MOSCOW (AP) – While Russia’s largest oil company Yukos fights government moves to take it apart, the pumps that produce 2 percent of the world’s oil still work. But the company has warned that exports could be interrupted as it gets pushed deeper into a corner over a gargantuan back taxes bill.

Oil traders were speculating about a possible 1 million barrel drop in daily output after the company, OAO NK Yukos, warned Thursday it could run out of cash to fund production within a few weeks. Analysts say the gap would likely be filled quickly by other Russian oil companies – but world oil prices leaped around 80 cents a barrel on fears of a shortage.

Despite President Vladimir Putin’s portrayal of the case as a clampdown on corruption, the relentless legal campaign against Yukos and its jailed founder Mikhail Khodorkovsky has given foreign investors serious worries about the Kremlin’s commitment to a free market.

With the company’s key Siberian production unit being readied for sale by bailiffs – most likely for a bargain-basement price – and a slew of proposals for restructuring the $3.4 billion tax steadfastly getting the silent treatment from the government, those fears were reiterated by U.S. officials Friday.

“We are concerned by the implications of the case for the rule of law and the solidity of property rights,” U.S. Ambassador Alexander Vershbow said after meeting with Yukos chief Steven Theede. “There are many private and institutional investors in the United States who could be directly affected by the handling of the case.”

Yukos says it doesn’t have the cash to pay the current bill, much less another $3.3 billion recently announced by tax authorities or the further crushing bills that are widely expected.

Khodorkovsky, however, claimed at his trial on chargest of forgery, fraud and tax evasion this month that Yukos has been an exemplary taxpayer, putting more money into government coffers than other Russian companies. A Yukos financial statement lists tax obligations of $473 million for the first nine months of 2003.

Hamstrung by a court order blocking it from selling assets to raise cash, Yukos has said it could face bankruptcy; Theede on Thursday suggested that could be coming in a matter of weeks.

Yukos says it has made 11 offers to the government for a restructuring of the tax bill and Khodorkovsky, who resigned as Yukos chief shortly after his arrest in October, has offered his stake in the company as settlement for the claims. Those offers were joined Friday by a proposal from a Britain-based investor group with connections to a former partner of Khodorkovsky’s.

But all have so far been brushed off or ignored, fueling speculation that the government is determined to dismember the company and sell the pieces into Kremlin-friendly hands.

Some analysts see the Kremlin’s unyielding line as part of Putin’s bigger economic and political vision for the country.

Chris Weafer, a strategist at Moscow’s Alfa Bank, argued recently that the Yukos case was intended to set a precedent guaranteeing support for potentially painful reforms.

“Pushing reforms that may be opposed by bureaucrats and vested interest lobby groups had to wait until the Kremlin’s strong position of power was firmly established,” Weafer said. The Yukos case “should ensure cooperation from big business as the economic priorities take center stage.”

It is, at least, a dramatic comedown for a company and mogul who emblemized Russia’s post-Soviet transition from chaotic, elbows-out wheeling and dealing to more circumspect business practices.

Within a few years of taking over at Yukos, Khodorkovsky transformed the company into Russia’s largest and most efficient oil company, bringing production costs per barrel down from $12 to $1.5 – one of the best in the world.

Yukos also led the way in introducing Western accounting standards to replace fuzzy Russian bookkeeping, throwing open its ownership structure and appointing Western executives to key positions.

But Khodorkovsky’s acquisition of Yukos happened under much less transparent circumstances.

Khodorkovsky and his partners bought Yukos from the state in 1995 for about $370 million in one of the highly controversial privatization auctions of the 1990s. That was widely seen as a severely undervalued price; at the height of Yukos fortunes last spring it was valued at $45 billion.

But the company’s value in the stock market has tumbled as its political and financial problems have grown. Shortly before Khodorkovsky’s arrest, its stock was trading at around $15.90 on Moscow’s RTS exchange; on Friday, it closed at $5.35.

With the endgame under way, observers say the only question now is who picks up the pieces.

If state-owned companies end up getting pieces of Yukos, that could reinforce fears that Russia is moving to renationalize companies. And a cut in production could threaten the impressive recovery Russia has made from its 1998 economic crisis – a recovery largely driven by high world oil prices.

Paul Collison, an oil and gas analyst with Brunswick UBS in Moscow, said oil exports, which account for some 40 percent of Russia’s budget revenues and provide much of Putin’s international clout, would be kept pumping come what may.

“Even if all the assets are stripped out of Yukos, the political powers wouldn’t stop domestic oil companies from stepping in to cover the gap,” Collison said. “I think there will be no interruption to total Russian output.”

Yukos exports about 75 percent of its 1.7-million-barrel daily production, primarily to Eastern European countries like Hungary, Slovakia and Poland.

AP-ES-07-25-04 1828EDT



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