Abstract

UPDATE

The story of Yukos Oil and its chief executive, Mikhail Khodorkovsky, took a dramatic turn this year when the Russian government began investigating Khodorkovsky and other major shareholders. How the case will be resolved is still not known, but it has created a crisis of confidence among investors in the new Russia, especially after Khodorkovsky resigned, in a letter written from his jail cell, in early November.

Over the next few years, I had set myself the goal to build an international energy company-one of the leaders of the global economy, he said in a statement from prison, where he has been held since October 25.i But the situation that has developed today forces me to set aside my plans. I am leaving the company.

The arrest of Khodorkovsky has sent shock waves through Russia and the international investment community. Russias richest man and Yukoss largest shareholder, Khodorkovsky was arrested and charged with a $1-billion fraud and with tax evasion on October 25. Five days later, the Russian government seized shares of Yukos Oil belonging to Khodorkovsky and his allies.

The dramatic arrest of Khodorkovsky is the latest in a series of arrests of Yukos executives. The first was on July 2, 2003, with the arrest of a large shareholder, Platon Lebedev, president of Menatep Bank, who is suspected of illegal appropriation of a 20-share holding of Joint Stock Company Apatit,' a mining company whose shares were owned by the government in 1994. The sum of the shareholding is estimated at $283 million.ii

The Moscow Interbank Currency Exchange Index, or Micex, dropped 13 percent before trading was suspended. Yukos plummeted 19 percent and Sibneft, a company that Yukos has agreed to buy, slid 16 percent. Shares of Yukos's main competitors, Lukoil and Surgut, also fell 10-to-15 percent on the Russian Trading System Stock Exchange (RTS).iii

Before the criminal investigation, Yukos shares had surged after its adoption of international standards of corporate governance, financial transparency and social responsibility. In June 2003 the companys market capitalization hit an all-time-high of $30 billion.iv

Investments in Russian oil dramatically increased earlier this year when BP Plc agreed to merge with TNK Oil to create TNK-BP, Russias third largest oil producer, in a $6.15-billion transaction.v Prior to the October 25th arrest, Khodorkovsky was in talks with two major oil firms Exxon and Chevronregarding the sale of as much as 40 percent vi of the largest Russian oil company. These companies consider Russia and its oil resources part of their long-term growth strategies.

In the official statement, published on the companys Web site (www.yukos.com), Yukos Oil called the charges against Khodorkovsky "absurd." They are considered to be politically motivated, the statement said. Yukos officials defended Khodorkovskys reputation, stating he was the first to place the importance of business ethics and a good business reputation on a par with such corporate fundamentals as economic efficiency and consistent growth. And, he was the first to actually start running his business fully in line with these principles of civilized corporate behavior.vii

The Yukos Oil case raises concerns about the interplay of politics and business in Russia, as Khodorkovsky is an open critic of President Vladimir Putin and has raised money to support Putins political opponents. Khodorkovsky himself has indicated he might someday pursue a political career. The seizure of his shares in Yukos Oil also raises the specter of nationalization of private businessessomething the Russian government has been quick to deny will ever happen again in Russia but which nonetheless concerns international investors.

SUMMARY

By the summer of 2003, Yukos Oil had become something of a test case for the private sector in Russia. Like many things in post-Communist Russia, the story behind Yukos is infused with intrigue, politics, and scandal. This paper examines how Mikhail Khodorkovsky, the controversial chief executive and controlling shareholder, transformed himself from a banker whose business practices were much maligned to an oil magnate whose company has been held up as a model for corporate governance in todays Russia.

The paper charts Khodorkovskys background, how he came to own Yukos and how he turned it, this year, into the worlds fourth-largest oil producer with the acquisition of Sibneft, the fast-growing Siberian oil corporation. Along the way, Yukos and Khodorkovsky benefited from the tumultuous changes in Russia while adopting a Western style of management and corporate governance. At the same time, Khodorkovsky benefited from the Russian legal system and from a reporting system that made investor scrutiny of the firm and its performance difficult.

In July, the story of Yukos Oil took another twist, when state prosecutors began investigating the firm. Khodorkovsky, now considered the countrys wealthiest man, is financing political parties opposed to President Vladimir Putin, raising concerns that investigations of Yukos are a politically motivated smear campaign. By the fall, Yukos was reported to be negotiating a deal to sell nearly half its shares to another international oil company.

iOstrovsky, Arkady; Jack, Andrew; Lloyd, John; Dempsey, Judy, Financial Times, "Yukos chief quits to push for 'truly democratic' Russia, Nov. 4, 2003, p. 1 (U.S. edition)

iihttp://www.rusnet.nl/news/2003/07/03/currentaffairs02.shtml

iiiCNN Money, http://money.cnn.com/2003/10/27/news/international/russia_yukos.reut/ind...

ivhttp://www.templetonthorp.com/en/news345

v http://www.cnn.com/2003/BUSINESS/06/26/russia.oil/

vihttp://www.forbes.com/newswire/2003/10/27/rtr1123986.html

viiwww.yukos.com

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Citation

Minder, Raphael, Rahim Rabimov, and Diana Yousef-Martinek. "Yukos Oil: A Corporate Governance Success Story?" Chazen Web Journal of International Business (Spring 2003). http://www.gsb.columbia.edu/journals/files/chazen/Yukos_proof.pdf.

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