MOSCOW – Russia's biggest oil producer YUKOS (search ), facing billion-dollar tax bills and foreclosure on its key production unit, said on Thursday it could be driven into bankruptcy within a month and major export contracts disrupted.
The admission by the Russian oil giant could delay a national ratings upgrade and limit investment flows.
YUKOS faces back tax demands of $3.4 billion, a bill that could eventually climb to $10 billion. Its assets have been frozen and its core unit put up for sale. Foreign banks were holding off from demanding $1 billion they are owed.
The company's main shareholder, Mikhail Khodorkovsky (search ), is standing trial on charges of fraud and tax evasion. He faces a long prison term if found guilty in a tussle described by many analysts as Kremlin retribution for his political ambitions.
YUKOS Chief Executive Steven Theede said restrictions on its assets meant the firm was simply not able to pay the tax bill.
"We will essentially run out of cash and not be able to fund our business operating expenses and obligations some time in the first half of August," Theede told a news conference called amid speculation YUKOS might file for bankruptcy.
Bailiffs enforcing payment of the tax debt are preparing to sell Yuganskneftegaz, YUKOS's Siberian unit accounting for 60 percent of its daily output of 1.7 million barrels per day.
YUKOS values Yuganskneftegaz at over $30 billion. But Theede said "we cannot expect to get any change" from the sale after the tax debt for 2000 is settled.
YUKOS, last year Russia's most valuable listed company, said it would no longer be a viable business if deprived of Yugansk.
With YUKOS exporting 75 percent of output, the loss could scupper long-term deals with overseas shippers and importers.
The company's warning contributed to a jump in U.S. oil prices, catapulting light crude back above $41 a barrel. YUKOS produces around as much as OPEC member Algeria.
Even if the cash crisis were solved, YUKOS said, it might "still be forced to file for bankruptcy and it may not be able to fulfil the export contracts, which have been concluded."
YUKOS shares sank as low as $5.00 on Moscow's RTS exchange on the warning, their lowest level since Christmas Day, 2001. On the ruble-denominated MICEX exchange, they plummeted 13.5 percent before recovering to 153.47 rubles, down 9.72 percent.
The plunge followed last October's arrest of Khodorkovsky, once Russia's wealthiest man, whose lobbying in parliament is believed to have angered President Vladimir Putin (search ). It is also seen as a state attempt to reassert control over strategic companies sold cheaply in 1990s privatization's.
YUKOS management said the government had made no reply to offers to settle the row and save the company. Surgutneftegaz, an oil firm with Kremlin ties, is Yugansk's most likely buyer.
"We are seeing the materialization of the worst-case scenario, and I think bankruptcy looks more or less certain because we are not seeing any signs of willingness to negotiate," said Zarko Stefanovski, senior oil and gas analyst at Aton brokerage in Moscow.
Ratings agencies Fitch and Standard & Poor's said the affair precluded any notion of granting Russia an investment grade now.
"With what we have seen it curtails the upside for the rating," said Konrad Reuss, managing director of sovereign ratings at S&P in London.
Fitch said the forced sale of Yugansk was likely to reduce investment, increase capital flight and slow economic growth.
"It clearly can't be good for the business investment climate," said Edward Parker, director in Fitch sovereign group.
Though one of Russia's most profitable firms in operational terms, frozen accounts and assets leave it short of the $1.7 billion in cash it needs to function each month.
But banking sources said creditors were not seeking repayment and that while YUKOS pumped oil and paid interest on debts, banks would be under no pressure to take further action.