The Russian Oil Giant Yukos - When Business and Politics Collide

            
 
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Case Details:

Case Code : ECON007
Case Length : 18 Pages
Period : 1993 - 2004
Pub Date : 2004
Teaching Note :Not Available
Organization : Oil
Industry : -
Countries : Russia

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"The company thinks it is humiliating for the Russian legal system. We have no doubts about a final victory in this war. We consider this whole thing as a politically motivated affair."

- A Yukos Press Statement Commenting on the Russian Government's Actions Against the Company, in October 2003.1

"The state surely does not want to destroy the company."

- Vladimir Vladimirovich Putin (Putin), President, Russia, in November 2003.2

"The situation with Yukos, when one day it suddenly turns out that the leadership of one of Russia's biggest companies has been accused of stealing, killing, violence, embezzlement and, on top of all that, tax evasion, looks like a campaign."

- A Senior Official at Kremlin, in July 2003.3

Russia's Richest Man Goes to Jail

In October 2003, Mikhail Khodorkovsky (Khodorkovsky), CEO of Yukos, the largest oil company in Russia, and the country's richest person (according to Fortune)4, was arrested and put behind bars. He was allegedly guilty of tax evasion and fraud to the extent of $1 billion against the Russian state.

The news caused a huge upheaval in the Russian stock market, which took a severe beating and plunged by 10% on the first trading day after the arrest. According to reports, this was the heaviest decline since the Russian financial crisis of August 1998. Khodorkovsky resigned from his position at Yukos eight days after his arrest.

Economics | Case Study in Management, Operations, Strategies, Business Strategy, Case Studies

Yukos had been accused of various malpractices for quite some time, such as tax evasions and theft of state property (by Khodorkovsky and other Yukos executives).

Two of its top executives - Planton Lebedev (CEO of Group Menatep5 that controlled 61% stake in Yukos) and Vastly Shakhnovsky (President of Yukos Moscow) were already behind bars on criminal charges. However, nothing had prepared company watchers for Khodorkovsky's arrest since he had strong business and political ties nationally and internationally. Some analysts felt that the financial crisis created by this development could even destabilize Russia's political and economic life.

The Russian business community expressed shock at Khodorkovsky's arrest and said that the State's law enforcement agencies could not be trusted any more.

Reportedly, many Russian business elite (called the oligarchs) feared that they might also meet the same fate as Khodorkovsky, for having indulged in similar practices during the 1990s.

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1] "Russia tycoon held on fraud charge," www.cnn.com, October 25, 2003.

2] "Putin denies Yukos license threat," http://news.bbc.co.uk, November 05, 2003.

3] Kremlin is the place where the official residence of Russian President is located. The word is commonly used to denote the Russian government or Presidential power. The quote is from "Yukos Affair is Tricky," Moscow Times, July 31, 2003.

4] With an estimated fortune of over $8 billion, Khodorkovsky occupied the 26th place in Fortune's list of richest persons in the world (outside the US).

5] Group Menatep is an international diversified holding company, formed in 1997 from consolidation of assets of its existing shareholders and business partners. Its key business areas include oil and gas; banking and financial services; mineral fertilizers; telecommunications and IT; and portfolio investments.

 

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