Market Insight: Yukos to tax loyalty of foreign investors
ByLine: Paivi Munter
Investing in Russian shares has always required nerves of steel but Yukos, the country's biggest oil producer,
has pushed its minority shareholders' resolve to the limit.
As Mikhail Khodorkovsky, its principal owner and Russia's richest man, faces trial on charges of tax evasion and
fraud today, remaining investors prepare to take a leap into the unknown.
Yukos has warned that the $3.4bn in back tax claims it may have to pay could bankrupt what was Russia's biggest
company by market capitalisation.
The apparently politically motivated conflict has driven a 62 per cent dive in the share price, wiping out $22bn of
the company's value.
Reigniting concerns about property rights, the feud has also severely undermined the wider Russian market at a time
when high oil prices should have boosted it.
The collapse in Yukos shares follows a spectacular run in the past four years, during which the company transformed
itself from a pariah known for violating minority shareholders' rights to the darling of the market.
Improvements in corporate governance and an increase in free float helped lift the shares from mere cents to more
than $16 at their peak before the arrest last July of Platon Lebedev, another key shareholder of Menatep, the holding
company controlling Yukos.
Recently, heavy selling has left only the hard core of investors holding the stock.
John-Paul Smith at Pictet Asset Management says: "It's a question of faith. You don't know what the
government wants to get out of this - or to what extent the process is independent of it."
Tax evasion and other practices verging on illegality were commonplace during the free-wheeling Yeltsin era, but
Vladimir Putin's administration is thought to be targeting Mr Khodorkovsky and his partners because of his overt
political ambitions. The Kremlin is seen to be making him a warning example to other oligarchs.
Mattias Westman, director at asset manager at Prosperity Capital, says the confusion created by the plethora of
charges has prompted many foreign shareholders to throw in the towel.
"For investors that are not specialised in Russia, it must be extremely difficult to keep track of these court
cases."
Yelena Anankina, credit analyst at Standard & Poor's, says fragile judicial institutions open to political
pressure increase risk in Russia. "The court system is Russia is quite weak and the unpredictability of how the law
is applied has already been demonstrated."
S&P has Yukos as Triple C on credit watch, with negative implications. The agency downgraded the credit by four
notches in April following a court decision to ban the company from selling or collateralising its assets, a move that
substantially reduces its chances of paying the tax claims.
However, the recent slide in Yukos shares has prompted some foreign investors to cautiously reassess the potential
for further falls. According to Moscow-based Alfa Bank, Yukos is now valued at one tenth of the price for BP, roughly
the Russian company's equal in oil production.
Chris Weafer, chief strategist at Alfa, says: "Investors assume the government will confiscate Menatep's
stake."
Whoever ends up controlling Yukos, the fate of minority shareholders will have wider repercussions for foreign
investment into Russian shares.
"Foreigners are going to pull away from the market if there is a bad outcome," said Eric Kraus at Sovlink,
a Moscow brokerage.
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