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Russia: State Freezes Shares of Oil Giant

by Andrew Jack, Arkady Ostrovsky and Lina SaigolFinancial Times
October 30th, 2003

Russian prosecutors on Thursday froze a 44 per cent block of shares in Yukos, the country's largest oil group, in a sharp escalation of the crisis surrounding the company and its owners.

The move, which was immediately denounced as illegal by the company, followed the arrest on Saturday of Mikhail Khodorkovsky, the chief executive and largest shareholder, on criminal charges of fraud and tax evasion totalling $1bn.

Menatep, the holding company that controls the shares, said most belonged to international companies and were no longer owned by Mr Khodorkovsky.

The freezing of the shares triggered an 8 per cent drop in the RTS, the key Russian stock index, and fuelled concerns among overseas investors about the risks of doing business in Russia. Yukos shares fell nearly 14 per cent in Moscow.

Yukos is the most significant of a number of Russian companies seeking investment by western counterparts. ExxonMobil and ChevronTexaco, the US oil groups, have both been in talks about taking a multibillion-dollar stake in the company.

Thursday's move was the latest action against the company by federal prosecutors - widely interpreted in Moscow as being politically motivated. One big question is whether such a campaign could be the beginning of a reversal of the 1990s privatisation of the Russian economy.

A leading Russian-based investment banker said: "This is potentially a very unstable situation. Every merger and acquisition deal has been put on ice. The market certainly has to fall much further."

Vladimir Putin, the Russian president, who on Monday rejected calls from Russian business leaders to discuss the case, on Thursday night made efforts to calm the market at a previously planned meeting with international investment institutions.

Stephan Newhouse, chairman of Morgan Stanley International, said Mr Putin gave an articulate summary of the government's programme.

"With regard to the recent Yukos events, he assured us that this does not represent a campaign against business nor any change in the government's commitment to the market economy and to support the property rights of individuals," Mr Newhouse said.

According to one banker present, Mr Putin expressed clear economically liberal views, and stressed there was no attack on business as a whole and that it was important to preserve Yukos and not destroy its value.

However, Alexei Kudrin, Russia's reformist minister of finance and a key ally of Mr Putin, warned that "events are beginning to affect the markets", and called on judges involved in the cases to be "objective and balanced".

The investigations risk sparking a political crisis. On Thursday night Mr Putin accepted the resignation of Alexander Voloshin as the head of the presidential administration. Mr Voloshin was seen as a counterweight to the hawkish siloviki faction in the Kremlin that has been behind the anti-Yukos campaign. Mr Voloshin was replaced by Dmitry Medvedev, a Putin loyalist.

Mr Voloshin's departure heralds a shift in power away from those close to former president Boris Yeltsin in favour of Mr Putin's circle from his native St Petersburg. Anatoly Chubais, a leader of the liberal Union of Right Forces party who has criticised Mr Khodorkovsky's arrest, said: "This is serious. There are dangerous signs of the change of course in Russian politics."

UES, the state-controlled Russian electricity monopoly, confirmed on Thursday that it had offered the job of executive chairman to Mr Voloshin.

In what some interpreted as a warning shot to Mr Chubais, the Federal Security Service on Thursday raided the offices of Novosibirskenergo, a regional subsidiary of UES.





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