[lbo-talk] Gazprom, Yukos, and the auction

[Peter Lavelle]

Analysis: Gazprom's losing bid for Yukos? 
By Peter Lavelle 
Published on December 19, 2004 
MOSCOW, Dec. 19 (UPI) -- Kremlin-controlled natural gas monopolist Gazprom lost its bid Sunday to purchase Yukos' largest production unit and crown jewel of Russia's oil sector, Yuganskneftegaz, to an unknown entity called Baikal Finance Group. This surprise winner, bidding $9.37 billion for Yuganskneftegaz, is most probably a stocking horse for the Kremlin and Gazprom. 
Yuganskneftegaz, part of Russia's largest privately owned oil company Yukos, was on the auction block due to debilitating back-tax bills in access of $28 billion. The attack on Yukos has been at the center of Russian President Vladimir Putin's grand strategy to capture control of Russia's vast energy resources for the Kremlin. This strategy has raised alarms in the West, where it is thought the Kremlin is violating Yukos' property rights. At home, the attack on Yukos is seen as part of Putin's plans to cut the country's oligarchs down to size.
Having its bank accounts frozen, assets arrested, some of its core shareholders on trial on charges of fraud and tax evasion, as well as facing the prospect of forced dismantling, Yukos filed for bankruptcy in a Houston court last week. The court ruled that the Yuganskneftegaz auction should be suspended for 10 days and barred Gazprom from taking part. International financial institutions were warned not to assist Gazprom with loans and other financing to purchase Yuganskneftegaz. Russian justice and other state officials rejected out of hand the U.S. ruling.
With Russian courts siding with the state and against Yukos for over a year, the U.S. filing most probably was the reason for Baikal's win on Sunday. Menatep Group, the primary shareholders of Yukos, has made it abundantly clear it will use foreign courts and conventions that Russia has signed to fight the destruction of Yukos.
Gazprom, the world's largest natural gas company, has long been the Kremlin's candidate to acquire Yukos' most valuable assets. Gazprom's drive into the oil sector started when it won control of state-owned Rosneft Oil Co. earlier this year. The purchase of Yuganskneftegaz was designed to turn Gazprom into an international energy giant with only small number of peers.
Has Sunday's auction soiled Putin and Gazprom's plans? This is entirely unclear. Baikal Finance Group is an unknown entity. It is also an unknown entity that apparently has access to enormous amounts of cash. Before the U.S. court order, Gazprom was in negotiations with some the world's largest international financial institutions, including Deutshe Bank and J.P. Morgan. Who was Baikal in negotiations with?
It is not to hard to guess where Baikal secured financial backing. Entering a bid for the Yuganskneftegaz auction after the Houston court order, Baikal's financial support most likely comes from a combination of Gazprom, state-controlled and largest bank Sberbank, and possibly from Russia's Central Bank. Rumors have also suggested that China's state oil company CNPC and India's ONGC may also be part of Baikal's financing as very small, minority shareholders.
Baikal most likely is some kind of domestic front for Gazprom and the Kremlin. The Houston ruling spooked Gazprom. Acquiring Yuganskneftegaz appeared to be relatively easy. Trying to legally keep Yuganskneftegaz could have seen Gazprom's current business activity challenged in foreign courts. Faced with the prospect that its exports could be blocked and/or seized, Gazprom and its Kremlin backer decided on a different course of action on Sunday.
What happens next is unclear. Baikal may now be the owner of an oil company, but toward what end? As of Sunday, Baikal controls oil reserves of 11.6 billion barrels of oil, 17 percent of Russia's total. Will officials from Gazprom be appointed to run and operate Yuganskneftegaz? Will Baikal remain a separate legal entity operating only in Russia and partner with Gazprom? Will Baikal, as a shell company for Gazprom, be able to avoid the kind of international litigation the Menatep Group has threatened?
What does appear to be clear is the fact that the Kremlin will not waiver in its efforts to control Russia's vast energy wealth. It should hardly be expected after a year uncompromising assault on Yukos, the Kremlin would decide to back off now. The Yukos affair still has a way to go before anyone can claim closure.

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