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. Last Updated: 07/27/2016

India to Enter Yugansk Poker Game

The Indian government has given the go-ahead to its Oil & Natural Gas Corp. to negotiate for a stake in Yuganskneftegaz, as confusion continued to swirl around the future of the former jewel in Yukos' crown.

ONGC chairman Subir Raha said Monday that the state-controlled company had received its government's approval for the bid, news agencies in New Delhi reported.

India's Business Standard newspaper said ONGC was seeking to acquire a 15 percent stake in Yugansk for $2 billion.

As the battle for Yukos dragged on into a new year, the announcement from New Delhi brought a new twist to a confrontation that is swiftly spiraling into a geopolitical poker game with Kremlin infighting, mystery Chinese bids, Texas courts and top European banks.

State-controlled Rosneft said late December it had taken control of Yugansk by buying little-known shell company Baikal Finance Group, which bought a 76.6 percent stake in Yugansk for $9.3 billion at a Federal Property Agency auction on Dec. 19.

That means the state is the beneficiary of the biggest asset transfer since the privatizations of the 1990s, when a powerful group of businessmen -- including former Yukos CEO Mikhail Khodorkovsky -- made massive fortunes by buying state assets at knockdown prices.

Yukos spokesman Mike Lake told The Moscow Times from Dallas that any bid from ONGC would ensure that the Indian company faces the same legal action as other beneficiaries of the Yugansk sale.

"One thing they are doing is guaranteeing that they will be a party to our law suits," Lake said. "We have said over and over again that anyone who participates in the sale or future sale and purchase of Yukos assets will face legal action as we seek damages."

Rosneft held a Yugansk extraordinary shareholders meeting in Nefteyugansk on Dec. 31, appointing Vladimir Bulba as the production unit's new general director. Bulba is general director of Rosneft-Purneftegaz, Rosneft's biggest oil unit, like Yugansk also based in Western Siberia. Rosneft said it was paying wages and planning to accelerate drilling programs to catch up with output plans, Bloomberg reported. It was unclear where Rosneft had gotten the money to purchase the stake in Baikal and to pay wages at Yugansk.

Yukos CEO Steven Theede called Rosneft's takeover illegal in Russian law and a breach of U.S. bankruptcy proceedings, and vowed to "pursue all legal and commercial actions in appropriate forums to recover damages caused by this expropriation."

The government is merging Rosneft into Gazprom in a share-swap deal as the state seeks to build a majority stake in Gazprom. But Industry and Energy Minister Viktor Khristenko said on Dec. 30 that Yugansk would not be merged into Gazprom as part of the merger, which he said would be concluded this month.

"They say that Rosneft has bought Yugansk, and that Gazprom will take over Rosneft, but that Gazprom will not take Yugansk. So there is something wrong with one of these three statements, unless they sell it on again. And what is the likelihood of that?" said Mattias Westman, CEO of Prosperity Capital Management, which manages about $550 million in Russian stocks and holds a small stake in Yukos.

Khristenko also said that the China National Petroleum Corp. could take a stake in a state-controlled company that will own Yugansk. China is searching for oil assets as its demand for oil soars on the back of massive economic growth.

But The Wall Street Journal cited a CNPC spokesman on Jan. 3 as saying that the Chinese oil major was unaware of any such offer. "We have no idea about any of this matter," said Liu Weijiang, a spokesman with CNPC's international division, the Journal reported. "The company's senior leadership doesn't know either."

Yukos, the biggest Russian oil exporter to China, decided in September to halt some oil exports to CNPC.

The government made a long-awaited announcement on New Year's Eve that it will go ahead with the building of an oil pipeline to the Pacific coast. The move is seen as a victory for Japan and a snub to China, which had wished for a pipeline directly to China. Khodorkovsky had supported a route to China.

Yukos stock tumbled further after the company defaulted on a loan and its credit rating was downgraded. Yukos' credit rating was downgraded to D, the lowest credit rating implying a borrower is in default, by Standard & Poor's on Dec. 28 after the company missed an interest payment on a loan organized by a consortium of Western banks including Societe Generale.

The banks sent Yukos a default notice in July about a $1 billion loan. Group Menatep, which controls Yukos, sent a similar notice on a $1.6 billion credit. Yugansk was guarantor for the loans.

Moody's downgraded Yukos from Caa2 to Ca, the second-lowest credit rating, on Jan. 5.

Ahead of the New Year's holiday, Yukos shares tumbled 16 percent to 19.11 rubles on MICEX on Dec. 30. Yukos, once the country's biggest oil exporter, now has a market capitalization of just $1.45 billion.

Yukos argues that filing for Chapter 11 bankruptcy protection in the United States gives the Texas court exclusive jurisdiction over the property of Yukos' estate "wherever located." It argues that the sale of Yugansk violates U.S. bankruptcy law and said it would seek more than $20 billion in damages from anyone involved in the sale of its assets.

In mid-December, U.S. bankruptcy judge Letitia Clark issued a temporary restraining order ahead of the Yugansk auction that named Gazprom and Western banks including Deutsche Bank. On Thursday, Clark said she would schedule a further two-day hearing for Feb.16-17 as Deutsche Bank seeks to dismiss bankruptcy proceedings by arguing that the Moscow-based company has no right to Chapter 11 protection in the United States.

But Rosneft's role in the purchase of Yugansk could hurt plans to merge the company into Gazprom, a step the government has said is key to freeing up share-ownership restrictions for foreigners.

"The key question for investors is whether the merger of Rosneft into Gazprom goes ahead," said Adam Landes, an oil and gas analyst at Renaissance Capital. "Yukos is claiming that Gazprom, by simply appearing at the auction, was in breach of the automatic stay, and Gazprom was rumored to have been an indirect financer of Rosneft's purchase of Baikal. These legal proceedings are so important that there is a risk that the merger may not go ahead. That is the big question for investors."

The financing of Baikal and Rosneft's purchase remains a mystery. Last month, Kommersant reported that No.4 oil producer Surgutneftegaz loaned $1.7 billion to Baikal so it could bid for Yugansk.

A source close to Yukos said money paid for Yugansk was transferred to accounts in MDM Bank, while state-controlled Sberbank probably financed Rosneft's spending.

Yukos vowed to go after anyone involved in the sale. "This is a high-stakes game of hide-and-seek, but we will find out what is behind the curtain and seek damages from those who have participated, facilitated and financed the sale or purchase of Yugansk," Lake said.