updated 8/1/2006 11:58:05 AM ET 2006-08-01T15:58:05

A Moscow judge declared the Yukos oil company bankrupt on Tuesday, paving the way for the liquidation of what was once Russia’s biggest oil producer.

Arbitration Court Judge Pavel Markov’s decision drops the curtain on a three-year drama that has seen Yukos’ billionaire founder Mikhail Khodorkovsky jailed in a Siberian penal colony and the company’s biggest production unit sold at a discounted price to the state.

The fraud investigation against Khodorkovsky and the tax probe into Yukos that began in 2003 were cast by the Kremlin as a crusade against a rotten corporate empire. But the case was perceived by others as punishment for Khodorkovsky’s perceived political ambitions and a drive by the state to regain mastery of the strategically important oil sector.

The widely expected ruling upholds a vote one week ago by Yukos’ creditors, who dismissed the assurances of the company’s lawyers that it could continue as a viable entity and pay down its remaining debts.

The creditors are dominated by the Federal Tax Service and the state-controlled oil group OAO Rosneft, which already owns the battered company’s biggest production unit, Yuganskneftegaz. The production unit was sold in December 2004 in a disputed auction against Yukos’ multibillion-dollar back tax bills.

Rosneft became the nation’s No. 3 oil producer overnight after its purchase of Yuganskneftegaz and is being primed as the nation’s champion oil company, capable of competing with the likes of Exxon Mobil Corp. and Saudi Arabia’s Aramco. It is expected to be a major beneficiary in the future liquidation of Yukos’ assets, which include capacity of 600,000 barrels per day at its Samaraneftegaz and Tomskneft subsidiaries.

Yukos’ current output averages 450,000 barrels per day — as the company has struggled to pay down its massive tax bills it has been able to invest less into production.

Rosneft currently produces about 1.6 million barrels per day, of which 1 million barrels come from Yuganskneftegaz.

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