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. Last Updated: 07/27/2016

Yukos Refuses to Pay Full Bill

Yukos is refusing to pay the $3.4 billion tax bill that the Moscow Arbitration Court upheld in a landmark ruling earlier this week and is proposing to pay one-third of that sum instead, a source close to the company said Wednesday.

The tough stance on settlement came as the embattled oil major continued to wait for an order from the Federal Tax Service enforcing payment of the bill. The order could come within a week and lead to asset seizures or bankruptcy, as the company does not have enough cash to immediately pay it in full.

It also came as Anton Drel, a lawyer for Yukos' founder and largest shareholder Mikhail Khodorkovsky, warned that his client said Wednesday that there were only two alternatives following the court's ruling: an agreement, or bankruptcy -- a crisis scenario that President Vladimir Putin has said is not in the government's interests.

"[Khodorkovsky] said that the company needs to act in accordance with the decision of the court, even though this decision has no legal precedent," Drel said by telephone Wednesday after meeting with Khodorkovsky in Matrosskaya Tishina jail, where the oil magnate has been incarcerated since October on charges of large-scale fraud and tax evasion.

"But he said it all depends on which path will be chosen," Drel said.

"There are only two paths," he cited his client as saying. "One that will cause damage to all the company shareholders, including minorities, and to the entire country: bankruptcy. Or the path of agreement."

He said that reaching an agreement with the government did not mean that the company should be ready to pay the entire sum.

Yukos forwarded a proposal for an out-of-court settlement to the tax service one week ago, in which it said it was ready to pay 33.95 billion rubles ($1.17 billion) over two years, as well as the tax service's legal costs, according to a copy of the proposal leaked to Interfax on Wednesday. The oil firm said, however, it would not pay the remaining 21.05 billion rubles worth of fines and penalties that make up the remainder of the $3.4 billion claim.

"This is a second line of defense," the source close to the company said on Wednesday. "Even if the court finds it should pay back taxes, Yukos will dispute the legality of the penalties and fines, which are a huge part of this bill."

Drel said that Khodorkovsky was not yet ready to say whether he would agree to reduce his holdings in Yukos as one way of raising cash to pay off the tax bill. Analysts have seen the legal assault against Yukos and its majority owners as being aimed at replacing them with owners more loyal to the state.

But Drel said it did not seem likely that Group Menatep, the holding company that owns 60 percent of Yukos, would call in a $1.6 billion loan it has extended to the oil firm because of the tax ruling. A call for immediate repayment would further exacerbate a looming cash crunch. "[Khodorkovsky] considers that the interests of all the shareholders of the company are more important than immediate gains," he said.

Troika Dialog noted in a research report Wednesday that Menatep could file for bankruptcy to prevent state-appointed court marshals from moving to seize Yukos' assets as payment for the tax claim. Under bankruptcy proceedings, Menatep could in theory control the process as Yukos' largest creditor, the brokerage said, but added it was unlikely the government would allow this.

Analysts said Wednesday it was unlikely the tax service would accept Yukos' bid to pay off just one-third of the bill.

"It might work if you were negotiating a fine with a traffic cop down a side street," said James Fenkner, head of research at Troika Dialog. "But this is a show case. [The tax service] may not be willing to negotiate with everyone watching."

A representative of the tax service told the court during hearings Tuesday that it was rejecting the proposal, but Yukos' lead defense counsel Sergei Pepelyayev told reporters he still held out hope that an amicable agreement could be reached.