Apicture of PresidentVladimir Putin hangs in theoffice of Sasha, a local manager at Tomskneft, a Siberian subsidiary ofembattled Russian oil group Yukos. But another portrait - that of Mikhail Khodorkovsky, Sasha'sformer chief executivearrested in October-has recently been removed. "The company security officercame round and ordered me to take it off, because Khodorkovsky is no longer part of the company," says Sasha. These are days of radical upheaval and divided loyalties at Yukos, which evolved under Mr Khodorkovsky's aggressive leadership into Russia's largest and most profitable company. Now it faces the prospect of new ownership and even bankruptcy as a result of investigations launched by Russian authorities over the past year. Mr Putin, a former spy bent on reasserting the authority of the state, has moved to cut Mr Khodorkovsky and his company down to size. Today Mr Khodorkovsky and Platon Lebedev, a business partner, go on trial in Moscow on fraud and tax evasion charges that could end with 10-year prison sentences. On Friday a commercial court will rule whether whether Yukos underpaid Dollars 3.4bn in taxes for 2000. Coupled with a court order that is blocking its ability to raise the money, that could trigger insolvency. The outcomes will reveal much about the scope for doing business in Russia, the evolution of the country's oil sector and the nature of Mr Putin's regime, which many believe is increasingly prepared to move against the interests of investors in its efforts to bring key resources under closer control. "There is a lot of worry that things will turn out badly," says Stephen O'Sullivan of United Financial Group, a Moscow brokerage. "Our clients are nervous and suspicious." Markets have already reacted. Since a peak last autumn Yukos' share price has more than halved. Despite Russia's strong macroeconomic growth and rising world oil prices which should have played in the country's favour, its entire stock market has been dragged down in Yukos's wake, making it one of the world's worst-performing this year (see chart, right). The authorities' attacks have been focused on Mr Khodorkovsky and his partners in Menatep, the investment vehicle through which they control Yukos. But their fate is so tightly linked to that of the oil company that it is also at risk. Sergei Shimkevich, head of Tomskneft, plays down the damage so far. But he says he is spending one-fifth of his time dealing with probes into the company from regional tax inspectors, prosecutors and officials from the ministry of natural resources. "The staff are concerned. We want to know what will happen." Mr Khodorkovsky won control of Yukos in one of Russia's cut-price privatisations of the mid 1990s. He aggressively exploited the country's weak regulations to make acquisitions and squeeze out minority shareholders. After the economic crisis of 1998 and at a time of low oil prices, when Russia defaulted on its debt and devalued its currency, Mr Khodorkovsky defaulted on loans from banks, ignored bills and delayed paying wages and taxes. But on the back of subsequent rising oil prices Mr Khodorkovsky hired foreign consultants and employees, paid out dividends to minority shareholders and made efforts to increase transparency, even revealing his holdings and those of his partners in Menatep. The company became the darling of the stock market, courted by several oil multinationals interested in buying strategic stakes. It sealed a merger with Sibneft, its rival, that was set to give it one-third of the country's oil production. Now, all that has changed again. Mr Khodorkovsky himself, arguably Yukos' most important asset, became its greatest liability when his growing financial weight and political ambition made him into a challenge that Mr Putin decided he could not ignore. Mr Khodorkovsky's aggressive lobbying culminated in open opposition to government policy, notably blocking the passage of tough tax laws in parliament. While at Yukos Mr Khodorkovsky had gone further than many of his Russian corporate counterparts in separating management from ownership. He appointed a predominantly independent board and put several expatriates into key positions. But such innovations had little time to gel. Mr Khodorkovsky had planned to remain chief executive until 2007. After his arrest the extent to which Yukos still depended on him became apparent. "Khodorkovsky is very impressive, but the quality of those beneath him drops off very quickly," says one company adviser. The crisis of the past few months has opened up divisions within Menatep. Mr Khodorkovsky appears to have distanced himself from the more confrontational approach towards the Kremlin adopted by Leonid Nevzlin, once his closest ally, who has fled into exile abroad. Two other Menatep partners - Mikhail Brudno, a senior executive in Yukos, and Vladimir Dubov, its top lobbyist - have quit Russia on fear of arrest. Vasily Shakhnovsky, the remaining partner, has already been convicted of tax evasion and stepped back from his senior role. The mysterious death in a helicopter crash this spring of Stephen Curtis, Menatep's key lawyer, struck another blow. Given current high oil prices, some analysts have speculated that Yukos' low reported cash position may reflect a reversion to Menatep's pre-1999 tricks involving less enlightened corporate governance. They suggest the group is extracting money from the company ahead of impending collapse. That may be one reason why tax authorities sought a court order freezing any asset sales. Bruce Misamore, an American whom Mr Khodorkovsky hired as Yukos' chief financial officer, dismisses the allegations as "utter garbage". Nevertheless, at the very least there is a lack of full co-ordination between Menatep and the company's own board of directors and top management. Simon Kukes, the chairman named by Mr Khodorkovsky when he decided to step down after his arrest, was clearly taken by surprise when the news emerged at the end of last year that Menatep had agreed in principle with Roman Abramovich, the owner of Sibneft, to unwind the merger of the two companies. The Yukos board, which includes US lawyers sensitive to their own international reputations, has maintained a more cautious line, stressing its duty to respect minority as well as majority shareholder rights. Its official policy is to push ahead with the Sibneft merger. But the directors and top executives no longer appear fully to control the situation. They have lost any influence over Sibneft, which was due to have been fully integrated by the start of this year, and have failed to take more aggressive legal action against Mr Abramovich to defend their position. A court has annulled a share issue that was part of the merger process. "We are still very strong, but without Khodorkovsky, we don't have a strategy," says Roman Khomenko, executive vice-president for retail sales at Yukos. "That is OK for one year, but it will soon lead to stagnation." Some insiders say that with top management distracted and the future unclear, Yukos executives are starting to feud between themselves. "The temptation will be go to back to the old Soviet ways," says one employee, hinting at a refusal to listen to orders from above and even at potential theft. Several middle and senior managers have left Yukos and others are talking to potential alternative employers. "People are leaving, money is leaving, and the whole company is starting to fall apart," says Steven Dashevsky, chief analyst with Aton, a Moscow brokerage. If Yukos has begun to unravel from within, it has also been increasingly picked on from without. Its rivals, including Gazprom, Rosneft and Surgutneftegaz, are eyeing its assets and prospective oil and gas fields that Yukos had planned to acquire. Until recently Mr Putin himself hadplayed down the significance of probes into the terms of the company's oil licences. But as the situation has deteriorated, Yukos finds itself fighting a losing battle on its 2000 tax bill and is braced for fresh demands for subsequent years. Its headquarters and regional offices are regularly raided by inspectors and police. "It's quite obvious that the Russian government is doing things that are not in the best interests of the company and its shareholders," says Mr Misamore. "Some of their actions are clearly political. If the government decides to bankrupt the company, we will try to fight, but you can't win a battle like that." While some dismiss the warning of bankruptcy as an alarmist strategy of defensive brinkmanship by Yukos, the prospect has shocked investors. They had previously viewed the conflict as a personal settling of scores between the authorities and Mr Khodorkovsky without wider repercussions. But now they fear that bankruptcy proceedings would be subject to manipulation. Bankers and minority shareholders could lose out while Yukos' commercial rivals might interfere. "The main driving force in this conflict was to deal with Khodorkovsky. It was very personal," says one Moscow investment banker who thinks Menatep will lose its controlling stake over Yukos. "But now it has opened up the opportunity for Russian-style asset-grabbing. The best approach would be to cut a deal. Bankruptcy and asset stealing would be the nuclear option." The escalation of the conflict around Yukos has also unnerved Russia's other tycoons. They have pledged to pay more taxes, accept greater government influence over the exploitation of natural resources and be better corporate citizens. Mr Putin alone knows his true motives for a campaign against Mr Khodorkovsky that could not have taken place without his personal sanction. It is likely that even he does not have full knowledge of the competing commercial and political interests at stake. Nor may he be able entirely to control the process now that prosecuting authorities, backed by public opinion, have scented blood. The result of such uncertainty is that other oligarchs are regularly cited as potential future targets of legal action: from Mr Abramovich at Sibneft to Vladimir Potanin, who controls the metals group Norilsk Nickel, and Mikhail Fridman of Alfa, one of the main shareholders behind the Russo-British oil joint venture TNK-BP. So far foreign oil companies in Russia remain relatively calm. They are accustomed to the country's political swings and cumbersome bureaucracy and can compare the risks and rewards with those elsewhere. "We would never do something without clear political blessing, and the Yukos case has brought that into focus," says one western senior executive based in Moscow. "Russia is certainly not the worst place to invest." But there is little doubt about investors' frustrations over existing oil projects and their hesitancy over new ones. With oil prices so high and the search for safer supplies outside the Middle East intensifying, Russia has not lived up to the hopes of foreign companies and governments alike. There is little to show for the "energy dialogues" launched two years ago by the European Union and the US to boost investment. Aside from a handful of eye-catching multi-billion dollar projects - such as the offshore Sakhalin developments by ExxonMobil and Shell in Russia's far east, and BP's joint venture with TNK - the sums coming into the country are extremely modest. "Yukos could set back Russia by two or three years," says one banker close to the company. "There is lots of private equity and foreign direct investment that has been halted while investors look at what's going on. Menatep and Alfa were the 'go-to' partners, the cleanest and most professional. Who is to be the partner of choice now?" Given the mutual mistrust between the authorities and Mr Khodorkovsky and his circle it is difficult to imagine what shape a deal on a change in Yukos' ownership would take. Mr Putin's hand may appear much stronger but Mr Khodorkovsky may not yet have played his last card. Yukos has damaged Mr Putin's political reputation abroad. On Monday in Switzerland Russian prosecutors were rebuffed in their attempts to freeze Dollars 3bn in Menatep's supposed foreign-held assets, the latest public embarrassment. Investors hope that bankruptcy or some intermediate form of state-controlled insolvency procedure for Yukos can still be avoided. If it does happen they will want to see whether the state takes and keeps control of Yukos, respects bankers and minority shareholders, and how transparent and fair it is in handling any asset sales. What is certain is that the longer the uncertainty continues, the worse it will be for Mr Khodorkovsky, Yukos, investors and even Mr Putin himself. The outcome of Yukos's court hearing on Friday against an additional Dollars 3.4bn tax bill for 2000 will be closely watched by domestic and foreign business groups as well as their financial advisers. Yukos argues that, like its peers, it respected the laws in force at the time of its tax returns in 2000, and that it has been the victim of retroactive evaluation by the tax ministry. "The allegations . . . are illegal, unfounded and selectively applied," the company said recently. A ruling that upholds the tax ministry's demands would set an unwelcome precedent for other companies, as well as their local and international tax advisers who helped them use tax-avoidance schemes and auditors who approved them. But the court action against Yukos mirrors intensifying rhetoric from Russian politicians, including President Vladimir Putin, who stressed the need to prevent "tax dodging" in his state of the nation address last month. Such comments reflect the government's frustration at the ability of companies to exploit legal loopholes by hiring experienced consultants to advise them on tax issues and to manipulate civil servants and judges in Russia's fragile post-Soviet institutions to their own advantage. In reality, the state often failed to draft effective laws and instead relied on the tax authorities and judiciary to interpret laws in the "right way". Nevertheless, the taxes paid by Russian companies have been modest, although the benefits the state provides in return have also been small. And Yukos was not the worst offender - at least on paper - in effectively paying a lower rate of tax than the statutory rate. Sibneft, which has strong connections to the Kremlin, was singled out by the finance ministry's own analysis in 2000 as being worse. Yukos paid 12 per cent of profits in taxes in 2000, 15 per cent in 2001 and 13 per cent in 2002, compared with a statutory rate of 30 per cent, 35 per cent and 24 per cent respectively. For Sibneft, the figures were 12 per cent, 10 per cent and 14 per cent. TNK has also been aggressive in the past, paying 10 per cent, 21 per cent and 14 per cent respectively. Even so, Yukos was singled out last year by Alexei Kudrin, the finance minister, as the "most aggressive" company in its use of tax avoidance schemes. Mr Kudrin rejected suggestions Yukos was the victim of a selective application of justice. He pointed to the heavy penalties and back-taxes levied against Lukoil and Bashneft since 2002. Whether Yukos interpreted the tax laws more or less effectively than its rivals is open to debate, particularly given the secrecy surrounding the financial structures Russian oil companies use. But some analysts say the company was more aggressive, employing and maintaining a network of companies in domestic low-tax zones, such as Mordovia, while rivals created and dissolved such companies every year, or consolidated their transactions abroad. BP, the British oil company, is believed to have negotiated indemnity with its Russian partner TNK for additional tax bills for the years up to and including 2003. It says it has also paved the way for a more transparent financial structure in the company. The case against Yukos has certainly pushed other Russian companies to pledge to pay taxes at a level closer to the official rate. What remains unclear, however, is whether Yukos will be the last to pay the price for its previous stance.