Yes, YUKOS (Pink Sheets: YUKOY) is an overseas company, a Russian oil and gas producer with no more representation on the U.S. exchanges than a Level I ADR listing, which puts it on the over-the-counter (OTC) board. This is important stuff for a whole lot of reasons.
YUKOS is one of the largest oil companies in the world -- after a recent merger with Sibneft, it became the fourth largest in the world. It accounts for 4% of the entire Russian GDP. So imagine, if you will, an ExxonMobil (NYSE:XOM) or a ChevronTexaco (NYSE:CVX) being pushed into bankruptcy. Multiply it by 10, and add a big factor of direct intervention by the government.
This is what's taking place in Russia, and it's triggering a banking crisis (one bank has already collapsed, and a big lender is teetering), a massive drop in the Russian stock market, the starving off of foreign investment, and a crisis of confidence in the Putin administration's commitment to the rule of law and economic liberalization.
Many analysts say that it is unlikely that YUKOS can avoid bankruptcy, even though it has sufficient assets to cover the debts. Think about that for a second: Oil prices are spiking worldwide, and the fourth-largest oil company in the world is in danger of going bankrupt.
Does that make you nervous? OK. Great. Now relax a little bit. The good news is even if YUKOS goes into bankruptcy, it is going to be one that does not impact operations. In the words of a spokesman, YUKOS is "technically insolvent." Little wonder since the Russian government has frozen its bank accounts.
At odds is a $4.2 billion, and growing, tax bill that the Russian government claims YUKOS owes, and it demands to be paid. But Russian tax collection efforts are notoriously spotty at best. Most observers believe that the focus on YUKOS has more to do with Putin wishing to take out one of his political rivals, billionaire Mikhail Khodorkovsky. He oversees an investment group known as Menatep, which controls 44% of YUKOS shares, and since October, he has languished in a Moscow jail.
Khodorkovsky broke what has been an unwritten rule that Russia's megarich oligarchs should stay out of politics when he began funding several parties opposed to Putin. Several groups in and out of Russia have noted that the vigor with which the government has gone after YUKOS smacks of "selective enforcement."
YUKOS' plight brings into harsh focus what risks exist for investors who buy stock in companies domiciled in countries where the rule of law does not have the same power as in the most developed economies. Last year, PetroKazakhstan (NYSE:PKZ), a company I hold stock in, had to scramble to respond to a rogue tax issue that launched fears that Kazakhstan would confiscate profits from the company.
Russia had come a long way from its Wild West reputation in the early 1990s, when all but the most steely-eyed capitalists dared to tread there. But the recent mauling of YUKOS suggests that the state has taken a giant step backward. That the capital is running scared in Russia at the moment is of no concern to the Kremlin. It wants Khodorkovsky.
Could YUKOS pay the bill? Yes, particularly if the government were to take Khodorkovsky's suggestion and sell off shares from YUKOS' majority shareholders to pay the debt. But YUKOS can't pay anything as long as its assets are frozen, and as such sits in default to the government as well as to commercial partners.
Another potential out would be for the Russian government or its state-owned oil company Gazprom to take over the shares from Sibneft. But even should YUKOS go into bankruptcy, then the company has plenty of assets and cash-generation capability to pay off the debts. It is possible that minority shareholders may be impacted further should the company file for protection, but that's more due to the unpredictability of the process in Russia than any economic insufficiencies at YUKOS.
The shame here is that one of the reasons YUKOS is getting drilled is that last year the company elected to improve its corporate governance and the information it provided investors and the public -- perhaps to give its shares more credibility among Western investors. How many other Russian companies do you suppose are going to make that mistake now?
Watch this story. It's extraordinarily important.
Bill Mann worked in Russia in the mid-1990s. He owns shares of PetroKazakhstan.
