Yukos
This article needs additional citations for verification. (July 2014) |
Moscow , Russia | |
Key people |
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Revenue | 5,860,000,000,000 Russian ruble (1994) |
Number of employees | 31,565 |
OJSC "Yukos Oil Company" (Russian:
From 2003 to 2004 onwards, the Russian government presented Yukos with a series of tax claims totaling US$27 billion (€20,1 billion). As the government froze Yukos' assets at the same time, and alternative attempts to settle by Yukos were refused, the company was unable to pay these tax demands.[7] Between 2004 and 2007, most of Yukos's assets were seized and transferred for a fraction of their value to state-owned oil companies.[8]
The
The Permanent Court of Arbitration in The Hague ruled unanimously upon awarding compensation of $50 billion for the company's assets, that Yukos was the target of a series of politically motivated attacks by Russian authorities that eventually led to its destruction, and that Russia had expropriated Yukos' assets in breach of the Energy Charter Treaty.[11][12] The treaty does not prohibit governments seizing or nationalizing commercial assets, but requires investors to be fairly compensated. Though Russia never ratified the full treaty, these clauses were still legally binding under both the treaty and Russian law until 2029.[13][14] According to the Permanent Court of Arbitration's ruling, the primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos, appropriate its assets for the sole benefit of the Russian state and state-owned companies Rosneft and Gazprom, and remove Khodorkovsky from the political arena.[15][16]
Formation and early years
The company was created on April 15, 1993 by
OAO Yukos Oil Company, known as Yukos (ЮКОС) was one of the companies so formed, on 12 May 1993.[17]: 12 [17]: 12 Its initial assets included:
- Yuganskneftegaz ("Yugansk Oil and Gas": Юганскнефтегаз), a West Siberian oil extraction operation based in Nefteyugansk, part of the Khanty-Mansi Autonomous Okrug and Tyumen Oblast ("district");
- Kuybyshevnefteorgsintez ("Samara), Novokuybyshevsk and Syzran, and various other oil-related operations.
The company was named after these assets, "Yuganskneftegaz" + "KuybyshevnefteOrgSintez". The Samaraneftegaz ("Samara Oil and Gas") refinery was added to Yukos in 1995 under decree No. 864, and it later incorporated eight distribution companies in Central Russia and Siberia and assorted technical businesses.[17]: 12
The first chairman and president appointed to lead Yukos, then still a government owned business, was Sergei Muravlenko (Russian: Сергей Муравленко), the former General Director of Yuganskneftegaz and son of Viktor Muravlenko, a former head of the oil and gas sector during the
Privatization (1995)
During 1995 and 1996, with Russia
"[O]wnership of some of Russia's most valuable resources was auctioned off by oligarch-owned banks... Although they were supposedly acting on behalf of the state, the bankers rigged the process-and in almost every case ended up as the successful bidders. This was how Khodorkovsky got a 78 percent share of ownership in Yukos, worth about $5 billion, for a mere $310 million, and how Boris Berezovsky got Sibneft, another oil giant, worth $3 billion, for about $100 million.... [T]he government was generally unable to exercise much control. Since the state was very weak, these "New Russians" paid little or no taxes on their purchases"
-
"Much of the second wave of privatization that did take place—in particular, the "loans-for-shares" scheme, in which major Russian banks obtained shares in firms with strong potential as collateral for loans to the state—turned into a fraudulent shambles, which drew criticism from many"
John Nellis, Center for Global Development[23]
In Putin and the Oligarch, Richard Sakwa offers a second perspective, that with oil prices varying from $16 to $25 a barrel, and great political and economic uncertainty, it was "unclear" at the time of the auction how much a company like Yukos was "actually worth", and concludes that perhaps the auctions were not wildly mispriced within the context, but regardless, they were a public relations disaster which "came to symbolize the flawed transition [of privatization] as a whole".[17]: 13
One of the commercial banks contending for Yukos – and controversially also managing its auction – was banking group Bank Menatep, chaired by its co-founder Mikhail Khodorkovsky, a 32-year-old early import-export (1987) and banking entrepreneur (1989),[24] former chairman of the Investment Fund for Assistance to the Fuel and Oil Industry (1992), former deputy minister of the Ministry of Fuel and Energy (briefly in 1993), and CEO of Rosprom, an investment and holding company created to manage Menatep's portfolio of around 30 large industrial companies (140,000 employees). Menatep became the owner of 78%[22] of Yukos shares following a two-stage auction in December 1995[25] and Khodorkovsky became its CEO, and from 1997, also its chairman.[26]
Post-privatization (1996 to 2003)
"In those days [the "anarchic
Yeltsinyears"] everyone in Russia was engaged in the primary accumulation of capital. Even when laws existed, they were not very rigorously followed. Therefore, if you conducted yourself too much in a Western manner, you were simply torn to pieces and forgotten."
- Khodororkovsky, quoted in a Forbes profile, March 2002[27]
The initial period of "oligarchic privatization" was characterized by ruthlessness and bloodshed, with those having power sometimes compared to 19th century
"When the former banker acquired his 36% stake in Yukos... most people assumed he would cash out as soon as a rich opportunity presented itself. The surprise was that he actually had a head for the oil business. He seemed to relish the job of turning Yukos into a world-class oil company. And he has succeeded."
- Bloomberg BusinessWeek, October 2003[31]
Yukos however recovered very quickly and, in the course of the next few years, became one of Russia's largest oil companies, one of the world's largest non-state oil companies, but more significantly, a leader in Russian corporate governance reform and corporate transparency,[32] with Khodorkovsky being widely seen as a pro-democratic reformer who advocated for international co-operation and against corruption in Russia.[citation needed]
In 2001 the company paid a $500m dividend, in 2002 – $700m and in 2003 the planned dividend payout was estimated at $3 billion. Its share prices were growing quickly: in 2001 by 191%, in 2001 by 81.5%.[clarification needed] It started international expansion, purchasing 49% shares of Transpetrol (Slovakia) and 53% shares of Mazeikiu Nafta (Lithuania). In 2002 four companies – Yukos, Lukoil, TNK and Sibneft – established a consortium to build a pipeline from Western Siberia to Murmansk.[33]
In a marked change of direction which gained considerable United States coverage, the company and its owner came to be seen as a leopard that might be changing its spots and setting aside the dubious conduct previously associated with it in the early oligarch years. Yukos had five Americans on its board, and Khodorkovsky's charity "Open Russia" listed Henry Kissinger and Lord (Jacob) Rothschild as chairmen. In 2001 the company donated $1 million to the Library of Congress Open World Program, to aid the development of Russian leadership and rule of law, in part by funding Russian judges to visit and observe United States courts.[34]
In a 2002 profile,
Yukos tax claims, breakup, and aftermath
Although weak at the time of the auctions and the
Control of Mikhail Khodorkovsky's shares in the Russian oil giant Yukos have passed to Jacob Rothschild, 4th Baron Rothschild upon his arrest.[38]
At the time of his arrest, Khodorkovsky was believed to be the wealthiest man in Russia and was
(The European Court of Human Rights eventually ruled that while the arrest and several other points were unlawful,[41][42] he was not a "political prisoner" since the charges against him had been based on reasonable suspicion.[43][44][45])
The arrest was followed by a tax investigation into Yukos by the tax authorities, in December 2003, after which in April 2004 Yukos was issued in stages with tax claims for $27 billion, a sum that exceeded its total revenues for 2002 and 2003. At the same time, Yukos' assets were frozen by the government and offers exploring other ways to settle, such as payment in stages or sale of non-core assets, were refused or ignored. In July 2004, its core asset, Yuganskneftegaz – producing 60% of the company's oil and by itself as much oil as Iraq[36] or Libya[46] and variously valued between $14.7 to $22 billion[47] and $30.4 billion[36][48] – was confiscated.
In December 2004, Yuganskneftegaz was sold for $9.35 billion in a closed-room auction of just two bidders (one of which,
Tax claims
In July 2004, Yukos was charged with tax evasion, for an amount of over US$27 billion. The Russian government accused the company of misusing tax havens inside Russia in the 1990s so as to reduce its tax burden; havens were set up by most major oil producers in outlying areas of Russia which had been granted special tax status to assist in their economic development; such "onshore-offshore" were used to evade profit taxes, resulting in Yukos having an effective tax rate of 11%, vs a statutory rate of 30% at the time. Yukos claims its actions were legal at the time and that the company used the same tax optimisation schemes as other Russian oil companies, such as Lukoil, TNK-BP and Sibneft. However, Yukos was the only one to be charged with tax evasion and penalised by the authorities.[52]
Yukos subsidiaries declared the oil they produced to be "oil-containing liquids"[53] to avoid paying full taxes. A general crackdown on such tax evasion practices began with Putin's presidency, with numerous companies closing or purchasing their trading vehicles. A management presentation from December 2004 shows that the tax claims put the "total tax burden" for 2000, 2001, 2002, and 2003 at 67%, 105%, 111%, and 83% of the company's declared revenue during those years. As a comparison, the annual tax bill of Gazprom is about US$4 billion on 2003 revenues of US$28.867 billion. Yukos' parent company, Menatep, lobbied extensively and successfully to influence Western public opinion, retaining Margery Kraus of APCO[54] who successfully pushed through resolutions inter alia before the US House of Representatives and the Council of Europe. According to a resolution[55] of the Council of Europe,
- "Intimidating action by different law-enforcement agencies against Yukos and its business partners and other institutions linked to Mr Khodorkovsky and his associates and the careful preparation of this action in terms of public relations, taken together, give a picture of a co-ordinated attack by the state."
- This "raises serious issues pertaining to the principle of nullum crimen, nulla poena sine legelaid down in Article 7 of the ECHR and also to the right to the protection of property laid down in Article 1 of the Additional Protocol to the ECHR."
- "The circumstances of the sale by auction of Yuganskneftegaz to “Baikal Finance Group" and the swift takeover of the latter by state-owned Rosneft raises additional issues related to the protection of property (ECHR, Additional Protocol, Article 1). This concerns both the circumstances of the auction itself, resulting in a price far below the fair market-value, and the way Yukos was forced to sell off its principal asset, by way of trumped-up tax reassessments leading to a total tax burden far exceeding that of Yukos's competitors, and for 2002 even exceeding Yukos’ total revenue for that year." [citation needed]
Forced sale of assets
In the Western media and the Russian opposition media the high-profile arrest of Khodorkovsky is usually attributed to his activism in the
On October 31, 2003, shortly after the arrest of the company's CEO, the Russian government froze ownership of 44% of the company's shares. The reason given was to prevent a group of shareholders led by Khodorkovsky from selling a large stake of the company to the US oil firm
On December 19, 2004, the
Bankruptcy
On June 15, 2006, based on a bank deposit of US$4 million and its American CEO's Houston home, Yukos filed for
Management responses
At the time, key management included:
- CEO: Steven M. Theede
- CFO: Bruce K. Misamore
- Chairman of the board: Viktor Gerashchenko
By mid-December, 2004, all members of the board of Yukos, and most of the company's senior managers, had left Russia, some of them because of "fear of arrest" after being "summoned for questioning by prosecutors". According to a December 2004 Houston, Texas court filing, the CFO resides in Houston. According to a company spokeswoman the CEO resided in London, UK as of December 2004. Executives Mikhail Brudno and Vladimir Dubov fled to Israel in 2003, and were seen on February 2, 2005 in Washington, D.C. at an official function for President George W. Bush.[62][63]
Both men were cited in an international arrest warrant regarding their involvement in the Yukos tax case. On Wednesday, April 6, 2006, the company's Executive Vice President,
The Yukos Oil Company's former shareholders and management filed a series of claims in courts and arbitration panels in various countries, seeking compensation for their expropriation. The largest, for over $100 billion, was filed at the
The total final award in damages announced by the Permanent Court of Arbitration on July 18, 2014 was some $50 billion.[70][71][72]
The European Court of Human Rights ruled for Russia to pay the former owners Yukos €1.87 billion ($2.51 billion) in compensation for unfair proceedings of the tax evasion case.[72] Yukos is asking for $333 million to cover losses incurred after its accounts were frozen plus costs and interests.[73]
On 20 April 2016 the District Court of The Hague set aside the decisions of the PCA, ruling that it had no jurisdiction as provisional application of the ECT arbitration clause violated Russian law.[74] In February 2020, the Court of Appeal of the Hague reversed the invalidation and held that the PCA awards were valid.[6]
See also
- Eminent domain
- Oil price increases since 2003
- Hermitage Capital Management
- Alexey Pichugin
- Svetlana Bakhmina
References
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The Russian oligarchs used brutal and criminal methods like those used by the "robber barons" in the United States at the end of the late nineteenth and early twentieth centuries.
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Using his [Khodororkovsky's] close contact with state officials, as well as illegal methods and violence, he saw his wealth and empire continue to grow until he challenged Putin.
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