31 October 2003 10:00
Yukos Shares Frozen, Voloshin Is Out
 Prosecutors dropped a bombshell on the market Thursday, freezing some $15 billion worth of shares in Yukos and Sibneft as the Kremlin's war against Mikhail Khodorkovsky moved into uncharted territory.
Prosecutors apparently froze 44 percent of Yukos, which now owns 92 percent of Sibneft, to stop Khodorkovsky from selling his controlling stake in the company.
The unprecedented move by prosecutors came just an hour before President Vladimir Putin was scheduled to meet with top executives of leading Russian and foreign investment banks, including, CitiGroup, Morgan Stanley, ABN Amro, Renaissance Capital and United Financial Group.
Details were sketchy, but participants said the meeting was called by the Federal Securities Commission, in part in an effort to calm investor fears that the assault on Yukos presaged a wider redistribution of property.
"Putin tried to make a real point that taking control over shares is not what this is about. He said the shares were being seized to cover what the liability is, not to confiscate," said UFG CEO Charles Ryan.
"He did appear to be conflicted over short- and long-term strategies. He realized that in the short term there could be a negative effect but he thought that could be outweighed in the long term by imposing the rule of law."
If Putin's goal was to calm the markets, it didn't work, as news that nearly half of the world's fourth-largest oil company had been sequestered sent shock waves through the global investment community, triggering a massive liquidation of Russian assets for the second time this week.
The shares, which lost 14 percent of their value on Thursday alone, were not seized, only frozen so they can't be sold, said Yury Kotler, spokesman for Menatep Group, the parent company of Yukos. Owners of the shares still have voting and dividend rights, he said.
Menatep condemned the Prosecutor General's Office for what it called another illegal action against the company.
"It means the state is capable of taking away anyone's property," Kotler said.
The prosecutor's office said in a statement that it had no choice but to hold the shares "as collateral against material damage" caused by Khodorkovsky and other founders of Menatep who are accused of cheating the state out of a total of about $1 billion.
Prosecutors denied that their next move would be renationalization.
"The shares have only been frozen, no one has seized them. There is no question of confiscating or nationalizing them," Natalya Vishnyakova, deputy head of the prosecutor office's press service, told Russian television.
The move stunned a business community already reeling from the arrest of Khodorkovsky, who was hauled out of a chartered plane at gunpoint in a pre-dawn raid at a Novosibirsk airport.
Investors were further spooked Tuesday by reports that Kremlin chief of staff Alexander Voloshin had handed in his resignation amid a mounting struggle for power between rival Kremlin clans. Those reports were confirmed late Thursday. His replacement, the Kremlin said, is Dmitry Medvedev, Voloshin's deputy.
The secretive siloviki, who are current and former secret service agents and appear to be pushing for the state to play a greater role in the economy, are pitted against the pro-business Family of people who came to power during former President Boris Yeltsin's term.
Analysts said the latest move by prosecutors, coupled with Voloshin's removal, was a clear sign that the siloviki have gained the upper hand in what could be a watershed event in the life of the country.
"This is going to take the level of fear to new heights," said William Browder, director of Hermitage Capital Management.
"The ultimate question now is what is going to happen to the shares," said James Fenkner, head of research at Troika Dialog. "Now that Khodorkovsky has been arrested, it is inconceivable that he can remain in control of Yukos."
"The worst-case scenario would be that the state takes over. The best case is that the state sells them on to a foreign oil major - there doesn't seem to be anything in between," Fenkner said, adding that if Khodorkovsky is convicted the state could confiscate his property.
Analysts said the prosecutors' move appeared to be aimed at preventing the sale of a strategic stake in YukosSibneft to a Western supermajor. ExxonMobil and ChevronTexaco have both been eying a stake in the newly merged Russian company in what, for Khodorkovsky, would have been one of the most profitable in world history.
Khodorkovsky bought Yukos in a rigged auction in 1995 for almost $300 million. At one point, prior to its tie-up with Sibneft and the launch of the legal assault against it, the market considered Yukos to be worth more than $30 billion.
But the siloviki appear determined to deprive Khodorkovsky of such a staggering windfall.
"When Russia began privatizing property it was done with the understanding that privately owned property would be more effective than state-owned property. We did not privatize so that the property could be sold to the United States and Khodorkovsky would get the money," said Sergei Markov, a political analyst close to the Kremlin.
Boris Nemtsov, the co-leader of the Union of Right Forces, a right-wing parliamentary faction funded by Yukos, said Thursday's move destroyed any hope that Putin's goal of doubling the size of the economy within a decade would be achieved.
"With the way the Kremlin and prosecutors are behaving, one can forget about it," Nemtsov said by phone.
"This will result in capital flight. The country's reputation will suffer tremendously. Investment - both domestic and foreign - is going to plummet, so will budget revenues. There will be a slowdown in economic growth," he said. "Russia rarely gets lucky, but we had a chance. Now we are losing this chance."
Markov, however, disagreed that a takeover of Yukos would harm the economy.
"All we are talking about is a change in the company's ownership structure, and a change of management toward those who are not considered by the siloviki to be dangerous," he said.
"The trend now is to strengthen the state, and they do it how they can." Menatep, however, said prosecutors would not be able to seize Yukos, and that in arresting the shares they were breaking the law.
"Prosecutors do have the right to arrest Khodorkovsky's property while he is in detention," Kotler said. "But unfortunately Khodorkovsky owns only 9.5 percent of Yukos. The shares they arrested have no relation to him."
Kotler said the shares seized were owned by Yukos Universal and Halley Enterprises, both foreign-registered entities that belong to Menatep Gibraltar, a daughter company of Menatep Group.
Moscow Times
By Catherine Belton, Valeria Korchagina and Alex Nicholson
Staff Writers
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