Yukos "Hail Mary" Bankruptcy Filing

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The last ditch attempt by Yukos managers to fend off a forced Russian "auction" of its assets to Putin-controlled Gazprom seems to have worked--for now, anyway. Frankly, this is incredible and amusing in a dark sort of way:

A Western bank consortium led by Deutsche Bank has frozen a planned credit line to Gazprom following a U.S. bankruptcy court injunction against the sale of the Yukos oil company's main subsidiary, the ITAR-Tass news agency reported Friday.

Gazprom, the state-controlled gas giant, was the expected buyer of the Yuganskneftegaz unit, which produces about 60 percent of Yukos' oil, at the auction scheduled for Sunday. The credit line is thought to be worth $10 billion.

Freezing the credit line could effectively prevent Gazprom from bidding unless it found alternative financing.

Citing unidentified, high-ranking Western financial sources, ITAR-Tass said the banking group had decided to freeze the deal at least until the bankruptcy court in Houston reaches a final decision.

One of the sources quoted by ITAR-Tass said the move was necessary, ``because in case a credit line is given to Gazprom over the next 10 days, Western banks would risk falling under legal prosecution in the United States.''

Of course, since Gazprom will be the only offer actually considered by the Russian authorities, does it really matter if their financing fails? I mean, a rubber stamp is a rubber stamp. This is just a nationalization program orchestrated to fit into globalization rhetoric:
A ruling late Thursday in a federal bankruptcy court in Houston, however, raised some questions about the participation in the auction of banks that were expected to finance the deal. A federal bankruptcy judge in Houston, Letitia Z. Clark, issued a temporary restraining order intended to block the participation of lenders and Gazprom. The banks, analysts said, have extensive operations in the United States and might be concerned about ignoring the restraining order, which could put them in contempt of court.

But Judge Clark's ruling did not apply to the government of Russia, and analysts said they expected the Russian authorities would go ahead with the auction on Sunday regardless of the ruling....

Although two other largely unknown companies have submitted bids for Yukos in the auction, their presence was seen as purely an effort to make the auction seem valid. Foreign investors, including companies from China, India and other overseas energy investors, have been discouraged from participating.

Well, duh?!? I'm disappointed, but not surprised, that U.S. newspapers give the Russian government's reasoning posturing more than two sentences of serious attention.

UPDATE:The FT joins the fray:

There is yet another scenario: namely that the Russian government proceeds with Sunday's auction, to demonstrate its independence from US law - but this auction then fails because Gazprom cannot get funding to meet the official $8.6bn sale price. If that occurs, the state may then seize control of Yugansk � and subsequently sell it to Gazprom at a considerably lower price. There is no proof that this is what the government plans. That scenario might yet suit the Kremlin rather well. In the meantime - and as conspiracy theories swirl - the one thing that is clear is that the potential legal risk for Western bankers is rising by the day.
UPDATE 12/18: The drama continues with a $9.3 billion sale to an unknown company:
Virtually nothing is known about the winner, BaikalFinansGroup, which emerged as a bidder at the last minute -- after a U.S. court issued an injuction against the auction, disrupting plans for a bid from the company that had been seen as the Kremlin's favorite to snap up the unit: the state-controlled natural gas behemoth, Gazprom.

Observers, however, believe BaikalFinansGroup could be just an alternative vehicle for Gazprom, with sources of funding that are different from those initially prepared.

Stephen Dashevsky, a leading analyst for Russia's Aton brokerage, said the winner was likely affiliated to Gazprom.

ITAR-Tass news agency claimed that BaikalFinansGroup's registration address -- in the central city of Tver -- corresponded to that of one of Gazprom's structures.

Gazprom said Sunday that neither it nor Gazpromneft -- its oil component, which was officially making the firm's bid -- had any relation to the winner, the Interfax news agency reported.

UPDATE 12/20: Can you believe that people are suspicious that the sale of Yukos was just hanky-panky? But, hey, Russia is a normal country, no?
The auction on Sunday seemed reminiscent of Russian privatization deals in the early 1990's - with murky financing, questionable bidders and unknown companies representing powerful financial groups emerging to win lucrative assets. Many of Russia's current generation of new oligarchs became billionaires in those deals overnight.

"This bid by Baikal Finans Group was a smoke screen and a delay tactic," said James Fenkner, head of research at the brokerage firm Troika Dialog - possibly, he said, to allow Gazprom more time to raise funds. "Why can't there be a transparent auction run by the state? The whole thing just makes Russia look bad."

The Baikal Finans Group, which listed its address as the same as that of a cellphone store in Tver, won a controlling stake, or 76.79 percent of the shares, in Yuganskneftegas with a bid equivalent to about $9.35 billion. That was above the starting price of $8.65 billion, but still far below what is considered he fair market value of the unit, according to independent banks hired separately by Yukos and the Russian government.

It is possible that another Russian oil company with lots of cash, like Surgutneftegas, was the real bidder, but analysts said it was more likely that all this was a way to give Gazprom time to come up with new financing.

The Russian government's prosecutorial assault on Yukos and its founder, which began in summer 2003, has set foreign investors on edge and raised questions about the rule of law, property rights and President Vladimir V. Putin's commitment to economic change. And Sunday's blow to Yukos, which had already sought bankruptcy protection in Houston last week, seemed part of that pattern.

The bidding process for Yuganskneftegas was a bizarre, confused affair: reporters were invited to watch the afternoon auction at the Russian Federal Property Fund's offices, but only on big-screen television sets. The property fund did not provide any information about the bidders.

Officials of Gazpromneft and the Baikal Finans Group sat side by side at separate tables in a plain, brown and beige room. Baikal made an opening bid, and then a Gazpromneft official left the room briefly to take a phone call. He returned a few minutes later, but Gazpromneft never submitted a bid.

The Baikal Finans Group's representative again raised his paddle, winning with a bid of 260.753 billion rubles, or almost $9.35 billion. From time to time, he conferred with a colleague sitting next to him. After just 10 minutes of bidding, the Russian Federal Property Fund, which organized the sale, announced Baikal Finans Group as the winner.

"The shares have been sold," said Valery Suvorov, a deep-voiced auctioneer dressed in bowtie and tails and wielding a gavel....

If Baikal should fail to make full payment for the Yuganskneftegas assets in the 14-day period required, under Russian law the government can order a new auction or seize Yuganskneftegas in lieu of unpaid taxes.

Russia's other major oil companies - including, besides Surgutneftegas, TNK- BP and Lukoil - all denied any ties to the Baikal group, according to the Interfax news agency.

UPDATE 12/21:Russia's de-facto dictator Putin reveals some more details:
"The shareholders of that company are exclusively private individuals," Mr. Putin said in remarks televised from Germany, where he is on an official visit. "But they are individuals who have for many years engaged in the energy business."

Mr. Putin further hinted that the new owners would not have, or maintain, exclusive control over their rich new holding, as industry analysts had speculated.

"As far as I know, they intend to establish certain relationships with other Russian energy companies which may be interested in this asset," he said.

Speculation has swirled around the identity of the buyers of Yuganskneftegaz, the Yukos subsidiary, since it was purchased at a six-minute auction on Sunday by Baikal Finans Group, a company that had not been heard of until days before the sale....

In an interview in the Komsomolskaya Pravda newspaper published today, Viktor Gerashchenko, chairman of the Yukos board of directors, summarized the Yukos position bluntly: "On Sunday they sold stolen property," he said.

Asked who it had been stolen from, Mr. Gerashchenko was equally blunt "They stole it from us," he said. "And they sold the company producing 20 percent of the country's oil to God-knows-who."

UPDATE 12/22: Thomas Barnett has a nice one-phrase summary:

Nye sluchaino chto is a wonderful old Russian phrase that means, "It is not by accident that . . ..

UPDATE 12/23: Rosneft just bought Baikal, and Putin insists that the sale of Yukos was "perfectly normal". :

President Vladimir V. Putin of Russia today strongly defended the purchase by a state-controlled company of the winner of Sunday's auction for the largest subsidiary of the oil giant Yukos.

"Today, the state, using absolutely legal, market mechanisms, is ensuring its interests - I consider this perfectly normal," Mr. Putin told reporters at a news conference in Moscow, referring to the purchaseby Rosneft of the Baikal Finans Group, which had widely been thought to be a shell company.

Mr. Putin talked of how the oligarchs, or private businessmen, obtained properties at bargain basement prices soon after the breakup of the Soviet Union in 1991.

"Some market participants got multibillion state assets using different tricks, including some violations of then-existing legislation," Mr. Putin said.

By contrast, he said, the purchase by Rosneft "was done in absolute conformity with market means."

What a dishonest, pathetic man--even by the standards of politicians. The sale of Yukos was a complete sham.
With the purchase complete, Rosneft is scheduled to merge sometime next year with Gazprom, Russia's natural gas monopoly, which had widely been thought to be the government's choice to win the auction in the first place....

Rosneft did not reveal what it paid, but Yuganskneftegas had been valued at $14 billion to $22 billion.

On Sunday, Baikal paid about $9.35 billion for 76.6 percent of the shares in Yuganskneftegas.

"Owners of Baikal Finans Group offered Rosneft to buy their assets, obtained through the sale of Yuganskneftegas on Dec. 19," a Rosneft official in Moscow told the Interfax news agency. "Rosneft bought 100 percent of shares previously owned by Baikal Finans Group."

Rosneft stock is growing since it bought Baikal:
Moscow. (Interfax) - The shares of Rosneft subsidiaries have been growing rapidly at Moscow's MICEX exchange following reports that Rosneft, Russia's state oil company, bought 100% of shares in Baikal Finance Group, a company that bought 76.79% of shares in Yukos's principal production unit, Yuganskneftegaz, at a Sunday auction.

Rosneft-Purneftegaz common shares gained 13% in their value to 667 rubles from 590 rubles in 5 minutes of trading at MICEX. Its preferred shares rose in price by 9.8% to 450 from 410 rubles.

Rosneft-Sakhalinmorneftegaz common shares grew by 7.7% to 160 from 148.52 rubles, and its preferred shares by 8.6% to 115 rubles from 105.88 rubles.

Forbes has more:
Russia did not grab the company by force of arms or through eminent domain. If it was a power grab, it was done through a series of steps, each one at least putatively legitimate: enforcement of tax and fraud laws, foreclosure on tax liens, an auction of assets for which $9.4 billion bid was paid (showing at least some concern about the rulings of a U.S. bankruptcy court) and a sale of the assets to a richer entity. The scenario suggests a consideration for the rule of law (or at least a concern for appearance) that would have been surprising in Russia just two decades ago.
Also, it is completely true that the oligarchs used connections to obtain state assets at huge discounts off market prices. Putin is using his state power to do the same with market assets...

Along those lines, Lynne Kiesling makes a bold understatement:

This retrograde development sends a chill up my spine. Using the heavy hand of the state to punish someone for buying Soviet assets at the post-Soviet fire sale, and then re-nationalizing them at a discounted price and still claiming it's all market-based and open and aboveboard. I am totally not convinced.

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Lynne Kiesling The 100% state-owned oil company Rosneft has taken over the company that bought the assets of the beleaguered Yukos, according to this Reuters story and several others. "Rosneft, which is de facto 100 percent state owned, bought Yuganskn... Read More

Why has Russia failed at developing a Western-style capitalist economy? Markus opened a modest general store on Gorky Street. But bandits soon preyed on owners like him, demanding protection money to serve as the store's krysha, or Read More


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This page contains a single entry by Kevin published on December 17, 2004 11:17 AM.

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