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. Last Updated: 07/27/2016

Yugansk Proceeds Finally Turn Up

Prime Minister Mikhail Fradkov on Wednesday gave the first official confirmation that at least part of the proceeds from the government auction of Yuganskneftegaz has been transferred to the budget.

During his appearance in the State Duma, Fradkov faced down a barrage of questions from independent Deputy Vladimir Ryzhkov over the sale, saying that 213 billion rubles ($7.6 billion) raised in the December auction of Yukos' main production unit had reached its intended destination.

It was unclear Wednesday why the remaining $1.7 billion raised in the $9.3 billion sale had not been transferred.

Finance Minister Alexei Kudrin's spokesman, Gennady Yezhov, refused to comment.

Ryzhkov, in a telephone interview after the Duma session, slammed Fradkov and Deputy Finance Minister Tatyana Golikova, who also spoke to the Duma, for sidestepping most of his questions.

"Fradkov's refusal to answer my questions means the legality of the whole deal is under a big question mark," Ryzhkov said. "If the government does not prove this sale was conducted in line with the law, it means that Yugansk was handed to its new owner illegally. This could lead to serious consequences."

Fradkov's comments came amid mounting pressure from Yukos, which has demanded to see documentation proving that the funds had in fact been transferred.

The government auctioned off Yugansk in December for $9.3 billion to recoup part of the $28 billion in back taxes levied against Yukos in a crippling legal onslaught on the oil major.

The unit went to a mysterious front company, Baikal Finance Group, which was bought days after the auction by Rosneft, circumventing a temporary restraining order against the sale issued by a U.S. court as part of Chapter 11 bankruptcy proceedings brought by Yukos.

State-owned Rosneft's acquisition of Yugansk has ensnared it in a spiraling legal tangle that grew further Tuesday when Yukos' majority owner, Group Menatep, served the Russian government with notice that it was suing for $28.3 billion in damages to its investment under the terms of an international energy treaty.

The possibility of international litigation has pushed the details of the Rosneft deal into the shadows as the legal risks grow for any participant exposed in the transaction.

Ryzhkov said Fradkov and Golikova had declined to answer questions over the origins of Rosneft's funding and whether it had transferred the funds within the 20-day deadline after the sale, as required by law.

The officials also declined to answer his question on whether Baikal Finance Group was still a minority shareholder in the unit, Ryzhkov said, adding that he had heard from "experts" that this might be the case.

"I don't know whether this is true or not. I would like to see whether this is so on the basis of documents," he said. "But if this is so, then the individuals who invested a couple of million dollars for the deal have gotten to be holders of billions of dollars worth of assets in a matter of weeks."

Fradkov said he did not know who the owners of Baikal Finance Group are, Ryzhkov said.

"I didn't get answers to any of these questions," the deputy said. "And there was no mention of the missing 50 billion rubles that should have been transferred to the budget."

Ryzhkov said he intended to make an official request from the Duma for all the documents for the transaction.

Alfa Bank chief strategist Chris Weafer said it looked like the missing $1.7 billion was the deposit for the auction that Baikal Finance Group appeared to have hastily raised from state-friendly companies to take part in the auction.

Under the deal, Rosneft may have paid back the necessary loans but has not been able to recoup $1.7 billion that it was set to gain from a sale of its stake in Sevmorneftegaz to Gazprom, Weafer said. The Federal Anti-Monopoly Service said last week that the sale is on hold as it scrutinizes the deal.

"This data on the transfers to the budget have only just been disclosed," Weafer said. "It looks like it's only just happened and it seems they've scrambled to do so in response to the fact that [Yukos] has been demanding documentary evidence it has been done."

Yezhov, Kudrin's spokesman, confirmed on Wednesday that funds raised from the sale had only just entered the budget.

But he denied that the delay since the Dec. 17 sale was unusual.

"The path these funds take is not simple," he said. He said the cash was first transferred to the Federal Property Fund, then to the Court Marshals Service, then to the Federal Tax Service and only then to the treasury.

Yezhov accused Yukos of deliberately raising a rumpus over whether the government had received the revenues from the sale as a PR move ahead of hearings in lawsuits against the sale.

"They are trying to lay the legal groundwork," he said. "They are trying to provoke the situation."

He said Rosneft was justified in not disclosing where it had raised the funds for the purchase because of legal threats by Menatep and Yukos.

"I don't think this information will ever be disclosed because of the ongoing legal action of the unit's former owners."

"Rosneft has a right to a legal defense and it has a right to say that any loan deal is a commercial secret," he said.

Menatep's move to press ahead with its international arbitration claim looks like the first step in a chain of potential lawsuits that could drag on for years, Western lawyers said Wednesday.

Claiming illegal expropriation, the group served Russia with notice under the terms of the Energy Charter, an international treaty aimed at providing protection for investors.

Russia has signed the treaty but has not ratified it, raising questions over whether the case will be granted jurisdiction in any international arbitration court.

"That's the billion dollar question," said Stephen Fietta, a public international law specialist at Herbert Smith in London. "This is unknown territory. We will have to wait and see what happens."

"It's clear this is part of a global strategy to try and attack on various fronts," he said.

But the fact that Russia has not ratified the treaty could create problems.

"I would imagine Russia will take a very obstructive approach. Menatep is going to face obstacles at every step of the way," he said.

Opposition from the government could play into Menatep's hands, said Coudert Brothers' international arbitration specialist Richard De Palma said.

"In doing so, they will drag out the dispute," De Palma said. "That would place a cloud over these assets for a very long time."

He said he believed Menatep stood a good chance of getting jurisdiction and a legally binding decision.

"I do think they will get somewhere on this," he said.