July 6-12, 2005
Yukos Still Pumping despite Everything
Viktor Gerashchenko reports on the production achievements of Yukos and hopes to start a dialogue with the authorities
By Dmitry Dokuchayev
At the recent annual meeting of Yukos shareholders it was pointed out that despite the pressures exerted on the oil company by prolonged lawsuits and tax claims, the oil company continues to work, producing crude and paying off its debts. Viktor Gerashchenko, chairman of the Yukos board of directors, talks about the prospects for the oil major.
Your report at the annual meeting of shareholders was unexpectedly optimistic. Yukos still ranks fifth or sixth among Russia's leading corporations, it plans to produce 20 million tons of crude this year and has paid off two-thirds of the sum total of the tax claims imposed on it... Is all that really true, or were you simply trying to cheer up the shareholders?
Most of the attendees were minority shareholders. Many of them worked in the company and are naturally worried about its fate. Therefore, it would have been silly on our part to try to fool them. We think that despite all the legal attacks on Yukos, 2004 was rather a good year for the company. This was of course largely due to high oil prices. It is also true, however, that throughout 2004 the company performed better than in 2003. We saw improvements across the board - quantitative, qualitative, and even financial. Just consider that in compliance with the court rulings and tax inspectorate's decisions, we paid $4.5 billion over and above the regular taxes. Because of this extra effort, however, we have no profits to pay dividends to the shareholders.
In your report, you mentioned a deal that failed to be stricken in late 2003 with one of the largest American oil majors (namely, Exxon Mobil, according to MN's information), which had been seeking to buy 45% of Yukos shares for $25 billion. Many analysts detected this hint in your utterance: Woes befell Yukos because its management had not gone to the Kremlin cap in hand to seek approval of that deal. Is this correct?
The deal was not coordinated with the ruling establishment simply because the company's management didn't have time to do so. I related that story at the shareholders' meeting for another purpose. In the course of the previous year, the company's capitalization decreased to $1 billion. Previously, it equaled $40 billion or even more, since a serious American company two years ago offered $25 billion for 45% of Yukos shares. My message to the minority shareholders was this: No one cheated you, and no one overvalued the company. Otherwise such a high-profile buyer would not have offered the mentioned price.
Many were amazed that Yukos' biggest shareholder - the Menatep group - chose not to nominate its representatives to the board of directors...
We too were surprised because both the law and the Yukos charter prescribe that without a board of directors the company can not exist. It looked like a boycott of ourselves. Maybe this was due to alienation. It was no coincidence that half of the board's former members - mostly foreigners - quitted it. They bluntly said that they could not see how one could possibly work in the situation when the ruling authorities refuse to keep in touch with the company, state their requirements and look for a solution. Under the Yukos charter, its board of directors should meet four or five times a year. Last year, however, we met 27 times owing to extraordinary circumstances. We discussed matters mostly over the phone, however, for most of the board members were foreigners and were abroad at the time. It was therefore necessary to renew the board of directors. Our view was that there should be more Russians than foreigners on the board.
You said that the foreign members of the board of directors could not figure out what the ruling establishment wanted. Do you know the answer to this question?
Unfortunately, I don't. But we proceed from the assumption that in 2004 the ruling establishment's representatives - the officers of justice who carry the court's rulings into effect - did their job in a manner that let the company survive - produce, refine and supply crude and oil products under internal and external contracts in accordance with its commitments. Even the auctioning off of Yuganskneftegaz (which we consider illegal) was scheduled to take place on December 19, virtually at the end of the year, although they could have held it a month earlier. Our view is that they did so in order to enable us to fulfill our delivery obligations. Some other departments met us halfway as well - the Russian Railways company, Unified Energy Systems, the Ministry of Emergency Situations, etc.
Is it feared that the oil assets still belonging to Yukos might be confiscated?
Yes, it is, because we were presented with colossal tax claims for 2000 to 2003 totaling over $25 billion, with double interest at that. We were accused of being tax dodgers. But in fact, the company paid its taxes regularly on the basis of the legislation which was in force at the time, and which permitted tax optimization, as was practiced by other companies. Yukos was not a trailblazer in the matter of optimization schemes. Yet there is a court ruling that obliges us to pay the tax authorities 90% of our proceeds. Do such taxes exist anywhere? This is veritable idiocy! And we can not rule out that the ruling authorities might demand more payments for back taxes and, for example, announce an auction to sell Tomskneft, although this subsidiary of ours has met all the tax claims imposed on it by the local authorities.
Do you clearly see now what mainly gave rise to the "Yukos affair"?
Well, I still remember a pedagogical principle of the Soviet school: To demonstrate to the class how it should not behave, punish some pupil to teach the others a lesson. I think the same is happening to Yukos. Why have Khodorkovsky and Yukos been chosen for public flogging? We hear all sorts of talk about this. You see, I was not present at the memorable meeting of members of the Russian Union of Industrialists and Entrepreneurs with the country's top leadership, where they discussed where to lay the oil pipeline - directly to China (as Khodorkovsky proposed), or on the eastern coast and sell oil to China via Japan. So I cannot tell what language they used in their wrangling, and who felt insulted. As you know, it was after all these events that I began to work for Yukos.
You have been chairman of the board of directors for a year. Has your opinion of Khodorkovsky changed within that time?
I have known Mikhail Borisovich since 1990, when I headed the Central Bank while he devoted his energies to his bank Menatep. I always thought of him as a representative of the new generation of technocratic youth that had succeeded in the new economic conditions. My relationship with him was always quite normal. At any rate, I always somewhat singled him out from the group of oligarchs that was the object of public remark in the mid-1990s. He seemed to me more civil and restrained than the others. I'm not telling you that because I now work for Yukos. So that you may not think that I am not objective, I can tell you that the managerial system we inherited here was somewhat tangled. Evidently, there were so many companies in the system, and they were so diverse that Yukos resembled a porcupine when I came here. You know, a porcupine has two brain centers; it raises its quills in different directions at the same time.
Are you sorry that you came to Yukos?
After 45 years of working in the banking system, I find my Yukos period very exciting, although I'm aware that our company's future is unpredictable. I should like to hope, however, that after this year's events, members of the ruling establishment have a better grasp of the complex process involving Yukos. At least they should realize that if Yukos is destroyed as Carthage was demolished upon the insistence of the Roman senators, then Russia's ruling establishment will bear a stain that will stay forever, because it is a moral rather than a physical stain.
Yukos' New Board of Directors
Steven Theede, president of Yukos; Yury Beilin, vice president of Yukos; Viktor Gerashchenko, chairman of the board of directors; Francois Buclez, director of Cube Capital Ltd.; Alexei Kontorovich, director of the Institute of Oil and Gas Geology ; Bernard Loze, president of Loze & Associes; Yury Pokholkov, rector of the Tomsk Polytechnic University; Yevgeny Saburov, director of the Institute of Investment Problems; Alexander Semikoz, advisor to the management committee and the Moscow Narodny Bank's representative on the board of directors of commercial bank Yevrofinance Mosnarbank; Ivan Silayev, president of the Russian Union of Machine Builders; Vladimir Forosenko, independent consultant.
According to the RF Ministry of Fuel and Energy, Russia's 2004 crude production was 459 million tons, while Yukos' crude output equaled 86 million tons (18.7% of Russia's total crude output), which is 6.4% more than in 2003. The 2004 amount of crude that underwent primary processing in refineries located in Russia was 194 million tons; of that amount, 16% was refined at Yukos plants located in Russia.