The Duck of Minerva

The Duck Quacks at Twilight

Shell games

June 28, 2007

On Tuesday, I mentioned that second rule of Russia watching is “follow the money”. The only problem is that following the money is not easy.

I’ve been asked on occasion whether I think Mikhail Khodorkovsky, the former head of YUKOS oil now in prison for tax evasion and fraud, is guilty or were the charges against him politically motivated.

My answer: “Yes.”

Khodorkovsky gained control of YUKOS in the notorious loans-for-shares auctions, which were a breathtakingly audacious scheme to defraud the Russian government (and thereby the Russian people) at a time when the government was on the verge of fiscal (and possibly political) collapse.

Once he held the reins of YUKOS, however, Khodorkovsky seems to have run it more or less in the style of a western public company. YUKOS was widely praised for its wise and productive investment decisions, which resulted in higher productivity, and its comparatively high level of corporate transparency. But Khodorkovsky wasn’t satisfied with running Russia’s most successful oil company. He started to dabble in politics–and in doing so, violated the bargain between the Kremlin and the oligarchs: you stay out of our business and we’ll stay out of yours.

Khodorkovsky is now in a Siberian prison, and YUKOS was split up and put back on the auction block to pay its tax debts to the Russian state.

Much like the loans-for-shares auctions, these auctions have been less than transparent–but in these cases, the prime beneficiaries of the shady dealing have been the energy parastatals: Rosneft and Gazprom. Borrowing a page from the oligarchs’ strategy book, they’ve used shell companies to pick up YUKOS assets while disguising their own role in the bidding. One of YUKOS’ prime assets, its Yuganskneftegaz subsidiary, was purchased by a mysterious company named Baikalfinansgrup. This company, which at the time of the auction had its address registered to a small office-building in the provincial city of Tver and had been in official existence for only two weeks, nevertheless managed to secure $1.7 billion in financing from the state-owned savings bank Sberbank. The only other registered bidder in the auction was the Rosneft-Gazprom joint venture Gazpromneft (which should not be confused with the former Sibneft, now owned by Gazprom and called Gazprom Neft), which ultimately declined to bid, leaving Baikalfinansgrup to acquire Yuganskneftegaz for a fraction of its market value. Baikalfinansgrup was later revealed to be a subsidiary of Rosneft, created specifically for the acquisition of Yuganskneftegaz.

If your head is spinning after reading that, I can’t blame you. It’s hard to keep track of all the maneuvering and switching. But wait, there’s more.

The big mystery currently occupying YUKOS watchers concerns the very last lot of YUKOS assets, which was auctioned off earlier this spring. Everyone expected that this last lot, which included YUKOS’ Moscow headquarters, would be acquired by Rosneft. But at the last minute, a previously unknown company, OOO Prana, appeared out of nowhere and outbid Rosneft, driving the final sale price up to over 100 billion rubles ($3.9 billion) from a starting price of 22 billion rubles.

Who is this mysterious company, and why was it willing to pay so much for this lot? Moscow real estate is expensive, but not that expensive. Details have started to dribble out, starting with the news that the lot included not only the real estate, but also numerous other assets, including accounts receivables of over $1 billion. Kommersant has made some serious effort to sort this out, though it’s still a bit murky. The biggest question, though–who’s behind Prana?–is still a mystery. Rosneft denies any connection, though phone records suggest a potential connection to Gazprom via Gazprombank.

Now Rosneft is in negotiations to acquire some of those assets purchased by Prana, possibly at a hefty discount. There’s also speculation that oligarch Roman Abramovich is somehow behind all of this. Before break-up of YUKOS, it was set to merge with Sibneft, which was at the time controlled by Abramovich. When the deal was cancelled, Abramovich ended up short. Could this be a way of paying him off?

Stay tuned, and we’ll keep trying to follow the money.

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