Analysis: Yukos' requiem

MOSCOW, Dec. 23 (UPI) -- State-owned oil company Rosneft announced late Wednesday that it had purchased Yukos' primary production unit from the winner of Sunday's auction for Yuganskneftegaz. Rosneft's purchase of Yuganskneftegaz from the obscure Baikal Finance Group essentially ends the Yukos affair. Yukos' core shareholders will use international courts to contest Rosneft's purchase. In the meantime, the Kremlin will create one of the largest energy companies in the world.

After 18 months, the Yukos affair is in the process of being wrapped up. Yukos, Russia's largest privately owned oil company, has been relentlessly assaulted - and now dismantled - by the Kremlin for staggering back-tax obligations in the area of $28 billion. Members of the company's management, particularly former CEO Mikhail Khodorkovsky, are on trial for tax evasion and fraud. With Yukos unable to pay its back tax bills, the Kremlin moved to extract for re-sale Yukos' primary product unit, Yuganskneftegaz. Sold at auction to an unknown group on Sunday for $9.4 billion, Yuganskneftegaz was sold again on Tuesday to state-own Rosneft oil company for an undisclosed amount.

Yuganskneftegaz's fate had been subjected to extraordinary speculation since Sunday's auction. Gazprom, widely expected to win the tender for Yuganskneftegaz, did not place a bid, probably due to the legal order barring it to do so issued by a Houston court last week, where Yukos attempted a last second bankruptcy filing. With Gazprom temporally out of the picture, the Kremlin scrambled to put into play "Plan B."

"Plan B" created, shock, dismay and uncertainty. The shell company Baikal Finance Group, with no meaningful legal address or operations, entered the winning bid for Yuganskneftegaz. How Baikal Finance Group found itself in possession of the $1.7 billion needed to participate in the auction remains unclear. It is speculated that oil giant Surgutneftegaz may have been behind Baikal Finance Group's financing. Gazprom, as well as some state banks, may also have covered Baikal's costs to participate in the auction.

Rosneft's announcement that it had purchased Yuganskneftegaz for an undisclosed amount essentially ends the Yukos affair. With Yuganskneftegaz as part of Rosneft's portfolio, Rosneft will become Russia's second-largest oil company after Lukoil and able to produce between 1.4 million to 1.6 million barrels a day. Exxon, the world's largest oil company, pumps 2.5 million barrel per day; France's oil giant Total pumps 1.6 million barrels a day.

Rosneft, state-owned, but slated to be integrated into state-controlled natural gas giant Gazprom, has achieved one of the Kremlin's most important policy objectives under Vladimir Putin - the creation of a super energy giant under state control. The primary components of that energy giant will include Gazprom, Rosneft, and Yuganskneftegaz. Other Russian oil assets are expected to complement these three core players.

Market analysts and investors, all things being equal, have greeted Rosneft's acquisition of Yuganskneftegaz. As Baikal Finance Group is an unknown entity, there were fears that a small group of Kremlin insiders had used state resources to simply seal Yukos assets for personal benefit. Stated differently, there were grave concerns that the Kremlin might have used state resources to destroy a few oligarchs, only create a set of new oligarchs close to the state.

What happens next appears to be clear. Rosneft, being integrated into Gazprom, will now focus its energies to digest the larger Yuganskneftegaz. Rosneft, valued at no more than $8.5 billion and with debts of $2 billion, will have to look for financial support to pay the full price Baikal Finance Group bid for Yuganskneftegaz. That support will probably come from Gazprom and state banks.

Rosneft's purchase of Yuganskneftegaz also sheds light on how the Kremlin used the tax code to build its energy empire. Being a state-owned company, Rosneft will pay $9.4 billion for Yuganskneftegaz and assume Yuganskneftegaz's $4.6 billion back tax liabilities. Simple mathematics shows that the state budget is a net loser in terms of back tax collection.

Yukos has claimed that it will continue its legal struggle against for what its claims is unlawful destruction of the company. Using foreign courts, it will do everything in its power to turn the Kremlin's energy empire into an international outcast. Yukos has its work cut for itself. Breaking up Yukos was done within Russia and by Russian legal entities, insulating the Kremlin from most foreign litigation.

For all intends and purposes, the Yukos saga has been played out. Consistently referred to as a personal vendetta against Mikhail Khodorkovsky for having political ambitions in opposition to Vladimir Putin, the Yukos story has only really been about two things: oil and who owns it. The only meaningful political element of the Yukos affair was the political decision the Kremlin made to control Russia's energy sector. That political decision is now a reality.

Mikhail Khodorkovsky should feel complimented in strange way. The Kremlin captured most of Yukos much in the same way as Khodorkovsky did building Yukos - both stole Russia's vast oil wealth fair and square.

--

Peter Lavelle is an independent Moscow-based analyst and the author of the electronic newsletter on Russia "Untimely Thoughts" untimely-thoughts.com.