On the heels of Yukos’ chapter 11 filing late Tuesday in a Houston, U.S. Bankruptcy Judge Letitia Clark will continue hearing testimony on Yukos’ request for a temporary restraining order this morning. The TRO request is Yukos’ last ditch attempt to create a some type of legal impediment to the Russian government’s scheduled auction of Yukos’ primary oil and gas unit this Sunday.
The Russian government has already announced that it intends to proceed with the auction regardless of the outcome of the TRO hearing. However, my sense is that Yukos’ real intent in pursuing the TRO is to create hesitation in the business planning of Western financial institutions that may be planning on financing an acquisition of the Yukos’ unit in Sunday’s auction. Yukos has named a number of those financial institutions as defendants in the lawsuit in which it is seeking the TRO.
The threshold issue in the Yukos’ case is whether a U.S. Bankruptcy Court has jurisdiction because nearly all of Yukos’s assets and most of its creditors are outside the United States. In the court hearing yesterday, Yukos’ attorneys stated that Yukos did not file for bankruptcy protection in Russia because the company fears it would not get a fair hearing there. Although that it probably correct, that is not a basis for jurisdiction in an American federal court. Moreover, lawyers for various defendants pointed out yesterday that Yukos successfully argued in obtaining dismissal of a federal lawsuit two years ago that Yukos had virtually no ties to Texas.
Yukos countered by contending that it has a greater stake in Texas and the United States now. Yukos contended that it is U.S. investors own more than 10% of the company and that Yukos has about $10 million in domestic banks. Moreover, Yukos’ chief financial officer is now working out of his Houston home after fleeing Russia because of government intimidation, although I doubt that making Yukos a home-based business in Houston will have any effect on Judge Clark’s decision on jurisdiction.
The sale of Yukos’ main oil and gas unit — Yuganskneftegaz, but thankfully nicknamed “Yugansk” — is the latest chapter in Yukos’ ordeal with the Russian government over the past year and a half. The company’s troubles — which include an ongoing criminal corruption case against its former CEO and main shareholder, Mikhail Khodorkovsky — is part of a campaign by the Kremlin to deter Russia’s new wealthy capitalists from opposing the Putin government and to regain government control over strategic assets that were privatized during the demise of Russia’s communist economic system in the early 1990s (see well-time Wall Street Journal ($) op-ed here). Given the reduction in Yukos’ equity value during the past year and a half, the Russian government’s handling of Yukos is likely to have a lingering effect on Western capital investment in Russia, which the Russian government still desperately needed.
During the hearing on Wednesday, Judge Clark told Yukos lawyers that they would have to establish in the TRO hearing that the Russian government was attempting to to undervalue Yugansk in the auction, and commented that, for starters, Yukos should be prepared to show that that Yugansk is worth at least twice the $8.6 billion starting price that the Russian government has established for the auction.
Longtime Houston bankruptcy lawyer Hugh Ray, who is representing Deutsche Bank AG (which is financing Gazprom’s bid for Yugansk), generated chuckles in the courtroom yesterday when he observed that Yukos’s chapter 11 filing and request for a TRO is the equivalent of a “legal Hail Mary.”