Back when I was in college, participating in a model United Nations competition (representing Ghana, if you must know), I learned about the concepts of "nationalization" and "expropriation." They're two flavors of the same thing and basically refer to a country taking private property, with or without paying a token price.
Last week, Russia thought long and hard and then decided: "Without."
Both Bill Mann and I have written several times about the YUKOS (Pink Sheets: YUKOY) scandal. (To get the full story, click through the links at the end of this article.) Basically, what is going on over in the land of caviar, oil, and vodka chasers is a classic example of "expropriation by taxation." It's kind of a state-level version of Priceline's (NASDAQ:PCLN) famous "name your own price" business model. A government decides: "I want X, but I don't want to pay full price for it." The government then imposes taxes on X until the amount of the tax owed equals the value of X. Then the government takes X in payment for the taxes.
Right now, "X" means YUKOS. And Russia has decided that YUKOS has underpaid several years' worth of taxes. At last count, the company's tab had reached $7.5 billion for tax years 2000 and 2001 alone, of which YUKOS has already moved heaven and earth to pay $3 billion. To pay for the balance, Russia wants to sell a YUKOS subsidiary that generates two-thirds of the company's cash. Russia commissioned Dresdner Kleinwort Wasserstein, a subsidiary of German financial powerhouse Allianz (NYSE:AZ), to audit the YUKOS subsidiary, and the numbers that Dresdner came back with were roughly $17 billion.
That wasn't what Russia wanted to hear, however, as the companies it is considering selling the subsidiary to, to satisfy the tax debt, don't have that kind of cash lying around. So Russia knocked the price down to $10.4 billion, saying the subsidiary's value was impaired by "high risks for potential buyers." Now, it appears that Russia is engaged in a madcap exercise in putting on the appearance of propriety. It already has YUKOS owing $4.5 billion in taxes. All it needs to do is "find" $5.9 billion more in unpaid taxes, and voila! The value of the subsidiary should exactly match the amount of taxes owed. That won't take long, as the government still has YUKOS' 2002 and 2003 tax returns to audit. There's almost certainly another 6 billion odd dollars in there somewhere, but just in case there isn't, the government floated a "Plan B" over the weekend -- it may discount the already discounted $10.4 billion valuation by a further 60% and sell the subsidiary for just $4 billion.
Lucky for Russia, none of this monkey business has yet deterred foreign investment. The list of recent new and expanded investors in Russia includes marquee names such as Alcoa (NYSE:AA), ConocoPhillips (NYSE:COP), General Electric (NYSE:GE), and SunMicrosystems (NASDAQ:SUNW). To all of whom I'd say just one thing: hope y'all know a good tax lawyer.
Read all about YUKOS' tribulations in:
- ConocoPhillips Looks East
- YUKOS: From Dismal to Worse
- Russian Market in Gulag
- YUKOS' Slippery Situation
Fool contributor Rich Smith owns no shares in any company mentioned in this article.
