All eyes are on performance of new Yukos chief

Nov 15, 2003 01:00 AM

Simon Kukes, the head of Russia's biggest oil company, claims not to be political. But his managership will to a large extent determine the future of the country's relations with suddenly nervous western investors.
Perhaps the most valuable of Simon Kukes' many valuable possessions is his passport. It bears the seal of the United States, and is a formidable last line of defence between him, as the new CEO of Russia's largest oil company Yukos, and the local political system. For all his wealth, Mikhail Khodorkovsky -- Kukes’ predecessor, who is now in a cold Moscow prison cell -- could not buy special treatment.

The Yukos affair is a serious setback for Russia's warming relations with western investors. Khodorkovsky's arrest by armed men and his incarceration on a scattergun of charges smacks uncomfortably of a Cold War James Bond script. The stock market fell and foreign investors are suddenly nervous about plunging into Russia.
Much is hanging on Kukes if those relations are to be repaired. Size alone means that Yukos's fortunes are irretrievably linked with the country's own. If the company is persecuted, renationalised or ruined by political interference, foreign capital will stay away, and domestic capital will try and escape.

If Kukes can indeed keep the company from the Khodorkovsky affair, it will have been little more than an ugly sideshow. Neither Kukes nor the region's analysts can believe Putin would jeopardise the years of work it's taken to get the former Soviet Union this far, but the doubt remains.
"The government cannot afford to single out Yukos -- it will blow investors out of the country," he says. "Russia's desire is to become not just a member but a key player in the World Trade Organisation. For that, it needs considerable investment and foreign know-how. The Yukos matter will have to be settled. There is no other way."

Russia's capitalist credentials were lent extra weight in October when Moody's raised the country to investment grade status. The move opened the doors for fresh capital flows into the country, but just as its free market got this stamp of approval, politics interfered.
Putin has made it plain that he will not tolerate any oligarch who sponsors opposition parties or expresses an interest in politics. Khodorkovsky did both, and is paying dearly. In the process, Putin is trampling over Russia's still fragile corporate system. Khodorkovsky's shareholding in Yukos has been frozen, while the company is being targeted by an over-zealous natural resources ministry.

Kukes accepts that there is "enhanced interference" in Yukos at the moment, but says he will not be cowed.
"They are investigating us more aggressively than usual. So what? It will make the company stronger." He is so confident that the attack on Khodorkovsky is personal that he even jokes about being arrested himself. "In three months everything will be back to normal," he claims.

His confidence may be misplaced. It is far from clear who is pulling the strings in the Russian government. Earlier this month, the natural resources minister, Vitaly Artyukhov, threatened to revoke Yukos's exploration licences. Putin doused his inflammatory comments, arguing that such a measure "would give the impression the state was trying to shut down the company", adding: "I hope the state will abstain from actions of this kind."
The reassurance this was supposed to provide was swiftly dissipated when, this week, more of Yukos's licences were put under investigation. Muddying the waters further are the siloviki -- "men of force" -- who, like Putin himself, served in the KGB. These mysterious power brokers are believed to be behind the attack on Khodorkovsky and the attempt to rein in the oligarchs.

Platon Lebedev, Khodorkovsky's Yukos ally, is also in jail. Vladimir Gusinsky, the media magnate, and Boris Berezovsky are in exile. Leonid Nevzlin, Yukos's second largest shareholder, has just secured Israeli citizenship.
But Putin knows that he needs foreign investment. He has repeatedly stressed that the Khodorkovsky issue is a one-off, and that there is no plan to renationalise Yukos -- even calling Moscow's leading banks to the Kremlin to reassure them in the week following the arrest.
Kukes echoes the party line: "The major target is not the company. Khodorkovsky is gone... why stew on the past?" Perhaps because it is the only guide we've got to assessing the risk.

Much as he would like to distance the company from its largest shareholder, Yukos will remain centre-stage, not least because charges against Khodorkovsky include "fraud through an organised group", "tax evasion by an organisation" and "document forgery". Conviction on these charges could mean 10 years in jail, and Yukos itself could be fined over half a billion dollars for unpaid tax.
Kukes is unfazed. The company will "make peace with the government", he says, adding that he is not an oligarch (he owns no shares in any Russian oil company), just a "nicely paid" manager. "I don't fly jets, I don't have speechwriters, I don't have expensive habits," he says. Above all, he claims not to be political.

But given that last year oil accounted for 15 % of Russia's GDP, 55 % of exports and nearly half of government revenues, it is impossible for the biggest oil company to stay out of the political arena. However you look at it, Kukes’ appointment is a shrewd, politically correct move.
A Russian oil man through and through, he could have been groomed for the job. He emigrated to the US in 1977 because he was "interested in free business and enterprise, and such philosophies were forbidden in Russia at the time", he says.

Between 1979 and 1996 he worked for Phillips Petroleum before rising to vice-president of downstream production at Amoco. He returned to Russia in 1996 with Yukos but left two years later to become CEO of TNK, which was taken over by BP earlier this year.
He has taken care not to sever his US roots. His wife, a fellow Russian, returned to New York with the children four years ago to benear specialist medical services after "serious surgery". His step-daughter works at UPS and his daughter, born in Oklahoma, is at college. All are US citizens. Other Americans may be joining the Yukos family soon.

Khodorkovsky held discussions about his 27 % stake with ChevronTexaco and ExxonMobil before his arrest. He has handed over his voting rights to Yuri Golubev, one of the smaller Menatep Group shareholders, and nothing will happen until the state releases the 44 % Menatep stake held by Khodorkovsky and his associates, but both sides need a deal.
This is the key. Oil majors must deal with politically unstable regions or run out of fuel. Russia has overtaken Saudi Arabia as the world's largest oil producing region and there has been "a clear and substantial progression of the energy relationship between the US and Russia over the last year", according to UBS analysts. Other investors can afford to be choosier. Danone, the French foods group, has postponed its investment, and Yegor Gaidar, head of the Institute of Economies in Transition, says: "The problem is business doesn't know whether it will go beyond Khodorkovsky and Yukos."

Foreign capital is essential if Russia is to have a chance of meeting its stated goal to double gross domestic product within a decade, but the arrest has turned the flow the other way, with capital flight of up to $ 13 bn in the last six months of 2003 compared with $ 4.6 bn inflow in the first half. Much more and Russia could suffer a ratings downgrade, Standard & Poor's has warned.
Kukes does not believe it will come to that. "I know the government is interested in all this. That's why I'm confident the Yukos matter will be settled," he says. "If I didn't think so, I wouldn't have taken the job." Well, that and the US passport.

Source: Moscow Times
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