The Russian Oil Giant Yukos - When Business and Politics Collide
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Case Code: ECON007 Case Length: 18 Pages Period: 1993 - 2004 Pub Date: 2004 Teaching Note: Not Available |
Price: Rs.500 Organization : Yukos Industry : Oil Countries : Russia Themes: Business Enviornment |
Abstract Case Intro 1 Case Intro 2 Excerpts
"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.
The state surely does not want to destroy the company."
- Vladimir Vladimirovich Putin (Putin), President, Russia, in November 2003.
"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.
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), 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.
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 Menatep 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.
Meanwhile, the crisis began to take a serious toll on Yukos. As Yukos investors began selling its shares with concerns over future growth, Yukos' stock price dropped by 12% by early November 2003 and analysts expected the share price to fall by a further 10% to 15%. The government froze over 40% of Yukos stock (which was controlled by Khodorkovsky). A very major setback followed when the news of the proposed merger between Yukos and Sibneft (Russia's sixth-largest oil company) being cancelled began to appear. It looked as if Yukos' dream of becoming one of the world's leading oil companies (through this merger) was going to be shattered (See Exhibit I for a fact-sheet of Yukos and Exhibits II and III for its financials).
Interestingly, through all this, Yukos stood by Khodorkovsky. Its directors issued a statement to this effect, and it read, "The board declares its full support and belief in the management of the company and states its certainty that a fair and open court hearing will find the arrest of Mr Khodorkovsky illegal and all accusations against him groundless."According to analysts, the troubles at Yukos and the arrest of Khodorkovsky were politically motivated. Media reports stated that the Russian government wanted to curb the rapidly growing financial and political power of Yukos as well as that of Khodorkovsky. The fact that Khodorkovsky openly supported the opposition parties was believed to have played an important role in this alleged campaign against him and Yukos. All these developments brought the uncertain, complex business environment in Russia and the extent of political meddling in the country's businesses onto the global stage.
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