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RUSSIAN ECONOMY in trends and outlooks Plenary Meeting of the RF Superior Arbitral Court includes reviewing materials of study and generalization of enforcement of laws and other regulations of courts of arbitration and providing consultancy on judicial practice. The Plenary Meeting of the RF Superior Arbitral Court issued regulations on its proceedings being mandatory for all courts of arbitration in the Russian Federation pursuant to Clause 2, Article 13 of Federal Law On Arbitration Courts of the Russian Federation. In addition, regulations specified in the federal law are superior to the provisions issued at the Plenary Meeting of the RF Superior Arbitral Court.

From the aforesaid, it might be assumed that according to the language of law ap plied to the sale of YUGANSKNEFTEGAZs shares held by YUKOS, the law enforcement of ficers service lawfully qualified debtors shares as assets subject to first priority seizure and sale under RF Law On Law Enforcement Proceedings.

2. First Priority Sale of YUGANSKNEFTEGAZs Shares Ambiguous assessments were also caused by the fact that the law enforcement offi cers made a decision on first priority sale of YUGANSKNEFTEGAZ, principal oil production subsidiary of YUKOS. In particular, according to some opinions, the very selection of YUGANSKNEFTEGAZs shares suggests that the RF government intends to ultimately de stroy YUKOS62.

Pursuant to Article 46 of Federal Law On Law Enforcement Proceedings, in case the debtor has no funds sufficient to settle recoverers claims, debtors assets are subject to recovery, except for the assets which are not subject to recovery under the federal law.

In addition, the debtor is entitled to specify those types of assets or items which are sub ject to first priority recovery.

JSC YUKOS was entitled to do the same, as evidenced from available public materi als. In particular, the company made a list of enterprises which could be sold (YUGANSKNEFTEGAZs shares were not included into the list). Nevertheless, since Article 46 of Federal Law On Law Enforcement Proceedings specifies that it the law enforce ment officer who is to determine the order of priority for recovering debtors assets, the law enforcement officers acted within their competence in the YUKOS case in qualifying YUGANSKNEFTEGAZs shares held by YUKOS as first priority assets to sell. From the above said it appears that the law enforcement officers had the right to impose first priority recovery upon YUGANSKNEFTEGAZs shares held by YUKOS on a pro forma basis.

3. Front Bidder de facto at the Auction An unknown company, LLC BAIKALFINANCEGROUP, won at the auction on sale of YUGANSKNEFTEGAZs shares held by YUKOS. Neither official data bases nor registers nor the Federal Tax Service website made any reference to this company. According to the documents submitted to the Russian Federal Property Fund, the LLC BAIKALFINANCE GROUP appeared to be incorporated in Tver (Russia). In this connection, many experts asked a question as to how an unknown company was admitted to the auction and hence whether the results of the auction were legitimate.

Pursuant to RF Law On Law Enforcement Proceedings, the bidding procedure dur ing law enforcement shall be specified in the RF Civil Code. Pursuant to Article 447 of the RF Civil Code, the entity offered the highest bid shall be deemed the winner at an auction.

Any entity may participate at an open auction. In addition, the regulation issued by Russian Federal Property Fund on November 29, 2001, No. 418 On Approval of the Procedure of Reznik I. They Started from Key Issues // Vedomosti. July 21, 2004.

Section 4.

Institutional and Macroeconomic Challenges Organization and Conducting of Bidding on Arrested and Seized Assets As Well As Confis cated, Unprocessed and Other Assets Appropriated by the Russian Federation provides no special requirements to participants at auctions on a block of shares.

Pursuant to RF Law On Mineral Resources, both changes in the authorized capital structure and replacement of a majority shareholder shall not be deemed a reasonable justification for license redistribution, early termination of the right of utilization of mineral resources on the basis of a license issued to a corresponding company. Hence the law provides no special requirements to entities participating at an auction on sale of shares.

From the above said it follows that the unknown LLC BAIKALFINANCEGROUP participated at the auction on a legitimate basis and in conformity with the Russian law and met all for mal conditions and requirements.

4. Legal Action in the United States It is known that YUKOS filed a bankruptcy claim with the United States Court of Bank ruptcy in connection to the recovery of tax arrears. YUKOS moved for prohibition of the auction on sale of YUGANSKNEFTEGAZ as a security for the claim. On December 16, 2004, the United States Court of Bankruptcy, South District, Houston, Texas, issued a provisional prohibitory injunction on YUKOSs claim on suspension of the auction on sale of YUGANSKNEFTEGAZs shares. The court ordered to perform no further transactions for the time being related to YUGANSKNEFTEGAZs shares, including but not limited to the auction on sale of the shares in question63.

Later, on December 30, 2004, YUKOS published an notice through mass media:

pursuant to 541, Section 11 of the Code of the Laws of the United States, the shares shall be deemed assets included into the bankruptcy assets of NK YUKOS pursuant to Chapter 11. The United States Court of Bankruptcy has an exclusive jurisdiction pursuant 1334 (), Section 28 of the Code of the Laws of the United States in relation to the bank ruptcy assets of NK YUKOS wherever they are located (pursuant to Chapter 11). YUKOS notified the parties concerned that should the shares have been sold, NK YUKOS would sustain losses to the amount beyond $20 billion . In addition, the company specified that it would apply all available legal mechanisms in order to claim compensation for the losses against any legal entities or physical bodies which would: 1) take part at the auction on sale or purchase of the shares, encourage or finance such sale or purchase; 2) interfere with the relationship between NK YUKOS and its staff members; 3) dispute NK YUKOSs assets representing the bankruptcy assets pursuant to Chapter 11; 4) intend to recover on claims against NK YUKOS which raised prior to petition in bankruptcy64.

Of course, the question now arises on whether the jurisdiction of the aforementioned American court may be applied to a bankruptcy case of the Russian company. One of the documents filed with the American court in regard to the YUKOS case provides the follow ing justification of the American courts jurisdiction for this particular case. YUKOS is an open joint stock company established in compliance with the legislation of the Russian Federation. According to .Mizamor, Financial Director of the company, Debtors subsidi ary deposited nearly $2 million to funds on the accounts with the Texas South Western Bank located at the South District of Texas. The Debtor also deposited nearly $6 million on the trust account of lawyers from Fubright & Jaworsky L.L.P as an advance fee for the pro vision of legal services and administrative costs which would be incurred in regard to the case in question. The foregoing funds are Debtors fixed assets in the United States. In ad Notice concerning the automatic stay. Case No. 04 47742 3 11, Chapter 11. 20.12.2004 (www.yukosbankruptcy.com).

In particular, the Notification of NK YUKOS was published by Izvestiya newspaper on December 30, 2004.

RUSSIAN ECONOMY in trends and outlooks dition, B. Mizamor specified that American institutional investors held nearly 15% of Debtors shares. Eventually, the American court issued the tentative prohibitory injunction at YUKOSs request to suspend the auction on sale of YUGANSKNEFTEGAZs shares65.

Pursuant to Article 27 of the RF Arbitration Practice Code, the jurisdiction of courts of arbitration of the Russian Federation also includes cases related to Russian business or ganizations, except as otherwise provided for by an international agreement with the Rus sian Federation. According to the regulations of the RF Arbitration Practice Code, the YUKOS bankruptcy case is subject to the exclusive jurisdiction of Russian courts of arbitra tion. Furthermore, for the time being there is no international agreement with the Russian Federation that would provide for otherwise.

In fact, there is a formal conflict of jurisdictions. On the one hand, pursuant to the Russian law, the YUKOS bankruptcy case is subject to the jurisdiction of Russian courts of arbitration. On the other hand, pursuant to the American law, the company may move the corresponding American court, since it certain assets of the company are allocated on the territory of the United States of America. Nevertheless, the ruling in question may be exe cuted on the territory of the Russian Federation, provided that the corresponding ruling is issued by a Russian court of arbitration pursuant to the procedure specified in Chapter of the RF Arbitration Practice Code. Pursuant to Article 244 the RF Arbitration Practice Code, arbitration court shall deny in full or in part the ruling on a case issued by a court of a foreign country, provided that such case is subject to the exclusive jurisdiction of the Rus sian court pursuant to an international agreement of the Russian Federation or the federal law. However, as was noted above, pursuant to the Russian law, bankruptcy cases of Rus sian legal entities are subject to the exclusive jurisdiction of Russian courts of arbitration, and there is no agreement concluded between Russia and the United States that would provide for otherwise. In addition, there is no public information on whether YUKOS applied to a Russian court of arbitration for adoption and execution of the aforementioned ruling issued by the American court. Consequently, the aforesaid ruling imposing a temporal in junction on sale of YUGANSKNEFTEGAZ shares, is currently effective only on the territory of the United States of America.

4.3. The third law on insolvency: the first results and prospects of improvement By present, in Russia there have formed all key elements of the institution of insol vency. However, the institution of bankruptcy in Russia can not be seen yet as a stable and efficient mechanism aimed at the rehabilitation of management and finances of compa nies. The existing institution of insolvency, in spite of a growth in the number of bankruptcy cases, is only of a point scale as concerns its application, and fails to settle the problem of withdrawal of inefficient enterprises from the market and repayment of debts to credi tors at the macro level. On the whole, the institution of bankruptcy fails to ensure the pre dictable distribution of risks faced by creditors. Moreover, in the 1990s and early 2000s, the institution of bankruptcy in Russia was used either as a method of redistribution (take over, retention, and privatization) of property, or a highly selective way to put political and economic pressure on enterprises on the part of the state. At the same time, there is ob served a significant underdevelopment of the infrastructure related to the implementation Pursuant to 28 & U.S.C. &1334 (a), district courts have primary and exclusive jurisdiction in regard the case pursuant to Title 11. A foreign company may be deemed a debtor pursuant to 11 U.S.C. & 109 (), provided that a part of its assets is located on the territory of the United States of America. Refer to Memorandum opinion of the United States Courts South ern District of Texas. 16.12.2004.

Section 4.

Institutional and Macroeconomic Challenges of the bankruptcy legislation. However, in spite of all costs of implementation of the institu tion of insolvency, the catastrophic tone of statements implying that exactly bankruptcy is the root of all evil should not be shared. For instance, in absolute terms there are much more offences and abuses in the framework of corporate law. There is little doubt that in the sphere of small and medium sized businesses a positive influence of the institution of bankruptcy has already been felt by now. In Russia, the bulk of criticism is related to the practices of bankruptcy of large enterprises.

4.3.1. Legislation on bankruptcy in 1990s through 2000s: specifics of formation In foreign countries, regulation of insolvency is a most dynamically developing sphere of law, since the economies of states require constant modernization of the respective provisions. In theory, the legal norms governing the regulation of bankruptcy of enterprises may be aimed at the settlement of the following problems:

at the macro level it is reduction of the level of economic risks in the economy by the way of liquidation of inefficient enterprises and redistribution of industrial assets in fa vor of efficiently operating economic agents, as well as development of a competitive environment;

at the micro level it is protection of the rights of creditors, instilment of financial disci pline, enhancement of reliability of the credit circulation, carrying out of reorganization of enterprises and their financial restructuring, improvement of the quality of corporate governance, redistribution of property in favor of efficient owners, replacement of in efficient managers, introduction of a rational management system at enterprises66.

The experience of developed foreign countries does not unambiguously indicate that the regulation of insolvency should be formed exclusively proceeding from the priority of creditors. There are examples, where the respective regulations are primarily aimed at protection of the interests of debtors or the state. All specifics of legislation are determined by the concrete economic policies pursued by the states and are closely associated with the sizes of public sectors in the respective economies and the attitudes as concerns the necessity of these sectors. A characteristic feature of the majority of modern developed systems aimed at regulation of insolvency is that they include and develop rehabilitation procedures aimed at the preservation of businesses in addition to such a classical mecha nism of bankruptcy as the closing down sale of debtors assets in the course of bankruptcy proceedings.

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