YUKOS
Encyclopedia
OJSC "Yukos Oil Company" was a petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...

 company in Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...

 which, until 2003, was controlled by Russian oligarch
Oligarch
Oligarch may refer to:* A member of an oligarchy, a form of government* Business oligarch* Russian oligarch...

 Mikhail Khodorkovsky
Mikhail Khodorkovsky
Mikhail Borisovich Khodorkovsky is a Russian prisoner, considered by some - such as Amnesty International - to have been imprisoned for political reasons, jailed until 2016 and a former Russian oligarch and businessman...

 and a number of other prominent Russian businessmen. After Yukos was bankrupted, Khodorkovsky was convicted and sent to prison.

Yukos headquarters was located in Moscow
Moscow
Moscow is the capital, the most populous city, and the most populous federal subject of Russia. The city is a major political, economic, cultural, scientific, religious, financial, educational, and transportation centre of Russia and the continent...

. Yukos was one of the biggest and most successful Russian companies in 2000-2003. In 2003, following a tax reassessment, the Russian government presented Yukos with a series of tax claims that amounted to $27 billion. As Yukos's assets were frozen by the government at the same time, the company was not able to pay these tax demands. On August 1, 2006, a Russian court declared Yukos bankrupt.

Most of Yukos's assets were sold at low prices to oil companies owned by the Russian government. The Parliamentary Council of Europe has condemned Russia's campaign against Yukos and its owners as manufactured for political reasons and a violation of human rights.

History

The company was created on April 15, 1993 by Resolution
Resolution (law)
A resolution is a written motion adopted by a deliberative body. The substance of the resolution can be anything that can normally be proposed as a motion. For long or important motions, though, it is often better to have them written out so that discussion is easier or so that it can be...

 №. 354 of the Russian government and consisted of the following enterprises: a Western Siberia
Siberia
Siberia is an extensive region constituting almost all of Northern Asia. Comprising the central and eastern portion of the Russian Federation, it was part of the Soviet Union from its beginning, as its predecessor states, the Tsardom of Russia and the Russian Empire, conquered it during the 16th...

n oil extraction enterprise Yuganskneftegaz
Yuganskneftegaz
Yuganskneftegaz is a wholly integrated subsidiary of Rosneft that owns and operates the second largest oil production complex in Russia. It was formerly the most important production subsidiary of Yukos, but was expropriated by the Russian government and given to Rosneft, a state-owned...

 and oil refineries in Samara Oblast
Samara Oblast
Samara Oblast is a federal subject of Russia . Its administrative center is the city of Samara. Population: In 1936–1990, it was known as Kuybyshev Oblast , after the Soviet name of Samara .-Demographics:Population:...

: Novokuybyshevsk
Novokuybyshevsk
Novokuybyshevsk is a city in Samara Oblast, Russia, located on the western bank of the Volga River, away from it. Population: Established in 1946, it was granted town status in 1952...

 NPZ, Kuybyshev
Samara, Russia
Samara , is the sixth largest city in Russia. It is situated in the southeastern part of European Russia at the confluence of the Volga and Samara Rivers. Samara is the administrative center of Samara Oblast. Population: . The metropolitan area of Samara-Tolyatti-Syzran within Samara Oblast...

 NPZ and Syzran
Syzran
Syzran is the third largest city in Samara Oblast, Russia, located on the right bank of Saratov Reservoir of the Volga River. Population: It was founded in 1683 as a fortress, and was granted town status in 1796. One tower from the 17th-century fortress still stands...

 NPZ (NPZ stands for NeftePererabatyvayushchy Zavod, literally "petroleum processing plant"). In 1995, decree
Decree
A decree is a rule of law issued by a head of state , according to certain procedures . It has the force of law...

 №. 864 of the Russian government added Samaraneftegaz to Yukos.

Its Russian abbreviation ЮКОС comes from the names of the main entities that initially comprised the company: Юганскнефтегаз (Yuganskneftegaz: Nefteyugansk
Nefteyugansk
Nefteyugansk is a city in Khanty–Mansi Autonomous Okrug, Russia, located south of the Ob River, close to the larger city of Surgut. Population: It is currently served by Surgut International Airport....

 + petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...

 + gas) and КуйбышевнефтеОргСинтез (Kuybyshevnefteorgsintez: Kuybyshev
Samara, Russia
Samara , is the sixth largest city in Russia. It is situated in the southeastern part of European Russia at the confluence of the Volga and Samara Rivers. Samara is the administrative center of Samara Oblast. Population: . The metropolitan area of Samara-Tolyatti-Syzran within Samara Oblast...

 + petroleum + organical synthesis).

Yukos was one of the world's largest non-state oil companies, producing 20% of Russian oil—about 2% of world production. Its assets were acquired in controversial circumstances from the Russian Government during the privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...

 process of the early 1990s. The initial period of "oligarchic privatization" was characterized by bloodshed, and Yukos was certainly no exception. Alexei Pichugin
Alexei Pichugin
Alexei Vladimirovich Pichugin was born in the town of Orekhovo-Zuevo, part of Moscow Region, in 1962. He was the chief security official at the former Russian oil giant Yukos. In August 2006, Pichugin was sentenced, by a Moscow court, to serve 24 years imprisonment for conspiracy in several murders...

, the former Security Chief of Yukos, has been convicted on multiple counts of murder and attempted murder, and is now under investigation along with Yukos partner Nevzlin for the shooting death of Vladimir Petukhov, the mayor of the Yugansk oil province and a vehement opponent of Yukos, on Khodorkovsky's birthday in 1998. Lawyers for Pichugin and Nevzlin, who lives in self-imposed exile in Israel, say that both the charges and the new investigation are politically motivated.

In 1996 the majority of Yukos shares (90%) were bought by Group Menatep in a series of auctions. At the time Yukos, as most other Russian energy companies, was badly affected by the economic recession in the 1990s. After privatisation Yukos started recovering very quickly and in the course of several years became one of Russia’s largest oil companies and a leader in corporate governance reform http://theyukoslibrary.com/index.php?option=com_content&view=article&id=17&Itemid=35.

In April 2003, Yukos agreed to a merger with Sibneft, but the merger was soon undone in the aftermath of the arrest of Yukos CEO Khodorkovsky in October, 2003.

In December 2003, a tax re-audit was conducted by the Russian tax authorities, after which Yukos was issued with tax claims that exceeded its revenues for 2002 and 2003. At the same time, Yukos's assets were frozen by the government. In December 2004, its core asset, Yuganskneftegaz, was sold in an auction to an unknown company called Baikalfinansgrup, which was later bought by state oil company Rosneft. Eventually, Yukos was bankrupted in 2006 and liquidated in 2007.

Tax claims

In July 2004, Yukos was charged with tax evasion, for an amount of over US$ 7 billion. The Russian government accused the company of misusing tax haven
Tax haven
A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....

s inside Russia in the 1990s so as to reduce its tax burden; havens were set up by most major oil producers in outlying areas of Russia which had been granted special tax status to assist in their economic development; such "onshore-offshore" were used to evade profit taxes, resulting in Yukos having an effective tax rate of 11%, vs a statutory rate of 30% at the time. Yukos claims its actions were legal at the time and that the company used the same tax optimisation schemes as other Russian oil companies, such as Lukoil, TNK-BP and Sibneft. However, Yukos was the only one to be charged with tax evasion and penalised by the authorities. Yukos subsidiaries also declared the oil they produced to be "oil-containing liquids" to avoid paying full taxes. A general crackdown on such tax evasion practices began with Putin's presidency, with numerous companies closing or purchasing their trading vehicles. It is widely believed that Yukos severe treatment at the hands of the tax authorities was due to its attempt to purchase a large block of Duma deputies so as to block oil tax reform legislation.

In a move to prevent bankruptcy, management made a friendly offer to the government to pay 8 billion dollars in a period of three years.

A management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...

 presentation from December 2004 shows that the tax claims put the "total tax burden" for 2000, 2001, 2002, and 2003 at 67%, 105%, 111%, and 83% of the company's declared revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

 during those years. As a comparison, the annual tax bill of Gazprom
Gazprom
Open Joint Stock Company Gazprom is the largest extractor of natural gas in the world and the largest Russian company. Its headquarters are in Cheryomushki District, South-Western Administrative Okrug, Moscow...

 is about $4 billion on 2003 revenues of $28.867 billion.

Yukos parent company, the Menatep group, lobbied extensively and successfully to influence Western public opinion, retaining Margery Kraus of APCO http://news.bbc.co.uk/2/hi/business/3228715.stm who successfully pushed through resolutions inter alia before the US House of Representatives and the Council of Europe.

According to a resolution of the Council of Europe,
"Intimidating action by different law-enforcement agencies against Yukos and its business partners and other institutions linked to Mr Khodorkovsky and his associates and the careful preparation of this action in terms of public relations, taken together, give a picture of a co-ordinated attack by the state."

This "raises serious issues pertaining to the principle of nullum crimen, nulla poena sine lege
Nullum crimen, nulla poena sine praevia lege poenali
Nullum crimen, nulla poena sine praevia lege poenali is a basic maxim in continental European legal thinking...

 laid down in Article 7 of the ECHR and also to the right to the protection of property laid down in Article 1 of the Additional Protocol to the ECHR."

"The circumstances of the sale by auction of Yuganskneftegaz to “Baikal Finance Group” and the swift takeover of the latter by state-owned Rosneft raises additional issues related to the protection of property (ECHR, Additional Protocol, Article 1). This concerns both the circumstances of the auction itself, resulting in a price far below the fair market-value, and the way Yukos was forced to sell off its principal asset, by way of trumped-up tax reassessments leading to a total tax burden far exceeding that of Yukos’s competitors, and for 2002 even exceeding Yukos’ total revenue for that year."

Forced sale of assets

In the Western media and the Russian opposition media the high-profile arrest of Khodorkovsky is usually attributed to his activism in the Russian political process. On October 31, 2003, shortly after the arrest of the company's CEO, the Russian government froze ownership of 44% of the company's shares. The reason given was to prevent a group of shareholders led by Khodorkovsky from selling a large stake of the company to the US oil firm Exxon
Exxon
Exxon is a chain of gas stations as well as a brand of motor fuel and related products by ExxonMobil. From 1972 to 1999, Exxon was the corporate name of the company previously known as Standard Oil Company of New Jersey or Jersey Standard....

.

A Yukos shareholders' meeting scheduled for December 20, 2004 was to discuss a "crisis plan." A Russian company must hold such a meeting before it can apply for bankruptcy in Russia. The Russian Government sold Yukos's main production unit, Yuganskneftegas, at auction on December 19, 2004 to recover some of $28 billion in alleged tax debts, following the loss of an appeal by the firm.

Menatep
Bank Menatep
Bank Menatep was a US$29 billion holding company created by Mikhail Khodorkovsky, that had indirect controlling interest in Yukos Oil Company. It was involved in the US$4.8 billion diversion of International Monetary Fund funds.-Scandal:...

, the company representing Mikhail Khodorkovsky, promised to challenge the sale's legality in a number of countries, and to sue the buyer and any company helping to fund the deal. The expected buyer was the 38% Russian state owned company OAO Gazprom
Gazprom
Open Joint Stock Company Gazprom is the largest extractor of natural gas in the world and the largest Russian company. Its headquarters are in Cheryomushki District, South-Western Administrative Okrug, Moscow...

. Some European and American oil firms decided not to bid.

On December 19, 2004, the Baikalfinansgrup
Baikalfinansgrup
Baikalfinansgrup is a Russian limited liability company owned by Rosneft Oil Company. It is best known as the company that won the December 19, 2004 auction for a 76.79% share in Yuganskneftegaz, formerly the core production subsidiary of Yukos Oil Company...

, an unknown company registered several days before the auction in Tver at an address, where a snack bar was located, won the auction for Yukos's subsidiary
Subsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...

 Yuganskneftegas with a 260.75 billion rubles
Russian ruble
The ruble or rouble is the currency of the Russian Federation and the two partially recognized republics of Abkhazia and South Ossetia. Formerly, the ruble was also the currency of the Russian Empire and the Soviet Union prior to their breakups. Belarus and Transnistria also use currencies with...

 ($9.4 billion) bid. Yuganskneftegas was a few months earlier valued at between $15 billion and $17 billion by DrKW which the Russian government hired to value the subsidiary.

Suggested financier
Financier
Financier is a term for a person who handles typically large sums of money, usually involving money lending, financing projects, large-scale investing, or large-scale money management. The term is French, and derives from finance or payment...

s to the Baikal Finance Group are Gazprom, Sberbank
Sberbank
Sberbank Rossii is the largest bank in Russia and Eastern Europe. The company's headquarters are in Moscow and its history goes back to Cancrin's financial reform of 1841...

, the Russian central bank, China National Petroleum Corporation
China National Petroleum Corporation
China National Petroleum Corporation is a state-owned fuel-producing corporation and the largest integrated oil and gas company in the People's Republic of China...

, and ONGC (India). The reason for this arrangement may be that Gazprom
Gazprom
Open Joint Stock Company Gazprom is the largest extractor of natural gas in the world and the largest Russian company. Its headquarters are in Cheryomushki District, South-Western Administrative Okrug, Moscow...

 feared international legal action against it after a Houston, Texas
Houston, Texas
Houston is the fourth-largest city in the United States, and the largest city in the state of Texas. According to the 2010 U.S. Census, the city had a population of 2.1 million people within an area of . Houston is the seat of Harris County and the economic center of , which is the ...

 court ruling that barred Gazprom from bidding for the unit. This ruling was subsequently vacated.

According to people familiar with the auction
Auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...

 only two bidders registered for, and were present during, the auction process: Baikalfinansgrup
Baikalfinansgrup
Baikalfinansgrup is a Russian limited liability company owned by Rosneft Oil Company. It is best known as the company that won the December 19, 2004 auction for a 76.79% share in Yuganskneftegaz, formerly the core production subsidiary of Yukos Oil Company...

 and Gazprom
Gazprom
Open Joint Stock Company Gazprom is the largest extractor of natural gas in the world and the largest Russian company. Its headquarters are in Cheryomushki District, South-Western Administrative Okrug, Moscow...

's former oil unit Gazpromneft
Gazpromneft
This article is about a former subsidiary of Gazprom. For the current oil arm of Gazprom, see Gazprom Neft.Invest Union is a Russian company based in St. Petersburg and a former subsidiary of Gazprom...

. Accounts from the auction say that the first bid of $8.6 billion came from Baikal. When the auctioneer asked Gazpromneft to offer its price, a representative of the company asked to make a telephone call and left the room. A few minutes earlier, the auctioneer had told participants that using a mobile phone or leaving the room was against the rules. When a Gazpromneft representative returned to the room, Baikal made a bid of $9.3 billion. Gazpromneft never placed a bid or spoke out.

Shortly after the Yuganskneftegaz auction, Rosneft, Russian state-owned oil company, acquired 100% of shares in Baikalfinansgrup. The acquisition of Yuganskneftegaz significantly increased Rosneft's profits and made it one of the largest oil companies in Russia.

In the course of these events the value of Yukos shares plunged.

Bankruptcy

On 15 June 2006, based on a bank deposit of $4M and its American CEO's Houston home, Yukos filed for bankruptcy protection in the United States, estimating its assets at $12.3 billion and its debts at $30.8 billion, including "alleged taxes owed to the Russian government". It accused the Russian authorities of "an unprecedented campaign of illegal, discriminatory, and disproportionate tax claims escalating into raids and confiscations, culminating in intimidation and arrests". After several weeks of deliberation, the Houston court declared that under no conceivable theory could Yukos assert domicile in the US.

On 25 July 2006, the creditors of Yukos decided to file for bankruptcy after the bankruptcy manager stated that the company should be liquidated.

Management

  • CEO
    Chief executive officer
    A chief executive officer , managing director , Executive Director for non-profit organizations, or chief executive is the highest-ranking corporate officer or administrator in charge of total management of an organization...

    : Steven M. Theede
  • CFO
    Chief financial officer
    The chief financial officer or Chief financial and operating officer is a corporate officer primarily responsible for managing the financial risks of the corporation. This officer is also responsible for financial planning and record-keeping, as well as financial reporting to higher management...

    : Bruce K. Misamore
  • Chairman of the board
    Chairman of the Board
    The Chairman of the Board is a seat of office in an organization, especially of corporations.Chairman of the Board may also refer to:*Chairman of the Board , a 1998 film*Chairmen of the Board , a 1970s American soul music group...

    : Viktor Gerashchenko
    Viktor Gerashchenko
    Viktor Vladimirovich Gerashchenko , byname Gerakl , was the Chairman of the Soviet and then Russian Central Bank during much of the Perestroika and post-Perestroika periods....



By mid-December, 2004, all members of the board of Yukos, and most of the company's senior managers, had left Russia, some of them because of "fear of arrest" after being "summoned for questioning by prosecutors". According to a December, 2004, Houston, Texas
Houston, Texas
Houston is the fourth-largest city in the United States, and the largest city in the state of Texas. According to the 2010 U.S. Census, the city had a population of 2.1 million people within an area of . Houston is the seat of Harris County and the economic center of , which is the ...

 court filing the CFO resides in Houston. According to a company spokeswoman the CEO resided in London, UK
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...

 as of December, 2004.

Executives Mikhail Brudno and Vladimir Dubov fled to Israel
Israel
The State of Israel is a parliamentary republic located in the Middle East, along the eastern shore of the Mediterranean Sea...

 in 2003, and were seen on February 2, 2005 in Washington, D.C. at an official function of George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....

. Both men are cited in an international arrest warrant regarding their involvement in the Yukos tax case.
On Wednesday 6 April 2006, the company's Executive Vice Predisent, Vasily Aleksanyan
Vasily Aleksanyan
Vasily Georgievich Aleksanyan was a Russian-Armenian lawyer, businessman, and a former Executive Vice President of Yukos oil company. On 6 April 2006 he was arrested as a suspected accomplice to tax evasion and money laundering...

, was arrested just six days into his new role. Yukos commented on its web site that, "We can only assume that this action against him is a direct result of his accepting a position to work to protect Yukos Oil Company and its legitimate stakeholders."

The next month, it was reported that some individuals established themselves as the "New Management" of Yukos. However, this was apparently an illegal act, as Yukos "emphatically rejected" the legitimacy of the "new management" which had Vinokurov as President. According to Yukos, these individuals were "loyal to Rosneft" and had as goal the downfall of Yukos.

Yukos' lawyer Pavel Petrovich Ivlev
Pavel Petrovich Ivlev
Pavel Petrovich Ivlev is a Russian lawyer, and now a political refugee in the USA. Ivlev advised Yukos and its former Chairman and CEO Mikhail Khodorkovsky and was charged by the Russian authorities as part of the controversial case against Khodorkovsky and other senior Yukos executives, in the...

 has been accused of several crimes, after which he moved to the USA.

In July 2006, one week before creditors would vote if they should file for bankruptcy, Steven Theede resigned his function because he believed the outcome of this vote was already fixed and therefore this meeting would qualify as a "sham".

Yukos Oil Company claim in the European Court of Human Rights

On 23 April 2004, shortly after the imposition of the tax assessment for the year 2000, the former management of Yukos submitted an application to the European Court of Human Rights.

Yukos’ claim in the ECHR argues that the company's rights, protected by the European Convention on Human Rights, were violated in Russian courts, which led to its bankruptcy and liquidation; it also argues that Yukos has been singled out for discriminatory treatment.

Yukos complained that their rights were breached under several articles of the Convention, specifically:
“Under Article 6 (right to a fair trial) of the Convention, the applicant company complains about various defects in the proceedings concerning its tax liability for the year 2000. Under Article 1 of Protocol No. 1 (protection of property), taken alone and in conjunction with Articles 1 (obligation to respect human rights), 13 (right to an effective remedy), 14 (prohibition of discrimination) and 18 (limitation on use of restrictions on rights) of the Convention, it complains about the lawfulness and proportionality of the 2000-2003 Tax Assessments and their subsequent enforcement, including the forced sale of OAO Yuganskneftegaz. Lastly, the applicant company complains, under Article 7 (no punishment without law) of the Convention, about the lack of proper legal basis, selective and arbitrary prosecution and the imposition of double penalties in the Tax Assessment proceedings for the years 2000-2003.”

Following an admissibility assessment that took five years, the court declared the Yukos application admissible on 29 January 2009.

This in itself was a significant achievement for Yukos, as the Court declares admissible only less than 5% of all submitted applications.

The hearing on merits of the Yukos Oil Company v Russia case in the European Court of Human Rights took place on 4 March 2010. Yukos Oil Company was represented by Piers Gardner, Barrister of Monckton Chambers. The Russian side was represented by a team of lawyers, which included Georgy Matyushkin, Representative of the Russian Federation at the European Court of Human Rights, and British lawyer Michael Swainston.

The claim before the ECHR amounted to $98 billion. This was the largest claim to be brought in the court’s 60-year history. The claim is an estimate of what the value of Yukos would have been if its assets had not been stripped away and the company had not been liquidated in 2007.

The decision on this case was announced on 20 September 2011.

The decision on this case was announced on 20 September 2011.

The court announced that the Russian state violated the human rights of Yukos by agreeing that there had been a violation of Yukos' right to fairness in legal proceedings in relation to a tax re-assessment for 2000. The court also established that there had been a violation of the right to protection of property through enforcement proceedings carried out over tax assessments from 2000-2003.

The interpretation of the tax liabilities which were applied to Yukos was foreseeable, but the court still noted that the crux of the case was the rapid and inflexible enforcement of those liabilities. Yukos had been effectively paralysed because all of its assets were frozen from the first assessment. The court held that two factors in particular contributed to Yukos' demise and violated Article 1 of Protocol No. 1:

'1. The bailiff's choice of Yukos' principal subsidiary as the first target for auction, without considering the implications for the company's future: this dealt Yukos a 'fatal blow';

2. The Russian authorities were unyielding and inflexible in response to requests for time to pay and the bailiffs imposed additional fines amounting to €1.15 Bn, which had to be paid before the taxes, but the payment of which was prohibited under the freezing orders."

The court did however note that the tax assessments themselves were not considered disproportionate. It was agreed that there was not enough evidence to suggest that Yukos had been treated differently from other companies and so no violation of Article 14 was found. The court denied an allegation that Russia misused legal procedures to dismantle Yukos despite the court's nine-judge panel finding that Russia violated three articles of the European Convention on Human Rights.

Both sides have claimed victory over the ruling.

No monetary amount has been awarded after the European Court of Human Rights found the question of damages as "not ready for decision". Both parties have three months to reach a settlement.

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