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Ministry Targets Yukos Oil Fields

The government turned the screws on Yukos yet again Wednesday, saying it was "practically inevitable" that production licenses to an unspecified number of oil fields will be taken away from the company.

"The ministry's actions [against Yukos] will be swift and precise," Natural Resources Minister Vitaly Artyukhov told the official government newspaper Rossiiskaya Gazeta.

The remarks were published just hours after President Vladimir Putin left for Italy for Thursday's summit with the European Union, which is alarmed by the recent arrest and imprisonment of Yukos founder Mikhail Khodorkovsky. Brussels on Tuesday said it wanted "clarifications" from Putin about his commitment to private property rights in light of the Yukos affair. When asked later Thursday about Artyukhov's remarks, Putin said he was against taking away Yukos' operating licenses because it "would give the impression that the state was trying to shut down the company." Putin said the economic consequences of such a move "would be negative and would have no basis in law." But he also gave the impression that he might not intervene if Artyukhov carries through with his threat: "I expect that the state will abstain for actions of this kind," he said at a joint news conference with Italian Prime Minister Silvio Berlusconi.

In a conference call with Western investors, Yukos' chief financial officer Bruce Misamore called the development "extremely strange," adding that he didn't know if it were a reason for concern. Market analysts were more concerned than Misamore, pointing out that Artyukhov's plan of attack would directly contradict Putin, who has stated several times that property rights, including minority shareholders' rights, will not be violated in the course of the Yukos investigations.

"The question now is: Are the president's words on protecting property rights only words? Or will they be backed by the leadership's actions?" said Stephen O'Sullivan, a colleague of Granville's at UFG.

If Artyukhov's threats are realized, particularly in light of the fact that Khodorkovsky resigned as head of Yukos this week, the blow to Russia's investment climate would be dramatic, O'Sullivan said. "There are other countries to invest in," he added. Analysts said it is virtually impossible for oil and gas companies to comply fully with each of their licenses, which can run into the hundreds for some companies.

Some of the most frequent license violations include failing to produce according to schedule and flaring an excessive amount of "associated gas," which is a byproduct of oil extraction. Companies often burn this gas instead of selling it because they cannot get access to state-controlled gas monopoly Gazprom's pipeline network. Yukos said there is nothing in Russian law that would prevent a company from meeting the requirements of its licenses just because its shares are frozen.

Prosecutors last week sequestered a 39.6 percent stake of Yukos as "collateral" for the $1 billion Khodorkovsky, Platon Lebedev and other Yukos shareholders allegedly cheated the state out of via tax evasion, fraud and forgery.

Whatever happens, one thing is clear -- life will never be the same for Yukos again, said Stephen Dashevsky of investment bank Aton. In essence, he said, Artyukhov's threat indicates that the forces behind the attack on Yukos were not convinced that Khodorkovsky's resignation meant his complete detachment from the company.

(The Moscow Times 06.xi.03)

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