Of all the battles involving an oligarch and the Russian state, the example of Yukos and its CEO Mikhail Khodorkovsky stands out. Like many mining, energy and exploration companies, Yukos was created in 1993 from the privatisation of struggling state-owned firms in the period after the fall of the Soviet Union. By increasing production and modernising Yukos’ Siberian oil fields and its Volga refineries, Khodorkovsky increased the company’s value from a buying price of around $1.5bn to almost $30bn by 2003.
The demise of the firm began with the effective seizure of Yukos’ main assets and subsequent imprisonment of Khodorkovsky and his business partner, Platon Lebedev, on the grounds of tax evasion and fraud. With its assets frozen and alleged unpaid taxes claimed by the authorities, the firm was declared bankrupt in 2006. Khodorkovsky is appealing against the 14-year prison sentence; the case begins this month. There seems little doubt that the legal case against Yukos is politically inspired. Vladimir Putin had warned the oligarchs not to interfere in politics if they wanted to be free to run their firms. Khodorkovsky chose not to go along with this instruction and has paid a high price.
When Yukos was broken up, many of its most valuable assets were auctioned off to state-owned firms. The firm’s prized production base, ‘Yuganskneftegaz’ was bought by Rosneft, at the time a medium-sized oil firm with state-owned oil assets worth an estimated $6bn. When Rosneft floated its shares in 2006, it had an implied value of almost $80bn. Clearly, its ex-Yukos assets must be worth a big proportion of this. The offer for sale of 13% of Rosneft’s shares was taken up by oil companies like BP, China’s CNPC and Malaysia’s Petronas. Other subscribers included large-scale Russian investors including Roman Abramovich and individual small-scale buyers.
What the investors recognise is the huge potential for profit from oil and gas exploration in Russia. Participating in the Rosneft share sale may open access to more resources for foreign-owned oil companies. Spending billions on the shares of a state firm whose wealth is based largely on the assets of another company effectively bankrupted by the state, may seem a little odd. But they are gambling that the gains from oil exploration in Russia will dwarf the costs involved. For Rosneft, the share sale raised capital to modernise pipelines and boost production using up-to-date drilling technology. Some high profile investors shunned the sale, spurring claims of a lack of widespread support for the company’s plans.
It seems likely that in years to come, the case of Khodorkovsky and Lebedev will continue to be debated. The fortunes of Rosneft are likely to be strategically linked to those of the Russian economy, still heavily dependent on trade in commodities. As a warning sign to Russia’s oligarchs, the fate of Yukos may well be effective. But its impact on Russia’s world standing might not be so positive.