Russian oligarchs, take note: you don't break a bargain with Putin

As Yukos teeters on the brink and its former chief executive stands trial, Tim Webb says the oil giant is ready for a fight to the death

As the clock strikes midnight tomorrow, Russian oil giant Yukos, which pumps more oil than the whole of Libya, faces ruin. On Wednesday, the company missed a midnight deadline to pay a backdated 100bn roubles (£1.8bn) tax bill from 2000. Russian companies usually have five days to come up with the money before bailiffs seize their assets, and Yukos officials were in frantic negotiations with government officials this weekend to try to save the company. If it went bankrupt, it would be the biggest single case of corporate vandalism by a government. Crude oil prices ticked up by more than 1 per cent on Thursday over worries about a disruption in supplies if it went bust.

As the clock strikes midnight tomorrow, Russian oil giant Yukos, which pumps more oil than the whole of Libya, faces ruin. On Wednesday, the company missed a midnight deadline to pay a backdated 100bn roubles (£1.8bn) tax bill from 2000. Russian companies usually have five days to come up with the money before bailiffs seize their assets, and Yukos officials were in frantic negotiations with government officials this weekend to try to save the company. If it went bankrupt, it would be the biggest single case of corporate vandalism by a government. Crude oil prices ticked up by more than 1 per cent on Thursday over worries about a disruption in supplies if it went bust.

Also tomorrow, after months of delays, the trial of Russia's richest man will begin in Moscow. Prosecutors for the state accuse Mikhail Khodorkovsky, the largest shareholder and former chief executive of Yukos, of tax evasion and embezzlement to the tune of £540m. The charges are so long and detailed, it will take four or five days just for the prosecution to read out the indictment against him. The trial could last up to three months.

No one knows what will happen to either Yukos or Mr Khodorkovsky. Russia is not known for transparency in either its political or business affairs. Eric Klaus, the chief strategist and head of equities at investment banking boutique Sovlink, says: "It has accelerated into the endgame, but the situation is obscure even by Russian standards." What is clear is that the fates of Mr Khodorkovsky and Yukos are linked. So what impact could this domestic squabble have on the international stage?

The "game" started in earnest last October at the Siberian airport of Novosibirsk, where Mr Khodorkovsky's private plane had landed for refuelling. Machine-gun-toting agents from the FSB security service, the former KGB, surrounded the plane then stormed it. They arrested Mr Khodorkovsky, who was still Yukos's chief executive, taking him back to Moscow for questioning in connection with an investigation into alleged theft and tax evasion.

Analysts and political strategists agree the charges are politically motivated. The OECD, the club of rich countries, said last week: "It is clearly a case of highly selective law enforcement." It added that the courts and prosecutors are "highly politicised". The arrest of Mr Khodorkovsky and the tax claims against Yukos sparked fears that the Kremlin was starting a wider cam- paign against the oligarchs - the small band of wealthy Russians controlling its biggest businesses - to claw back some of the millions they made during the murky privatisations of the '90s. But it hasn't. The mistake Mr Khodorkovsky made was to get involved in politics and, in doing so, break the "oligarch pact" that President Vladimir Putin made when he came to power. In return for the Kremlin not interfering in their business affairs, the oligarchs agreed not to dabble in politics.

The other oligarchs have heeded the message. In Moscow on 1 July, Mr Putin met the 21 most important oligarchs, including Roman Abramovich, the Chelsea Football Club owner and oil and aluminium tycoon. On the same day, Russia's tax authorities levelled another £1.8bn tax charge on Yukos for 2001. Being Russia, the timing was no coincidence. The message was clear: "Cross me like Khodorkovsky did, and I will nail you too."

Other oligarchs have started to buy assets abroad, but this is as much for business as political reasons. Norilsk Nickel, the world's largest producer of nickel and palladium, is controlled by Vladimir Potanin, one of Russia's biggest oligarchs. It bought a 20 per cent stake in South African miner Gold Fields earlier this year. This was Norilsk Nickel's largest foreign investment to date, which analysts said would help it expand. But it is not a sign that the other oligarchs are running scared, and afraid that the fate of Mr Khodorkovsky and his company will befall them.

For all the speculation about Mr Abramovich's motives in buying Chelsea - could it be to curry favour in the UK in case he ever needs to seek shelter here? - he is frequently in Russia. He still owns a 25 per cent stake in Yukos, which recently merged with his oil company, Sibneft. Despite ample opportunity, he has not sold his stake to a foreign company, nor tried to sell Sibneft to a cash buyer, which could be the actions of someone worried about having his assets frozen and wanting to take the money and run. As Mr Klaus says: "The other oligarchs are not next. Putin is happy to let them become fabulously wealthy as long as they do not get involved in politics. They know what happens if they do."

The Yukos affair has attracted the attention of the West. Jack Straw, the Foreign Secretary, said in Moscow last week: "The whole of the Russian government appreciates the need for there to be a predictable and stable climate for foreign investment to continue." He conceded, however, that it was an "internal matter". In other words, as long as the Yukos affair is not widened to include other businesses, the West will not interfere.

Richard Wallace, the director of the Russo-British Chamber of Commerce in Moscow, says the Yukos affair does not mean foreign firms should avoid Russia. "Because of the publicity, British companies have been getting in touch," he says. "But our message is that Russia is still a good place to invest and do business, provided companies carry out the right research."

But the affair has damaged the Russian economy and its standing in the West. The head of Russia's largest private bank, Alfa Bank, warned last week that up to half its retail deposits could be withdrawn by customers because of nervousness. New regulations from the central bank, as well as Germany's restructuring of Russian debt, have caused most of the uncertainty, but bond markets have also been unsettled by the Yukos affair.

It has, at least, reminded investors that the country is not risk free. The Russian economy has boomed in recent years, helped by high oil prices which underpin much of its wealth. Foreign investment, such as BP's £8.3bn joint venture with Russian oil company TNK, has poured in. But apart from Moody's, credit rating agencies have still not given the country the highest rating. The UK-based Russian oil producer Sibir Energy also experienced the downside of doing business in Russia when it discovered that its stake in a Russian joint venture had been secretly diluted, leaving it almost worthless.

Yukos shareholders are jittery too. The share price has bounced like a yo-yo on every scrap of news, good or bad. "Exile", a satirical website run by expatriates in Moscow, ran a joke news story last month which sums up the mood. "President Putin may have said the word 'Yukos' while sneezing yesterday, causing the company's stock to soar 400 per cent," it said, quoting an analyst as saying: "The market is taking that as a positive sign that the Kremlin is backing off."

The Yukos camp hopes that its survival of the midnight deadline last week is a good sign. Robert Amsterdam, a lawyer for Mr Khodorkovsky, says: "They did not shoot the captive on Wednesday." But if this only proves to be a temporary reprieve, Mr Khodorkovsky's advisers who represent Menatep, the investment vehicle which owns 44 per cent of the company, are planning their response.

Mr Amsterdam says that if the Russian government starts seizing Yukos's assets, they would seek a ruling in an international court allowing them to seize the overseas assets of Russian state-controlled companies in compensation. "There is an unlimited possibility for legal action by Menatep. Any assets relating to Russia would be fair game," he says. Lawyers in the UK said this would be difficult to pull off, but it suggests that Mr Khodorkovsky will not go down without a fight.