The Smoke and Mirrors of the Yukos Auction

Miriam Elder at the Moscow Times has a front page article running in tomorrow’s edition about the sham auctions of Yukos assets. RA is also quoted in the story.

Tuesday, May 15, 2007. Issue 3656. Page 1. Yukos Auctions All Smoke and Mirrors By Miriam Elder The mysterious sale of Yukos’ headquarters to an unknown firm for nearly $4 billion sealed — and exemplified — the fate of what was once the country’s largest privately held company. The most competitive struggle for Yukos assets in bankruptcy auctions over the past two months was not — as analysts had predicted — for the company’s major oil or gas production units, but for the office building in central Moscow that once housed the firm. At least that’s how it was billed by the office of receiver Eduard Rebgun, appointed by the courts in August 2006 to sell off the company’s assets when it was declared bankrupt. Questions about the lot’s composition were only posed after a company named Prana waged a three-hour battle Friday against Rosneft, nearly quadrupling the starting price to $3.9 billion and forcing Rosneft out of the game. The lot included Yukos’ main trading firm, Trading House Yukos-M, which former Yukos vice president Alexander Temerko said held $2 billion to $3 billion in cash. “They should have said that the money was there. Instead, they said, ‘Look, a building is up for sale.’ They hid it,” he said by telephone from London on Monday. State-controlled Rosneft, which has scooped up the lion’s share of Yukos assets since the legal onslaught began against former CEO Mikhail Khodorkovsky four years ago, has spent two-thirds of the $31.5 billion raised by the recent auctions. The total was $4 billion more than creditors were seeking. Rosneft could also end up walking off with the Yukos building — and the trading house — if Friday’s sale is annulled. No market sources have heard of Prana, and a source close to the auctions would only say that its general director was named Vladimir Yesakov. “We have not yet approved [Prana’s] application,” said Yelena Nagaichuk, spokeswoman for the Federal Anti-Monopoly Service. A decision will likely be made by the end of the week, she said. The anti-monopoly service has already disqualified one winner, rejecting Promregion Holding’s victory in a May 3 auction for southern oil and electricity assets after citing the company’s obscure shareholding structure and failure to declare for whom it was buying the assets. Electricity consultancy Halcyon Advisors had been negotiating with Promregion Holding before the auction to buy up some of the assets, Halcyon managing director David Herne said. Market sources said some of the assets were also due to fall to LUKoil, and one source said the Promregion bidder was actually a LUKoil representative. Halcyon was also negotiating with Monte-Valle, a real estate firm run by American Stephen Lynch, to buy up the electricity assets it won in an April 17 auction, Herne said. “It’s complicated to participate yourself,” he said when asked why Halcyon did not directly take part. Nikolai Lashkevich, Rebgun’s spokesman, said a creditors’ committee would likely decide by the end of the week whether to hand Promregion Holding’s lot to the second-highest bidder, Rosneft subsidiary Neft-Aktiv. In Yukos’ heyday under Khodorkovsky, Rosneft was a middling oil concern that struggled to place 8th in the list of the country’s largest oil producers. Less than four years later, it now stands as the country’s No. 1 oil firm, largely thanks to its acquisition of Yukos’ three main production units, Yuganskneftegaz, Samaraneftegaz and Tomskneft. “Rosneft is the rebuilt Yukos,” said Joseph Stanislaw, senior energy adviser to Deloitte & Touche and a longtime friend of Khodorkovsky. Rosneft acquired Yuganskneftegaz for $9.4 billion via a forced auction in December 2004, tripling its production overnight. It paid a further $13.2 billion for Samaraneftegaz and Tomskneft at auctions earlier this month, bringing its production to 2.1 billion barrels per day. To fund its recent purchases, which totaled $20.8 billion and included a 9.44 percent stake in itself and a clutch of service companies, it took a $22 billion loan from a consortium of Western banks. Thus, through a combined investment of $30 billion, Rosneft has gone from an estimated value of just $6 billion to $86 billion. Yet to replenish its coffers, Rosneft can also expect to recoup $10 billion from the proceeds of the Yukos auctions, as it has successfully laid claim to being the bankrupt oil firm’s largest creditor after the Federal Tax Service. Its IPO in July 2006 raised $11 billion. Khodorkovsky has accused Rosneft board chairman Igor Sechin, who is also President Vladimir Putin’s deputy chief of staff, of being behind the legal onslaught on Yukos. “[The Kremlin] has been staging auctions which are … fraudulent and designed to bring out the lowest bid,” said Robert Amsterdam, a lawyer for Khodorkovsky. Khodorkovsky is serving an eight-year sentence in the east Siberian region of Chita on charges of fraud and tax evasion, and was recently slapped with new charges of embezzlement and money laundering. “This will be the first corporate-sponsored show trial in history,” Amsterdam said. Anton Drel, a member of Khodorkovsky’s Moscow-based legal team, said he had been given no indication when the trial would begin, or whether it would be held in Moscow or Chita. Khodorkovsky’s lawyers have said they expect the trial to take place before the State Duma elections in December. Khodorkovsky was arrested in October 2003, just before elections for the Duma in which he was funding opposition parties. He was thought to be close to selling a stake in Yukos to a U.S. major, either Chevron or ExxonMobil. “It was a struggle for personal power among individuals,” said Stanislaw. “He was in a situation of wealth in terms of financial power and political power.” “We thought [at first] it was something that could be dealt with,” said Tim Osborne, the director of GML, formerly Group Menatep, Yukos’ largest shareholder. “It didn’t seem like they had every step planned, but clearly the plan was to make Yukos disappear.” The dismantling of Yukos, by the levying of $33 billion in back taxes, heralded a new era of increased state control over the oil and gas industry. Yet former Yukos officials insist the company’s bankruptcy was contrived. “The company could have paid, we’ve never recognized the bankruptcy ruling,” Temerko said. Three minor auctions scheduled for later this month will bring an official end to the bankruptcy process. “If this bankruptcy were legal, there should have been enough money just to pay off the creditors,” Temerko said. “Every one of these auctions has shown that the whole process is a farce.” One source close to the auctions who declined to be identified said certain companies were prevented from taking part. Most auctions had just two bidders, the minimum required by law. While some companies’ applications were denied outright, at least one was presented with technical obstacles that prevented its participation, the source said. “One of the participants came to deliver [the company’s] documents to the anti-monopoly service,” the source said. “All they had to do was deliver documents and get a receipt,” the source said. The company representative was told the receipt machine was broken and to come back at a later set time. When he showed up, no one was there and the company was barred from taking part, the source said. “Not everything was done in an entirely orderly fashion,” said Alexander Komarov, a spokesman for the Federal Property Fund, which organized the auctions. “But that’s not our problem. All the demands were fulfilled — the auctions took place.” Analysts agreed that the auctions were orchestrated, with most results decided before bidding opened. “These things are not transparent,” said Al Breach, chief strategist at UBS. “They are not open auctions. There were political decisions about who gets what.” It was a political decision that kept Gazprom from directly participating in the auctions, Breach and other analysts said. First Deputy Prime Minister and Gazprom chairman Dmitry Medvedev, a possible presidential hopeful for 2008, could not open himself up to the possibility of legal action, they said. Gazprom pulled out of the Yuganskneftegaz auction at the last moment after a U.S. court injunction. Gazprom appeared to win just one of the bankruptcy auctions, signing a call option with Italian firms Eni and Enel to buy a chunk of the gas assets, including a 20 percent stake in Gazprom Neft they won at the second sale on April 4. And the outcome, the victory of Rosneft, appears to be about politics and Kremlin influence rather than commercial factors. “When it comes down to the major issues, it seems Rosneft has more power than Gazprom,” said Chris Weafer, chief strategist at Alfa Bank.