Yukos case will not stop private investors

An unbiased look at confrontation between Yukos and the authorities reveals a rather boring picture. The Yukos case is approaching the long-expected final stage: the oil major has started paying its 99-billion rouble ($3 bln) tax bill in compliance with a court ruling.

The Russian Ministry of Taxes and Levies has now presented its claims in the amount of about 200 bln roubles (more than $6 bln) to Yukos on the results of inspection of its operation in 2000 and 2001. The arbitration court has confirmed the tax claims for 2000.

The key question for private investors now is not the Yukos case but its consequences, meaning what will happen to the investment climate in Russia. We know the rumours and fears, but what are the facts?

Previous investment trends promised an investment influx in February-March after the traditional November-January pause. This year the expectations did not come true, possibly because of Yukos, but there is no reliable proof of this. Stock market experts say the crux of the matter is not a general change in the climate but the political conflict between the authorities and Khodorkovsky, which must not affect other market participants. Many experts say that if everything is being done perfectly legally in the district and arbitration courts and this is not the beginning of re-nationalisation, the investment pause will not be long.

However, Igor Yurgens, vice-president of the Russian Union of Industrialists and Entrepreneurs, says, "If Yukos defaults in August, the ratings of all Russian borrowers will plummet." The worst thing would be if Russian oligarchs stopped investing in Russia. If their investments drop from 80% to 20% of profits, this may become a much more serious problem for the national economy than a change in the mood of Western investors. Having said that, Western companies and nationals invested in Yukos, too, and if the oil major loses its licenses and/or other assets, the investors will lose a great deal of money.

But then, this will hardly happen, as Yukos is a global company whose capitalisation was $40 bln only recently. It should have something left after the repayment of all the debts - unless its shareholders find a super-clever method of dispersing its assets.

Anyway, these are the "what if" and "maybe" aspects of the Yukos case, which the Russian government views as highly beneficial to the national economy. Indeed, tax collection to the federal budget has grown by 17% to 1.48 trillion roubles in January-June 2004. Receipts from profit tax have grown by 56%, VAT by more than 10%, and income tax, by 27%.

Deputy Finance Minister Sergei Shatalov explained this, "in part, by the consequences of the Yukos case, which spotlighted the danger of using tax optimisation schemes." In other words, the outflow of capital and a fall in investments are only probables, while the increase in tax collection is a solid fact.

As for forecasts, the most pessimistic of them is: potential capital outflow will slow economic growth and the 6-8% GDP growth rate will drop to 2-4%. On the other hand, no serious expert has speculated about an abysmal fall. The main engines of the Russian economy have been turned on and will ensure continued growth even with smaller investments.

Besides, it will be difficult to scare off investors, as potential returns from investment in Russia are higher than in Europe and America. Even a comparatively unsuccessful investment project in Russia has a profit margin of 10-20% a year, while successful investments in America earn no more than 5%.

It is a fact that there are only three countries with a giant growth potential this century: Russia, China and India. And investors will bring their money to them in the coming decades. Long-term trends are what matters to them; they have analysed the situation thoroughly and know that unless they invest in an emerging market today, they will stand to lose 10-20 years down the line. Against this planetary background, the Yukos saga looks like a minor incident.