Sun, Dec. 19, 2004

By Mark McDonald

Knight Ridder Newspapers

MOSCOW - A mysterious firm won a highly suspicious auction Sunday of one of Russia's most valuable oil assets.

Baikal Finance Group, completely unknown to financial and energy analysts in Russia, bid $9.37 billion to win the government's forced sale of Yuganskneftegaz, the core production unit of embattled oil giant Yukos.

"'Oily' is the best way to describe this whole thing," said one analyst who asked not to be identified.

At one point in the bizarre auction, Baikal even bid against itself.

The Russian government held the sale to collect some of the $27 billion it's claiming from Yukos in back taxes.

But most observers in Russia believe the auction was the latest episode in a Kremlin-led campaign to bring down Yukos and its billionaire founder, Mikhail Khodorkovsky. Jailed the last 14 months on charges of fraud and tax evasion, Khodorkovsky angered Russian president Vladimir Putin with his financial backing of a host of opposition leaders.

Now Khodorkovsky's once-mighty conglomerate is on the verge of bankruptcy. Yukos, formerly the nation's largest oil producer, accounted for 20 percent of Russia's total oil production.

Calling Sunday's auction "a dirty theft," the company vowed to pursue any buyer of Yugansk legally in courts outside Russia. A Yukos spokesman said Baikal had "bought itself a serious $9 billion headache."

State-owned energy behemoth Gazprom was widely expected to win the auction for Yugansk, which was pumping a million barrels of oil per day for Yukos. Gazprom, through its subsidiary Gazpromneft, was the only other potential bidder in the auction room on Sunday, but it didn't make a single bid. The ITAR-Tass news agency reported that a confused Gazpromneft official left to make a phone call as things got underway, then returned but ignored the auctioneer.

Most financial analysts in Moscow believe Gazprom eventually will end up with Yugansk through some opaque wheeling and dealing.

Baikal has two weeks to pay the auction price. If it defaults, Gazprom could be declared the winner.

Or if the auction is deemed to be invalid, a Justice Ministry official said Sunday, Yugansk could become state property and then assigned to Gazprom.

Events of the last few days certainly led to suspicions that the auction was being manipulated, perhaps by government officials who want to see Russia's vast natural resources back under Kremlin control, as they were during the Soviet era.

"There is, of course, absolutely no way this company (Baikal) is not tied in with some very powerful interests in Russia," said Dan Harris, an international attorney with broad experience in Russia.

There also was speculation Sunday that Baikal Finance is a front for Gazprom. Company officials could not be reached for comment.

The curious auction saga began Thursday, when a U.S. bankruptcy court in Houston granted a request from Yukos for a 10-day halt to the auction. Yukos conducts some business in Texas and chief financial officer Bruce Misamore, afraid to return to Russia for fear of arrest, is now working out of Houston.

Russian officials dismissed the U.S. ruling as irrelevant, but the court order probably led an international banking consortium to freeze Gazprom's $13.4 billion credit line on Friday.

The same day, the Baikal group applied to participate in the auction.

"It would be unprecedented for a new player to both perform its own internal due diligence and to raise $9.3 billion in three days," said attorney Rhett Campbell, a specialist in energy-bankruptcy issues with the Houston firm Thompson & Knight.

"Few backers could provide that kind of financing on short notice. There are some, but not many. It's more likely that Baikal's bid was based on financing `to be arranged at a later date.' What that arrangement will be remains to be seen."

On Saturday, a U.S. District Court rejected an 11th-hour Gazprom request to let it bid on Yugansk.

The auction started Sunday at 4 p.m. Moscow time, and the bidding lasted all of 10 minutes. The Baikal group opened with the starting price of $8.6 billion, then inexplicably raised its own bid to $9.37 billion.

"When does that ever happen?" Harris asked. "I'm thinking they did this in a misguided effort to show that the auction was fair because the assets actually went for more than the minimum bid."

But Harris said that strategy would likely backfire if Yukos contests the auction in a non-Russian court.

"Most judges would view this bizarre behavior as further evidence of the auction's illegitimacy."