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. Last Updated: 07/27/2016

Menatep Prepares to Sue Kremlin

Yukos' core shareholder, Group Menatep, has taken the first step toward suing Russia in international courts for compensation over the massive drop in Yukos' share value since the legal onslaught against it began, Menatep director Tim Osborne said Thursday.

Menatep sent a letter to President Vladimir Putin at the end of last week, serving notice that the group could sue under the terms of the Energy Charter, an international treaty aimed at protecting the interests of investors, which Russia signed in 1994 but has not yet ratified.

The official notice gives the administration three months to reach an amicable settlement before Menatep can launch proceedings in an international tribunal.

"We have just served them notice that we wish to begin the compulsory negotiation process," Osborne said. He said Menatep had discussed the notice for some time as a way to get the government to answer their calls for talks.

Osborne said that Menatep, which controls about 60 percent of Yukos, could sue for the drop in share value since the onslaught began last year. The company's market capitalization has plummeted from $32.3 billion before Khodorkovsky's arrest last October to $6.3 billion now.

The notice is being served by two Cyprus-based entities, Hulley and Yukos Universal, through which Menatep holds its shares in Yukos. Cyprus is also a party to the treaty, which offers protection to investors against expropriation of assets by a state, or measures deemed equivalent to expropriation.

A group of Swedish investors in Yukos has also indicated it could take the government to international arbitration in a letter sent to Economic Development and Trade Minister German Gref.

Faced with a possible fire sale of its main production unit, Yuganskneftegaz, Yukos said Wednesday it was calling an emergency shareholders meeting for Dec. 20 to decide whether to file for bankruptcy, or restructure the company in the event of a last-ditch settlement being reached with the government.

At the meeting, shareholders will be presented with a stark choice: settlement or bust.

But investors can only vote for the settlement or "anti-crisis" plan, which is aimed at staving off a sale of Yugansk as payment for Yukos' $14 billion in outstanding back taxes, if the government agrees to it.

"The anti-crisis plan ... has to be approved by shareholders and the relevant state authorities," Yukos board chairman Viktor Gerashchenko said in a statement Thursday.

Settlement proposals forwarded to the government to pay off the tax bills include an offer made by jailed former Yukos CEO Mikhail Khodorkovsky to hand over his stake in Yukos, as well as debt rescheduling, the possibility of raising international loans and the sale of noncore assets, Yukos CEO Steven Theede said in an interview Wednesday.

Each proposal requires the approval of the government. Asset sales are currently prohibited under a court-imposed asset freeze, while raising financing from international banks is impossible while the company still does not know the total value of its tax bills, Theede said.

Yukos has been served with $17.5 billion in back tax claims for 2000-02, and could face more for 2003. The Federal Tax Service began an investigation into the company's tax payments for 2003 several weeks ago, Theede said.

"There would be considerable borrowing power if we had a final resolution as to what the liabilities were," Theede said. He said the company had been in talks with some international banks on the matter, but none of them could be termed "serious" until the company knew its final tax liability.

Yukos officials have been in talks with top-level Kremlin and government officials over the proposals for months. But Theede said the government has never indicated whether it was ready to accept any of them.

On Monday the government appeared to dash any hopes for a settlement by serving the company with massive new tax claims for 2002 worth just over $9 billion.

If no settlement is reached, Yukos would likely be forced to file for bankruptcy. If the government announces it will sell off Yugansk for a low price, the company's total debts would outweigh the value of its assets -- a condition that, under Russian law, would mean the company has to file for bankruptcy.

On Wednesday, however, Theede was still holding out hope for a last-minute settlement.

"I have some hope, based on the fact that so far the government hasn't done anything that is irreversible. The playing field is still wide open," he said. "They've done nothing that would force them to sell Yuganskneftegaz."

Both Menatep and Yukos have said they consider a sale of Yugansk illegal and have threatened to sue.

Osborne said Thursday a decision on whether to file for bankruptcy should lie with the company's management and board. "We'll be waiting for a recommendation," he said. "But if the government continues with the ludicrous approach of using incredible tax assessments while selling off assets for a song, bankruptcy may be obvious.

"It seems to me beyond the credibility of any government that it can drive its most successful company into bankruptcy on the basis of a personal vendetta."

Menatep's threat to take the Russian state to international arbitration may not get too far, because the treaty has yet to receive parliamentary ratification, making it unclear what the state's legal obligations are.

"The manner and extent to which a state's acceptance of provisional application of a treaty creates legal obligations is not completely clear under international law," said Tim Gould, a spokesman for the Energy Charter's secretariat in Belgium.

Osborne, however, said it was his understanding that Russia's signature of the treaty meant that it was binding, even without ratification.

A third option up for discussion at the December shareholders meeting is whether the company should liquidate itself. This step can only be taken if its assets are still worth more than its liabilities, a partner at Linklaters law firm, James Mandel, said.

Liquidation could leave Yukos with some room to maneuver with its assets.

If a company is already in self-liquidation when its liabilities exceed the value of its assets, it has to file for bankruptcy. But under Russian law, it would then no longer have to hand over management to a court-appointed external manager. Instead, a board-appointed liquidator would remain in control of the assets.

Under bankruptcy, the court-imposed asset and account freeze would be lifted, possibly leaving a Yukos-appointed liquidator with some room to transfer assets out of the government's reach.

The court, however, would control the sale of assets under bankruptcy, Mandel said.

 A court in Chukotka on Thursday upheld a decision to overturn a share swap Yukos undertook as part of its now aborted merger with Sibneft, Interfax reported. Yukos now has to return the 15 percent stake it gained as part of a share swap for 72.5 percent of the company, the agency said.

Yukos has already canceled a share issue for a 57.5 percent stake in Sibneft.