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. Last Updated: 07/27/2016

Yukos Licenses Hang in the Balance

Selling Yukos assets to cover its $7 billion tax debt would be the "most natural" way to end the yearlong dispute, a senior government official said Monday.

The statement came as the Natural Resources Ministry prepares to rule on whether to revoke production licenses from key Yukos subsidiary Yuganskneftegaz, a move that potentially could slash its value tenfold.

"Of course the assets need to be sold at not less than they are valued, about $15 billion," Deputy Industry and Energy Minister Ivan Materov told a Brunswick UBS investment conference Monday. "This will be a normal, natural conclusion of the process."

The oil major has been scrambling to pay off two whopping tax bills for 2000 and 2001, totaling $6.8 billion, as tax authorities chasing the money have managed to arrest practically all of the company's bank accounts, depriving it of cash.

The Justice Ministry's Court Marshals Service has earmarked Yuganskneftegaz for sale and appointed investment bank Dresdner Kleinwort Wasserstein to put a price tag on the production unit. The valuation is expected later this week.

Vedomosti last week reported a source in the Justice Ministry as saying that Yuganskneftegaz would be valued at between $15 billion and $17 billion, a sum that would likely put it beyond the reach of any Russian company willing to bid for the asset.

Materov did not say whether his understanding of a fair price was related exclusively to Yuganskneftegaz, which produces about two-thirds of Yukos' output, or the entire company.

Analysts agree that between $15 billion and $17 billion could be a fair price for Yuganskneftegaz.

The Industry and Energy Ministry said Monday that Materov was voicing a personal view and not the ministry's official position.

Materov said that simply transferring Yukos assets to another company would not just contradict free market principles, but "would be immoral."

He did not comment on whether other ways of lowering Yukos' value, such as taking away production units' licenses, would be acceptable.

"It is obvious to just about anyone that if the licenses are taken away, the capitalization of any company will be reduced exponentially," Natural Resources Minister Yury Trutnev told journalists in Moscow on Monday.

Trutnev's ministry is to decide later this week whether Yuganskneftegaz is violating its licensing agreement by not paying current taxes.

Trutnev said the Federal Tax Service had called on his ministry to revoke the licenses over the nonpayment, but refused to speculate on whether his ministry would revoke the licenses. He said that if the tax complaint were upheld, the production unit would be given three months to rectify the situation before the licenses could be revoked.

A Yukos representative said Monday that all three of the company's main production subsidiaries -- Yuganskneftegaz, Tomskneft and Samaraneftegaz -- are no longer able to pay current tax bills. But the tax service's complaint only concerns Yuganskneftegaz, he said.

But regardless of whether licenses are revoked, investors appear to be losing faith in Yukos surviving the ordeal and the Kremlin's inability to resolve its dispute with Yukos and its majority shareholder, Mikhail Khodorkovsky, who is being tried on separate charges of massive fraud and tax evasion.

"I think Khodorkovsky will lose everything because he won't make a deal with Putin," said one foreign investor at the Brunswick UBS conference, who asked not to be named. "I haven't touched the stock for a long while and I wouldn't advise anyone else to. The company will be destroyed."

Adam Landes, oil and gas analyst with Renaissance Capital, said by telephone Monday that the direct risk posed to portfolio investors by the affair has probably been neutralized, given the fall in the Yukos share price.

Yukos shares now represent only 5 percent of the Russian market's value, compared to about 20 percent last year.

Landes said Yukos had almost no chance to survive. "If the state were after the tax money, it would have gotten it. The offers have been made," he said.

Yukos has said it has sent about 50 proposals to the government offering various ways to settle the debt, but has received no response.

Instead, Landes said, the Kremlin appears to be aiming to take Yukos away from Menatep, so selling Yuganskneftegaz for about $15 billion also "hardly seems to serve the purpose."

Landes said that using Trutnev's ministry to slash the price tag on Yuganskneftegaz could be a way for the Kremlin to achieve its goal.

The state could use a clause in licensing laws that allows the state to transfer control of the company to other hands in an emergency, without waiting three months, he said.