================================================================= YUKOS BANKRUPTCY NEWS Issue Number 1* ----------------------------------------------------------------- Copyright 2004 (ISSN XXXX-XXXX) December 16, 2004 ----------------------------------------------------------------- Bankruptcy Creditors' Service, Inc. 215-945-7000 FAX 215-945-7001 ----------------------------------------------------------------- YUKOS BANKRUPTCY NEWS is published by Bankruptcy Creditors' Service, Inc., 572 Fernwood Lane, Fairless Hills, Pennsylvania 19030, on an ad hoc basis (generally every 10 to 20 days) as significant activity occurs in Yukos' chapter 11 proceeding. New issues are prepared by Ivy B. Magdadaro, Christopher G. Patalinghug, Frauline S. Abangan and Peter A. Chapman, Editors. Subscription rate is US$45 per issue. Any re-mailing of YUKOS BANKRUPTCY NEWS is prohibited. ================================================================= IN THIS ISSUE ------------- [00000] HOW TO SUBSCRIBE TO YUKOS BANKRUPTCY NEWS [00001] BACKGROUND & DESCRIPTION OF YUKOS [00002] YUKOS' CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2003 [00003] COMPANY'S PRESS RELEASE ANNOUNCING CHAPTER 11 FILING [00004] YUKOS OIL COMPANY CHAPTER 11 DATABASE [00005] YUKOS OIL COMPANY'S 20 LARGEST UNSECURED CREDITORS [00006] ADVERSARY PROCEEDING -- Yukos v. Bidders & Their Lenders [00007] DEBTOR'S MOTION TO CLARIFY STAY APPLIES WORLDWIDE [00008] DEBTOR'S MOTION TO COMPEL ARBITRATION PROCEEDING KEY DATE CALENDAR ----------------- 12/14/04 Chapter 11 Petition Date 12/16/04 9:30 a.m. Hearing on Yukos' Request for Injunction 12/29/04 Deadline for filing Schedules of Assets and Liabilities 12/29/04 Deadline for filing Statement of Financial Affairs 12/29/04 Deadline for filing Lists of Leases and Contracts 01/03/05 Deadline to provide Utilities with adequate assurance 02/12/05 Deadline to make decisions about lease dispositions 03/14/05 Deadline to remove actions pursuant to F.R.B.P. 9027 04/13/05 Expiration of Debtors' Exclusive Plan Proposal Period 06/12/05 Expiration of Debtors' Exclusive Solicitation Period 12/14/06 Deadline for Debtors to Commence Avoidance Actions Organizational Meeting with UST to form Committees First Meeting of Creditors pursuant to 11 USC Sec. 341 Bar Date for filing Proofs of Claim ----------------------------------------------------------------- [00000] HOW TO SUBSCRIBE TO YUKOS BANKRUPTCY NEWS ----------------------------------------------------------------- YUKOS BANKRUPTCY NEWS is distributed to paying subscribers by electronic mail. New issues are published on an ad hoc basis as significant activity occurs (generally every 10 to 20 days) in the Debtor's chapter 11 proceeding. The subscription rate is US$45 per issue. Newsletters are delivered via e-mail; invoices, transmitted following publication of each newsletter issue, arrive by fax. Re-mailing of YUKOS BANKRUPTCY NEWS is prohibited. Distribution to multiple individuals at the same firm is provided at no additional charge; folks outside of your firm should set-up and pay for their own subscriptions. Subscriptions may be canceled at any time without further obligation. 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Name: ---------------------------------------------- Firm: ---------------------------------------------- Address: ---------------------------------------------- ---------------------------------------------- Phone: ---------------------------------------------- Fax: ---------------------------------------------- E-Mail: ---------------------------------------------- (Distribution to multiple professionals at the same firm is provided at no additional cost.) YUKOS BANKRUPTCY NEWS is distributed to paying subscribers by electronic mail. New issues are published on an ad hoc basis as significant activity occurs (generally every 10 to 20 days) in the Debtor's chapter 11 proceeding. The subscription rate is US$45 per issue. Newsletters are delivered via e-mail; invoices, transmitted following publication of each newsletter issue, arrive by fax. Re-mailing of YUKOS BANKRUPTCY NEWS is prohibited. Distribution to multiple individuals at the same firm is provided at no additional charge; folks outside of your firm should set-up and pay for their own subscriptions. Subscriptions may be canceled at any time without further obligation. ----------------------------------------------------------------- [00001] BACKGROUND & DESCRIPTION OF YUKOS ----------------------------------------------------------------- Yukos Oil Company a/k/a OAO NK IOKOC 31A Dubininskaya Ulitsa Moscow 115054 http://www.yukos.com/ Yukos Oil Company is an open joint stock company existing under the laws of the Russian Federation. Yukos is involved in the energy industry substantially through its ownership of its various subsidiaries, which own or are otherwise entitled to enjoy certain rights to oil and gas production, refining and marketing assets. Yuganskneftegas ("YNG") (a Russian company), which is a direct wholly owned subsidiary of Yukos, owns or enjoys the benefits of a majority of Yukos' oil and gas reserves and production. YNG currently produces in excess of 60% of the oil and gas produced by the Yukos companies. Yukos' international trading operations are primarily done through its subsidiary Petroval (a Swiss company). Yukos and its subsidiaries are the largest producers of crude oil in Russia, and the largest exporters of crude oil from Russia. Yukos and its subsidiaries produce slightly less than 20% of all the crude oil produced in Russia, and refine and market slightly less than 20% of the refined products in Russia. Yukos is generally regarded as Russia's most progressive, transparent, and successful multinational company, and, as a result, attracted a considerable amount of foreign investment from around the world, including significantly from the United States. Privatization of Russia's Oil & Gas Sector Following the collapse of the Soviet Union in the early 1990s, the Russian Federation's oil industry consisted of hundreds of stand-alone state-owned entities, each with a specific scope of activity, limited geographic reach, and local economic interests. The vast majority of these companies were inefficiently run, unprofitable, and overstaffed. They survived only through continued state support. In 1993, the Russian Government set out to restructure the nation's oil and gas sector. Through the sector's privatization, the Government hoped to make the Russian oil and gas sector viable in a global market environment and, above all, attract much needed direct foreign investment into the country. Yukos is Born Yukos was founded by the Russian Government, as a separate legal entity, on April 15, 1993, by Decree No. 354, through the integration of state-owned producing, refining, and distribution entities. Although it was now a separate legal entity, the newly created Yukos remained entirely state-owned. Yukos remained in state hands from April 1993 to December 1995. During this time, the company continued to suffer under poor management, mounting debts of the individual operating units, and the overall economic recession in the country. The Russian Government thus decided to sell its stake in Yukos to private investors in a planned privatization process. With the prevailing unfavorable political environment, however, investors from outside of Russia were wary of spending hundreds of millions of dollars for a potentially profitable but predominantly loss- generating enterprise. Ultimately, a group of Russian investors with experience at turning around troubled industrial companies was awarded the privatization tender bid. Thus, through a series of tenders and auctions held in 1995 and 1996, Yukos essentially became Russia's first fully privatized oil company. Yukos Becomes Russia's Success Story Despite the arrival of private investors at the end of 1995, Yukos continued to experience a sharp decline in production output and mounting salary arrears, and faced the technical bankruptcy of its main production unit, YNG. Its debts to the Russian Government alone had swelled to more than US$3.5 billion. In May 1996, Mikhail Khordokovsky stepped in as Chairman of Yukos' Executive Board, bringing a dynamic, professional management team with him. At the time of his arrival, Yukos was a company burdened by billions of dollars in tax arrears and an outdated Soviet management structure. The task for the new management was clear: to transform the company into a multinational enterprise, managed in accordance with the highest international standards of operational efficiency, transparency, and corporate governance. Over the next eight years, Yukos was successfully transformed from a disparate group of Soviet-era enterprises into a viable, vertically integrated, transnational oil company competing with the biggest oil industry players worldwide. Yukos quickly repaid all debts owed to Russian federal and regional governments that had accumulated during the period when the company had been state-owned. From 1996 to 1997, Yukos increased its production capacity by reinvesting its profits in drilling, capital construction, and new oil field development. In order to improve the efficiency of its operations, Yukos undertook a comprehensive corporate restructuring program in 1999, streamlining its structure into three wholly owned subsidiaries: a "headquarters" management company (Yukos-Moscow); a single company responsible for managing all upstream operations (Yukos-EP); and a company responsible for managing all downstream operations (Yukos-RM). Wholly owned subsidiaries were established in the United Kingdom and the Netherlands in full compliance with regulations of the Central Bank of Russia to facilitate the company's expanding global interests. Starting in 1999, Yukos began a share consolidation scheme to replace a labyrinthine and opaque system of cross-shareholdings in subsidiary companies by offering shareholders in its subsidiaries the opportunity to swap their equity in these companies for Yukos shares. Further, realizing that attaining Yukos' stated goal of becoming a successful international energy major would require substantial foreign investment into the company, Yukos embarked on an ambitious program to transform the company's corporate culture to attract international investors. A Corporate Governance Charter was adopted in 2000, laying out a clear course towards becoming a fully transparent, Western-style corporation. In the same vein, Yukos also created an independent Board of Directors, with nearly half of the Board consisting of prominent international business leaders. In 1999, it became the first large Russian company to switch to international accounting standards. Since then, the company has published its annual financial statements in U.S. GAAP format retroactively to 1997, and, until recently, has issued regular quarterly U.S. GAAP reports since 2001. In June 2002, Yukos also became the first major Russia-based multinational to disclose its management and ownership structure to the public, including the names and holdings of its core shareholders. Its annual U.S. GAAP and statutory financial reports were audited by PriceWaterhouseCoopers and publicly disclosed. The company's annual production output grew by 17% in 2001, and by 19% in 2002. By 2002, Yukos accounted for approximately 18% of Russia's total oil production, producing an average of 1.4 million barrels a day. Today, Yukos and its subsidiaries are the largest producers of crude oil in Russia and the largest exporters of crude oil from Russia. Together, they produce slightly less than 20% of all the crude oil produced in Russia, and refine and market slightly less than 20% of the refined products in Russia. This makes Yukos one of the largest oil-and- gas companies in the world. In 2003, for example, Yukos' production was 80.8 million metric tons (591 million barrels) of crude oil and gas condensate, more than that produced by ChevronTexaco, Total, or the country of Libya. In December 2002, Standard & Poor's rated Yukos "BB with stable outlook," and in January 2003, Moody's Investor Service assigned the company a rating of "Ba2." At the time, these were the highest long-term and foreign currency issuer ratings for any privately held Russian multinational. Mr. Khodorkovsky himself won the 2002 "Entrepreneur of the Year" prize, awarded annually by Russia's leading business daily Vedomosti, published jointly by the Financial Times and The Wall Street Journal. The same year, the Russian Government named Yukos the "Best Company for Compensation and Social Payments Programs," as well as for the "Implementation of Social Programs at Enterprises and Organizations." By 2003, Yukos had signed major joint venture and strategic alliance agreements with international companies such as Total, Schlumberger, and Microsoft. In fact, the company's success was so internationally celebrated that, in 2003, ExxonMobil was reported to have expressed its interest in acquiring between 40% and 50% of Yukos for an estimated US$25 billion -- a transaction that would have been the single largest direct foreign investment in Russian history. Not surprisingly, since 1998, the value of Yukos' shares increased more than tenfold, including a growth of 250 percent in 2001 alone. Its shares trade on the RTS, MICEX, and MSE stock exchanges in Moscow. In addition, the company implemented an ADR (American Depositary Receipt) Level 1 program in March 2001. Its ADRs are currently traded over-the-counter in the USA, directly on the Berlin, Stuttgart, Frankfurt and Munich stock exchanges, and through the London Stock Exchange International Order Book. In stark contrast to its incorporation as a wholly state-owned company in 1993, today Yukos is majority foreign-owned. Approximately 60% of Yukos' shares are owned by a Cypriot company, which is, in turn, owned by an Isle of Man company, which is a subsidiary of a Gibraltar company. Approximately 25% of the common stock of Yukos is owned by public market sources, many of which are in the United States. Approximately 15% of Yukos' common stock is, or has been, owned by large institutional investors, many of which are United States residents. In addition, Yukos has subsidiaries in many countries, including the USA, Switzerland, the Netherlands, and the United Kingdom. By all accounts, Yukos was the marquis success story of the new Russian Federation. By October 2003, the market capitalization of Yukos' worldwide stock was estimated at over US$ 30 billion. As late as April 2004, Yukos' market capitalization was estimated at over US$40 billion. A company that had been formed from the decaying remnants of the Soviet era had become a standard bearer for the new, pro-foreign investment Russian Federation. Within a mere eight months, however, between April and December 2004, this transparent, globally respected multinational corporation, worth an estimated US$40 billion, was subjected to a series of carefully timed and politically motivated attacks by the Russian Government, ultimately forcing it to seek bankruptcy in the United States on December 14, 2004. Mr. Khordokovsky's Participation in Russian Politics Provokes the Wrath of the Government During 2002 and early 2003, Mikhail Khodorkovsky reportedly became concerned about the potential for a two-thirds pro- government majority in the Russian Parliament (or Duma) following the country's upcoming general election. A two-thirds majority is termed a "constitutional majority" in Russia, because it is the percentage required by the 1993 Constitution of the Russian Federation to effect changes in the "foundation" of Russia's economic and political systems, like re-nationalization, the extension of the president's tenure to include a third four-year term, and the imposition of the "development fee," or "rent," for the use of natural resources. Mr. Khodorkovsky began to contribute openly to major opposition parties, but reportedly refused requests to finance United Russia, the current governing party. He became an outspoken critic of the alleged endemic corruption in the Russian administration and advocated for progressive legislative reforms. Worse still, due to his close ties with Western business and political leaders, his words were resonating outside of Russia and his reputation growing. In mid-2003, an election year in Russia, the Kremlin reacted. Platon Lebedev, Chairman of Menatep Limited, Yukos' largest shareholder, was arrested in July 2003 on charges of fraud and tax evasion, and Vasily Shakhanovsky, a member of Yukos' Management Board, was charged with tax evasion. In July 2003, the Russian Government raided Yukos' offices where it went through computer records for approximately 17 hours. And on October 25, 2003, Mikhail Khordokovsky was arrested at gunpoint by government agents and jailed on charges of tax evasion, theft of state property, and fraud. Despite the political activism of its largest individual shareholder, however, Yukos itself was never involved in Mr. Khodorkovsky's political activities. All his contributions to opposition parties, for example, were made from his personal funds and not from corporate accounts. Nevertheless, hand-in-hand with its criminal investigations, the Government also apparently perceived that it had to move against Mr. Khordokovsky by targeting Yukos, the single most concentrated source of his wealth. In December 2003, a few weeks after Mr. Khordokovsky's arrest, the Ministry of Taxation conducted a perfunctory two-week "special" audit of Yukos' books. In April 2004, the Government slapped a US$3.4 billion audit report on Yukos, which it claimed Yukos owed in respect of the 2000 fiscal year. The Russian Government's moves against Khordokovsky's wealth, through tax assessments against Yukos, have been numerous since then, self-evidently retaliatory and have involved the systematic repudiation of the rule of law. The Tax Assessments Following the first assessment against Yukos for US$3.4 billion in April 2004, the additional tax assessments levied by the Russian Government against Yukos and certain of its subsidiaries have continued to mount. "Including massive penalties and interest, the Tax Assessments today total approximately US$27.5 billion," Bruce K. Misamore, Yukos' Chief Financial Officer says in some court papers, though other court papers signed by Mr. Misamore put the total at US$17 billion, which may exclude interest and penalties. In either case, the assessment is huge . . . and absurd from Yukos' perspective. The alleged tax charged by the Tax Assessments falls into three categories. (A) Alleged Misuse of Tax Incentives: Yukos has been assessed by the Russian Government on the grounds that it misused tax abatement incentives granted under Russian law, which allowed companies to be granted tax incentives by local government authorities in certain regions of Russia. Under the law, companies were permitted to negotiate their tax rates with these local authorities in consideration for establishing and registering offices in areas to benefit the economic development of the surrounding area. On the basis that the law did not expressly permit companies to negotiate their tax rate with local authorities, the Government has now alleged that those companies were not in fact entitled to these incentives. (B) Alleged Improper Claims for VAT refunds: Oil exports from Russia have a 0% VAT rate; the 20% VAT (currently 18%) initially paid by the exporting company is refunded by the Government back to the company. Following its audit, the Government charged that the export earnings of certain trading companies were actually the earnings of Yukos. As a result, the Government's VAT refunds to those subsidiaries for oil exports, which should have instead been refunded to Yukos, had to be returned to the tax authorities. However, despite its agreement that the export was actually made, the Government has refused to recognize Yukos' right to those same VAT refunds, thus enabling the Government, in essence, to charge Yukos 20% VAT plus interest and penalties for its export operations despite the 0% rate under the law. (C) Alleged Improper Transfer Pricing: The Government has claimed taxes relating to transfers between Yukos' affiliated companies. By law, transfers between inter- dependent companies could not be challenged if the prices were within 20% of the average prices in that region. In making its assessments against the company, the Russian Government now claims that the transfers between affiliates should have been undertaken within 20% of the highest price in region, allowing it to claim that the transfers were made in contravention of the law. The Tax Assessments were based on audits of Yukos' books previously audited by PriceWaterhouseCoopers, formally audited and confirmed as correct by Russian tax authorities, and made as transparent as possible as part of the company's corporate philosophy. Further, in light of the fact that Yukos was one of Russia's largest taxpayers, the Company was in constant communication with the regional Russian tax authorities, which had approved all of Yukos' previous filings following similar audits. The Tax Assessments were imposed by the Government in relation to actions which: (a) were either expressly authorized by or not prohibited under Russian tax law; (b) were commonly used by a number of different Russian companies that have never received similar tax assessments; (c) concern prior tax years in which Russian authorities had previously indicated to Yukos that no additional taxes were due; and (d) could only be unlawful under a selective and retroactive reinterpretation of Russian tax law that could not reasonably have been anticipated when the transactions took place. In addition, the amount of the taxes swells by usurious default interest, penalties, and fines. This exponential rate of increase has jeopardized Yukos' ability to conduct business and has decimated its net equity. Further, when compared to the company's gross revenue for 2001 and 2002, the Tax Assessments have been in excess of 100% of Yukos' annual consolidated gross revenue; for 2003 the assessments have been in excess of 80% of Yukos' consolidated gross annual revenue. Indeed, the assessments levied against Yukos for 2001 were in excess of four times the consolidated gross industry average taxes; for 2002, in excess of 3-1/2 times the industry average; and for 2003, in excess of 2-1/2 times the industry average. Finally, despite vigorously defending itself against the Tax Assessments before the reportedly Government-controlled national judiciary, not one case has ultimately been decided in the company's favor since April 2004. In addition, over 70 letters to the various Russian authorities offering settlement for the Tax Assessments (reportedly including an offer of Mikhail Khodorkovsky's entire equity stake) have gone substantively unanswered. $38 Billion Market Cap Loss Prior to October 25, 2003, the market capitalization of Yukos stock was over $40 billion. As late as April 2004, Yukos' market capitalization had rebounded to over $40 billion. The Russian Government's actions have caused Yukos' market capitalization to fall below $2 billion. Chapter 11 Strategy Yukos' chapter 11 filing was approved at a meeting of the Management Board of YUKOS-Moscow Ltd. on December 10, 2004. A full-text copy of the Board's Resolution is available at no charge at: http://bankrupt.com/misc/CPFL0001.pdf Yukos unveiled a three-part strategy for the first phase of its chapter 11 restructuring: (1) tell the Russian Government and the Federal Property Fund that the U.S. Bankruptcy Code prohibits the auction of Yukos' equity in YNG on Dec. 19; (2) tell U.S. banks they're prohibited from working with bidders who intend to participate in the Dec. 19 Auction; and (3) tell the Russian Government that it must submit to an arbitration proceeding in Houston with a to-be-named arbitrator. Yukos in Houston? Bruce K. Misamore, Yukos' Chief Financial Officer, explains that there's no evidence that the Russian Government has changed course in its desire to destroy Yukos. In fact, Mr. Misamore says, criminal prosecution with no basis whatsoever against people related to Yukos has accelerated. Diplomats and other high level emissaries have sought to intervene with the Russian Government on these matters, but to no avail. As the Russian Government has continued on its path against the Company and its personnel, Yukos has increased its business presence in the United States and Houston specifically. Two weeks ago, Mr. Misamore relates, he was on his way back to Russia after a business trip when "I received an informed message advising me not to return for my own safety." "I immediately called my wife, who was waiting for me at our home in Moscow," Mr. Misamore says. "I told her to pack all our possessions and belongings at once. My wife and I returned to our home in Houston, Texas on December 4, 2004. Since then the role of Chief Financial Officer for Yukos has been conducted out of my home office in Houston, Texas." To deal with the company's insolvency and related arbitration issues, Yukos paid a substantial retainer to Fulbright & Jaworski L.L.P. That unearned retainer is property of Yukos Oil Company, and is being held in Houston, Texas at Wells Fargo Bank. This money was transferred from a non-Russian subsidiary for the benefit of Yukos. Additionally, earlier this year when shareholders sued Yukos in the United States under the U.S. securities laws relating to the precipitous decline in Yukos' stock, Yukos placed a substantial retainer with Debevoise & Plimpton, LLP, in the United States to defend those U.S. securities fraud lawsuits. Since he returned to Houston, Mr. Misamore indicates that an additional $500,000 in cash was transferred from a non-Russian subsidiary for the benefit of Yukos and is on deposit in Houston, to ensure that Yukos has sufficient additional assets available to pay him and pay bankruptcy-related expenses. This property of Yukos is in an account in Houston at Southwest Bank of Texas, in the name of Yukos USA, Inc., a subsidiary of Yukos, organized under the laws of Texas, for the beneficial ownership of Yukos. This money at Southwest Bank of Texas is property of Yukos Oil Company. The Associated Press reports that Rhett Campbell, Esq., at Houston-based Thompson and Knight and other western lawyers surveyed, expressed some doubts about whether Yukos filed for bankruptcy protection in the right place. The Ultimate Goal "Our Management Board made the decision that we had to file bankruptcy in Houston because our company is being rendered insolvent by unlawful Russian Government actions which have greatly damaged the Company and destroyed billions of dollars of value for investors," Mr. Misamore relates. "Our Management Board concluded that there is absolutely no chance of our obtaining justice in the Russian court system or from the Russian Government without protection to preserve the core of the company and reorganize our affairs. At this point, we have made the decision not to file for bankruptcy for Yukos' various subsidiaries. If we are able to resolve our disputes with the Government, we are convinced that we will be able to receive all the relief that is necessary to provide a fair resolution to these issues and save the company as a whole." If the U.S. Bankruptcy Court declines to take jurisdiction over Yukos, Mr. Misamore stresses, billions of dollars of value once held primarily by U.S. institutional investors will vanish from Yukos forever. ----------------------------------------------------------------- [00002] YUKOS' CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2003 ----------------------------------------------------------------- YUKOS Oil Company Interim Condensed Consolidated Balance Sheet At September 30, 2003 (UNAUDITED) (expressed U.S. Dollars) Assets Cash and cash equivalents $1,579,000,000 Cash and cash equivalents deposited with equity investees 714,000,000 Marketable securities and other short-term investments 917,000,000 Accounts and notes receivable, net 2,844,000,000 Inventories 543,000,000 Current deferred income tax asset and other current assets 317,000,000 --------------- Total current assets 6,914,000,000 Equity investees and long-term investments at cost 3,670,000,000 Property, plant and equipment, net 7,329,000,000 Deferred income tax asset 123,000,000 Other long-term assets 478,000,000 Total assets $18,514,000,000 =============== Liabilities and Shareholders' Equity Short-term debt and current portion of long-term debt $128,000,000 Trade accounts and notes payable 488,000,000 Other accounts payable & accrued liabilities 3,257,000,000 Taxes payable 572,000,000 Current deferred income tax liability 20,000,000 --------------- Total current liabilities 4,465,000,000 Long-term debt 1,499,000,000 Deferred income tax liability 1,523,000,000 Other long-term liabilities 543,000,000 --------------- Total liabilities 8,030,000,000 Minority interest 350,000,000 Ordinary shares (2,237,000,000 shares authorized and issued; nominal value - RR 0.004 per share) 9,000,000 Additional paid in capital 991,000,000 Retained earnings 12,847,000,000 Accumulated other comprehensive income (net of $7,000,000 income tax expense) 95,000,000 Ordinary shares held in treasury, at cost (302 million shares) (3,808,000,000) Commitments and contingent liabilities --- --------------- Total liabilities and shareholders' equity $18,514,000,000 =============== ----------------------------------------------------------------- [00003] COMPANY'S PRESS RELEASE ANNOUNCING CHAPTER 11 FILING ----------------------------------------------------------------- YUKOS FILES FOR BANKRUPTCY PROTECTION SEEKS TO HALT YUGANSKNEFTEGAS AUCTION, SEEKS DAMAGE CLAIMS HOUSTON, Texas -- December 14, 2004 -- Yukos Oil Company today filed a voluntary petition for reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code. The existing management continues to operate the business and manage its properties as debtor-in-possession. The Company also asked the Court for an Emergency hearing on a Motion for a Temporary Restraining Order and for a Preliminary Injunction to halt the planned December 19th auction of its core asset, Yuganskneftegas and to compel the Russian Federation to arbitrate the Company's claims for the billions of dollars in damages. Yukos was forced into reorganization because Russian authorities are proceeding with the sale of the Company's largest unit, Yuganskneftegas, which accounts for roughly 60% of the Company's oil production. If allowed, the sale of Yuganskneftegas will cause the Company to suffer immediate and irreparable harm. In addition, Yukos Oil Company's bank accounts and other assets have been frozen by Russian authorities as part an unprecedented campaign of illegal, discriminatory, and disproportionate tax claims escalating into raids and confiscations, culminating in intimidation and arrests. These actions have severely damaged Yukos and the company's ability to conduct normal business operations. The company made the filing in the United States Bankruptcy Court for the Southern District of Texas, Houston Division. U.S. Bankruptcy law has worldwide jurisdiction over property of the debtor and the Company is seeking a judiciary that will protect the value of all shareholders' investment in Yukos. Houston is a major international oil and gas center. Yukos has assets and business dealings in the area. In addition, the Company's Chief Financial Officer is currently fulfilling his management responsibilities from Houston. Yukos is asking the Court for a Temporary Restraining Order halting the planned Sunday auction of Yuganskneftegas by Russian authorities. The order seeks to prevent the Russian Government, the auction bidders and financiers from participating in the sale process of purchasing, attempting to purchase, facilitating the purchase, financing or encumbering the property of Yukos. "The management of Yukos has worked tirelessly and in good faith over the past year to establish a dialogue with the Russian authorities in an attempt to work out a compromise that would have prevented today's reorganization filing. We have submitted more than 70 settlement offers and publicly stated that reorganization was a distinct possibility if a reasonable resolution was not reached. It is regrettable that we did not receive one substantive response," said Yukos Chief Executive Officer Steven Theede. "The steps we took today were done as a last resort to preserve the rights of our shareholders, employees and customers. Unfortunately, we believe it was the only resort left for us." "The selective and retroactive application of tax law by Russian authorities is improper under Russian and international law and has directly resulted in the loss of approximately $38 billion in market value for our investors. The actions by the Russian authorities appear to be expropriation - 21st century style," said Theede. The Russian authorities have pursued an unprecedented campaign against Yukos by asserting tax claims (in excess of 100% in 2001 and 2002 and 80% in 2003 of the company's annual consolidated gross revenues - not net income, consolidated gross revenues) that are not consistent with Russian tax policy or the rule of law. As a result of these obviously exorbitant claims, the Company believed it has no other choice but to seek reorganization protection while pursuing its damage claims. "Yukos worked and fought hard to become the most transparent and successful company in Russia, as well as one of the most efficient and successful oil and gas companies in the world. In many ways it became the poster child for business reform in Russia. On behalf of our 100,000 employees, shareholders and customers, management is committed to do everything in its power to maintaining our position as leader in the world energy markets and an example of the spirit and accomplishments of the Russian people," said Theede. ----------------------------------------------------------------- [00004] YUKOS OIL COMPANY CHAPTER 11 DATABASE ----------------------------------------------------------------- Debtor: Yukos Oil Company c/o Bruce K. Misamore, Chief Financial Officer 6791 Lempria Court Houston, Texas 77069 Bankruptcy Case No.: 04-47742 Chapter 11 Petition Date: December 14, 2004 Court: United States Bankruptcy Court Southern District of Texas Houston Division 5401 Bob Casey United States Courthouse 515 Rusk Avenue Houston, Texas 77002 Telephone (713) 250-5500 Judge: Letitia Z. Clark Debtor's Counsel: Zack A. Clement, Esq. C. Mark Baker, Esq. Evelyn H. Biery, Esq. John A. Barrett, Esq. Johnathan C. Bolton, Esq. R. Andrew Black, Esq. FULBRIGHT & JAWORSKI, LLP 1301 McKinney, Suite 4100 Houston, TX 77010-3095 Telephone (713) 651-5434 Fax (713) 651-5246 U.S. Trustee: Diane G Livingstone, Esq. Ellen Maresh Hickman, Esq. Office of the United States Trustee 515 Rusk Ave., Suite 3516 Houston, TX 77002 Telephone (713) 718-4650 Financial Condition as of October 31, 2004, according to Russian accounting principles: Total Assets: $12,276,000,000 Total Debts: $30,790,000,000 Major Shareholders identified by Yukos: Shareholder Stake ----------- ----- Hulley Enterprises Limited 48.73% Deutsche Bank Trust Company Americas 18.33% UBS AG 10.09% ----------------------------------------------------------------- [00005] YUKOS OIL COMPANY'S 20 LARGEST UNSECURED CREDITORS ----------------------------------------------------------------- Approximate Entity Nature of Claim Claim Amount ------ --------------- ------------ Russian Federation Alleged Tax $17,000,000,000 The Ministry of Justice of the Debt -- Disputed Russian Federation ul. Vorontsovo Pole, 4a, Moscow 109830, GSP, Gh-28 Russian Federation Societe Generale Trade Debt $1,426,000,000 SG Corporate & Investment Banking 17 Cours Valmy 92987 Paris La Defence Cedex France Attn: Alexandre Huet, Senior VP Telephone: (33 1) 414 59704 State Customs Committee of the Trade Debt $185,000,000 Russian Federation Russia 107842 Moscow 1 A Komsomolskaya Place Telephone: 7-095-975-4070 Transneft Trade Debt $73,000,000 Russia, 119180, Moscow, Bolshaya Polyanka Str., 57 Attn: Simon M. Vainshtock Telephone: (095) 951 48 89 Zapadno MalyBalyk Trade Debt $28,000,000 Nefteyugansk, 11 districk, 26 628300 KhMAO Makrotrade Trade Debt $21,000,000 Lenina avenue 5 Saransk, Mordovia Russian Federation 430000 Bank Menatep Trade Debt $3,500,000 Moscow Branch 4 Kolpachny Lane Moscow 101990 Russia Attn: Yuri Kotler JSC Mazeikiu Nafta Trade Debt $2,200,000 5526 Mazheikiu, Lodeikiu, 89467, Lithuania BCEN Eurobank Trade Debt $2,000,000 79-81 Bulevard Haussmann 75382 Paris cedex 08 France Kargill Yug OOO Other Debt $1,000,000 Krasnaya street, 180 Krasnodar Investpribor ZAO Trade Debt $1,000,000 Veresayeva, 6 Moscow, 121357 Prikaspburneft Povolzhie OOO Trade Debt $1,000,000 Neftyanikov street, 14 Volgograd prospect Russian Federation NPO Intekh OOO Trade Debt $1,000,000 Tetcrenskyi per., 4/8, cxp.2 Moscow, 109004 ZAO PricewaterhouseCoopers Trade Debt $1,000,000 Kosmodamianskaya nab., 52 Building 5, 115054, Moscow, Russia Tyumen exploration Trade Debt $760,000 expedition ZAO 128 Druzhba Tyumen, 625031 Russian Federation SovGeoInfo Trade Debt $615,000 Nezhinskaya street, 13/4 Moscow, 117571 Burson Marsteller/NIS Trade Debt $600,000 1801 K Street, N.W. Suite 1000-L Washington, DC 20006 See terminal Trade Debt $600,000 Primorsk, Vyborg region Leningrad oblast, 188910 Property Committee of Other Debt $600,000 Khanty Mansyisk Region Mira street, 5 Khanty-Mansyisk, Tyumen oblast KhMAO, 626200 Obneftegasgcologia Trade Debt $500,000 Federova street, 68A Surgut, 628400 ----------------------------------------------------------------- [00006] ADVERSARY PROCEEDING -- Yukos v. Bidders & Their Lenders ----------------------------------------------------------------- In an attempt to halt the auction of Yuganskneftegas equity seized by the Russian Government that's currently scheduled for Dec. 19, 2004, Yukos Oil Company filed a complaint in the U.S. Bankruptcy Court requesting an injunction against: * the Russian Federation, * OOO Gaspromneft, * ZAO Intercom, * OAO First Venture Company, * ABN Amro, * BNP Paribas, * Calyon, * Deutsche Bank, * JP Morgan * Dresdner Kleinwort Wasserstein, and * any and all other banks and financial institutions that do business in the United States that would provide any financing for any bidders at the December 19, 2004 auction scheduled in Moscow for the stock of Yuganskneftegas, which is Yukos' primary asset. Within a week, Zack A. Clement, Esq., at Fulbright & Jaworski, LLP, tells Judge Clark, Yukos is about to suffer immediate and irreparable harm if the Court doesn't issue the injunction. If Yukos is able to obtain an injunction now, the Company says, it may never need to file a Chapter 11 case for a host of affiliated companies. The Players OOO Gazpromneft has been instructed by the Russian Government (Gazpromneft's principal shareholder) to bid for the YNG stock in the Auction, according to press reports. As of December 10, 2004, three entities have been reported to have filed with Russia's Federal Antimonopoly Service to bid at the Auction: (1) Gazprom, (2) OAO First Venture Company, and (3) ZAO Intercom. Yukos understands from an Interfax press report that Gazprom is raising financing for the Auction from a consortium of international banks, including: (a) ABN Amro, (b) BNP Paribas, (c) Calyon, (d) Deutsche Bank, (e) Dresdner Kleinwort Wasserstein and (f) J.P. Morgan. All of these Auction Financiers have U.S. offices and operations. The Auction's Rigged Yukos believes that the Auction will not be conducted in a commercially reasonable fashion designed to bring the highest price. Bids at the Auction will start at $8.65 billion, yet the Russian Government's own appraisal of YNG valued it at between $15.7 and $18.6 billion and independent assessments of its asset value suggest $20 billion or more (YNG produces approximately 1 million barrels of oil a day and is, by itself, one of the world's largest oil and gas companies). Several major western oil companies and the Chinese national oil company which had previously expressed interest in the YNG assets have indicated that they will not participate in the Auction. Yukos is not aware of either Intercom or First Venture as a company involved in the oil and gas industry, or as a company capable of such a substantial transaction. If there is only one real bidder at the December 19 Auction, then the shares of YNG may be sold to state- owned Gazprom at a price substantially below YNG's asset value. Adding some color, Bruce K. Misamore, Chief Financial Officer and a Member of the Management Board of Yukos-Moscow, the managing company of Yukos Oil Company, tells Judge Clark that since announcing the Auction, the Russian Government has proceeded far down the ranks below Yukos' former CEO, Mikhail Khodorkovsky, with its efforts to arrest Yukos' managers, keeping them from doing their jobs, and has jailed or threatened to charge other company employees on improper criminal charges. For example, Mr. Misamore relates, within the past week, Svetlana Bakhmina, a young Deputy General Counsel of Yukos and the mother of two young children, was arrested late at night at her home in Moscow on charges relating to her legal work at Yukos. It has been reported to Mr. Misamore that she is currently in a semi- conscious state unable to recognize colleagues shown to her. This is just a solitary yet eminently repugnant example of a series of such recent malicious arrests of Yukos employees and outside service providers. The Injunction The Debtor tells Judge Clark they will suffer irreparable harm, for which there is no adequate remedy at law, if the Defendants, their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them, are not enjoined permanently from all actions seeking: (a) to continue pre-petition actions and proceeding against the Debtor to recover a claim against the Debtor that arose pre-petition; (b) the enforcement against the Debtor or against property of the estate of a judgment obtained pre-petition; (c) to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; (d) to create, perfect, or enforce any lien against property of the estate; (e) to create, perfect, or enforce against property of the Debtor any lien to the extent that such lien secures a claim that arose pre-petition; (f) any act to collect, assess, or recover a claim against the Debtor that arose pre-petition; and (g) the setoff of any debt owing to the Debtor that arose pre-petition against any claim against the Debtor. In particular, the Debtor seeks to enjoin the Defendants, their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them, from taking any actions with respect to the YNG stock pending international arbitration between the Debtor and the Russian Federation concerning alleged tax liabilities. The issuance of a preliminary restraining order prohibiting an auction of the YNG Stock from taking place and temporarily enjoining all further attempts by parties to take away the Debtor's assets will protect the public interest by insuring that the investments of U.S. residents in the Russian Federation are treated in accordance with international norms as guaranteed by the Russian Federation in the Foreign Investment Law, Yukos argues. ----------------------------------------------------------------- [00007] DEBTOR'S MOTION TO CLARIFY STAY APPLIES WORLDWIDE ----------------------------------------------------------------- To put what the U.S. Bankruptcy Code says into the form of a court order that Yukos Oil Company and its lawyers can pass around, the Debtor presents Judge Clark with an "Emergency Motion for Entry of Order Pursuant to Sections 105, 106, 362 and 366 of the Bankruptcy Code (a) Authorizing the Debtor to Operate its Business, and (b) Implementing the Worldwide Automatic Stay." Yukos asks Judge Clark to enter an order on an emergency basis "enforcing the automatic stay pursuant to Sections 105, 106, 362 and 366 of the Bankruptcy Code against all persons, entities and governmental units, including the Russian Federation, prohibiting them from taking any actions in violation of the worldwide automatic stay, including participation in the auction scheduled for December 19, 2004, which seeks to sell the most valuable property of the Debtor's bankruptcy estate." If the automatic stay is not immediately enforced against the Russian Federation and the persons or entities that may participate in the auction, the most valuable assets of the Debtor's bankruptcy estate will be sold at a price significantly below market. The Debtor's estate will suffer complete, immediate and irreparable harm. Stop the Auction Yukos asks the Court to enforce the automatic stay that went into place with respect to Yukos' assets worldwide when Yukos filed this Chapter 11 bankruptcy case. In particular, Yukos asks the Court to enjoin the Russian Government from completing the sale of the YNG Stock that is currently proposed at the Auction on December 19, 2004, which, as described in the press, will likely result in the sale of the stock of YNG to Gazprom at a price significantly below market. There may only be one real bidder at this sale, the bids will start at $8.65 billion, and YNG's assets are worth $20 billion or more. To make this injunction meaningful, Zack A. Clement, Esq., at Fulbright & Jaworski, LLP, says, Yukos also asks the Court to enjoin Gazprom and any other persons that either have bid, or who might bid, from participating in that Auction. Finally, Yukos asks the Bankruptcy Court to enjoin all international financial institutions with operations in the United States, from financing the bid of Gazprom, or any other person to purchase the assets of Yukos. The Debtor-in-Possession Concept Section 1108 of the Bankruptcy Code authorizes a trustee to operate the business and manage property of the estate in the ordinary course of business. Section 1107(a) of the Bankruptcy Code provides that, with certain exceptions not relevant in Yukos' case, a debtor-in-possession has all of the rights, powers, and duties of a trustee in a case under Chapter 11. Accordingly, the Debtor is authorized under Sections 1107 and 1108 of the Bankruptcy Code to operate its business and manage its properties in the ordinary course of business, including transactions with its vendors and creditors located in the United States and other countries as well as intercompany transactions with its approximately 200 active subsidiaries. Send a Clear Message The Debtor fears that parties unfamiliar with the United States Bankruptcy Code may attempt to commence, or attempt to proceed with, litigation and other acts against the Debtor and property of its bankruptcy estate despite the implementation of the automatic stay. The Debtor believes that it may be difficult to convince these foreign creditors that their actions against the Debtor may violate federal law, or that the Debtor is able to operate its business merely by pointing out the existence of the automatic stay. Many of these foreign creditors may require tangible evidence that the automatic stay has, in fact, been implemented and that they are enjoined from collecting prepetition debts and taking actions against the Debtor and its estate before they cease those actions. Accordingly, the Debtor asks the Court to enter an order pursuant to 11 U.S.C. Sec. 105(a) that will serve to notify the parties with whom the Debtor does business of the requirements of Section 362 of the Bankruptcy Code, including, but not limited to: (a) that the Debtor is authorized to continue to operate its business and to manage its properties; (b) that, in the course of those operations, the Debtor has the power to enter into all transactions (including obtaining services, supplies and inventories) that it could have entered into in the ordinary course of its business had there been no bankruptcy filing; and (c) that suppliers and other parties may continue to engage in transactions with the Debtor in the ordinary course of business in the same manner and on the same terms and conditions as they did before the filing. The Debtor also requests that the order provide notice to all applicable courts of competent jurisdiction to take all appropriate measures required to enforce and recognize its Chapter 11 case, including, but not limited to, application of the automatic stay and all other orders entered in its Chapter 11 case in the relevant jurisdictions. American Bankruptcy Basics The injunction contained in Section 362 of the Bankruptcy Code is self-executing. It constitutes a fundamental debtor protection which, in combination with the other provisions of the Bankruptcy Code, provides the Debtor with the "breathing spell" that is essential to the Debtor's ability to reorganize successfully. See, e.g., Variable-Parameter Fixture Dev. Corp. v. Morpheus Lights, Inc., 945 F. Supp. 603, 606 (S.D.N.Y. 1996) ("[Section] 362 is meant to give 'the debtor a breathing spell from his creditors [and] . . . permit [ ] the debtor to attempt a repayment or reorganization plan.'"). This protection was extended to protect a debtor's property wherever it is located and by whomever it is held. See, e.g., Underwood v. Milliard (In re Rimsat, Ltd.), 98 F.3d 956, 961 (7th Cir. 1996) (bankruptcy court's in rein jurisdiction over property of the estate permits injunctions against foreign proceedings pursuant to the automatic stay). The automatic stay under Section 362(a) of the Bankruptcy Code prohibits the commencement or continuation of any prepetition action. Section 541(a) of the Bankruptcy Code defines "property of the estate," as "all legal or equitable interests of the debtor in property as of the commencement of the case" both "wherever located and by whomever held." Section 106(a) of the Bankruptcy Code abrogates sovereign immunity. Sovereign Immunity The Debtors point Judge Clark to Tuli v. Republic of Iraq (In re Tuli), 112 F.3d 707, 711 (9th Cir. 1999), where the Ninth Circuit Court of Appeals addressed the issue of whether Iraq had sovereign immunity from a Bankruptcy Court order under the Foreign Sovereign Immunity Act, 28 U.S.C. Sec. 1602, et seq. In that case, the debtor sued the Republic of Iraq for turnover of property that the government had illegally confiscated. The Ninth Circuit found that since the enactment of 11 U.S.C. Sec. 106, foreign states can no longer assert sovereign immunity from liability for certain actions under the Bankruptcy Code, including adversary proceeding complaints brought pursuant to Section 542 of the Bankruptcy Code. Id. at 711. The court noted that Section 106 of the Bankruptcy Code abrogates sovereign immunity as to a "governmental unit," which the Bankruptcy Code specifically defines to include a foreign state or other foreign or domestic government. Id. at 712 (citing 11 U.S.C. Secs. 101(27) and 106(a)(l)). Other Courts Have Done It Although the automatic stay arises by operation of law, the Debtor believes that a court order is necessary to ensure that all creditors, including the ministries of the Russian Government, timely comply with the stay. The Debtor notes that other bankruptcy courts have issued similar orders in In re UAL Corp., et al, Case No. 02-B-48191 (Bankr. N.D. 111. December 11, 2002); In re Comdisco, Inc., et al., Case No. 01 B 24795 (Bankr. N.D. 111. July 17, 2001) (entering an order implementing the automatic stay); In re Trans World Airlines, Inc., et. al., Case No. 01-00056 (Bankr. D. Del. Jan. 10, 2001) (same); In re Trans World Airlines, Inc., Case No. 95-43748-399 (Bankr. E.D. Mo. June 30, 1995) (same); In re Pan Am Corp., et al, Case No. 91 B 10080 through 91 B 10087 (Bankr. S.D.N.Y. Jan. 8, 1991) (same). ----------------------------------------------------------------- [00008] DEBTOR'S MOTION TO COMPEL ARBITRATION PROCEEDING ----------------------------------------------------------------- Yukos Oil Company asks the U.S. Bankruptcy Court to compel the Russian Federation to arbitrate with Yukos and bring an end to the Russian Government's vicious and unprecedented campaign of illegal and discriminatory taxes, confiscations, arrests, and intimidation. Russian Foreign Investment Law In July 1999, the Russian Federation adopted a new Federal Law on Foreign Investment in the Russian Federation in order to attract and encourage foreign investment on its territory. According to its preamble: "This Federal Law determines the basic guarantees of foreign investors' rights to the investments, and to the income and profits obtained from such investments, and the terms of business activities of foreign investors in the Russian Federation." The legislation's preamble declares its purposes to be: "attracting foreign material and financial resources, advanced engineering and technologies, managerial experience and efficient application thereof in the economy of the Russian Federation, and ensuring that the legal regime of foreign investments is in compliance with the norms of international law and the international practice of investment co-operation." An 18-page English translation of the Russian Foreign Investment Law provided by the International Centre for the Settlement of Investment Disputes of The World Bank is available at no charge at: http://bankrupt.com/misc/RussianInvestmentLaw.pdf C. Mark Baker, Esq., at Fulbright & Jaworski L.L.P., tells Judge Clark that Yukos is protected by the investment guarantees set forth in the Russian Foreign Investment Law because foreign investors own at least 10% of Yukos' capital stock and because Yukos reinvests its income and profits in oil production and related activities on the territory of the Russian Federation. Article 4(5) expressly provides: "A foreign investor or a commercial organization established in the Russian Federation in which a foreign investor[s] own[] at least 10 percent of the charter (joint stock) capital of such organization while reinvesting shall be entitled to the full legal protection, guarantees and privileges provided by this Federal Law." The ownership of Yukos' capital stock by foreign investors far exceeds the 10% minimum requirement. Under the Russian Foreign Investment Law, Mr. Baker relates, the Russian Federation guaranteed Yukos five basic rights: (1) protection from discriminatory treatment under the legal regimes governing investment (Article 4(1)); (2) full and unconditional protection of its rights and interests, together with the right to receive compensation for damages inflicted as a result of illegal actions (or failure to act) of governmental authorities (Article 5(l)-(2)); (3) protection of property from forced seizure, including nationalization and requisition, without compensation for the value of the property and other damages (Article 8(l)-(2)); (4) protection from unfavorable changes in existing federal laws and other normative acts that change the rate of federal taxes (excluding excise tax and value added tax on goods), or that result in the increase of the cumulative tax burden on activity aimed at implementation of priority investment projects (Article 9); and (5) the right to reinvest, remit abroad, or otherwise fully dispose of the proceeds of its investments or business activities (Article 11). Under Russian law, the Russian Federation also was obliged to treat Yukos, its investments, and business activities in good faith. It hasn't. The Russian Federation's Failures In the course of its unrelenting attacks on Yukos, Mr. Baker argues, the Russian Federation has violated each of these fundamental investment protections and guarantees. It has also breached its obligations under international law, including the obligation not to treat Yukos, its investments or business activities discriminatorily, unfairly, inequitably, arbitrarily or capriciously; not to deny Yukos justice; not to expropriate or confiscate Yukos' property, or interests in property; and to grant full protection and security to Yukos, its investments and business activities. Article 4(1) requires: "The legal regime governing investment activities of a foreign investor and use of profits obtained from such investments may not be less favorable than the legal regime governing the investment activities and use of profits obtained from such investments established for Russian investors, with the exceptions established by federal laws." As interpreted and applied by Russian governmental authorities, the legal regime governing reinvestment activities of Yukos in the Russian Federation -- specifically, the tax regime and its enforcement mechanisms -- is brutally discriminatory and, indeed, confiscatory, depriving Yukos of revenues and profits, strangling its ability to operate and conduct business, and destroying shareholder value. Under Article 5(1), the Russian Federation expressly guaranteed Yukos the "full and unconditional protection of its rights and interests in the Russian Federation which are provided by this Federal Law, other federal laws and normative acts of the Russian Federation and by international treaties of the Russian Federation." Under Article 5(2), Yukos "shall have the right to receive compensation for damages inflicted on it as a result of illegal actions (failure to act) of any governmental or local authorities or any officer of such authorities." Based on these protections and guarantees, Yukos is entitled to full compensation in monetary damages from the Russian Federation for the destruction of its value as a commercial organization by governmental authorities. Article 3 of the Russian Foreign Investment Law recognizes that international treaties are part of the legal regulation of foreign investments. The general rules governing the status of international treaties in the Russian Federation are provided in Article 15(4) of the 1993 Russian Constitution and Article 5(1) of the 1995 Federal Law on International Treaties of the Russian Federation, which both provide: "International treaties of the Russian Federation shall, together with generally-recognized principles and norms of international law, be an integral part of its legal system in accordance with the Constitution of the Russian Federation." In Article 8(1), the Russian Federation also promised that "[t]he property of a foreign investor or an organization with foreign investments shall not be subject to forced seizure, including nationalization and requisition," except on grounds established by federal laws and treaties. Under Article 8(2), Yukos must be compensated for the value of requisitioned property and in the event of nationalization must be compensated for the value of the property and other damages. The illegal manipulation and misuse of the tax system, tax authorities, and courts by the Russian government in order to take control of the assets of Yukos, including court orders expressly authorizing the seizure of all of Yukos' revenues, violate this prohibition against forced seizure. Furthermore, to the extent governmental authorities subject the assets of Yukos to the forced sale to state enterprises at prices far below their fair value, the Russian Federation violates its obligation not to nationalize property without full compensation. The Russian Federation has also breached its obligations to guarantee against unfavorable changes in the tax regime applicable to Yukos. The illegal acts of the Russian government, in manipulating, misusing, and reinventing the Russian tax laws, violate its stability obligation under Article 9, radically changing the tax regime under which Yukos undertook its activities and investments to Yukos' immense disadvantage. The Russian Federation's failure to maintain the stability of the tax regime violates Article 9 and, accordingly, its obligation under Article 5(1) to accord Yukos the full and unconditional protection of its rights and interests provided by the Russian Foreign Investment Law. Under Article 5(2), Yukos has the express right to receive compensation for damages inflicted on it as a result of these illegal actions. Pursuant to Article 11, subject to the payment of all legally permissible taxes, the Russian Federation guaranteed Yukos "the right to use its income and profits for reinvestment in the Russian Federation . . . or to apply it for any other purposes which are not in conflict with the laws of the Russian Federation, and to transfer outside of the Russian Federation without limitation such income and profits and other foreign currency legally received in connection with its prior investments." By imposing or permitting the imposition of illegal and impermissible taxes against Yukos, and ordering the seizure of its revenues, the Russian Federation has breached the above guarantees. It has impaired Yukos' ability to reinvest, or otherwise fully dispose of, its profits and dividends. The Russian Federation has also violated its obligation to allow the unrestricted transfer abroad by Yukos of the proceeds of its investment and business activities in the territory of the Russian Federation, including "income from investments in the form of profits, dividends or any other income," "moneys received under contractual or any other obligations," "moneys received from the liquidation [of Yukos, any of its affiliates, or assets], or the disposal of investment assets, property rights and exclusive intellectual property rights." International Arbitration Required Article 10 of the Russian Foreign Investment Law sets forth the Russian Federation's "Guarantee of Proper Settlement of Disputes Related to Investment and Business Activities of Foreign Investments in the Russian Federation." The Russian Federation's consent to international arbitration is provided in Article 10, as follows: "Any dispute involving a foreign investor and related to the investment and business activities of such investor in the Russian Federation shall be settled in compliance with the international treaties of the Russian Federation and federal laws in a court, an arbitration court, or international arbitration (arbitration tribunal)." There are no limitations on the scope of the Russian Federation's consent to arbitration. Moreover, by its terms, Article 10 does not require any additional agreement for the Russian Federation's consent to be operative. Under the Russian Foreign Investment Law, Yukos is guaranteed the same investment protections, including those provided in Article 10, as a foreign investor, based on its significant percentage of foreign ownership. Yukos says it is entitled to submit its investment disputes with the Russian Federation to international arbitration. With the Russian Federation's consent in Article 10 of the Russian Foreign Investment Law to submit investment disputes to international arbitration, all that is required is the investor's acceptance of the offer to arbitrate. That an offer to submit investment disputes to international arbitration, which is set forth in a national investment law, can be accepted by a notice of arbitration is now widely recognized. Leading commentators on the law and practice of international commercial arbitration recently noted: Investment arbitrations are frequently based on provisions in national investment laws or international treaties by which the state agrees generally to arbitrate investment disputes. These provisions constitute a unilateral standing offer to the public to submit to arbitration with any party fulfilling the requirements. The offer is accepted by the investor when it initiates arbitration proceedings against the state. Julian D. M. Lew, et al, COMPARATIVE INTERNATIONAL COMMERCIAL ARBITRATION f 28-12 (2003). See also Tradex Hellas v. Albania, Decision on Jurisdiction, 24 December 1996, 14 ICSID Rev. - F.I.L.J. 161, 187 (1999) (stating that "it can now be considered as established and not requiring further reasoning that [a state's consent to arbitrate] can also be effected unilaterally by a Contracting State in its national laws the consent becoming effective at the latest if and when the foreign investor files its claim with ICSID making use of the respective national law."); SPP v. Arab Republic of Egypt, Decision on Jurisdiction 1, November 27, 1985, 3 ICSID Rep. 112, 114-15 (1995) (ruling in favor of arbitral tribunal's jurisdiction based on consent to arbitrate contained in Egypt's Law No. 43 of 1974 Concerning the Investment of Arab and Foreign Funds and the Free Zone, pursuant to which the investor was provided with several options for settling its disputes with the Egyptian Government). Based on the Russian Federation's consent, Yukos sent a Notice of Arbitration to the Russian Federation on December 14, 2004, giving Yukos' assent in writing to arbitrate its claims concerning the Russian Federation's breach of its investment obligations under the Russian Foreign Investment Law and International Law. A full-text copy of Yukos' 26-page Arbitration Notice is available at no charge at: http://bankrupt.com/misc/YukosArbitrationNotice.pdf Forcing Arbitration The great favor and deference federal law gives to recognizing and enforcing arbitration agreements has become enshrined in American arbitration jurisprudence, Mr. Baker tells Judge Clark, directing her attention to Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217-18, 105 S. Ct. 1238, 1240-41, 84 L. Ed. 2d 158 (1985); Moses H. Cone Mem. Hasp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 941-42, 74 L. Ed. 2d 765 (1983). Indeed, Mr. Baker continues, the United States Fifth Circuit Court of Appeals, while reviewing a bankruptcy court's decision not to order arbitration, recognized that "in the absence of an inherent conflict with the purpose of another federal statute [i.e., the Bankruptcy Code], the Federal Arbitration Act mandates enforcement of contractual arbitration provisions. . . ." In re National Gypsum Co., 118 F.3d 1056, 1067 (5th Cir. 1997) (citing Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 237-38 (1989)). This support for recognition and enforcement of arbitral agreements "applies with special force in the field of international commerce." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631, 105 S. Ct. 3346, 3353, 87 L. Ed. 2d 444 (1985); see also Pennzoil Expl. & Prod. Co. v. Ramco Energy Ltd., 139F.3d 1061, 1065 (5th Cir. 1998). Enforcement of arbitration agreements touching on international commercial matters is governed by the New York Convention, as implemented by Chapter 2 of the FAA, 9 U.S.C. Secs. 201-208 (2000). The strong policy favoring enforcement of agreements falling under the New York Convention is necessary to prevent the frustration of "the orderliness and predictability essential to any international business transaction." Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 538, 115 S. Ct. 2322, 2329, 132 L. Ed. 2d 462 (1995), quoting Scherkv. Alberto- Culver Co., 417 U.S. 506, 516, 94 S. Ct. 2449, 2456, 41 L. Ed. 2d 270 (1974). Article 11(1) of the New York Convention requires each Contracting State to recognize an agreement in writing to arbitrate disputes, and Article 11(3) requires the court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement to arbitrate, to refer the parties to arbitration. Section 206 of the FAA implements this treaty requirement by providing that "[a] court having jurisdiction under this chapter may direct that arbitration be held in accordance with the agreement at any place therein provided for, whether that place is within or without the United States." United States courts have determined that they can direct parties to arbitration under this provision when the parties have designated the place of arbitration in their agreement to arbitrate. See, e.g., Jain v. de Mere, 51 F.3d 686, 689 (7th Cir. 1995). When the parties have not designated the place of arbitration, pursuant to Section 208, the courts default to the provisions of Chapter 1 of the FAA and rely on Section 4 to compel arbitration. See, e.g., id.; Bauhinia Corp. v. China National Mach. & Equip. Import & Export Corp., 819 F.2d 247, 250 (9th Cir. 1987). Under Section 4, the arbitration hearing and proceedings shall be held within the district in which the petition for an order directing arbitration is filed. See Jain v. de Mere, 51 F.3d 686, 690 (7th Cir. 1995). Houston's the Place Yukos asks the Court to recognize the agreement in writing to arbitrate set out in Article 10 of the Russian Foreign Investment Laws and Yukos' Notice of Arbitration and direct the parties to arbitration. Because Article 10 of the Russian Foreign Investment Law does not specify the place of international arbitration, Yukos asks the Court to compel arbitration in Houston, Texas, the principal city within the Southern District of Texas and, appropriately, the center of the international oil and gas industry. Yukos says that because the Russian Government has over many months used, manipulated, and abused its court system in its efforts to destroy Yukos, there is absolutely no reason to believe that the Russian Government would abandon its destructive campaign to participate in the fair resolution of Yukos' investment claims before an impartial and independent international arbitral tribunal, and every reason to believe that it would not. For Yukos to make a request to arbitrate to the Russian Government without immediately thereafter applying to the U.S. Bankruptcy Court to compel arbitration would not only be a futile act, but would only ensure that the Russian Government, which has repeatedly shown its utter contempt for the rule of law in the course of attacks on Yukos, would again manipulate its courts in an attempt to prevent Yukos from pursuing its rights under Article 10 of the Russian Foreign Investment Law to arbitrate its claims and from enforcing its right to arbitration under the New York Convention. Under the extreme circumstances of its case, Yukos insists that there is no doubt that it is an "aggrieved party" in every sense of the word, including for purposes of recourse to arbitration under the New York Convention and the FAA. Yukos also asks the Bankruptcy Court to name the individual who should serve as the arbitrator, without offering any candidates. *** End of Issue No. 1 ***