MOSCOW (ResourceInvestor.com) -- The Russian government said this week it would sell part of the Yukos oil company's main production subsidiary at knock-down prices.
The sale would mean the effective destruction of Yukos, which only a year ago was the darling of portfolio investors and billed as "Russia's best company". By far the biggest of Yukos's three production subsidiaries, Yuganskneftegaz accounts for 60% of Yukos's reserves and 70% of its production.
The Russian authorities seized the Yuganskneftegaz subsidiary earlier this year in lieu of about $7bn in unpaid tax bills.
The government is impatient with the slow progress of the investigations and legal cases, hence the intention to sell 76.8% of Yugansk. However, government^1s $10.6bn valuation for the company and $4bn starting price shocked analysts.
Dresdner Kleinwort Wasserstein (DKW) was hired by the government to assess the company^1s value and said this week Yuganskneftegaz was worth between $14.7bn and $17.3bn.
Yukos chairman Viktor Gerashchenko estimated Yuganskneftegaz should be worth $30bn, but DKW has included a deep discount for "political risks", something the government has also been quick to point out as a justification for the low auction price. The irony is that it is the same government that is the source of those risks.
As government has the greater influence over those risks, the value of the company ends up being what the state declares. One of the biggest risks is the Natural Resources Ministry's threat to pull five of the subsidiary's 21 production licenses that give the company the right to pump oil. The Ministry would make a final decision on October 21, and analysts estimate that without its licenses Yuganskneftegaz^1s physical assets are worth about $4bn.
A Yuganskneftegaz fire sale is clearly designed to gut the company. The sale of Yukos's two minor subsidiaries - Tomskneft and Samaraneft - would easily cover the tax bill and leave the company more or less intact as a functioning oil company. There is also Yukos's 20% stake in failed merger-partner Sibneft, which is worth at least $3bn, which has been frozen by the courts.
The only remaining question is who will buy Yuganskneftegaz? All of Russia's major companies - including Kremlin-friendly Surgutneftegaz and state-owned gas monopoly Gazprom have expressed no interest. None of the remaining big private oil companies have funds to bid even if they wanted to.
And foreign investors are unlikely to buy an asset that will be dragged through the courts by Yukos's management.
Despite president Vladimir Putin's repeated claims that the Yukos legal battle was not of his doing, the attack on Yukos is clearly politically motivated and undermines Russia's fragile property rights.
The selective nature of the attack is highlighted by the charges: Yukos was found guilty of using tax optimisation schemes that reduced its effective tax bill to between 12-15% against the 24% headline rate. However, its jilted bride Sibneft was a far more egregious abuser of tax rules and in 2003 got its effective tax rate below 10%. Yet it seems to have got off Scott free.