Yukos, Rosneft and the Yuganskneftegaz Auction
In June 2004, despite Yukos’ efforts to make payments, bailiffs moved to seize the shares in all Yukos subsidiaries. In response, Yukos wrote to the tax authorities to propose selling its shares in Sibneft, a production subsidiary, which would have been more than sufficient to cover the equivalent of the 2001 tax debt. (As has been said, an amount equivalent to the 2000 debt had already almost been paid). The Sibneft shares were a relatively recent acquisition by Yukos, and were not part of the company’s core business dealings. In short, sale of these shares would allow full payment of almost all the remaining tax debt, but it would not adversely affect Yukos itself.
The tax authorities simply did not respond to this proposal. Instead it quickly became clear that the bailiff’s real target was the production subsidiary Yuganskneftegaz (YNG), Yukos’ principle production asset, and the key to its business survival. YNG accounted for 60% of Yukos’ total output in 2004, and nearly 2% of the world’s total oil output. To destroy Yukos, one needed YNG.
When Yukos attempted a legal challenge against the tax authorities’ failure to reply to the Sibneft proposal, the courts held that the bailiff’s discretion as to which of Yukos’ assets to sell was unreviewable, and that they could not be reproached for declining to sell those assets which would have least adverse impact on the company.
This decision directly contravened Russian law, which stated that a bailiff was required to enforce first against assets which were not integral to the business of the debtor. With the courts persisting in freezing of all Yukos’ assets, so that the Sibneft shares could not be sold, the reassessed tax liability could not be paid.
Despite these difficulties, Yukos was nonetheless able to finally pay off an amount equivalent to all the extra tax assessments for 2000 by 26 November 2004, within just seven months of receiving the first reassessment and within five months of it becoming due).
Had Yukos’ Sibneft proposal been accepted, most of the remaining tax debt could also have been paid and there would no longer have been any basis for Yukos assets being frozen. Yukos would then have been able to re-establish control over its own affairs and organise appropriate means for meeting the anticipated further tax liabilities for later years.
Instead, on 18 November 2004, notice was given that YNG would be sold at auction on 19 December – giving any prospective buyer a mere month to conduct due diligence, or a valuation, on a company producing over a million barrels of crude oil a day.
In the event, there was only one bidder: Baikal Finance Group.
Baikal had been formed as a company on 6 December 2004, less than two weeks before the auction. It had its registered office in Tver in Central Russia at an address where a fast-food restaurant (Cafe London) and a liquor store (Dionysis) were located. It was created with a share capital of RUB 10,000 (EUR 280), but despite this, less than twenty-four hours after its registration for the auction, Baikal somehow paid the deposit of RUB 49 billion (well over EUR 1 billion), required to attend the sale.
As the only bidder, Baikal issued a first bid, and then bid against itself, to ‘win’ the auction. (The auction ‘rules’ specified that at least two bids were required for the process to be legitimate; it did not specify whether the two bids had to be from different companies). The Russian tax authorities had assessed YNG’s value at approximately US$18.5 billion. Ultimately, Baikal bought the facility for half that: $9.35 billion.
The final link in the expropriation chain occurred only a few days later, when ОАО Rosneft Oil Company acquired 100% of the shares in Baikal. Rosneft was wholly owned by the Russian State, with 10 of the 11 members of its Board of Directors combining their duties with State office either in the Russian Government or the Presidential Administration. Igor Sechin, the Chairman of the Board of Directors, was (for example) at the time also deputy head of the presidential administration to President Putin.
It is interesting to note that the prospectus Rosneft issued for its IPO in London and Moscow on 14 July 2006 specified the director’s other political roles, and frankly admitted the company’s dependence on, and agency for, the policies of the Russian Federation government.
From these proceedings, it is difficult to draw any conclusion other than that the Russian authorities made a concerted effort to paralyse Yukos and obtain YNG cheaply. It imposed unfounded and exorbitant tax re-assessments and frustrated Yukos’ attempts to contest them. In addition, the authorities made it impossible for Yukos to pay these tax re-assessments by imposing arbitrary freezing orders, leading to Yukos’ commercial paralysis.
The request of Yukos to sell its shareholding in Sibneft, which was not a core activity, was refused without reason. Finally, the Russian authorities sold YNG to itself at a fake auction, for half its value. By doing this, the State not only took Yukos’ primary asset, but also ensured the remaining ‘tax arrears’ were left unpaid.