Yukos's debt to western creditors may improve its standing

As a result of fallout from Russia's economic woes, Russian oil major Yukos has seen nearly a third of its shares fall into the hands of foreign banks. The upshot is that this may have strengthened the company's prospects.

Three foreign banks-West Merchant Bank of Germany, Daiwa Bank of Japan, and Standard Bank of South Africa-have gained control of a combined 31.9% percent of the company, entitling them to 8 seats on the 24-member board of directors.

Yukos is scheduled to hold an annual general meeting on June 29 to elect a new board of directors, reflecting recent changes in the company's ownership structure.

Priobskoye factor

In early 1998, Menatep, a member of the Yukos-Rosprom holding company, transferred the interests to the foreign banks after failing to repay $235 million in debts. The shares were transferred under Russia's REPO scheme, which provides the option of a buy-back. In effect, the stake was mortgaged.

After Russia's Aug. 17, 1998, financial crash, which saw Menatep lose its license, it became clear that Yukos had forfeited any hope of regaining the stake. The only question was who would take control of the shares.

In March and April of this year, news circulated that Goldman Sachs, Merrill Lynch, ABN Amro, and ING-Barings were planning to purchase the stake and invest in the development of Priobskoye oil field in the Khanty-Mansiisk autonomous region. Yukos subsidiary Yuganskneftegaz holds a license to develop the deposit's northern area (see story, p. 21).

Priobskoye development will be complicated but is expected to be well worth the effort, as the area is estimated to contain 5 billion bbl of oil. According to Yukos, the northern area alone could produce up to 145 million bbl/year (almost 400,000 b/d).

Priobskoye is particularly attractive to foreign investors, as it is on the list of deposits to be developed under production-sharing agreements. And, according to Yukos, at least 30% of the $1.6 billion in estimated development costs for the northern sector will have to be raised from foreign sources.

An elegant solution

Yukos creditors West Merchant Bank, Daiwa Bank, and Standard Bank have now apparently decided to involve themselves in an effort to get Priobskoye's potential cash cow up and running. The new board members will evaluate the relevant data and participate in strategic decisions on its development.

The foreign banks' move is good for Yukos in that it creates the precedent of a civilized approach to resolving a debt conflict with foreign partners.

Given that Yukos is capitalized at $170 million, the $235 million value of the 31.9% stake taken by the banks represents a good price. If Yukos had chosen to repay its debt, it would not have been able to finance the company's development programs, which require $500-600 million/year.

Also, with representatives of respected foreign banks on its board of directors, Yukos will become more attractive to foreign investors and institutions, including the World Bank, with which Yukos has been negotiating for some time to secure a long-term, low-interest loan of $500 million to finance Priobskoye development.

Finally, Russia's so-called leftist political forces have made calls to nationalize Russian industry in the past. But even if the Communists return to power, they would find it difficult to nationalize an oil company owned one-third by foreign shareholders. Such an act would be fraught with danger for the government, exposing Russia's foreign assets to retaliatory measures.