Yukos. Cinderella’s witching hour

Does Russia's Yukos face bankruptcy or break-up?

AT MIDNIGHT on July 7th, Yukos's golden carriage began to turn into a pumpkin. As The Economist went to press, officials were waiting nervously at the oil firm's Moscow headquarters for bailiffs to turn up, brandishing not glass slippers but court orders allowing them to seize assets to cover the 99 billion rubles ($3.4 billion) that it has been ordered to pay in back taxes for the year 2000.

What broke Cinderella's spell? Once the belle of Russian business, wooed high and low by handsome investor princes, Yukos had still looked beautiful to many of them despite a year of unremitting tax and criminal probes. And two weeks ago it seemed close to a truce with the Kremlin. It had offered to sell its remaining stake in Sibneft - an oil company it bought last year - to pay off the tax bill. Viktor Gerashchenko, a former central-bank governor with good political connections, had become its chairman. President Vladimir Putin said that the authorities were “not interested in the bankruptcy of a company such as Yukos.” Investors believed him, and Yukos's shares shot up.

They are having doubts now. A tax official denied negotiations were going on; on June 29th, a court overturned Yukos's appeal against the tax claim. Two days later bailiffs arrived and gave Yukos until July 7th to pay. That same evening the tax ministry said it would sue for another 98 billion rubles for 2001. At the weekend prosecutors raided Yukos again. This week the chief prosecutor hinted at further tax claims for 2002 and 2003. Reports that Mikhail Khodorkovsky, Yukos's jailed main shareholder and ex-boss, had offered to give up his stake to cover the debt were denied by Yukos, confirmed by his lawyer and ignored by the authorities.

Creditors and minority investors got scared. A syndicate of banks led by Societe Generale announced that Yukos was in technical default on a $1 billion loan, though they are not yet asking for the money. An investment fund, Roxwell Holdings, launched a lawsuit alleging that Yukos had misled investors.

And faith in Mr Putin's assurances began to fade. Though declaring Yukos bankrupt could take months, its effective demise could come sooner. With its bank accounts frozen and oil-shipment fees due soon, it could have trouble doing business. Suppliers are already demanding money upfront. Its three main subsidiaries, which produce the oil and also hold most of Yukos's cash, could keep running for a while even with the parent company disabled, but not indefinitely: they have already cut investments to a bare minimum.

Investors have held their breath and wondered. Would the authorities accept Yukos's terms? Would they keep squeezing until Yukos agreed to theirs, whatever those are? Or would bailiffs start selling off the firm's subsidiaries to cover its debts? And if so, would they do it transparently to the highest bidder - maybe even a foreigner - or in a hasty fashion to state firms and others in the Kremlin's favour? And, again that question: what went wrong?

It has long been clear that the case was politically driven. The rigged auction by which Yukos was acquired, with the then government's blessing, was little different from others in the wild days of the early 1990s. And when it came to using tax havens, which the government began to abolish only last year, Yukos was not even the most effective (that distinction, according to Troika Dialog, an investment bank, went to Sibneft).

Theories abound about why Yukos became the Kremlin's target. But a mixture of hints and historical piecing-together suggest that Mr Khodorkovsky had done more than any other “oligarch” to defy Mr Putin's command that such people stop wielding political clout as they had during Boris Yeltsin's presidency. In particular, Mr Khodorkovsky's success in lobbying Russia's legislators to block the closing of tax loopholes persuaded the Kremlin that he - and by example, the others - needed to be taught a lesson.

Platon Lebedev, one of Mr Khodorkovsky's main partners, was arrested, and probes into Yukos were launched. Then Mr Khodorkovsky was thrown in jail on charges of tax evasion and embezzlement that could leave him there for ten years. Until recently, most assumed that the Kremlin would persuade or force Menatep, the firm that represents Yukos's main shareholders, to let go of Yukos while leaving Yukos itself relatively unharmed.

Instead, things have escalated. Perhaps there was never a deal in the works. Or perhaps, after Mr Putin's reassurances last month, Menatep became stubborn again. Or perhaps the process has acquired its own momentum. The conflicting signals coming from the government suggest either that only the very highest levels are privy to any talks going on, or that Mr Putin is not in full control of his underlings.

That is unnerving for both foreign and Russian business. An investigation of 140 other privatisations released this week by the audit chamber found irregularities in 56 of them, estimated to have cost the state $1.5 billion: small change next to the sums being demanded from Yukos, but enough of an excuse to make life difficult for many others. Even foreign oil companies, which are accustomed to unpleasant regimes, are playing it cautious. This week the government claimed that ChevronTexaco had plans to invest up to $10 billion in Russia, but the American oil giant, already burned this year by the annulment of an agreement to let it develop oil fields off Sakhalin Island, pointedly remarked that its investment decisions were led by “such factors as... the sanctity of contract conditions”.

A deal over Yukos's future may yet emerge. Yukos officials are defiant, saying that, if the idea is to strip out the subsidiaries and leave an empty shell, their complex ownership structure will make it a tough legal battle. But the authorities have already shown little regard for the niceties of the law. And if Yukos is picked apart and the spoils divided among its ugly sisters, handsome princes will steer clear of courting in Russia for a while.

Does Russia's Yukos face bankruptcy or break-up.

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