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The Yank Caught In Yukos' Nightmare


By a curious twist of fate, the job of rescuing Russian oil giant Yukos has fallen to an American who arrived in Moscow just over a year ago -- and who still needs a translator's help. Steven M. Theede, a 30-year veteran of U.S. oil major ConocoPhillips (COP) and a native of the Kansas farm belt, now has the unenviable task of managing a company that could soon be torn to pieces to settle a huge tax bill.

It's not exactly the role Theede thought he would play in the spring of 2003 when he first met Yukos' main owner, Mikhail B. Khodorkovsky, at the Ritz Hotel in London. Khodorkovsky had already turned Yukos into one of Russia's most modern companies and was keen to attract seasoned Western managers. "I was impressed with his vision of the future of the company," says Theede, 52, who quit his job as ConocoPhillips' president for exploration and production in Europe, Russia, and the Caspian to become Yukos' chief operating officer. It sounded like "an exciting challenge," he adds.

Maybe a bit more exciting than he bargained for. By October, 2003, Khodorkovsky was behind bars, facing charges of fraud and tax evasion -- politically motivated charges, according to Khodorkovsky, who resigned as CEO shortly afterward. But that didn't stop the government from hitting Yukos with billions of dollars in back-tax claims relating to the use of tax havens, which Yukos insists were legal. It was hardly the best starting point for Theede, who took over as CEO in June, replacing Simon G. Kukes, a Russian oil veteran who had been unable to stem the Kremlin's assault. Perhaps shareholders thought that by picking an untainted American, they would soften the blows raining down on the company.

If so, they thought wrong. Yukos faces a back-tax bill of $7 billion, with more claims pending. To settle the debt, the Kremlin plans to sell Yuganskneftegaz, Yukos' largest production subsidiary. Theede started out believing that if Yukos made its own proposals, such as paying the disputed taxes in installments, or paying with Yukos shares, the company could avoid losing such assets. Now he's growing pessimistic. "When you step back from all our proposals and all the comments by officials, it still seems that the first choice [of the government] would be to take away major core assets. Of course, only time will tell," he adds.

While Theede portrays himself as cautious, his defensive tactics have raised eyebrows. Yukos has warned more than once that it is on the brink of bankruptcy and could be forced to suspend production or exports because the government has frozen bank accounts. Some analysts accuse Yukos of playing up these woes to embarrass the Kremlin. Theede denies this. He feared the government might end up bankrupting Yukos by accident, and he wanted to give them the full facts. "We were trying to educate, not threaten," he says.

50-50 SPLIT

Despite the Kremlin's attack on the company, Yukos' production was up 8.7% in the first six months of the year, while exports grew 11.4%. According to Moscow investment bank Renaissance Capital, revenues will be $21 billion, up from $16.5 billion last year, with cash flow growing to $6.4 billion from $5.5 billion.

Of course, money doesn't do you any good if you don't have access to it. Yukos says more than half of its $2 billion-a-month revenues are seized by the government to cover the tax debt. Yukos has so far managed to avoid bankruptcy through savage cuts in expenditures and a default on $120 million in natural-resource taxes in August. Russia's Natural Resources Ministry has threatened to withdraw production licenses from Yuganskneftegaz if the taxes aren't paid.

So how does Theede feel about this crash course in Russian business and politics? "I'm not in a position to make negative comments about things in Russia. I want to depoliticize my role and stay focused at the business level," he says. A worthy objective. But maybe, in the case of the Yukos affair, a hopeless one.

By Jason Bush in Moscow


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