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Almost 16 years ago the dismantling of Russia’s then biggest oil company started. Out of the carnage a new tycoon was born, which until then had been a lightweight among Russian energy companies. The impact of those events has been resurfacing with various frequency, generating emotions and discussions not only about the energy sector, but also about politics as such – Mariusz Marszałkowski, editor at BiznesAlert.pl, writes.
Yukos’s torn out heart
On the 19th of December 2004, a previously unknown energy company Baikalfinansgrup bought in a bailiff auction 76 percent of Yuganskneftegaz ‘s stocks, which cost RUB 261 billion (i.e. USD 9.3 bn back then). Since 2003 Yukos, whose heart was Yuganskneftegaz, had been subjected to a dismantling process and the auction was the result. “The Yukos case”, as the scandal which started in early 2003 was dubbed, was about destroying a company established by a “converted” oligarch Mikhail Khodorkovsky . He built his empire in the 1990s era of “wild” privatization. Khodorkovsky was the CEO and main shareholder of Yukos, which topped the list of Russia’s oil companies in 2003. Its yearly output reached 80 m tons, which was about 20 percent of the total oil extraction in Russia. Yuganskneftegaz was responsible for 60 percent of Yukos’s total output, and it produced over 1 million barrels per day from its 26 oil fields. The company’s biggest rivals were Lukoil and Surgutneftegas, which back then were privately owned. State-owned companies were not among Yukos’s rivals. However, that situation was about to change.
The pariah…
Rosneft was established in 1993 as a state-owned company, and did not stand out as the owner of an exceptionally diverse portfolio. It owned a few underinvested refineries and a few not very efficient oil fields. Its position was undermined by inefficient management. Hence, its future was bleak. It was almost privatized during the 1990s rush to sell all state assets, but it was so unattractive that nobody wanted to buy it. Entities such as TNK, Sibneft (later Gazpromneft) or VNK were separated and then privatized between 1994 and 97.
At the end of the 1990s Rosneft could have been bought by Gazprom, but due to economic reasons, the gas company’s management was strongly against that idea. The situation changed completely after Vladimir Putin became president. He discontinued the previous plans for development and started controlling individual oligarchs, especially in the energy sector. In early 21st century, energy resources started gaining on significance. Due to the political crises and the war on terror waged by the West, oil prices were going up very quickly. Putin’s establishment did not miss that trend. To maintain his political power and curb the growing strength of the oligarchs a decision was made to take down one of the biggest tycoons, who was very openly engaged in politics. That person was Mikhail Khodorkovsky. In 2003 he was accused of a multi-billion tax fraud, starting tax carousels and other crimes (including hiring hitmen to kill inconvenient politicians and businessmen). Enter Igor Sechin, Putin’s close friend and deputy head of his chancellery.
In June 2004 he became chairman of the board of directors of Rosneft. Putin was soon reelected for his second term as Russia’s president and Sechin, having his friend’s total trust, started to remodel the domestic oil market. It is worth stressing that at that point Rosneft extracted a little over 19 m tons of oil, which was only 6.5 percent of Russia’s total annual extraction. Yukos, Lukoil, TNK-BP, Tatneft and Surgutneftegas were all bigger than Rosneft. Nothing indicated that this mid-sized, state-owned company, that was tossed around and handed over from one person to another, would soon become Russia’s biggest oil company and one of the largest in the world.
A hegemon
Baikalfinansgrup, the company that on the 19th of December won the bailiff auction and bought Yuganskneftegaz’s assets did not have a long history on the energy market. Actually, it did not have any history. It was established on the 6th of December 2004 with the minimum required starting capital of RUB 10 thousand (USD 358). The company was started in Tver, but it did not have any permanent headquarters. Nevertheless, it very quickly received a USD 1.68 bn financial guarantee from the state-owned Sberbank, which was necessary to participate in the auction. During the auction Baikalfinansgrup bid only against Gazprom, represented by its oil holding Gazpromneft. On the 15th of December Yukos asked a court in Houston for legal protection against a takeover and the court agreed, mandating Gazprom to withdraw from the auction of the Yukos conglomerate. On the 16th of December, after the ruling of the American court, Gazprom’s European partners that bankrolled the transaction decided to withdraw from supporting Gazprom’s offer. On the same day, Baikalfinansgrup announced it would take part in the auction. The bidding took place on the 19th of December and only Gazpromneft and Baikalfinansgrup took part. However, the former company did not make any offer, which allowed Baikalfinansgrup to formally purchase a block of shares of Yukos’s daughter company at first attempt. According to JPMorgan, the Yukos subsidiary was purchased for about 40 percent of its market value.
Three days later, on the 21st of December, Rosneft bought the stocks from Baikalfinansgrup and became the new owner of Yuganskneftegaz . Of course, this impacted the company’s position as such and significantly increased its output. In 2005 Rosneft produced 74.5 m tons of oil, out of which 51 million tons came from the assets purchased during the December auction. Yukos was edging towards a disaster and finally went bust in November 2007. In the same year, Rosneft took over all the other assets of Khodorkovsky’s company, including a few refineries and oil subsidiaries. This allowed the state-owned giant to finally and unequivocally dominate the Russian market. After that, Sechin was determined to integrate other oil assets, so in 2012 he took over the TNK-BP company and in 2016 – Bashneft. That transaction finally ended the discussion on merging Gazprom (via Gazpromneft) with Rosneft. The original plan said it was supposed to have happened in 2004.
According to the Vedomosti daily, the Yukos assets were responsible for 72.6 percent of Rosneft’s extraction, and 74.2 percent of the output at Rosfneft refineries in 2007. It is worth reminding that in 2006 Orlen bought the refinery in Lithuania’s Mažeikiai from Yukos. If it hadn’t been for Poland, the facility would have been probably bought by Rosneft, which would pose a serious risk to Poland’s and the Baltic State’s energy security.
Protracted court disputes
Even though 16 have passed, those events still have an impact. The former shareholders of Yukos got together and sued for the return of the nationalized assets. In 2007 the shareholders filed a USD 100 bn suit at the Hague Permanent Court of Arbitration. In 2014 the Court granted the plaintiffs USD 50 billion. The court agreed Russian officials abused the tools of the state to bankrupt Yukos and then take over the company’s assets. In 2016 the Circuit Court in the Hague annulled that decision, pointing out that the Arbitration Court did not have the power to decide about the dispute, because Russia did not ratify the so-called Energy Charter that regulated, among others, the ways to solve disputes between the investors in the energy sector and the state. In January 2020 the Hague’s Court of Appeal changed the Circuit Court’s sentence and upheld the 2014 ruling of the Arbitration Tribunal, ordering Russia to pay compensation to the tune of USD 57 bn. The figure went up as the court added interest. The Russian state appealed to the Supreme Court and asked for preventing the shareholders from seizing the company’s assets to recover the compensation. Contrary to Russia’s expectations, the Supreme Court rejected its plea to stop the asset seize by Yukos’s former shareholders. This means, they can ask relevant courts to seize the property of the Russian state abroad to secure any debts accrued in lieu of the compensation.
The Supreme Court is planning to start the main proceedings in early 2021.
Russia is still facing the risk of losing its assets in the West. This may cause issues for Russian state-owned companies, especially those that operate in the energy sector. One cannot exclude that in the future, a court may seize, e.g. Gazprom’s property in Germany. So far a court seized the Stolichnaya and Moskovskaya vodka trademarks . However, this has not been a widespread practice, but if the Dutch Supreme Court’s decision is upheld, Russia’s state-owned businesses may face issues across the world, especially in places where court orders are treated seriously.
As a company Yukos built its position in Russia thanks to very murky connections between the business world and politics, using the weaknesses of the Russian state and legal loopholes. Eventually it was destroyed by the actions of an awaken state over ten years later. However, apart from Khodorkovsky himself, Western investors also owned shares in the company. For them it was a promising investment in a growing oil tycoon that later on operated in a completely transparent way. They put their money into it to earn more, not get mixed up in politics. This profit opportunity was taken away from them, which is why new court disputes are being opened. The interest on the compensation is still growing, and so is the thirst for justice.
