Edition: U.S. / Global

Yukos Oil's Accounts Are Frozen by Russia

Published: July 2, 2004

MOSCOW, July 1 - The $3.4 billion tax dispute between the Kremlin and the Yukos Oil Company, Russia's biggest oil producer, reached a decisive point Thursday, when court bailiffs took the extraordinary step of freezing the company's bank accounts and demanding payment in full within five days.

Yukos officials said the action threatened to shut the company. To pay the tax claim, they offered to sell a major block of stock that Yukos holds in Sibneft, a competitor that it tried and failed to merge with last year.

Hours before the bailiffs froze the company's accounts, the government sharply raised the ante in the dispute, indicating that it might double its demand for back taxes from Yukos by adding charges for 2001 to the case. The original $3.4 billion claim relates to the 2000 tax year.

Yukos, founded by the maverick Russian financier Mikhail B. Khodorkovsky, has been sparring publicly with the Kremlin for nearly a year over taxes and other issues. Mr. Khodorkovsky has been in jail since November on charges of fraud, embezzlement and tax evasion related to his creation of Yukos during the murky privatizations of Russian state assets in the 1990's. His trial, begun and adjourned last month, is scheduled to resume on July 12. Mr. Khodorkovsky has denied all the charges.

Yukos is one of the world's largest oil companies, producing 1.7 million barrels a day, about 2 percent of the world's total output. It is the leading exporter in a country that is heavily dependent on oil revenue and that regularly jockeys with Saudi Arabia for the top rank among oil-producing countries.

Russian law gives tax authorities the power to "arrest," or freeze, bank accounts as they try to collect claims, so the bailiffs' action was not completely unexpected. The action applied to all Yukos accounts in Russia, according to a Yukos spokesman quoted by the Interfax news agency. The effect on overseas accounts was not immediately clear.

Still, the power had never before been used against so large or so important a company, and Yukos warned in a statement Thursday evening that the consequences could be drastic.

"The actions of the court bailiffs' service to arrest the bank accounts create a direct threat to current operations of Yukos Oil Company, which are of strategic importance for Russia's fuel and energy industry," the company's statement said. In addition, Yukos said the freeze was "a threat to the company's ability to pay current taxes and meet its obligations to creditors," including its payroll.

Though the Russian tax ministry indicated on Thursday that it would claim another $3.4 billion from Yukos for 2001 taxes, bringing the total demanded from the company to $6.8 billion, Yukos officials said that they had not received any documents from the ministry concerning the 2001 tax claim.

Yukos offered on Thursday to sell its 92 percent stake in Sibneft to cover its tax bill. Sibneft, controlled by another Russian billionaire, Roman Abramovich, called off a proposed merger with Yukos after Mr. Khodorkovsky was arrested, but Yukos's purchase of the Sibneft shares has not yet been unwound.

Mr. Khodorkovsky, reputedly Russia's richest man, irritated President Vladimir V. Putin by financing opposition political parties and lobbying publicly for greater oil exports from Russia, a policy area that Mr. Putin viewed as the Kremlin's purview. The prosecution of Mr. Khodorkovsky, his partners and his company is widely viewed as punishment for that independence.

It is not clear how Yukos could possibly satisfy the tax claims. Its chief financial officer, Bruce Misamore, said last month that the company had about $1 billion in cash and that it was blocked by court order from selling any assets other than oil.

According to a Yukos executive, the company tried to persuade the bailiffs who visited its headquarters on Thursday to accept Sibneft shares as payment, but the bailiffs refused. The executive said the company was willing to sell its 92 percent stake in Sibneft to a major Western oil company like Exxon Mobil or Total and use the proceeds to pay the tax ministry. "If there's any semblance of fair play, we would be allowed to do this," said the executive, who insisted on anonymity.

In an effort to settle the matter last week, Yukos offered $1.17 billion - one-third of the total claim for 2000 - in payments spread over two years, and to reimburse the tax ministry for its legal costs. But Yukos said that it would not pay the remainder of the claim, which includes fines and penalties.

On Thursday, as the confrontation between the government and the company escalated, Mr. Putin summoned many of the country's leading business executives to the Kremlin to talk about improving relations between the private sector and the state.

Business lobbying groups have expressed concerns about the security of property rights after the arrest of Mr. Khodorkovsky. They now appear to be reluctant to press the issue with Mr. Putin.

The subject of Yukos was not discussed at all at the meeting, according to Boris Titov, vice president of the Union of Industrialists and Entrepreneurs, who briefed reporters afterward.

Another executive, Aleksei Mordashov, the general director of the Severstal Group, a metals producer, said that the meeting mainly addressed the image of big business in Russia. "The objective reasons behind criticism of big business stem from a broad gap between the country's rich and poor," he said after the meeting.

During his first term in office, Mr. Putin held regular audiences with executives, but the meeting Thursday was the first since November, just after Mr. Khodorkovksy's arrest.

Yukos's share price dropped sharply last month after the company warned that the original tax claim could bankrupt it. The shares recovered after Mr. Putin and the finance minister, Aleksei Kudrin, said that the government was not interested in seeing the company collapse.

Investors following the dispute said that the new 2001 tax claim was not unexpected. "There had been talk of further tax claims coming out," said Ivan Mazalov, director of Prosperity Capital, a $550 million Russian investment fund. "Investors have started factoring that in to the stock price. The real issue is how the tax authorities want to collect it, and when these become enforceable."

Mr. Mazalov's fund wrote to Mr. Putin this week on behalf of a dozen financial institutions that are Yukos minority investors, asking the government not to disregard their interests.

Yukos and the tax ministry "can still negotiate at this point," Mr. Mazalov said on Thursday. "But this changes the backdrop for negotiations. Bankruptcy is not certain. There's still hope."