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// YUKOS Is $3.4 Billion Lighter
The YUKOS Affair
Yesterday the Moscow Arbitration Court allowed the former Ministry of Taxation's suit [the ministry (MNS) has been reorganized into the Federal Tax Service] against YUKOS to collect nearly 100 billion rubles from the company. The speed with which the court considered the largest tax suit in Russia's history repudiates all versions of the YUKOS affair except the political one. It is unlikely that YUKOS will be able to make use of defense opportunities provided by legislation: during consideration of MNS's claim, the court turned down all attempts by YUKOS's lawyers to discuss the legal side of the case.
The third day of the Moscow Arbitration Court's sitting in the former Ministry of Taxation's suit against YUKOS and its managing company YUKOS-Moscow was essentially devoted to hearing of the defendant's representatives and pleadings. We remind our readers that MNS brought tax claims against YUKOS amounting to 99 375 538 234 rubles and 40 kopecks following an audit of the MNS inspectorate for Nefteyugansk (Khanty-Mansi Autonomous Area), which in turn audited YUKOS last fall. A repeat audit of a taxpayer is prohibited by legislation, but MNS often “reaudited” taxpayers by auditing their subdivisions: this is a controversial practice but so far no one has succeeded in contesting it in court.
YUKOS tried to contest the very legality of MNS's filing of a suit against it through a countersuit. Since this right is based on the fundamental provisions of the Constitution, YUKOS's lawyers were of the opinion that the court had to consider it in order of priority and postpone a hearing of the case on the merits until it was determined whether MNS had the right to such a suit. However, Judge Sergei Grechishnin reserved consideration of the countersuit until June 1 (another of YUKOS's petitions has been postponed until May 28) and continued his consideration of the case on the merits.
YUKOS's defense against MNS's claims promised to be extremely interesting for legal specialists. Sergei Pepelyaev, a lawyer with the law firm Pepelyaev, Goltsblat, and Partners who represented YUKOS in court, yesterday drew up a list of 11 fundamental objections to MNS's position. Furthermore, whereas OOO YUKOS-Moscow's objections, which lawyer Mikhail Dolomanov of the firm Dolomanov and Partners presented in court, mainly concerned procedural complaints, discussion of even four of Mr. Pepelyaev's points could considerably enrich jurisprudence.
Mr. Pepelyaev claimed that MNS's findings on the activities of Mordovian “offshore” companies that were part of the YUKOS holding's chain of operations were obtained illegally, since MNS did not have the right to use data on their operations during the audit; to do this, it would have to order an audit of them. He also claimed that charging YUKOS extra taxes for 18 companies that were officially independent of it amounted to double taxation. In addition to this, YUKOS's complaints stemmed from MNS's introduction of the concept of “straw men” into legal practice, which is not mentioned in the legislation, as well as from the means MNS used to determine the “actual owner” of the oil and petroleum products.
We note that MNS officials have never used any of these concepts in other cases, and court rulings upholding or refuting these points on “Pepelyaev's list” could be considered a precedent. Acceptance of MNS's position will in effect lead to a legal revolution: many Russian holdings have built their business on the use of companies that are de facto but not de jure affiliated.
However, there was no debate of this very promising case. After the judge declared the evidence in the case examined, 19 Federal Tax Service (FNS) officials and 2 YUKOS lawyers were supposed to enter into a debate. But they managed to exchange only a few retorts before Judge Grechishnin unexpectedly declared the case considered and the court retired to make a decision. An hour later it was announced that all of MNS's claims had been allowed. YUKOS was obliged to pay the FNS 47.989 billion rubles in unpaid taxes, 32.19 billion rubles in fines, and 19.195 billion rubles in penalties; the duty of delivering these payments to the budget was imposed on YUKOS-Moscow.
The court ruling added nothing to the criminal cases of Mikhail Khodorkovsky and Platon Lebedev. Irina Golub and Mikhail Dodonov, YUKOS's chief accountant and executive officer, respectively, may incur criminal liability if the Prosecutor General's Office sees evidence of intent to evade taxes in the court ruling: the court found them liable for nonpayment of taxes, and this was recorded in the minutes of the trial.
The fact that the court took only three days to consider a major tax litigation case in first instance arbitration in such a complicated suit leaves no doubt that all future cases involving YUKOS, Mikhail Khodorkovsky, and his colleagues will be considered in a manner that at the very least differs from conventional judicial practice. Sergei Pepelyaev and Mikhail Dolomanov announced that their clients would contest Judge Grechishnin's ruling in a court of appeal within 30 days as prescribed by lawthe ruling will not enter into legal force until then. However, after yesterday's ruling, the appearance of new, unexpected interpretations of the laws by the courts, the Prosecutor General's Office, the bailiff service, and the Ministry of the Interior should not be ruled out in the YUKOS affair. The company's lawyers have not succeeded in obtaining satisfaction of any of their complaints against procedural violations during consideration of any case connected with YUKOS; therefore, the authorities are unlikely to stop at any other “medium-sized” violation of the Criminal Procedure Code, Arbitration Procedure Code, or Civil Code. The court did not even pay attention to the arithmetic mistakes MNS made in its calculation of claims against the company.
The actual consequences of the court ruling are still unclear. Yesterday at YUKOS they said they were hoping for a consideration of their countersuit on June 1. If, contrary to the business community's obvious expectations, the arbitration court finds MNS's suit illegal, this will require a review of yesterday's decision. If the court of appeal turns down YUKOS or YUKOS-Moscow with the same speed as the Moscow Arbitration Court did, the question as to whether YUKOS will actually pay $3.4 billion will become a pressing one in early June.
Experts believe that the company is theoretically capable of paying this amount but note there is a high probability that it will declare bankruptcy. Aleksandr Shokhin, chairman of the supervisory board of the investment company Renaissance Capital, believes there is a very likely possibility that YUKOS will go bankrupt, and the way out of it is through a large-scale sale of YUKOS's assets. However, according to YUKOS's press secretary Aleksandr Shadrin, the company's assets will remain under arrest until its appeal is considered.
A variation of YUKOS's “self-bankruptcy” is also possible: Group MENATEP, YUKOS's largest shareholder, has already warned the company of a possible technical default on a $.16 billion loan. However, despite the fact that given this turn of events, the FNS and its claims of nearly 100 billion rubles will automatically fall into the fifth rank of creditors and will not have voting authority at any meetings of creditors except the first, the probability that the creditor banks and Group MENATEP will succeed in appointing a loyal external manager to the company is not very high. Furthermore, the FNS may try to satisfy its claims against YUKOS in adversary proceedings and then the dismantling of the company's assets will start.
Yesterday's ruling of the Moscow Arbitration Court on the merits of the YUKOS case most likely means that the time for a decision “on the merits” of the dispute between Mikhail Khodorkovsky and the state out of court is fast approaching. The tax department's victory gives the government enormous odds: if judicial practice is preserved in the YUKOS affair, the company's shareholders will be left with only bad and very bad choices of a way out of the situation.
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The Court Took Away YUKOS's Profit for the Day
Stock market trading was buoyant yesterday after Tuesday's drop. Sepculators reacted positively to President Vladimir Putin's address to the Federal Assembly, which emphasized economic development, a strong army, and abundant natural resources. In the words of Maksim Shein, an analyst at the investment company BrokerCreditService, “despite the fact that the president said almost nothing new, the speech had a liberal tone that investors liked.”
Growth has touched almost the entire range of securities. Whereas blue chip quotations fell in unison on Tuesday, on Wednesday they rose in the same unison. As a consequence, the Russian Trading System (RTS) index rose 1.8% on trading results, returning to the 630-point mark. However, yesterday's rise stayed within the limits of general market movement. If it had not been for the president's speech, traders would have found other positive pretexts. Growth leaders among blue chips were Surgutneftegaz (+4.6%) and RAO UES of Russia (+3%) stocks. However, activity is not that high, and RTS trading volumes are holding within the $70–80 million range as they have on previous days. At the same time, traders note that the activity of short-term speculators is being restrained by low ruble liquidityinterbank credit rates have been holding at a high level of 15–20% per annum for more than a week now. And the liquidity situation is unlikely to change for the better before the end of the month.
At the end of trading YUKOS securities were once again in the center. After the end of the RTS session, news agencies received information about the Moscow Arbitration Court's ruling on the collection of 99.4 billion rubles from YUKOS in the suit filed by MNS. This caused an instant collapse of quotations. Whereas YUKOS had shown a 4.4% increase in value on the RTS, on the Moscow Interbank Currency Exchange (MMVB) all accumulated potential was recouped within a matter of minutes. Buying started at close to the 260-ruble per share mark. As a result, YUKOS managed to stay in the black but only with a result of +0.72%. In the opinion of Anatoly Kaplin, an analyst at Aton Investment Group, the relatively calm reaction to the court's decision shows that it was predictable, and everyone who wanted to get rid of their shares had already done so.
The MMVB index rose 1.8% on the day's results; and the Kommersant index, by 2.1%.
They'll Sell YUKOS to an “Orthodox Banker”
In the opinion of Evgeny Yasin, research manager at the Higher School of Economics, after the presidential elections, the political basis of the YUKOS affair gave way to an economic basis. “The point of what is happening now is to take away the company's property,” the well-known economist believes. Evgeny Yasin outlined a possible scenario of the future development of events for Kommersant. “The company's property is arrested to compensate the government for inflicted damage. The court declares these actions lawful. YUKOS's assets are transferred to state ownership. Then the property is put up for public auction. Some nice Orthodox banker ideologically close to the government appears and on legal grounds acquires everything put up for sale.” According to Mr. Yasin, this version is supported by the imposition of an injunction on alienation of the company's property adopted as a security measure in MNS's suit against YUKOS. “The amount of these security measures is many times higher than the damage imputed to the company.”
Dmitry Butrin, Vadim Visloguzov
All the Article in Russian as of May 27, 2004
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Photo: Pavel Smertin
