Dilemma for Putin Over Yukos £2bn Tax Bill

A Russian court yesterday turned down an appeal from Yukos and said it must pay a £2bn tax bill, giving bailiffs the right to seize the oil group's property.

The company claims it has the funds to pay the bill, levied for alleged illegal use of offshore tax havens in 2000, but that the money is frozen by a court. President Putin must now decide whether to unfreeze the accounts and save the company from liquidation.

The decision comes two weeks after the start of the trial of former Yukos chief executive officer Mikhail Khodorkovsky, whose gunpoint arrest on a Siberian runway in October sparked fears that the Kremlin was reining in big business. Yukos, which was to merge with Sibneft, creating the world's fourth largest oil firm, has been under the scrutiny of tax police and prosecutors, causing its share price to fall and the merger to collapse.

It has three months to pay before it faces bankruptcy proceedings. Yukos's lawyer, Sergei Pepelyayev, told Interfax that within three days it would become apparent to the authorities that Yukos lacked the funds to settle the bill. He said that bailiffs could, within the next week, begin seizing some of the company's shares and other parts of its property, which would be evaluated and then come under state ownership or be sold.

"There are illegal decisions and there are blatantly illegal decisions and this is the latter, so we'll recommend that our client appeal," he told Associated Press.

Yukos announced on Monday that it was seeking an out-of-court settlement with the Kremlin but the court decision came as a tough response to that olive branch and the firm's shares fell 3% on the announcement.

Analysts held out hope the Kremlin would step in and engineer a last-minute deal, saving the company from a damaging bankruptcy which would also unsettle investor confidence in the emerging Russian market.

"The Kremlin now has to make a decision to allow Yukos to pay the debts," said Roland Nash, chief strategist at Renaissance Capital. "Now is the moment of truth for Putin's comments that he does not want Yukos to be made bankrupt."

Last week Mr Khodorkovsky's successor at Yukos, Simon Kukes, was dismissed and replaced by US oilman Simon Theedes, in an apparent attempt to depoliticise the dispute by introducing foreigners into key management positions.

Former Russian central bank chairman Viktor Gerashenko was also elected to Yukos's board as chairman in a further effort to staff its senior ranks with bureaucrats that the Kremlin can feel comfortable dealing with.