A SECURITY GUARD STANDS OUTSIDE YUKOS HEADQUARTERS IN MOSCOW
Alexander Natruskin  /  Reuters
A security guard stands outside Yukos oil major headquarters in Moscow Wednesday. Russian tycoon Mikhail Khodorkovsky was reportedly ready to give up control of the oil giant to save it from bankruptcy.
By John W. Schoen Senior producer
msnbc.com
updated 7/7/2004 6:49:36 PM ET 2004-07-07T22:49:36

In a high-stakes endgame watched closely by world oil markets, Russian oil giant Yukos, as it previously warned, missed Wednesday's midnight deadline to pay $3.4 billion in back taxes. After reports of last-minute talks to avert bankruptcy, the government appeared ready to begin taking control of the company's assets.

The government takeover would end a year-long political feud between Russian President Vladimir Putin and jailed billionaire oil tycoon Mikhail Khodorkovsky, who controls a 44 percent stake in Yukos. Khodorkovsky’s trial on fraud and tax evasion resumes next Monday.

The government’s crackdown on Khodorkovksy is widely seen as an effort to thwart his political ambitions, which last fall broke an uneasy peace between Putin and oligarchs who bought lucrative state-owned oil assets at what some Russians believe were fire sale prices. Analysts say that in exchange for not challenging the privatization process, Putin won agreements from the oligarchs not to challenge him politically.

But in last fall’s campaign for Parliamentary elections in December, Khodorkovsky challenged Putin by supporting opposition candidates. He was arrested in October on charges that could land him in a labor camp for 10 years.

Now, with Yukos’ assets frozen by the government and the deadline for the company’s tax payment already passed, there were reports that the Kremlin was ready to seize some or all of his stake in the company.

That could effectively return control of the company to the government. With the Russian government already in control of the state-owned monopoly pipeline, Transneft, control of Yukos would give the Kremlin a tighter grip on Russia’s private oil industry.

"(Putin) sent a very clear signal to the other Russian oil companies and foreign investors that if you want to play in this back yard, these are the rules,” said A.G. Edwards futures analyst Bill O’Grady.

Skittish markets
Meanwhile, oil traders have been closely watching for any signs of a possible short-term interruption in crude oil supplies. With global oil production barely able to keep up with growing demand, world oil markets are already skittish about any possible shortfall. Recent short-term interruptions of relatively small supplies — from a damaged pipeline in Iraq or a five-day strike in Nigeria — have sent prices climbing.

Russia is currently the world’s second largest oil producer, behind Saudi Arabia. Yukos produces about one-fifth of Russia's output, accounting for 1.7 million barrels a day.

The immediate concern is a possible interruption in operations if Yukos is forced into bankruptcy and unable to pay its bills, an outcome that Putin has vowed not to let happen.

Yukos has paid fees for pipeline and rail shipments through July, but any future financial disruption could shut down oil shipments and cut off exports, according to John Kingston, director of global oil at Platt’s.

Some analysts have suggested that other Russian producers could make up the slack, but Kingston said it may not be that easy to shift gears.

“The pipeline system and the rail system were built to service fields that were there,” he said. “You can’t just pick up a pipeline and move it.”

Investment impact
But even if Yukos' oil keeps flowing, the dust-up has drawn attention from more than just oil traders.

The Bush administration said Tuesday that the government's move against Yukos could scare away further invesment in Russia's expanding oil industry. And credit rating agencies like Standard & Poors caution that if a political disagreement can threaten the financial viability of Yukos, investments in other Russian companies could face the same uncertainties.

“Even if Yukos survives, the damage done to foreign investors' confidence in Russia's rule of law and property rights is already enormous,” Raymond James & Associates oil analyst Wayne Andrews wrote in a recent research report.

That means that those foreign investors will be less eager to invest in boosting Russia’s oil output, strengthening OPEC’s hand in controlling prices, Andrews said.

In the past, Russia's private oil companies have been eager to pump more crude — even amid pleas from OPEC members to curb output and support prices. Consolidating the Kremlin's control could make it easier for the Russian government to cooperate with OPEC when the interests of both parties benefit from keeping oil prices high, said O'Grady.

“They’re better off working with OPEC,” he said. “(Putin) really doesn’t benefit a whole lot from $18 oil with a lot of that going to the U.S.”

The Associated Press and Reuters contributed to this report.

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