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According to the history of YUGANSKNEFTEGAZ, the provisions of RF Law УOn Exe cution of Legal ProcessФ were sufficient to take control over the company29. In particular, RF Federal Law УOn Execution of Legal ProcessФ provides no prohibition of preferential for feiture and sales of shares of a company integrated into a holding company. The order of forfeiting debtorТs property is supposed be determined unilaterally by an officer of justice who is entitled to discretionary conceive debtorТs specification of the property to be for feited first. Altogether, this creates conditions for abuse of power by law enforcement offi cers in executing legal processes, as well as provides for a case when a single person is empowered at his own or any other government entityТs discretion (including the govern ment itself) seal fate of a major company. The sale of YUGANSKNEFTEGAZ also demon strated that the applicable law enforcement process is not only far from being perfect but also selective thus violating the principle of equality before the law and justice, i.e. one of the fundamental principles of the RF Constitution.

The sale of YUGANSKNEFTEGAZ had an ambiguous effect. Referring to the chronicle of events specified in Annex, the stock market responded by some growth. Furthermore, as seen in Section 4, empirical data provide no support for the prevailing opinion that the Russian stock market was driven to London by the risks caused by the YUKOS case and political and economic uncertainty in Russia. Indeed, the conflict concerning YUKOS oil company created concerns of non residents about protection of their participation in Rus sian companies. This factor, however, caused no capital outflow from the MICEX to Lon don because a share of non residents trading in Russian shares at the MICEX is insignifi cant. More likely the YUKOS case had an adverse impact on volatility of trade volumes of depositary receipts at the London Stock Exchange which fluctuated substantially on a monthly basis.

However, almost all stock market analytics point out that foreign investors and busi ness community at large have a more negative perception of Russia. In addition, the fol lowing aspects should be taken into account in this respect: (1) the current situation in the The staff members have a chance to achieve the freedom in exchange of information compromise.

However, the YUKOS case should be broken down into two components from the very beginning: claims on the company and legal prosecution of its owners as physical bodies.

YUKOS still remains in business, as was promised at the top governmental level in fall of 2004.

Section 4.

Institutional and Macroeconomic Challenges Russian ФdomesticФ stock market is commonly assessed as fairly speculative and poorly relying on the fundamental parameters of the Russian economy; (2) the fact that basic risks related to YUKOS case were created by investors as early as 2003. The latter is fully supported by the data on comparative movement of stock indices. For example, the RTS index and the MICEX index grew by only 7% at the background of a general growth by 18% in the consolidated stock index of emerging markets in 2004, while in 2003 the consoli dated stock index of emerging markets and the RTS index and the MICEX index showed nearly similar growth, correspondingly by 52, 58 and 61% (Table 4).

Table Changes in Priorities of Foreign Portfolio Investors 1997 1998 1999 2000 2001 2002 2003 Emerging markets consolidated Ц13 Ц28 +64 Ц32 Ц5 Ц4 +52 +stock index, % RTS stock index, % +98 85 +197 Ц20 +98 +34 +58 +MICEX stock index, % - - +77,6 Ц4,7 +65,5 +34 +61,6 +7,Note. In 2004, incremental growth in the stock market in Russia came to be close to zero, while other coun tries - raw materials exporters - demonstrated different results: Venezuela +52%, Indonesia +47%, Mexico +36%, Republic of South Africa +35%. According to the IIF (21 countries in January 2005), private investment inflow to the emerging markets grew by 32% to reach its maximum in 2004 since 1997 ($279 billion).

Source: according to the data of Vedi analytical laboratory (seminar on УChanges in the Russian EconomyФ, Higher School of Economics, January 26, 2005); Institute of International Finance (IIF); authorsТ estimates.

Moreover, assessments of the УinputФ of the transaction with YUGANSKNEFTEGAZТs equity and the YUKOS case in overall investment process in 2004 are quite ambiguous.

This is due to different approaches employed at various socio economic institutions. On the one hand, almost all liberals, including senior government executives, expressed their negative attitude towards the transaction in terms of violation of ownership rights, creating unfavorable investment environment, collapse of confidence in the government, moving towards an autocratic regime, etc. The arrest and sales of YUGANSKNEFTEGAZ were di rectly associated with (drastic) deterioration of the investment climate in Russia and in creased capital outflow (export)30 in 2004. A regular polling by Expert analytical center of 50 top managers of the western investment banks, companies and funds operating in Rus sia, revealed less importance of such factors as investment attractiveness as law enforce ment, protection of ownership rights in general and those of minority shareholders in par ticular, enhanced administrative pressure upon the business community and corruption31.

A monthly polling conducted by the Association of Managers of Russia (in January 2005)revealed the following distribution of answers to the question of the reasons for capital out flow from Russia in 2004 : 47% - poor protection of ownership rights, 38.6% - the YUKOS case, 14.5% - search for new investment objects, 1.2% - USD fall, 1.2% - the summer (2004) banking crisis.

On the other hand, there were some positive assessments as early as 2005. For ex ample, in February 2005, according to Standard & PoorТs, one of the most conservative rating agencies, ranked ФBЦУ for Russia with УstableФ forecast (with the proviso, however, that political decisions and actions of regulatory agencies are unpredictable), which pro vides for investments from long term conservative investors. In spite of deteriorated in According to А. Illarionov, adviser to the RF President, specified $27 billion of Уcapital exportФ in 2004 against $10 billion in 2001. The Deputy Minister of Economic Development and Trade А. Sharonov specified four time growth in Уcapital outflowФ in 2004, but his total amount is more moderate, $8 billion.

Shokhina Е. Investors Feel Uncomfortable in Russia // Expert. 2005. No. 4. p. 43.

According to the data of the Association of Managers of Russia (www.amr.ru).

RUSSIAN ECONOMY in trends and outlooks vestment environment for a certain part of business community, the RF Ministry of Eco nomic Development and Trade has forecasted investment demand in 2005, which may po tentially be created in high tech industries and aircraft industry. Nevertheless, credit bal ance deficit of net foreign capital inflow is expected in 2005 as it was in 200433. The ExpertТs analytics also provided a fairly optimistic forecast of a new wave of economic growth as based on interpreting the data of the Russian Agency for Statistics on invest ments in fixed assets in 2004. They believe that there were two basic factors that worked for animation of investments in 2004: the government made its intentions more clear and transparent in regard to YUKOS and the economy at large (the government intends to gain control over the sector of raw materials exports as well as get УcompensationФ from the Уfirst waveФ tycoons who got hold of their assets on the tide of uncivilized privatization, which made a clear picture of most risky political areas as well as those economic areas under minimum risk: small and medium size businesses, high tech industries, consumer sector), and substantial amount of idle funds in the economy34.

There is another unique material aspect which is worth mentioning. The transaction with YUGANSKNEFTEGAZТs equity demonstrated clearly that there was a, putting it mildly, foreign economic issue (or the most important task) about the entire YUKOS case. This was evidenced by a fairly contradictive and poorly designed process of establishing a pub lic oil company on the basis of GAZPROM OJSC.

The idea of setting up a public oil company (conditionally GOSNEFT) was discussed as early as at the beginning of the 2000Т. This company (if established) was supposed to become a foothold for more active participation of the government in the industry along with consolidation of all remained state owned assets in this industry. As early as 2003, the hypothetic GOSNEFT (on a par with ROSNEFT and SURGUTNEFTEGAZ) was considered by analytics as a candidate manager of the nationalized package of YUKOSТs equity in the name of the government.

In 2004 this idea was implemented in practice. In spite of a relatively wide range of options of increasing public share in GAZPROM OJSCТs equity, the final choice was made in favor of combining assets of a series of companies with government participation. In September 2004, a future acquisition of JSC NK ROSNEFT was announced - exchange of 100% OJSC ROSNEFTТs shares for 10.47% УtreasuryФ stocks of GAZPROM OJSC avail able on the balances of its subsidiaries (presumably 4.83% of GAZPROMТs shares are on the balance of Gazprominvestholding, 3.64% - Gazprombank, 1.5% - gas producing en terprises, as well as 1.74% out of 4.58% shares owned by Gazprom Finance BV). On No vember 1, 2004, the Chairman of the Board of GAZPROM OJSC signed an initiatorТs deci sion on establishing LLC GAZPROMNEFT with a 100% participation of GAZPROM. Director of ROSNEFT35 S. Bogdanchikov was appointed as the Director General of the company. Oil and gas condensate production, transportation and storage were supposed to be core business of the company.

As far as we know, the following scheme was officially approved by mid December 2004 :

Х the Russian Federation establishes JSC ROSNEFTEGAZ in the name of an authorized body and invests 100% shares of JSC NK ROSNEFT owned by the federal government in its authorized capital ;

Press conference of А. Klepach, Head of Macroeconomic Forecast Department under the RF Ministry of Economic Devel opment and Trade February 1, 2005. (www.economy.gov.ru).

The worse is behind. Editorial // Expert. 2005. No. 4. P. 11.

Data from official website OJSC GAZPROM www.gazprom.ru. The issues of corporate risks and assessment of combined assets are not considered.

Section 4.

Institutional and Macroeconomic Challenges Х OJSC GAZPROMТs subsidiaries transfer 10.74% of GAZPROM OJSC shares owned by them to LLC GAZPROMNEFTТs balance ;

Х JSC ROSNEFTEGAZ transfer to LLC GAZPROMNEFT 100% shares of JSC NK ROS NEFT in exchange for 10.74% of OJSC GAZPROMТs shares.

Implementation of the scheme was started late in 2004. The Russian Federation es tablished JSC ROSNEFTEGAZ. On December 7, 2004, the RF President issued a Regula tion in which he excluded JSC NK ROSNEFT36 from and included JSC ROSNEFTEGAZ into the list of strategic enterprises and joint stock companies, as well as ordered to accept the proposal of the RF Government to invest 100% shares of JSC NK ROSNEFT owned by the federal government in the authorized capital of JSC ROSNEFTEGAZ.

The scheme of establishing a public energy giant was supposed to be finalized by purchasing a block of stocks of YUGANSKNEFTEGAZ by GAZPROMNEFT (and conse quently making the former a subsidiary to GAZPROM OJSC) at an auction to be held on December 19, 2004. However, it encountered a strong opposition of YUKOS shareholders (refer to Annex) and failed: in order to avoid potential legal risks abroad, OJSC GAZPROM had to sell 100% of its participation in LLC GAZPROMNEFT to unknown persons which are not affiliated to JSC GAZPROM. ROSNEFT OJSC won through an intermediary which as sumed all risks at the auction, thus increasing its capitalization by several times.

Further prospects of merging oil assets of GAZPROM and ROSNEFT or making the government a majority shareholder of GAZPROM OJSC still remain uncertain. In spite of large financial liabilities arisen from transactional payments (existing debts plus debts re lated transactional financing and debts due to YUGANSKNEFTEGAZ), ROSNEFT OJSC may become a leading player in the petroleum industry (such position is enhanced by major contracts on oil supply to China till 2010). However, various options are possible: a 100% integration of ROSNEFT into GAZPROM OJSC without a block of shares of YUGANSKNEFTEGAZ; exchange of shares between GAZPROM OJSC and ROSNEFT con sidering the value of the latter (GAZPROM OJSC may come to have a minority share); es tablishing direct control over GAZPROM - ROSNEFT - Baikal Finance Group - YUGANSKNEFTEGAZ; and unconditional refusal of merger.

For example, according to the option of the RF Ministry of Industrial Energy, it would be expedient to transfer YUGANSKNEFTEGAZТs assets from a corresponding joint stock company to an independent company owned (100%) by the government (it could be pre viously established ROSNEFTEGAZ). Twenty percent of shares of the new company may be sold to CNPC (China). GAZPROM should acquire ROSNEFT without participation of as sets of YUGANSKNEFTEGAZ. It is obvious that this scheme is intended to prevent legal risks abroad: the new public company may become an oil supplier to the domestic market, ROSNEFT will become the key public oil exporter after integration into GAZPROM37. On January 19, 2005, А. Miller, Chairman of the Board of GAZPROM OJSC, announced that development of the merger scheme of GAZPROM and ROSNEFT, which reportedly makes no provision for including YUGANSKNEFTEGAZТs assets, had been completed and pack ages of stocks would be exchanged at the end of January 2005. However, early in Febru JSC NK ROSNEFT was included into the list of strategic enterprises and joint stock companies by a Decree of the RF Presi dent УOn Approval of the List of Strategic Enterprises and Strategic Joint Stock CompaniesФ of August 4, 2004 No. 1009.

Strategic enterprises and joint stock companies must not be privatized unless they are excluded from this list as provide for by Federal Law УOn Privatization of Public and Municipal propertyФ of 21 December 2001, No. 178 FL.

This option was presented by D. Medvedev, Head of RF PresidentТs Administration on December 30, 2005 (see :

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