Yukos – A Tale of Professional Oligarchs

July 23, 2004

by Jérôme Guillet

In the latest twist to the Yukos story, Russia’ Bailiff Service (part of the Ministry of Justice) has decided to seize its main production affiliate, Yuganskneftegaz, and sell it to pay for the approx. USD 3.4 bn owed by Yukos in year-2000 back taxes according to the recent court decisions.

Yugansk accounts for 70% of Yukos’s reserves and 60% of its output; its share in Yukos’s value is perhaps even greater as Yuganskneftegaz is developing the flagship Priobskoye field, which has been the key source of Yukos’s production growth in recent years. Yukos estimates its value at USD 30 bn, independent brokerage firms estimate it at USD 16-21 bn. But the Bailiff Service has put, according to Yukos, an initial estimate of USD 1.75 bn. The fact that they are seizing the biggest asset of Yukos (although it has two other subsidiaries valued in the USd 5 bn range each) to compensate only for the amount due under 2000 taxes only (with new claims regarding 2001 and 2002 to be expected), shows that the Kremlin is going for the kill.

(Recent news on Yukos et al. can be found via Renaissance Capital or Aton capital.)

The more interesting question, of course, is – who gets to buy a 30b$ asset for 3b$? The main favorites are Rosneft, the state-owned oil company, Surgutneftegaz, controlled by its “red director” Bogdanov, Gazprom, the national gas company or some of the other majors like Lukoil or TNK.

Rosneft would make a little bit of sense in that it is state-owned and thus this nationalisation-confiscation of Yukos would appear be for the benefit of a public entity, in coherence with Putin’s stated goals to reinforce the Russian State and put it to work for the good of ordinary Russians and not just the few connected fat cats. But is it likely?
The experience of past “sales”, including under Putin, shows that a well- connected informer gets to buy the assets at a ridicully low price, and that Putin is no different than Eltsin in that respect (only the beneficiaries are different – see the sales of Onako and Slavneft). These beneficiaries had to pledge fealty to Putin politically (and presumably financially), and are thus less powerful than their predecessors, but it is hard to see any of that wealth reaching ordinary Russians, then or now.

But at least, a several hundred % immediate return on your investment, don’t you think that would make any self-respecting Halliburton manager cry?

The Bush administration is no worse than Saddam as regards to torture and it is also still not as bad as Russia as far as corporate cronyism goes. How’s that for a nice campaign motto?

Posted by b on July 23, 2004 at 12:39 UTC | Permalink

Comments

Here’s a slogan to go with it:
Keeping up with the Saddams’s and Putins’ of the world is no easy task. We’re putting your money in our pockets for 4 more years and beyond. Bush / Cheney

Posted by: Anonymous | Jul 23 2004 14:55 utc | 1

that was me above.

Posted by: sukabi | Jul 23 2004 14:56 utc | 2

So Jerome,
If I understand correctly it’s that old robber baron adage….buy low steal high.
But I wonder, naively no doubt…. are the assets really worth that much that this can be done over and over again (ie. is this really a perpetual money machine)?

Posted by: RossK | Jul 23 2004 16:12 utc | 3

… [the] nationalisation-confiscation of Yukos would appear be for the benefit of a public entity, in coherence with Putin’s stated goals to reinforce the Russian State and put it to work for the good of ordinary Russians and not just the few connected fat cats. But is it likely?
About as likely as finding a hot potato beneath Siberian permafrost.
A deeper observation that ties together the latest posts of Billmon, Jérôme, and Bernhard is:
Money seems to have an affinity for itself. Much like matter under the influence of gravity it tends to condense into ever larger structures.
In fact over time, and without any checks, money will aggrandize itself into veritable black holes.
That’s just the way money works. Don’t ask me why…it just is–empirically.
And of course monetary black holes are not friendly to innovation, growth, or to the diversity of the local economic ecology.
They are dead zones. Pure lifelessness. Because they radiate no life-sustaining light.
The healthiest states are those that recognize the inherent property of money to condense, and figure out a way to re-distribute income and thus invigorate their economic ecology.
Most of the leadership of the United States is pretty much clueless concerning my above paragraphs.
They haven’t thought deeply about much of anything in life, except perhaps the politics of getting reelected. And that of course means the art of making richer people richer. Or, in other words: actually assisting the formation of black holes.
So I expect the cycle of despair to continue. The poor to get poorer to the point of violence.
Periodically an American city gets set aflame.
I should think one is going to burn soon now.

Posted by: koreyel | Jul 23 2004 18:43 utc | 4

@koreyel – I agree
The pursuite of happiness should not be seen as a single persons right, but as a public right. To maximize the “happiness” of “the people” pure capitalism is the wrong way as is pure communism. My ideal is a social democracy BUT with a strong constitution and independent constitution courts AND -equally important- with a strong independent currency bound to some fixed stuff of value. The second point is important, as any social democracy government tends to give away more than it dares to take away. If there is no barrier to this social democracies will end like the Weimar Republic in the 1930s.
About Yukos my view is simplistic because I lack the knowledge around the subject: Some robber barons did manage to steal away the potential wealth of the Russian people while Yeltsin was nursing on his bottles. This would not have been bad alltogether, but those robber barons started to sell their “aquired” rights to people outside Russia. That was the point where Putin had to step in. The econommical rent of Russian commodities has to stay in Russia. Some robber barons did not agree, so Putin had to set an example. Conviniently Yukos did have a soft tax patch, like Al Capone, and he could attack that without frightening off all foreign investments.
My guess is that Putin doesn´t care who owns Yukos, as long as the rent stays in Russia and as long as it doesn´t disturbs his political agenda.
He is a strategist and leader of a dying people attacked from multiple sides – Islam movement in Chenia, China in Siberia, too small birth rate, to much alcoholism. If he gives up on the money from the commodities, he gives up Russia. Putin would never do that.

Posted by: Bernhard | Jul 23 2004 20:07 utc | 5

@koreyel – interesting point
@ bernhard – not sure about your hypothesis. foreign ownership is not incompatible with keeping the rent inside the country; in fact, the opposite is probably true (PSAs are a lot more favorable to host governments than any deal with a well-connected local oligarch, who keeps the rent to himself and gives some of it back – to the guys in power, not to the actual institution.
Many theories about Yukos, I’ll try to get into them in a later comment. The main one today was – it’s an example for others (and probably a way to get-(very)-rich-quick for people in power now but did not join the privatisation “fun” of the 90s).

Posted by: Anonymous | Jul 23 2004 21:15 utc | 6

Halliburton executives slam Iraqi golden goose for failing to match productivity with costs of five-star hotels
Of course, even with support from the highest echelons of government big businesses can still somehow stumble…
Halliburton posts 2Q losses of $663 million

Posted by: Nemo | Jul 23 2004 21:23 utc | 7

I didn’t notice this as a thread from Billmon’s site.
I’ll go back and check.
er… is this a place for comment on Billmon’s posts or is it a site for anyone to post questions and their own thoughts?
Thanks,
William

Posted by: William Treat | Jul 23 2004 21:24 utc | 8

William,
a bit of both…
Halliburton executives slam Iraqi golden goose for failing to match productivity with costs of five-star hotels
must make more monetary reappropriation related activities….. crap, need to embezzle more for the embetterment of the company.

Posted by: sukabi | Jul 23 2004 21:40 utc | 9

Jérôme,
merci beaucoup for your info. This is much more detailed than anything I have read or seen so far.
Sadly, I have only very little time at the moment, so I have nothing to contribute. I even had to suspend my usual info routines; fortunately, I am used to being pretty clueless – talk about my life. It’s good to ‘have’ MoA as a valuable source of information, and I hope it will live long and prosper. Good night for now.

Posted by: teuton | Jul 23 2004 21:50 utc | 10

@Jérôme? @ 5:15 PM
Imagine 90% of Yukos being in the hand of CalPer or other US Aamerican fonds. If Putin then would have to control Yukos for any reason it would be much more difficult then doing it when 90% of Yukos is in the hand of people living in Russia.

Posted by: Bernhard | Jul 23 2004 21:55 utc | 11

Attention webmasters, politicians, businessmen and women and paupers:
Might a discovery about the connectivity of the internet have relevance to power and wealth disparities in the world?…
”…The UN issued a report a few years ago saying the net worth of the world’s three richest families – the Gateses, the Sultan of Brunei and the Waltons, of Wal-Mart – exceeded the GDP of the 43 poorest nations. The pattern holds within countries too. The ratio of remuneration of a US firm’s chief to that of the average employee is at an all-time high of about 500.
Not only is there a strong tendency for the rich to get richer, but also for the healthy to get healthier. Contrast the money, energy and advertising that go into treatments for wrinkles, impotence, baldness and obesity with that for malaria, diarrhoea or tuberculosis. This disproportion is reflected in media, politics and the military. Disparities are no doubt necessary for complex societies to function, but they needn’t be as extreme as they often are. A worrisome speculation is that market volatility, the shape of the internet and increasingly unipolar geopolitical power are indicators of even greater social disparities to come.
The formula for ‘success’

Posted by: Nemo | Jul 23 2004 23:01 utc | 12

Nemo: ”…The UN issued a report a few years ago saying the net worth of the world’s three richest families – the Gateses, the Sultan of Brunei and the Waltons, of Wal-Mart – exceeded the GDP of the 43 poorest nations.”
Shades of science fiction tales of galactic empires, or accounts of the ruling families of the Happy Planet for the last thousand years or two. Either one works, and the future is now.
Thanks for the quote Nemo. I’ll bet the Sultan of Brunei is pissed. They could do a new Survivor type show … with a Lifestyles of the Rulers of the Planet thing . I think they’ll have to include a few of the invisible ruling families though, just to make it more competitive. 😉

Posted by: Kate_Storm | Jul 23 2004 23:22 utc | 13

WaPo Group Offers to Pay Yukos Tax Debt

A British-based consortium of investors offered Friday to pay the beleaguered Yukos Oil Co.’s crippling tax debts in exchange for control of the company, the latest bid to head off the collapse of Russia’s largest oil producer.

Posted by: Bernhard | Jul 24 2004 6:06 utc | 14

Bernhard – yes, I wrote that unsigned post, sorry. I’m working on a text on the issue of what it actually means to “control” oil, i’ll refer to it when I’m done. In the meantime, you can go have a look at my site (rouille.blogspot.com), I had another post about Yukos a few weeks back with some interesting links (the last one, I think.
Can’t read the Wapo link, but it sounds like Russian money to me from what you wrote…
Just a separate word on wealth vs GPD comparisons. It’s not very meaningful because GDP measures the creation of wealth of a country (over a year), whereas wealth is the total stock of it, the accumulation of past wealth creation.
As an aside, and to speak in mathematician’s terms, GDP is a first derivative, growth is a second derivative, and variation in growth (about which many people care too much about) is a third derivative. I don’t think many people are very comfortable manipulating third derivatives when they are presented as such…

Posted by: Jerome | Jul 24 2004 6:22 utc | 15

I’m thinking of it like this (mainly because I don’t live in Russia so its easier to ne humorous about):
Putin seems to be doing for capitalism what Stalin did for Socialism.
If the types running Haliburtons are the sort of double-dealing crooks I always imagined them to be it comes as no surprise that Haliburtons makes little or no profit. Why would they want to put in all of that chicanery just to benefit a mob of shareholders? My guess the eggs are being swept up from the golden goose by some subcontractors. The executives will be picking up their share with a nod and a wink. I wouldn’t mind seeing the next annual meeting though. You’d have to imagine there would be some pretty pissed stockholders there.
“Now let me get this straight. You’ve been charging $150.00 a piece for a couple of million cheeseburgers and fries and we’re still down the tubes? How does that work? We spent a fortune getting our CEO elected vice prez and you still can’t make a buck? Do you think we’re dumber than you seem to be?”
The execs will grab the nearest golden parachute and head for the door I reckon.
It seems that for all of the capitalist rhetoric that Republicans spout investors always to better with a Democrat administration.

Posted by: Debs in ’04 | Jul 24 2004 12:59 utc | 16

Mission creep
Corporate power is the driving force behind US foreign policy – and the slaughter in Iraq
”…As the corporate interest moves to power in what was the public sector, it serves the corporate interest. It is most clearly evident in the largest such movement, that of nominally private firms into the defence establishment. From this comes a primary influence on the military budget, on foreign policy, military commitment and, ultimately, military action. War. Although this is a normal and expected use of money and its power, the full effect is disguised by almost all conventional expression.”
”Given its authority in the modern corporation it was natural that management would extend its role to politics and to government. Once there was the public reach of capitalism; now it is that of corporate management. In the US, corporate managers are in close alliance with the president, the vice-president and the secretary of defence. Major corporate figures are also in senior positions elsewhere in the federal government; one came from the bankrupt and thieving Enron to preside over the army.”
“Defence and weapons development are motivating forces in foreign policy. For some years, there has also been recognised corporate control of the Treasury. And of environmental policy.”
”We cherish the progress in civilisation since biblical times and long before. But there is a needed and, indeed, accepted qualification. The US and Britain are in the bitter aftermath of a war in Iraq. We are accepting programmed death for the young and random slaughter for men and women of all ages. So it was in the first and second world wars, and is still so in Iraq. Civilised life, as it is called, is a great white tower celebrating human achievements, but at the top there is permanently a large black cloud. Human progress dominated by unimaginable cruelty and death.”
”Civilisation has made great strides over the centuries in science, healthcare, the arts and most, if not all, economic well-being. But it has also given a privileged position to the development of weapons and the threat and reality of war. Mass slaughter has become the ultimate civilised achievement…”
J.K. Galbraith – A cloud over civilisation

Posted by: Nemo | Jul 24 2004 21:32 utc | 17

Iraq asked for Russian troops, Russia firmly declined. Is there anything that could change Putin’s mind, or lead to a redefinition of the word ‘niet’?
Russia, Iraq to probe oil deals signed under Saddam Hussein
Negotiating Russian style – how not to go to war and still hang on to your oil interests.

Posted by: Nemo | Jul 25 2004 22:04 utc | 18

Update
MOSCOW – While Russia’s largest oil company Yukos tries to fight off government moves to take it apart, the pumps that produce 2 percent of the world’s oil supply continue to work – for now. But as the company gets pushed further into a corner over a gargantuan back taxes bill, it’s warning that exports could be interrupted.
Oil traders were speculating about a possible 1 million barrel drop in daily output after the company, OAO NK Yukos, announced it could run out of cash to fund production within a few weeks. Analysts say the gap would likely be filled quickly by other Russian oil companies – but world oil prices leaped around 80 cents a barrel on fears of a shortage after Yukos’ Thursday warning…
Analysts assess fallout from Yukos woes

Posted by: Nemo | Jul 26 2004 4:09 utc | 19

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