Russia to Hold Fire Sale at Yukos Oil

MOSCOW — Russian tax authorities today scheduled the equivalent of a fire sale at what was once the nation’s largest oil company, offering the main production facility at Yukos Oil for auction next month for a fraction of its value.

Company officials called the planned auction terms for Yuganskneftegaz — the crown jewel of Russian oil facilities, producing almost as much oil as Iraq — a “stunning” announcement.

“What we are witnessing is, simply put, a government-organized theft to settle a political score,” Yukos CEO Steven Theede said in a statement.

The effective re-nationalization of Yukos through its sale to a state-controlled energy company is now considered one of the most likely outcomes.

Analysts said major foreign oil companies would be unlikely to bid on a key component of a company that now faces up to $20 billion in tax bills, thanks to the Kremlin’s year-long battle with Yukos and its former CEO, imprisoned billionaire Mikhail Khodorkovsky.

“Many believe at this point that the company is going to be destroyed as a signal to all the other oligarchs to get behind the Kremlin, and don’t make trouble,” said James Fenker, head of research at Troika Dialog in Moscow. “It’s a very medieval signal. You take the criminal, and you put his head on a stick outside the Kremlin.”

Yuliya Latynina, an analyst with Echo of Moscow radio, said it is likely that Yukos assets will go to a Kremlin-friendly company in a controlled auction — an outcome that would support claims that the government is more interested in acquiring Yukos’ assets than punishing the company for alleged tax evasion.

“Now, for the civilized world, we look like Nigeria,” Latynina said. “Yukos is long dead,” she said.

The stock market was leaning similarly — trading on Yukos was halted at midafternoon when the company’s already depressed shares lost more than a quarter of their value.

Yuganskneftegaz, which produces more than 1 million barrels of oil a day for Yukos out of central Siberia, was recently valued by the investment bank Dresdner Kleinwort Wasserstein at $14.7 billion to $17.3 billion.

The starting price established by Russia’s Federal Property Fund today for the Dec. 19 auction of 77% of its shares is $8.65 billion.

Yukos officials in their statement today complained bitterly that the company never was given the chance to dispose of its assets to pay its disputed tax bills. Those bills have mounted by the billions in recent weeks as tax authorities launched new raids and investigations.

Yukos complained that the government edged the company toward bankruptcy by freezing the assets that would have allowed it to pay the tax arrears.

“The sale is clearly illegal under Russian law, which states that non-core assets are to be disposed of first in tax settlement cases,” Theede said. “Yuganskneftegaz is the heart of Yukos, and its sale will lead to the destruction of the most efficient Russian company, and the one that has attracted the most western investment.”

In a statement released through his lawyers, the imprisoned Khodorkovsky, who is now facing trial on tax evasion and fraud charges, said the government has chosen “the worst possible way” to resolve the Yukos crisis.

“These actions are shifting all responsibility for work carried out by especially dangerous Yukos plants, supplies to regions, benefits to workers, etc., to the government,” he said, adding that he hopes “that they strive to [uphold] this responsibility.”

Yukos directors have scheduled a special shareholders meeting for Dec. 20 — a day after the auction — to discuss their next move. Their options could include declaring insolvency or bankruptcy, depending on the events of the next few weeks.

Russian President Vladimir V. Putin has spent much of the week attempting to reassure business leaders and the international community that Russia remains open for business and committed to democracy and private property.

In an interview with Chilean journalists made public today, the Russian president said a return to a totalitarian system is “absolutely out of the question.”

But at the same time, he said, “Democracy cannot be interpreted as complete permissiveness. A free market cannot be interpreted as the right to rob the state and national riches. We will build democracy, not anarchy.”

Putin emphasized that Russia has been able to maintain economic growth rates of 6% to 8% a year despite the Yukos crisis that began with Khodorkovsky’s arrest in October 2003.

“It seems to me that Russia currently occupies one of the leading positions in the world. But Russia’s capabilities and potential are still not appreciated. In several months last year and this year, volumes of oil production in Russia were higher than Saudi Arabia,” Putin said.

Analysts said foreign oil companies might be reluctant to bid on Yukos assets because of the huge tax bill, some of which might be assessed against Yuganskneftegaz’s new owners.

Many predict that the state-owned gas company, Gazprom, in connection with state-controlled Rosneft, are the most likely bidders, along with Surgutneftegaz, which has assets in the same region of Siberia.

Given Putin’s friendly relationship with Italian Prime Minister Silvio Berlusconi, the Italian company Eni has also been suggested as a potential buyer.

In any case, foreign interest in Russian oil sector investment remains substantial. With Yukos, Fenker said, at least the new rules of the game are becoming clear, and they may include the state owning a large part of the oil and gas sector. But that does not necessarily mean that other private oil companies are threatened, he said.

“OK, Yukos is going to collapse. But the value is going to go somewhere else,” Fenker said. “No one is going to be silly enough to follow in Khodorkovsky’s footsteps,” and the Yukos case will have made it clear to others “that in Russia, if the state in [a market of] $50 oil can bankrupt an oil company, you’d better not take on the state.”