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December 17, 2004

Updating the Yukos case -- Judge Clark issues TRO

U.S. Bankruptcy Judge Letitia Z. Clark issued a temporary restraining order late Thursday enjoining the Russian government's auction in Moscow on Sunday of the main production subsidiary of Russia's OAO Yukos. Here are the earlier posts on the Yukos chapter 11 case.

Although no one involved in the case really expects the Russian government to comply with a United States court order, the real purpose behind Yukos seeking the order in the first place is to chill participation by Western financial insitutions in financing an acquisition of the Yukos unit at the auction.

Russian natural-gas company Gazprom is expected to bid on the Yukos unit named Yuganskneftegaz ("Yugansk") and Deutsche Bank AG is leading a consortium of Western banks in financing Gazprom's bid for Yugansk. The Russian government owns 40% of Gazprom, which has extensive dealings with Western oil and gas firms. Consequently, the prospect of being held in contempt of the TRO is a serious consideration for the banks and Gazprom, both of which are quite likely to be found to be subject to the jurisdiction of U.S. courts.

Although a major issue in the Yukos chapter 11 case is whether a U.S. Bankruptcy Court can exercise jurisdiction over a Moscow-based business with tenuous American ties, Judge Clark concluded that she had jurisdiction in issuing the TRO. The fact that U.S. investors own 15% of Yukos' shares was an important factor in her decision, which stated in part:

"Participants in international commerce, in Russia, in the United States and elsewhere, need to have an expectation that when they invest in foreign enterprises they may do so without fear that their investments may be the subject of confiscatory action by agencies of the foreign government."

Judge Clark went on to find in her order that the events in Russia that led to the notice of the auction are "inconsistent with the regular application of Russian law within Russia" and that harm to Yukos from the sale would be "irreparable." In comparison, she noted that delaying the sale did not cause any material harm to the Russian government's ability to collect its tax claim.

Consequently, Yukos looks to have won the first round of this fight to take its case against the Russian government to the investing public. And make no mistake about it, this is really a high stakes public relations battle in which Yukos is attempting to embarrass the Kremlin in the international business community. Although the principles of sovereign immunity almost certainly protect the Russian government from any damage claims, the basis for damage claims against Western banks and Gazprom is far better. Many precedents exist for Western companies grabbing assets of Russian firms in the West to satisfy judgments issued by Western courts.

That is the essential point that Alan Riley, an expert on European law, makes in this Wall Street Journal ($) op-ed:

Mr. Putin now may well find that in lands with independent courts and respect for the rule of law, the title of Gazprom to Yukos's assets will come under serious legal attack. Yukos has a very strong property rights argument in most Western jurisdictions to persuade the courts that Gazprom has no title to its assets and then seek compensation in the form of seizing Gazprom tankers, bank accounts and subsidiaries. If Yukos can prevail in the Western courts, Gazprom's revenues are likely to fall sharply as a result. Oil and gas arriving in the West will be seized and Gazprom, for fear of further seizures, will be unwilling to ship more oil and gas abroad. Given Gazprom's size, such a disruption will have a knock-on effect on the flow of oil and gas to the EU, and a serious negative impact on the Russian economy. If Yukos prevails in the courts of the West, Mr. Putin, however bitter he may find it, may realize that he has to settle if he wants to protect Gazprom and keep the oil flowing.

So, bankers -- lend at your peril and stay tuned.

Posted by Tom at December 17, 2004 4:24 AM |


Never have I seen such wishful thinking. It is doubtful that this US bankruptcy court ruling will have any impact on any bidders such as China and India. The Russian ruble itself is very strong due to the windfall of high oil and gas prices.

Posted by: Mike Harrington at December 17, 2004 9:24 PM

Interestingly, as of today, only four companies -- all of them Russian -- have deposited the almost $2.0 billion that is a condition of participating in the auction. To say the least, interest in the auction from the international business community has not been robust.

Posted by: Tom K. at December 17, 2004 10:05 PM

I rather doubt Russia permitted foreign companies to bid on such a strategic asset.

Posted by: Dylan at December 19, 2004 4:02 PM

Dylan, that is correct, but many Western companies invest in Russian assets through foreign subsidiaries that are involved in Russian joint ventures. The point is that the Russian government's heavy-handed treatment of Yukos has chilled Western investment interest in the Yukos production unit, which would otherwise have generated extensive interest from the Western oil and gas community.

Posted by: Tom K. at December 19, 2004 4:44 PM

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