's inevitable piecemeal break-up of the company," said Moscow brokerage Nikoil, which no longer rates YUKOS' stock -- down 95 percent from last year's peak.

Russia has put Yugansk, which pumps over 1 million barrels per day of oil, up for auction on Dec. 19 at a starting price of nearly $9 billion, in pursuit of punitive back-tax demands which now exceed $27 billion.

"We are here to stop 60 percent of our body from being cut off on Sunday," Zack Clement, a lawyer for YUKOS, told Clark in an initial hearing in Houston on Wednesday.

SAVING REPUTATIONS, NOT THE COMPANY

On one level, a confiscation of Yugansk would smash the business empire of Mikhail Khodorkovsky, an oligarch who dared to challenge the Kremlin and who is now on trial for tax evasion and fraud.

But analysts also say that with Russian gas monopoly Gazprom (GAZPPE.RTS: Quote, Profile, Research) set to win the auction, a new "state oligarchy" could emerge enabling the world's second biggest oil exporter to project power through energy policy, rather like an OPEC state.

Khodorkovsky, whose $15 billion fortune has been virtually wiped out in a year, expressed sympathy with YUKOS' U.S.-led management team but said their gambit would do nothing to help the firm's shareholders.

"They have done more than anyone could expect to save the company, and now they are defending their reputations," he said from his prison cell in a statement issued through his lawyers.

"That, of course, won't help the company's shareholders."

Rubbing salt into YUKOS' wounds, a Moscow court blocked the holding of an emergency shareholders meeting next Monday, which was due to have decided on whether to wind up the company.

Millhouse Capital, the vehicle of owners of oil firm Sibneft (SIBN.RTS: Quote, Profile, Research) headed by pro-Kremlin tycoon Roman Abramovich, said it filed a motion to block the EGM. YUKOS and Sibneft have been unable to completely unwind a merger which fell apart last year.

NO RECOGNITION

Lawyers say Russia will almost certainly not defer to the jurisdiction of the U.S. court even if Clark issues a staying order in the case.

"It may well be that the Russian government chooses to ignore this. At the bottom line it's a dispute between a Russian oil company and the Russian government," said Rhett G. Campbell, a partner at Texas-based law firm Thompson & Knight.

But banks putting together a 10 billion euro ($13 billion) syndicated loan to fund Gazprom's bid for Yugansk might have more reason for concern, as they all have significant operations in the United States.

The banks in the syndicate are: ABN Amro (AAH.AS), BNP Paribas (BNPP.PA), Calyon, Deutsche Bank (DBKGn.DE), Dresdner Kleinwort Wasserstein (ALVG.DE) and J.P. Morgan (JPM.N).

"Although the legal liability of the banks is questionable, they would probably be loath to lend to Gazprom, particularly secured by Yugansk assets, because of bad PR and damage to their reputations," said Scott Semet at MDM Bank in Moscow.

YUKOS, Russia's largest oil exporting firm and once Moscow's biggest blue-chip stock with a market capitalisation of $40 billion, argues the auction price grossly undervalues Yugansk.

Chances grew that the case, widely seen as an acid test for the rule of law and respect for investors' property rights in Russia, could develop a major political dimension after the U.S. State Department backed YUKOS.

"YUKOS management has the right to pursue any legal remedies it determines are in the best interest of the company and its shareholders," State Department spokesman Richard Boucher said late on Wednesday.

"We've expressed our concerns about the YUKOS case and about its implications for the Russian economy and for Russia's reputation as a place to do business. And we've made that clear in public and in private with the Russian government, as well." (With reporting by Dmitry Zhdannikov)