The Yukos Affair: Useful Facts

Many of the realities of the Yukos Affair may have been forgotten with time. The facts in this section remind us that the liquidation of Yukos was not inevitable and was a direct result of the enforcement proceedings in Russia, the speed and inflexibility of the enforcement, the additional fees, the freezing and seizure of all Yukos’s assets, and the selection of Yuganskneftegaz for sale, despite Yukos’s proposals for other less damaging means of full payment of its liabilities.

• Russian authorities were extremely inflexible with enforcement of alleged tax assessments.  Liabilities were imposed on Yukos together with injunctions over Yukos’s assets leading to severe cash flow difficulties and complications impacting on the payment of these liabilities.

• The speed at which the tax re-assessment was enforced on Yukos, was extraordinary and in breach of the company’s right to a fair trial. The proceedings were rushed when the Russian Government needed to obtain an enforceable judgment and delayed when Yukos was challenging these decisions. For example, in the case of tax assessment for 2000, the appeal judgement was produced within 2.5 month of the Tax Ministry’s decision. By contrast, it took over 7 months for courts to decide on Yukos’ claim disputing the tax authorities’ decision.

• Yuganskneftegaz , Yukos’ main asset that accounted for 61% of the company’s income and was crucial for its on-going operations and cash flow, was chosen as the first item to be auctioned in order to satisfy Yukos’s liabilities, when it should have been a last resort option.

• The decision to sell Yuganskneftegaz was made within three weeks of the rejection of Yukos’s appeal against the 2000 tax assessment before the expiry of statutory appeal proceedings. When, 11 working days later, Yukos submitted alternative proposals to pay its liabilities, it was informed that the decision to sell Yuganskneftegaz could not be reconsidered because preparations for the auction of Yuganskneftegaz were already underway.

• The Russian Government was looking to recover over $3 billion of tax liabilities from Yukos. Yukos, as Russia’s largest oil company, had a monthly gross revenue of over $1.375 billion, before expenses, and even though it disputed any legal liabilities, would have been able to pay the alleged liabilities over an agreed period of time. In addition, based on its market capitalisation, the company could have initiated activity to borrow funds to cover immediate payment requirements (before the Russian Federation froze all assets and bank accounts). However, Yukos was not given any opportunity to take such measures. Instead the Russian Government imposed the shortest possible period for payment of each tax re-assessment – for example less than 24 hours was given to Yukos to pay 2002 and 2003 tax liabilities.

• In Russia, standard practice is to allow up to 60 days for payment of tax re-assessments. Yukos was given two days to pay the tax assessment of 2000, two days (but only one working day) to pay the 2001 tax assessment, one day to pay the 2002 tax assessment and one day to pay the 2003 tax assessment.

• Court hearings to obtain enforceable decisions against Yukos were accelerated to an extraordinary speed between May and November 2004, and returned to normal timetable after the sale of Yuganskneftegaz.

Tax Assessment for 2000
Tax Ministry decision	14 April 2004
Upheld at first instance	26 May 2004
Appeal Judgement (enforceable immediately)	29 June 2004
Tax Assessment for 2001
Tax Ministry decision	2 September 2004
Upheld at first instance	15 October 2004
Appeal Judgement (enforceable immediately)	18 November 2004
Tax Assessment for 2002
Tax Ministry decision	16 November 2004
Upheld at first instance	23 December 2004
Tax Assessment for 2003 (post YNG auction)
Tax Ministry decision	6 December 2004
Upheld at first instance	21 April 2005

 

• Yukos did not receive a fair value from the Yuganskneftegaz auction.  The Government fixed a minimum price that was far below the market value of the asset.  They did this by using the total tax liability owed by Yukos at the time (as opposed to the actual market price) as reference for the desired proceeds from the Yuganskneftegaz  auction. The Russian Tax Ministry had been advised of the real valuation by both State-owed and independent banks and valuation firms.  In addition, contrary to expert advice, the Russian Tax Ministry decided to sell a majority of shares in Yuganskneftegaz rather than selling all shares, and by doing so further lowered the value of the proceeds of the auction.

• Tax reassessment for 2001 became due for payment only 3 months before the Yuganskneftegaz  auction was held. The Government issued 2002 tax assessment and penalties to Yukos, one day before the auction of Yuganskneftegaz  was announced and gave Yukos only one day to meet this payment, before proceeding with apparently ‘appropriate enforcement measures’;  the fire-sale of Yuganskneftegaz.

• The winner of the Yuganskneftegaz  auction was Baykalfinansgrup, an unknown company, registered less than two weeks before the auction, with an issued capital of RUB 10,000 (€280).  This company, previously owned by state-owned Rosneft, did not have the required monopoly clearance (which invariably took 7 working days).  Furthermore, it had not filed the requisite deposit to participate in the auction of €1 billion.  Within 24 hours of registering for the auction,  Baykalfinansgrup achieved monopoly clearance to participate in the auction and apparently paid the deposit of more than €1 billion through a loan provided by the state controlled and owned Sberbank.

• Rosneft Oil Company acquired Baykalfinansgrup immediately after the auction, and so acquired the controlling shares in Yuganskneftegaz.

• At the time of Yuganskneftegaz auction, Rosneft was wholly owned by the Russian State with ten of the eleven members of its Board of Directors being also members of the Russian Government or the Presidential Administration.