Russia Freezes 44% Of Yukos Shares

by Tatiana Smolenska, Tax-News.com, Moscow

31 October 2003

After arresting Yukos head Mikhail Khodorkovsky last weekend on charges of fraud, forgery and tax evasion, the Russian authorities have now frozen 44% of the shares of Yukos, saying that they need to be able to access the value of the shares if Khodorkovsky is convicted of crimes which could carry penalties of up to US$1bn. The shares are worth US12bn even after falls in their value this week as a direct result of the Russian actions.

The Prosecutor General's Office said the shares are owned by two foreign companies registered on Cyprus and the Isle of Man: "An estimated 1,141,403,296 shares owned by the company Hulley Enterprises (Cyprus), and 49,478,440 shares owned by Yukos Universal Limited (Isle of Man) have been seized. The corresponding accounts with Trust bank have been seized." These companies are subsidiaries of Menatep Group Limited, which is registered in Gibraltar, said the unnamed official. "An estimated 59.5% of the shares in this company belong to Mikhail Khodorkovsky," he said.

Mr. Khodorkovsky, who is being held in a relatively comfortable jail in Moscow, has denied the allegations through his lawyer, saying the investigations are a blatant attempt to muzzle him in advance of elections this winter which the President is determined to win.

Although the shares are frozen, their holders can still vote them, and can receive dividends. It has been supposed recently that Yukos was planning to sell a substantial holding to a Western oil major. Mr. Khodorkovsky had been negotiating with Exxon Mobil Corp. and ChevronTexaco Corp. about selling a stake of as much as 40% in Yukos to one of those US companies, and one of the reasons given by Russian officials for Thursday's action was the need to prevent Yukos from appointing a Western-dominated board.

Reaction to the freezing has been swift and almost universally negative, both inside and outside Russia. Boris Yeltsin said in an interview after the arrest of Khodorkovsky: "Opposition voices should always exist in society. Without them, life is impossible. I've told Vladimir Vladimirovich [Putin] that."

At a previously-scheduled meeting with bankers on Thursday, Mr. Putin described the Yukos case as a necessary step in his effort to strengthen the rule of law; but in televised coverage the bankers looked morose, and one of them read a statement, warning that the situation had become potentially dangerous and calling on Mr. Putin to resolve it. Mr Putin appeared tense and annoyed.

Washington officials said there was mounting concern in the administration: "It raises a lot of worries that weren't there 48 hours ago," said one. "But you still have to think about the whole relationship."

In the first half of this year, Russia reported a net inflow of capital for the first time since the collapse of the Soviet Union, but the trend was reversed in the third quarter after the government began to target Yukos, and more than $7 billion left the country. One financial industry leader said this week: "This is the single worst thing the Russian government could have done for the economy." But others were more sanguine, at least before the seizure of the shares, saying that the affair would blow over.

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