An Open Letter to Western Institutional and Individual Minority Shareholders in the YUKOS Oil Company

Printed in Wall Street Journal and Financial Times
December 15, 2004

Re: Your Rights as YUKOS Shareholders

Dear International Investor:

For the past year, the Russian Administration has been engaged in a political and economic campaign against Mikhail Khodorkovsky and YUKOS Oil Company (“YUKOS”). As shareholders in YUKOS, you are directly impacted by these events, and have legally recognized interests in the company which has been subjected to the Russian Administration’s campaign. The cumulative impact of the government’s actions has driven the YUKOS share price and market capitalization down by approximately 93% since April 2004. To date, minority shareholders have been relatively quiet in the face of the onslaught against their commercial interests – perhaps in the hopes that a mutually acceptable resolution of the disputes would occur and that the Russian government would not act to decimate the value of their investments. In view of recent developments, you may wish to re-consider taking a more pro-active stance, including taking legal action to protect your interests, before it is too late.

Under Bilateral Investment Treaties (“BITs”) between Russia and many European nations and Canada, and under the Energy Charter Treaty (“ECT”) signed by Russia and many of the same Western nations, Russia is legally obligated to ensure the fair and equitable treatment of investors from treaty signatory countries, must not take unfair or discriminatory measures affecting such investors’ shareholdings in Russia, must provide full protection and security to such investor’s holdings, and may not take measures having the nature or effect of expropriation of such investors’ holdings. YUKOS’ largest shareholders have already advised the Russian government in writing of damages they have suffered as a result of Russia’s having violated each of these provisions with respect to YUKOS, have requested good faith negotiations under the ECT, and have reserved their rights to require arbitration if such negotiations fail to achieve a satisfactory result. In the US, the Russian Government has caused severe damage to the value of YUKOS ADRs, and American ADR holders may wish to consider taking action under US securities laws and common law in US federal courts.

On 18 November 2004, the Russian government’s Property Fund announced that, on 19 December 2004, it will conduct an auction for the sale of 76% of the shares of Yuganskneftegaz, a wholly owned subsidiary of YUKOS and its largest and most valuable production subsidiary. The stated purpose of the auction is to raise funds to satisfy YUKOS’s alleged outstanding tax liabilities. However, the Russian Property Fund does not have the right to sell the shares in Yuganskneftegaz. The Russian Tax Ministry concocted YUKOS’s alleged tax liability with little or no basis in reality. The liability is premised on a misapplication of the underlying tax law for the use of internal tax havens; YUKOS has been denied its appellate rights; the alleged tax liability has been artificially inflated; and the penalties have been improperly calculated.

On the latter two points, the stupefyingly high taxes assessed against YUKOS also defy logic: the new assessments – now over US $26 billion – bring YUKOS’s total tax burden to multiples of its operating cash flow and near or over 100% of its total revenues. Moreover, since the year 2000, YUKOS has paid taxes, per ton of oil produced, at levels equal to or greater than the average of the six largest Russian oil and gas companies. The new taxes assessed by the government, including the penalty interest, fines, and bailiff’s fees would put YUKOS in the position of paying more than three times the industry average.

Notwithstanding its denial of the tax charges, YUKOS made numerous good faith attempts to settle these matters but the Russian government has ignored the offers and, instead, has frozen YUKOS’s assets in order to deny the company the means to generate the cash to pay the tax liability, threatened to withdraw the Yuganskneftegaz operating licenses and precipitously seized, and announced the auction of the shares of Yuganskneftegaz. This latter tactic violates Russian law, which requires that the government properly value a company’s assets and then only seize assets of approximate proportionate value to the outstanding taxes so as to exercise less intrusive means to satisfy tax liabilities and avoid unnecessarily impeding the company’s conduct of its business. In particular they are required firstly to take cash and then seize and liquidate non-core assets before going against core assets.

In addition to the flaws in calculating and assessing the alleged tax liability and the decision to seize and sell Yuganskneftegaz, the auction procedures themselves may well contravene Russian law. Issues exist regarding whether the government has provided proper notice of the sale or properly set the price for the asset. If past is prologue, the result of the auction will be a fait accompli and no regard will be given to the rights of the debtor or disfavored bidders, especially foreign strategic investors, if any are interested. Moreover, the Russian Government is intentionally and artificially deflating the auction price set at US $8.6 billion, whereas the government-commissioned Dresdner Kleinwort Wasserstein evaluation of Yuganskneftegaz included a number of valuation scenarios in the range of US $20 billion.

Under the current circumstances, the auction will give rise to causes of action by YUKOS shareholders against any successful bidder and/or any financing institution that supports such bidder for misappropriation of assets, tortious interference with contractual and commercial relations, and disparate treatment of investor rights, just to name a few. Based upon the value of Yuganskneftegaz, a purchaser and its financial backers will be participants in a theft of unprecedented magnitude. The alleged abuses of the privatization process in the immediate post Soviet era pale in comparison to the unvarnished disregard by the Russian government for substantive property and investment rights and procedural due process.

A prospective purchaser should not delude itself in the belief that the auction is merely a matter of Russian Law or seek comfort in the belief that the only venue for relief from these abuses is the Russian Courts. In addition to any rights YUKOS shareholders may have against the Russian government either through bilateral treaties, the Energy Charter Treaty, or under US securities laws, shareholders will also have valid claims against any successful bidder or financial backer in any country where the rule of law prevails and that bidder or financial backer is located, has assets or does business.

If you are a minority shareholder of YUKOS and wish to discuss these matters, kindly contact us as below.

Yours faithfully,

YUKOS Minority Shareholder Coalition
E. Michael Hunter, Director

51 JFK Parkway
First Floor West
Short Hills, NJ 07078
USA

Phone: +1(973) 218-2510
Fax: +1(973) 218-2401
hunter@YukosShareholderCoalition.com