By 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.

It wanted to compete at an international level and in order to do so recognised that it needed to bring more corporate governance and transparency to its operations. It duly did this, working with recognised experts to drive efficiencies and restructure the business so that it could capitalise on new opportunities as well as mitigate risks. The company put a particular focus on its financial reporting bringing it into line with US GAAP regulations, which was above and beyond what Russian Law required. It also retained renowned consultancy PricewaterhouseCoopers to advise on its financial and tax arrangements.

Alongside these measures, YUKOS also recruited international executives in order for the business to thrive from their expertise and industry knowledge.  In 2001 American oil expert Bruce Misamore joined as CFO. He was followed by 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.

The company epitomised modernisation and was seen as a pioneer, not just for the oil industry but for Russian business as a whole. Combined, this renewed energy and focus saw YNG start producing over a million barrels a day, whilst at the same time slashing production costs. 

YUKOS' transformation didn't go unnoticed. 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.

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.

Witnessing the amazing turn around of the company and its rapid growth, 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.

These low tax regions were permitted by law and YUKOS' use of these areas were approved by the Federal and Regional Governments. Furthermore many other oil companies had the same tax arrangements as YUKOS. Yet, despite yearly audits being carried out by the authorities and on-going government approval of its tax threshold, in December 2003 the State undertook a surprise tax audit and cited 'irregularities' amounting to the sum of $3Bn.  No other company using the low tax regions was subject to an audit or penalised for its low tax region arrangements. 

YUKOS appealed against the Tax Assessment. When this appeal ultimately failed, it publicly stated its intent to pay its liabilities and at no point did the company seek to shun its responsibilities. However, 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.

Since then, historic legal cases have been fought, or concluded, in the USA, the Netherlands and Armenia and the European Court of Human Rights.

The YUKOS Library will keep you fully informed about the history and groundbreaking legal cases surrounding the YUKOS Affair. Please browse the site, and sign up for regular email updates.