The Rise And Fall Of Yukos

In 1993, YUKOS, an oil producer and supplier, was created by the Russian government by resolution. It quickly became a major economic force in Russia, supplying 20% of the country’s oil and 2% of the world’s oil supply. In an effort to re-structure the oil industry, the government created four independent companies to refine and distribute oil of which YUKOS was one of them. BY 1995, YUKOS was already having management problems and the government put 45% of the company’s shares up for auction. Shortly after, YUKOS became Russia’s first privately owned oil company.

Under the direction of Mikhail Khodorkovsky, YUKOS restructured and became a very profitable company. This success did not come without difficulties as YUKOS’s delivery system could not keep up with the company’s increasing output. But Khodorkovsky was up to the challenge and by 2003, not only was LUKOS Russia’s largest oil company, but a company respected worldwide and lauded for its great management and organizational efficiency. Politics started becoming a factor in YUKOS’s growth plans and YUKOS was forced to fight with Russian authorities over the building of a new pipeline. Still a merger between YUKOS and competitor Sibneft gave YUKOS the world’s largest oil reserves. But things changed quickly in 2003 and not only were pipeline plans killed, but the fall of YUKOS was just beginning.

Mikhail Khodorkovsky was arrested on tax fraud charges and was forced to resign. The merger with Sibneft was undone. In 2004, YUKOS itself was charged with tax evasion and the company scrambled to try and file for bankruptcy protection. Eventually, the Russian government auctioned off the company’s remaining assets and many of YUKOS’s executives fled Russia in fear of being arrested. Just like that, the world’s third largest oil producer was in ruins.

YUKOS’s rise and fall was the result of many external forces. First, was the unstable nature of the Russian political system. The privatization of large companies was a relatively new concept in Russian history. Internal squabbles between first President Yeltsin and later President Putin and others around the Kremlin led to much turmoil. Government officials felt threatened by these new entities and bloody power struggles ruled the day. Powers they enjoyed under Yeltzin were being challenged under Putin’s administration. Even the aggressive prosecutions and arrests of Khodorkovsky and others can be tied to this political wrangling. In fact, many of the events surrounding the klegal issues that crippled YUKOS were blamed on a deliberate effort of Russia’s government to regain control of the mighty YUKOS empire.