Yukos’ Banquo Act

By Roland Oliphant Russia Profile 03/18/2010

Rosneft’s Own Preparations for a Legal War of Attrition Are the Best Sign of Yukos’ Refusal to be Laid to Rest

Russia’s biggest oil company Rosneft got a scare yesterday when the Reuters news agency reported that Yukos Capital, the successor trust to the now-defunct oil company, had won two injunctions against Rosneft, freezing its assets in Britain and the United States. Rosneft, which swallowed most of Yukos’s assets after it was bankrupted by a politically-tinged tax-evasion case, saw its share price plunge almost three percent amid speculation that the injunction could affect up to a fifth of Russia’s oil exporting capacity. Was it an overreaction, or has Yukos’ ghost come back to haunt Rosneft’s banquet?

The story broke just before midnight on Tuesday, when Reuters quoted oil-industry traders saying that an injunction preventing payments to Rosneft in dollars in the UK and the United States threatened “a complete deadlock of Rosneft’s exports.”

The findings were reportedly related to a 2007 ruling by a Dutch court, which awarded Yukos Capital $380 million from Rosneft, a state-controlled oil company headed by Deputy Prime Minister Igor Sechin, whom former Yukos CEO Mikhail Khordokhovsky has accused of masterminding the campaign against his firm. The injunctions in the United States and Britain, where Rosneft is listed, were said to be the result of attempts to get hold of that so-far elusive money through British and American commercial courts.

The U.S. injunction reportedly froze Rosneft’s assets in New York State, which total $419 million, equivalent to six percent of the state-owned oil major’s profits last year. Meanwhile a British court was reported to be about to order the seizure of assets in the UK, although not in any amount that would pose a significant risk to the company, the New York Times reported.

While neither Rosneft nor Yukos Capital S.a.r.l. would initially agree to comment on the story, the news sent Rosneft’s share price tumbling by about three percent, and spread speculation that Yukos had re-grown its teeth. Kommersant ran a front page story under the headline “Yukos Blocks Rosneft’s Pipe.” Bill Browder, former CEO of the now defunct Hermitage Capital investment fund, emerged to tell the Daily Telegraph that the Yukos lawyers had acquired a “huge weapon” to use against Rosneft, grandiosely declaring that “the wheels of justice move slowly, but they do move. The significance of this is that Russia has to behave or there will be real consequences.”

But by Thursday morning Rosneft had got its side of the story out, issuing a press release strenuously denying that any “restrictions on payments for delivered oil in U.S. dollars” exist. “Such messages are either somebody's invention, or pre-planned disinformation,” the statement said.

Rosneft concedes that Yukos Capital filed a lawsuit in New York on February 8 and obtained a temporary injunction, but that it was overturned on February 17, “after Rosneft was given the opportunity to state its legal position.” And contradicting the reports that $419 million of assets in New York State had been frozen, the company claimed that on March 17 the New York court decided it could only hear Yukos Capital’s case if there were actually Rosneft assets in the state of New York, and gave them sixty days to prove such assets existed.

Meanwhile, the company acknowledged on March 10 that a London court had ordered the seizure of Rosneft assets in England and Wales as an “interim measure” before freezing them. Rosneft said it was appealing the decision, and called the sum involved “inessential” for the company’s business.

They’re probably right – Rosneft turned over $46.8 billion and made a profit of $6.5 billion in 2009, making the supposed $419 million frozen in New York negligible. And besides, “that liability is already provisioned for in Rosneft’s balance sheet as part of its short-term liabilities,” said Chirvani Abdoullaev, a senior oil and gas analyst at Alfa Bank. “Secondly, it has the option of providing payment guarantees rather than having its assets frozen. And thirdly, even if there was an injunction on buying oil from Rosneft in England and Wales and New York State, there would be plenty of ways to get around it.” Indeed, the original Reuters report said only that making cash payment to Rosneft could get “complicated” – not that it would be impossible.

“You can’t actually seize someone’s oil – it’s such a fluid commodity it’s almost impossible to tell which company it came from,” explained Chris Weafer, the chief analyst at Uralsib. “Besides, they’ve been aware of this risk for a long time and they’ve certainly taken adequate precautions. Our information from Rosneft is that the net effect in terms of finances and operations and the way the company functions is very minor, if not negligible.”

The Yukos case has become such a feature of Rosneft’s operations that no one on the inside of the industry can have seriously been surprised by yesterday’s news, and it certainly doesn’t explain the sharp drop in Rosneft shares, argues Abdoullaev – especially since the 2007 finding in the Netherlands did not have a similar impact. Rather, Rosneft has been battling growing negative sentiment since January, when the Finance Ministry appeared to renege on a deal to grant the company export duty breaks in exchange for developing East Siberian oil fields. The predictions of collapsing trade “just gave people the reason to sell,” said Abdoullaev.

So, the liability is negligible. Rosneft has prepared itself well for its long drawn-out war of attrition with the remnants of Yukos, and the sanctions supposedly imposed would be near unenforceable anyway. So much for Browder’s “huge weapon.”

But super weapon or no super weapon, Yukos’ owners have succeeded in keeping the case in the public eye. The news from London and New York came while the European Court of Human Rights in Strasbourg began considering the case brought against the Russian state for $100 billion – what they say the firm was really worth when it was broken up and swallowed by Rosneft. They even have a good chance of winning, but, as Weafer points out, the state and Rosneft will still have an awful lot of scope for appeals and counter-appeals. “Yukos isn’t going to quit, but pigs will fly before the government pays up. One day, they might come to a settlement just to lay the ghost to rest. But we’ll all be retired by then.”