In April 2004, Yukos was given just two days to pay all the ‘reassessed’ additional tax for 2000. But the tax authorities did not even bother to wait: they froze all the company’s assets, making it impossible for Yukos to pay even while simultaneously challenging the legitimacy of the reassessment. The spurious back-tax claims, asset- freezing orders and absurdly unrealistic payment deadlines ultimately led to the seizure of one of Yukos’s crown-jewel production assets, Yuganskneftegaz (YNG), in June 2004. In November 2004, the Russian authorities announced that an auction of YNG would take place the following month. This contravened Russian law, which requires the sale of non-core assets before core assets for the settlement of tax claims. Yukos had proposed to the tax authorities that the company would sell its shares in Sibneft, which would have allowed it to pay off most of the tax liability without affecting its core operations, but the tax authorities ignored the proposal.
At the time of its seizure, YNG was responsible for over 60 per cent of Yukos’s total output. It had been valued by management at between $16.1 billion and $22.1 billion, and by the Russian state- appointed evaluators Dresdner Kleinwort Wasserstein at between $14.7 billion and $17.3 billion. Nonetheless, the Russian Ministry of Justice announced that the value of YNG for the purposes of the auction would be no more than $10.4 billion.
In an effort to block the sale of YNG, Yukos filed for bankruptcy protection in December 2004, in the United States Bankruptcy Court for the Southern District of Texas. The Texas court agreed to issue a temporary restraining order, according to which, ‘the weight of the evidence supports a finding that it is substantially likely that the tax assessments of Yukos and the manner of enforcement regarding taxes were not conducted in accordance with Russian law’. The court also found that ‘the evidence supports a finding of the likelihood that the Plaintiff’s shares of YNG will be sold for approximately half the value estimated by two different investment bankers’.
In spite of the court order, the auction went ahead on 19 December 2004. The only bidder was a mysterious company called Baikal Finance Group, which was completely unknown in the industry and appeared to have been founded just two weeks earlier. Its total share capital was declared at $300 and its registered company address turned out to be a liquor store in the city of Tver. President Putin nevertheless gave Baikal Finance his enthusiastic endorsement, stating that its shareholders were ‘individuals who have been in the energy business for many years … and who intend to build relations with Russia’s other energy companies interested in this asset’. Despite its lack of capital, Baikal Finance Group was somehow able to put up the $1 billion deposit needed to participate in the auction and then another $8.8 billion to make good on its successful, uncontested bid to purchase YNG. The mystery was explained two weeks later, when it was announced that Baikal Finance Group was itself being purchased by the state- controlled Rosneft, chaired by Igor Sechin, for an undisclosed sum.
The chief Kremlin economic adviser, Andrei Illarionov, who was still in his post at the time, described the unlawful expropriation of YNG as the ‘scam of the year’, stating that there was ‘no free economic space remaining anywhere in Russia’ and that Russia now qualified as ‘a politically unfree country’. When he resigned 12 months later, he amplified his remarks. ‘Russia has become a different country,’ he said. ‘It is no longer a democratic country. It is no longer a free country.’ Illarionov confirmed that his resignation was in protest against the embezzlement of billions of dollars out of Rosneft’s profits by Putin’s inner circle. Russia, he said, was now run by an authoritarian, corrupt elite. ‘It is one thing to work in a country that is partly free. It is another thing when the political system has changed, and the country has stopped being free and democratic.’
In June 2006, the Kremlin appointed a bankruptcy receiver for the remaining Yukos divisions and a creditors’ meeting was called. At the meeting, a restructuring plan was presented by Yukos that would have allowed the company to settle its liabilities and continue operating in light of rising oil prices. The plan was rejected by the Kremlin, as the Russian authorities again demonstrated that they were not interested in settling with Yukos. In August 2006, a Russian court declared Yukos insolvent. The rejection of Yukos’s restructuring plan forced a fire sale of the company’s remaining assets, which included the production facilities Tomskneftegaz (including the Angarsk and Achinsk refineries) and Samaraneftegaz (with a further three refineries). The majority of the assets were acquired at well below market value by Rosneft. Rosneft then included its stake in YNG in its IPO for flotation on the London Stock Exchange. As the Financial Times pointed out, the state-controlled company’s expropriation of all of Yukos’s production units and refineries transformed Rosneft from Russia’s number-eight oil major, worth just $6 billion, into the country’s biggest producer, with a market capitalisation of $90 billion. Rosneft itself described the purchase of YNG as ‘the most monumental bargain in Russia’s modern history’.
Yukos investors received no benefit from any of the auctions, as Yukos’s liabilities were artificially calculated to match exactly the fire sale prices of its assets, leaving no balance to be distributed to the shareholders. American investors in particular lost nearly $7 billion. In November 2007, Yukos’s liquidation was complete and the company was removed from the Russian register of enterprises.
I was put on trial, together with my friend and business partner, Platon Lebedev, at the start of summer in 2004. There was a widespread acceptance in Russia and abroad that the charges against us were a legal farce, and that this was a politically motivated show trial. The Parliamentary Assembly of the Council of Europe, which oversees the European Court of Human Rights, had appointed a commission to investigate the legality of the case. Its chairman, the former German Justice Minister Sabine Leutheusser-Schnarrenberger, was outspoken in her assessment:
There are many circumstances which lead us to believe there must be a political motivation in this case. Khodorkovsky is the only oligarch who sits in prison since October last year. There are massive claims for back taxes directed against him. And this is not happening to any other large company in Russia. These are all circumstances where one can say there is politics involved, not the rule of law. There are significant accusations that human rights have been violated around the arrest and also in prison, especially concerning the medical treatment of some of the Yukos detainees. That a businessman manager is held in pre-trial detention for nine months although he is highly unlikely to flee abroad, that he is held like an animal in a cage during court hearings, all this is alarming.
The commission highlighted the wider threat to democracy posed by the Yukos case:
I am very concerned about the developments as far as the rule of law is concerned, democracy in general and the strengthening of civil society. In summary, I believe we are really faced with a very dangerous development here, a move away from democracy and the rule of law.
I believe we must tell Putin: If you are going to continue like this, with the cloak of justice but with political reasons in the background, then we won’t be able to continue business relations in this way.