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On December 19, GAZPROMNEFT and BAIKALFINACEGROUP were qualified to par ticipate in the auction on sale of 76.79% of the authorized capital of YUGANSKNEFTEGAZ or 100% voting shares held by YUKOS. LLC Pervaya Venchurnaya Kompaniya failed to ap ply for participation at the auction, CJSC INTERCOM failed to provide the required $1,billion deposit. The initial price of the foregoing block of shares was RUR246,75 billion. The auctions step was RUR2,8 billion. LLC BAIKALFINACEGROUP made its initial bid of RUR260,7 billion for YUGANSKNEFTEGAZs shares to become the winner. The remainder (upon granting a deposit) of $7,65 billion due was to be transferred before January 18, 2005. GAZPROMNEFT made no bid.

On the night of December 22 to 23, 2004, NK ROSNEFT announced that it had re purchased a 100% equity of BAIKALFINACEGROUP thus taking possession of 76.6% of YUGANSKNEFTEGAZ (and getting entitled to purchase YUGANSKNEFTEGAZ together with the winner). YUGANSKNEFTEGAZs shares were purchased as part of ROSNEFT devel opment plans providing for its transition into a national energy corporation through the de velopment of production facilities . Neither terms and conditions nor the value of the transaction were disclosed.

On December 23, 2004, RF President V. Putin announced at a press conference: In fact, ROSNEFT, a 100% public company, has purchased a well known asset, YUGANSKNEFTEGAZ In my opinion, it has been done by using purely market mechanisms You all are well aware of how privatization was performed in this country in the beginning of Section 4.

Institutional and Macroeconomic Challenges the 90, and how many market participants took possession of public assets which are worth a billions of dollars by utilizing various tricks, including those violating the law appli cable even at that time. Today, the government is securing its interests through absolutely legal market mechanisms Referring to this very transaction, I believe that it has been per formed in severe conformity to the Russian law and all standards of international law and international commitments assumed by the Russian Federation as part of the documents which we sign with our counterparts at the international level.

On December 23, 2004, the RTS index grew by more than 2% and got close to points by the middle of the day. Shares of ROSNEFTs subsidiaries grew by nearly 10%, GAZPROMs shares by 3% (with the value of ROSNEFT ranging within $6 8,5 billion, while the value of acquired YUGANSKNEFTEGAZ is estimated not less than $9,35 billion with nearly $8 billion of debt, the settlements required for the transaction on YUGANSKNEFTEGAZs shares are raising ROSNEFTs debt).

At the end of December 2004, ROSNEFT obtained a $6 billion loan from a syndicate of Chinese banks. According to the official data, the loan was obtained to invest in pro duction and economic activity and implementation of capital intensive strategic projects which were not disclosed.

On December 30, 2004, D. Medvediev, Head of the RF President Office and Chair man of the Board of Directors of GAZPROM OJSC announced that GAZPROM and ROS NEFT would merge without YUGANSKNEFTEGAZs assets.

On January 6, 2005, Italian Ministry of Industry . Marzani announced to Reuters that it kept interested in YUKOSs assets.

On January 7, 2005, Chinese mass media released information that Chinese public oil company CNPC assessed it possible to purchase 20% shares of YUGANSKNEFTEGAZ.

On January 10, 2005, Indian oil company ONGC announced its intention to purchase a block of shares of YUGANSKNEFTEGAZ by means of the Indian government.

On February 8, 2005, MENATEP Group laid a legal action for $28 billion against the Russian Federation to the International Committee for Settlement of Trade Disputes in re lation to expropriation of the group, YUGANSKNEFTEGAZ. Financial claims were laid against Energy Charter according to an Agreement. Membership of the Charter includes mostly European countries (Russia signed it in 1994 but not ratified).

On February 9, 2005, Deputy Minister of Finance . Golikova announced that pro ceeds from the sale of YUGANSKNEFTEGAZ (RUR213 billion) were allocated to the con solidated budget (RUR138 billion to the federal budget, the remainder to the budgets of constituent entities of the Russian Federation).

On February 9, 2005, Arbitration Court of Appeal No. 9 (Moscow) confirmed that the decision of the Major Taxpayers Interregional Inspection No. 1 (under the RF Federal Tax Service) obliging YUKOS to pay additional RUR115,4 billion of tax arrears for the period of 2001 was legitimate.

Negative legal evaluation of the transaction relied upon determination of a fact of il licit sale of shares, because YUGANSKNEFTEGAZ is the principal oil production asset of YUKOS holding company. The similar line of arguments was presented in the previous pe riods: the arrest of YUGANSKNEFTEGAZs shares was baseless, since NK YUKOS should be considered as a holding company, and it is specified in the law that securities of sub sidiaries held by a holding company shall not be first to forfeit. Law enforcement officers shall first to forfeit the property that is not utilized in production 57.

Egorova ., Tutushkin . Yukos Subsidiaries Remain Under Arrest // Vedomosti. August 10, 2004.

RUSSIAN ECONOMY in trends and outlooks It is our opinion that the key problem of the transaction with YUGANSKNEFTEGAZs shares is not so much an illicit sale as a directly opposite case: the sale was performed on absolutely formal legitimate grounds. And, paradoxical as it may appear, it is the very case that creates principal risks in terms of protection of ownership rights of the business in Russia. We will try to analyze in details the sale of YUGANSKNEFTEGAZs shares in terms of its legitimacy58.

1. Debtors Assets Arrest Procedure Federal Law On Law Enforcement Proceedings of July 21, 1997 FL 119 specifies a procedure of forfeiture of debtors (organizations) assets. In particular, Article 59 of the Law specifies that debtors assets must be seized and sold in order of priorities as follows:

first priority: assets which are not directly utilized in production (securities, deposit funds and funds on other accounts of a debtor, foreign exchange assets, passenger cars, office design items and other assets); second priority: final products (goods) as well as other tangible assets which are neither directly utilized in production nor intended to be directly utilized in production; third priority: immovable property as well as raw materials, plant and equipment, other fixed assets designed for direct utilization in production.

Hence, pursuant to Federal Law On Law Enforcement Proceedings, the securities (YUGANSKNEFTEGAZs shares in this case) held by NK YUKOS are neither considered the assets which are directly utilized in production nor subject to first priority seizure and sale.

Nevertheless, pursuant to Clause 3 of a Regulation issued by a Plenary Meeting of the RF Superior Arbitral Court on March 3, 1999 No. 4 On Various Issues Related to Imposing a Recovery on Shares, the following should be taken into account in making a decision on order of priorities of imposing recovery actions on assets of a debtor acting as a holding company or other type of company established during privatization of public assets pursu ant to a Decree of the President of the Russian Federation or a regulation of the Govern ment of the Russian Federation, whose authorized capital is built up by contributing a con trolling block of shares of subsidiaries held by the government.

The foregoing companies are established by the government as single economic bodies for the purpose of coordination and cooperation of operational and commercial ac tivity of integrated subsidiaries, and operation of such company may come to be impaired or discontinued if one or several such subsidiaries would be withdrawn from the company as a result of recovery imposed upon the relevant blocks of shares. Article 59 of Federal Law On Law Enforcement Proceedings specifies the order of priorities of levying an exe cution upon debtors (organization) assets so that it may not be unreasonably forced to discontinue its core activity (production or any other activity the organization is established for) upon liquidation of debt due to seizure and sales of its assets (including shares). In this connection, the blocks of shares of subsidiaries contributed to the authorized capital of the foregoing companies can not be subject to first priority recovery. Pursuant to Sub Paragraph 3, Article 59 of Federal Law On Law Enforcement Proceedings, such blocks of shares should be considered as assets which are critical for maintaining production ac tivity of the company and subject to third priority recovery.

It should be noted, however, that the key issue related to the sale of YUGANSKNEFTEGAZs shares is justification of tax claims laid against YUGANSKNEFTEGAZ and its parent company YUKOS. For some obvious reasons we cannot make a com prehensive analysis of tax claims against these and other companies integrated into YUKOS. It is also worth noticing that, in judging the YUKOS case, the courts relied upon the materials provided by the Federal Tax Service and refused the defense to file reports of independent expertise of the tax claims made by request of the defendant with other documents of the case.

Apparently, the right to unconditional filing of at least the independent expertise (appraisal) reports with the tax arrears documents must be undisputable.

Section 4.

Institutional and Macroeconomic Challenges Hence, a Plenary Meeting of the RF Superior Arbitral Court specified the following conditions under which blocks of shares of subsidiaries are not subject to first priority re covery:

authorized capital of a corresponding holding company or other type of company was built up during privatization of public assets by contributing a controlling block of shares of subsidiaries held by the government ;

a parent company was established by the government as a single economic body for the purpose of coordination and cooperation of operational and commercial activity of its integrated subsidiaries, and operation of such company may come to be impaired or discontinued if one or several such subsidiaries would be withdrawn from the company as a result of recovery imposed upon the relevant blocks of shares.

To which extent the foregoing provisos of Federal Law On Law Enforcement Pro ceedings can be applied to YUKOS and YUGANSKNEFTEGAZ In 1993, pursuant to a De cree of the RF President of November 17, 199259, the authorized capital of YUKOS oil com pany 38% was supplemented by shares of YUGANSKNEFTEGAZ joint stock company established during reorganization of PO YUGANSKNEFTEGAZ. Later, the share of YUKOS in the authorized capital of YUGANSKNEFTEGAZ was increased up to 100%. On the one hand, YUGANSKNEFTEGAZ was actually integrated into YUKOS during privatization.

YUGANSKNEFTEGAZ is owned by YUKOS, hence operation of the entire holding company may come to be impaired or discontinued due its withdrawal from YUKOS60. On the other hand, as was noted above, the shares of subsidiaries held by the parent company are not subject to first priority recovery provided that the authorized capital of the parent company is built up by including controlling blocks of shares of its subsidiaries. The foregoing statement, which is included into the ruling issued at a Plenary Meeting of the RF Superior Arbitral Court, can be interpreted both as restrictive and expansive. In case of restrictive interpretation, one may suppose that the authorized capital of a corresponding company must be built up exclusively by including controlling blocks of shares of its subsidiaries.

However, in case of expanding interpretation, one may conclude that the authorized capi tal of a corresponding holding company may be built up both of majority and minority blocks of shares of its subsidiaries. In addition, as was noted above, the authorized capital of YUKOS was initially supplemented by only 38% shares of YUGANSKNEFTEGAZ (i.e., a share of YUKOS in the authorized capital of YUGANSKNEFTEGAZ was initially less than the value of controlling block of shares of YUGANSKNEFTEGAZ).

From the aforesaid, it might me assumed that the foregoing provision as part of a the regulation of the Plenary Meeting of the RF Superior Arbitral Court on exclusion of recovery on holding companies from the order of priorities is applicable to the sale of YUGANSKNEFTEGAZs block of shares held by YUKOS. In addition, it should be noted that the provision of the Plenary Meeting of the RF Superior Arbitral Court actually provides for exclusion of Clause 59, Article 1 of Federal Law On Law Enforcement Proceedings. How ever, according to the applicable law, the Plenary Meeting of the RF Superior Arbitral Court is not vested with legislative functions. In particular, pursuant to Clause 1, Article 13 of Federal Law On Arbitration Courts of the Russian Federation61, the competence of the RF Presidents Decree No. 1403 On Specifics of Privatization and Reorganization of Public Enterprises, Production and Research Associations of Petroleum and Petroleum Refinery Industries and Oil Product Supply.

In 2003, YUGANSKNEFTEGAZs output accounted for 49,7 million tons of crude oil, or 62% of total oil production by YUKOS. Production totaled 25,6 million tons of crude oil within the first half of 2004. The company has 26 oil and gas pro duction licenses at the fields located in Nefteyugansk, Surgut and Khanty Mansyisk regions with the reserves totaling (ac cording to the SPE methodology) 16,2 billion tons of crude oil, or 73% of reserves proved by YUKOS (refer to: Rock Bottom Price by Reznik I., Bushuyeva Yu.,. YUGANSKNEFTEGAZ can be sold at $3 billion // Vedomosti. October 15, 2004).

Federal Law of April 28, 1995. No. 1 FL.

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