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Russia's Yukos Warns it May Stop Oil Production - 2004-07-28

Russia's embattled Yukos oil company may have to stop production within days due to a new court order in the ongoing legal battle with the Russian government. The order is the latest twist in a case that critics say is politically motivated and may break apart Russia's largest oil company.

Court officials ordered Yukos to halt the sale of all company property including oil, in a move that company officials warn will likely cause the company to collapse.

Currently Yukos produces 1.7 million barrels of oil per day, around 20 percent of Russia's output.

The company has already had all of its bank accounts and other assets frozen by court order in a case that the Kremlin says is intended to crack down on corruption.

But critics say that politics is what really lies behind the legal assault on the company as well as in a parallel case against Yukos' former director Mikhail Khodorkovsky and another top shareholder. The two men are now on trial in Moscow for fraud and tax evasion.

Yukos has long warned it may be forced into bankruptcy after the court ordered the company to pay a back-tax bill that could total $10 billion.

But company officials say the freeze on assets prevents them from paying the taxes and all attempts to negotiate a phased payback have been rebuffed by the government.

Since it started a year ago the Yukos affair has rattled nerves in financial circles around the world and raised questions about the Kremlin's stated commitment to property rights and economic reforms.

The new court order applies to Yukos' main operating units, including Yugansk-Neft-Gaz which accounts for 60 percent of total output.

Last week, court bailiffs announced that Yuganzk-Neft-Gaz would be auctioned off in order to pay the tax bill, possibly at a price far below its estimated market value.

Ron Smith, an oil and gas analyst with Renaissance Capital brokerage firm in Moscow, says an agreement would be the best way out for all parties, but that the time for talking may already be over.

"We were thinking a negotiated solution would be far better, so if they do end up following through and sell it at a bad price, I will officially be surprised. But it could happen, it's looking more realistic every day," he said.

The latest order led to another steep plunge in the price of Yukos stock, to just under three dollars. The company has also warned that a halt in production could force thousands of employees out of work, at least temporarily.

But predictions of disaster were brushed off by Justice Minister Yury Chaika, who was quoted by Russian news agencies as calling such statements blackmail.

He reportedly said that Yukos will have no problems, including payment of salaries.

Analysts say any sale of Yukos assets would likely mean a transfer to other oil companies that are on good terms with the government.