The Yukos Affair
In 1996 Yukos Oil Company’s future looked bleak.
After the collapse of the Soviet Union in 1991, Russia found itself with a weak and inexperienced central government in charge of a huge country. The national economy was in the hands of a cabal of managers running powerful state-owned enterprises. These managers were unwilling to undertake any desperately needed reform.
This difficult situation was made worse by the Russian financial crisis of the mid-90s. A national disaster loomed, and the Russian authorities agreed that the urgent privatisation of certain assets, including the government-run oil industry, was essential.
Yukos was the result of that privatisation. Cobbled together in 1995 and 1996, it had crumbling infrastructure and soaring costs. This was the result of ineffectual management and little, if any, strategic planning. Investment in production development had been essentially zero, and huge wage arrears had created simmering social tension in many areas that threatened to explode.
Making matters worse, the new company’s largest and most important extraction complex, Yuganskneftegaz (YNG), was producing only 0.5 million barrels a day, down from 1.4 million barrels a day in 1987. Siberia-based YNG constituted around 80 percent of Yukos’ value and was responsible for pumping most of Russia’s oil.
Despite this, once privatised, Yukos staged a remarkable comeback.
Entrepreneurial leadership, sound management and simple hard work were the key to a gradual, then spectacular, recovery. Yukos focused on generating maximum profit through efficiency, using the most advanced Western technologies to increase production capacities. This resulted in a dramatic rise in output and reduction of costs: YNG started producing well over a million barrels a day, while production costs were slashed, from a high of US$12 per barrel in the early 1990s to only US$1.50 per barrel.
Significantly, Yukos also developed a style of corporate governance that was distinctly Western. An essential part of this policy was the level of corporate transparency the company adhered to. For a Russian company, this was unprecedented. The company quickly came to be seen as a pioneer of modernisation in the Russian oil sector. The Financial Times put Yukos on its list of ‘Top Ten Companies for Shareholder Confidence’ in 2003, and the company quickly found itself courted by Western banks and investors as a result.
Yukos also became the first Russian company to hire foreign specialists and expat executives for crucial positions, bringing in American oil experts Bruce Misamore, who joined in 2001 as CFO, and Steven Theede, who joined in 2003 as Chief Operating Officer. These international appointments helped reinforce the ethos of professionalism and fiduciary duty that underscored senior management decisions regarding Yukos’ strategy, shareholders and staff.
A native of Ohio, Bruce Misamore played a crucial role in ensuring Yukos met world-class standards of operational excellence, corporate governance, financial reporting, and investor relations.
“It seemed like a place where I would be able to make a major positive contribution”, Misamore explained, “not just to the company itself, but also to the wider Russian economy”.
Kansas-born Steven Theede was widely regarded as a leading industry expert when he joined Yukos, with over 30 years’ experience at oil companies. After graduating from Kansas State University in 1974 with a degree in mechanical engineering, Conoco had employed Theede in a variety of management positions, including President for Exploration and Production in Europe, Russia, and the Caspian.
So it was that, against remarkable odds, Yukos had become an internationally respected and highly successful company. Its market capitalisation grew from US$320 million in 1999 to US$21 billion in 2003, peaking in March 2004 at US$36 billion.
This success, however, seemingly sowed the seeds of the company’s eventual downfall.
The majority of Russia’s economic and administrative systems were still largely Soviet, and Yukos’ more modern approach was often seen as a rejection of the Soviet way. Although it could be described as having pioneered the Russian model of corporate governance, financial reporting and investor relations, Yukos’ alienation from the socialist past might have been the catalyst for its downfall. Culturally, Yukos was making a gigantic leap, which required a mindset many were not yet ready to adopt.
As a result, the Russian authorities decided to reassert control over what was now thought to be a strategic asset. They began a campaign not of nationalisation (which would imply compensation from the State), but of simple expropriation.
For Yukos, the expropriation process began with tax. In essence, the Russian authorities took tax liabilities away from various Yukos subsidiaries and associated companies, which were tax payers in their own right (based in different regions throughout Russia), and reassigned those companies’ incomes to Yukos. This process is explained in detail here.
The Russian authorities also froze all of Yukos’ assets, thereby making it impossible for the company to pay any debts. This inevitably led to the company’s paralysis, the forced sale of Yuganskneftegaz and ultimately Yukos’ sham bankruptcy.
As it became increasingly clear that the battle over Yukos was politically motivated, the management of the company took steps to ensure Yukos would survive to fight for justice outside of Russia.
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