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November 19, 2004
YUGANSK AUCTION: FINAL CHAPTER IN YUKOS SAGA
MOSCOW, November 17. (RIA Novosti economic analyst Nina Kulikova). Early on November 19, the news broke that the authorities had scheduled an auction Russian and foreign investors had long been waiting for: Yuganskneftegaz, Yukos's main production unit, will go under the hammer on December 19, 2004.
On November 19, the Russian Federal Property Fund begins accepting bids for the open auction of 43 ordinary shares of Yuganskneftegaz that make up 76.79% of its authorized capital and at present are under arrest. The stake will be sold in a single lot.
The authorities have long been preparing the sale of Yuganskneftegaz, which produces about 60% of Yukos's total oil output, to recover about $14 billion in back taxes and fines. A presidential aide, Igor Shuvalov, recently said that the auction might settle the tax dispute between the government and the oil major.
The starting price has been set at $8.65 billion, which means that the Property Fund estimated the minimum cost of Yuganskneftegaz's total stock at $11.26 billion, a little higher than the figure provided by the DrKW investment bank. Accordingly, if Yuganskneftegaz is sold at the starting price or higher, it will not be underestimated. This means it will be difficult for Yukos to appeal the sale in court.
Valery Nesterov from the Troika Dialog investment company believes that initially the knockdown price of $4 billion was announced on purpose and now that it has been doubled, any criticism that the company is being sold for nothing holds little water. Other experts believe that although the price exceeds market expectations, it is still less than the tax bill presented to the company, so Yukos is unlikely to be left in peace after the auction.
Structures related to Gazprom and Surgutneftegaz are believed to be the frontrunners in he bidding. The latter's advantage, besides its economic possibilities, is that its fields are situated close to those of Yuganskneftegaz. However, Lev Snykov from Sovlink believes that the new price expands the spectrum of potential buyers to Sibneft, Rosneft, LUKoil and possibly TNK-BP.
Vadim Mitroshin from Credit Suisse First Boston says that the auction may end without a single bid being submitted. In compliance with enforcement proceedings, another attempt to sell the assets may be made in this case and the starting price may be lowered. A spokesman for the Bank of Moscow agrees that the auction may not take place because of a lack of bids. Afterwards the state may confiscate Yugansk as a debt payment and then either sell it in pieces or to exchange it for some assets, such as treasury stock of Gazprom or Surgutneftegaz.
On one hand, Yuganskneftegaz is an extremely attractive asset, but on the other, its back taxes have not been fully revealed and settled. So foreign companies may choose to leave the auction well alone. It should not be forgotten that there are minority shareholders as well, who have recently been consolidating efforts around Swedish investment funds. The possibility of their turning to an international arbitration court (a new phenomenon in Russia's law-enforcement practice) may give the authorities another headache, experts believe.
Pre-sale preparations are being made at a time when new tax bills and new criminal proceedings are expected. Yukos may respond by declaring bankruptcy. The oil major has scheduled an extraordinary shareholders' meeting for December 20 to discuss this possibility. Earlier this week, CEO Steven Theede said that the board would not recommend this move to shareholders, as the company was still viable. Yet now the bankruptcy question is looming on a rapidly approaching horizon.
The authorities evidently want to sell Yuganskneftegaz as soon as possible, even though Yukos believes it illegal, because it is the main asset and cannot be sold first. When the auction's conditions were announced, Yukos released a tough statement saying that it was "a government-organized theft to settle a political score." If its main production unit is sold, Yukos may have to sell some of its refineries, because it will have excessive processing capacities.
Remarkably, the announcement of the sale came at a time when Fitch Ratings upgraded Russia's rating to the investment level. This should create a new incentive for Western investment funds and have a positive influence on the investment climate. Many investment funds cannot start investing in a country if it does not have investment-grade rating from at least two leading agencies. Now Russia has received ratings from Fitch and Moody's, which allows largest foreign investment funds to buy its securities. Possibly, Fitch's move will partially set off the negative effect on the stock market of the Yuganskneftegaz sale.