YUKOS/Sibneft: Corporate Governance Risk Increasedir.gazprom-neft.ru/fileadmin/user_upload/documents/troika-2004-04... · YUKOS/Sibneft Corporate Governance Risk Increased ... little

April 2, 2004

YUKOS

Phone: +7 (501) 258 0511 www.troika.ru

Sibneft

Russia Corporate Governance

YUKOS/Sibneft

Corporate Governance Risk Increased

[email protected]

In accordance with US SEC Regulation AC, the text of the analyst certification can be found on the last page of this report.

Divorce is as traumatic for companies as it is for people. Even more so than for theprotagonists, it is painful for the minors caught up in it, or, in the corporate world,minority shareholders.

On October 24, YUKOS and Sibneft were married before the FCSM, the registeringauthority, technically creating the worldís sixth largest oil company in terms ofreserves. Operationally, however, the marriage was never consummated. After littlemore than a month of awkward cohabitation, Millhouse Capital, Sibneftís (former)core shareholder, demanded a divorce.

All this has severely tested corporate governance at the two companies, which, forthe past three years, have been held up as an example of good conduct. Thereorganization may be past the stage when minority shareholders are mostvulnerable, but the risk that they face is clearly much higher than it was before themerger. This has prompted us to downgrade Sibneftís corporate governance ratingunder four out of six criteria and YUKOSí under three. We hope that the companieswill seek to regain lost ground and that a corporate divorce will not mean a divorcefrom best corporate governance practices.

YUKOS and Sibneft downgraded on sharply increased corporate governance risks

Rating criterion YUKOS Sibneft

Ownership structure and transparency Unchanged Unchanged

Supervision and board accountability Downgraded Downgraded

Management and investor relations Downgraded Downgraded

Information disclosure and financial discipline Downgraded Unchanged

ìSteel trapsî in charter and contingent risks Unchanged Downgraded

Governance track record Unchanged Downgraded

Vulnerable to high

Exposure to potentialcorporate governance risk

Fair to vulnerable

Low to fair

Vulnerable to high


Fair to vulnerable

Low to fair

APRIL 2, 2004 YUKOS/SIBNEFT: CORPORATE GOVERNANCE RISK INCREASED

11

Contents

2 Hit By Divorce

3 YUKOS: Sidelined by Menatep

3 Core shareholders sideline management, board and minority shareholders

5 YUKOS: emerging from de$merger

7 YUKOS corporate governance profile

9 Sibneft: High Affinity with Ex$Shareholders

9 Small shareholders put at risk, majority shareholder (YUKOS) left out in the cold

11 Sibneft: emerging from de$merger

12 Sibneft corporate governance profile

14 What Went Wrong

16 Reversal and its Risks

16 The difficulties of unmerging

17 Scenarios and risks

20 Merger Calendar


22

Hit By Divorce

Divorce is as traumatic for companies as it is for people. Even more so than for the protagonists,it is painful for the minors caught up in it, or, in the corporate world, minority shareholders.

On October 24, YUKOS and Sibneft were married before the FCSM, the registering authority,technically creating the worldís sixth largest oil company in terms of reserves. Operationally,however, the marriage was never consummated. After little more than a month of awkwardcohabitation, Millhouse Capital, Sibneftís (former) core shareholder, demanded a divorce.

The original merger schedule was comprised of four stages. Only two were completed. The firststage still stands, the second is being challenged by Millhouse Capital.

YUKOSSibneft merger: how it was to have been

Source: Companies, Troika Dialog

CHALLENGED

COMPLETEDMerger preparation and execution (April*October 2003)

April 22: YUKOS and Sibneft reveal plans to merge assetsMay 28 EGM: put back offer

August 6: buyout through YUKOS5MOctober 3: Millhouse and YUKOS officially complete deal

Merger approval (August*November 2003)

August 14: Antimonopoly Ministry approves mergerOctober 24: FCSM approves results of new YUKOS share issue to Millhouse

November 28: YUKOS EGM approves changes to charter sealing merger

Operational integration (November*December 2003)

December 16: Sibneft EGM liquidates own executive board and transfers operational control to YUKOS MoscowDecember 30: Sibneft EGM elects YUKOS5nominated directors

November5December: Sibneft subsidiaries similarly replace boards and amend charters

Completion of merger

January 1, 2004: YUKOSSibneft starts doing business


33

YUKOS: Sidelined by Menatep

Core shareholders sideline management, board and minority shareholders

MERGER PREPARATION

As part of the merger preparations, YUKOS launched a buyback offer on August 6. Although itwas open to all YUKOS shareholders, it was communicated in such a way that some of them,especially ADR owners, could have been dissuaded from taking up this advantageous offer.

We find at least five faults with the offer.

1. No rationale given, inadequate clarification of procedures.The YUKOS board failed to explain to shareholders why it had approved a buyback. YUKOSmanagement was also very inarticulate on this point and on the subject of buyback procedures.

2. Business conducted by a third party, closely associated with Menatep.A. The buyback offer was handled by Trust Bank, a nominee for Group MENATEP, not byYUKOS itself. The acceptance form, too, was posted on the bankís rather than YUKOSí site.

B. YUKOS did not host a conference call to discuss the procedures. Instead, it was conductedby Trust Bank and Deutsche Bank.

3. Offer effectively backdated.The market learned about the buyback from a notice posted on the Trust Bank website onJuly 7, three days after the record date.

4. Information vacuum.ADR holders did not know whether they were eligible to participate in the offer for fourweeks after it was published. Only on August 5 did Deutsche Bank, the custodian to theYUKOS ADR program, follow up with details. Until then the bank was unable to provide uswith any guidance on the issue, stating merely that legal formalities were being finalized andthat a public announcement would follow.

5. Offer mistimed. The buyback overlapped with a buyout of YUKOS shareholders that had voted against itsmerger with Sibneft. Management did little to explain the difference between the two offersand thus resolve the confusion.

In short, while the offer was made to all, it was so poorly explained that, whether by chance orchoice, Menatep found itself better placed than the other shareholders to exercise the option.

MERGER APPROVAL/OPERATIONAL INTEGRATION

The first signs that things were going wrong became visible in the lead5up to the November 28EGM. It was only two days before the meeting that YUKOS finally posted on its website theproposed charter amendments that were to have sealed the merger results. YUKOS usuallyposts detailed materials at least 20 days ahead of general meetings.

The big communications breakdown, however, occurred at the EGM itself. Just as shareholderswere preparing to vote on the charter amendments, CEO Simon Kukes made as if to interruptthe voting. He said that he was going to make an ìurgent announcementî but checked himselfand sat down with a heavy ìNever mind, please go onî. The changes were not approved, asthe persons authorized to vote for Menatep abstained. Why would they do so?

Outside shareholders

dissuaded from buyback

New management failed

to complete operational

integration agreed by

predecessors


44

One obvious answer is that the instructions had been countermanded by Menatep itself, whichhad already gone into de5merger talks with Millhouse Capital, Sibneftís core shareholders, asasserted in the press release issued by Sibneft on the EGM date. In this case, management couldhave known about the talks. However, it vehemently denied all knowledge at the time and hasdone so since. Alas, here ignorance was no bliss.

1. Management knew nothing.It is entirely possible that management did not know anything about the Millhouse5Menateptalks. If so, both board and management had been completely sidelined. We strongly believethat it should not be up to one shareholder to negotiate reorganizations. Management shouldlearn about them, and then the board, and then the other shareholders. Clearly, under thescenario that we are discussing, there was a breakdown in this reporting chain.

2. Management knew more than it let on. This would mean that management willfully concealed from shareholders vital information,which would be an even worse communications breakdown and a worse breach of goodcorporate governance than in the first case.

We do give management the benefit of the doubt. We also concede that at the time it was inan ambiguous position and had not yet found its footing. During the meeting, the managersblew hot and cold, stating that they would push ahead with the merger as agreed by theirpredecessors while, in the same breath, dissociating themselves from their policy and some oftheir transactions. Even now YUKOS management insists that it will press ahead with themerger, although all practical steps taken to this effect so far have proved futile.

To sum up, Menatep appeared to have sidelined board and management already at this stageand managementís ambivalence towards its predecessor was hardly conducive to carrying outthe predecessorsí policies and agreements, including the deal with Sibneft.

MERGER SUSPENSION

On November 28, Sibneft issued a press release that ran: ìCompletion of the merger betweenYUKOS and Sibneft has been put on hold in accordance with a mutual agreement between theshareholders of the two companiesî. Sibneft called it a ìjoint announcementî by YUKOS anditself, but YUKOS management disclaimed it, saying that it was not aware of any agreement.

It is not the best practice for a 92%5owned subsidiary to make announcements in the name ofits parent company, which the latter is forced to disavow. Such an unnatural situation is thedirect consequence of the majority shareholderís excluding YUKOS board and managementfrom talks about the companyís fate.

Information disclosure

suffers temporary

breakdown

Majority shareholder

plays a lone hand?


55

MERGER REVERSAL

On February 3, it was reported that Menatep had signed a letter of intent to reverse the merger.Yet again, it was the Sibneft investor relations department, not YUKOS, which broadcast thenews. Yet again, it was Menatep that engineered a YUKOS reorganization, not YUKOS itself. Yetagain, YUKOS management claimed to be unaware of any such agreement. Yet again, YUKOSmanagement and board seemed to have been sidelined by Menatep and saw their efforts to carryout Sibneftís operational integration on behalf and for the benefit of all shareholders foiled.

It is not consistent with good corporate governance for a majority owner to conduct talks abouta companyís reorganization on its own. First, the other shareholders ought to be consulted.Second, it is management that should properly lead such talks. It was quite acceptable for aMenatep shareholder, Mikhail Khodorkovsky, to conduct them as long as he was also YUKOSCEO. To see Menatep still negotiating privately on behalf of YUKOS when Khodorkovsky haslong resigned as CEO, signifies that minority shareholdersí interests are not being consulted.

YUKOS: emerging from de$merger

MENATEP OWNS YUKOS BUT WHO OWNS MENATEP?In February, sources within the group were quoted as saying that Menatep would list legalentities rather than individuals as its owners. This probably means that it will no longer discloseits ultimate beneficiaries, stopping instead at nominee level, as most Russian companies do. Ifour suspicions are confirmed, we will downgrade YUKOS on transparency of ownershipstructure, as it would no longer be possible to determine the ownership of a 44.6% (beforemerger 53.7%) stake in the company. For the time being, we assume that this block still belongsto the six individuals that Menatep listed as its beneficiaries in mid 2003.

Current Menatep shareholders

Stake in Stake in Current Status

Group YUKOS stake in

MENATEP before merger YUKOS

Special trust (sole beneficiary ñ

Mikhail Khodorkovsky) 50.0% 26.9% 22.3%

Mikhail Khodorkovsky 9.5% 5.1% 4.2% In custody

Leonid Nevzlin 8.0% 4.3% 3.6% Arrest warrant issued

Platon Lebedev 7.0% 3.8% 3.1% In custody

Vladimir Dubov 7.0% 3.8% 3.1% Arrest warrant issued

Mikhail Brudno 7.0% 3.8% 3.1% Arrest warrant issued

Vasily Shakhnovsky 7.0% 3.8% 3.1% Convicted on tax evasion

charges but released ìdue to

altered circumstancesî

Other 4.5% 2.4% 2.0% Personal accounts frozen

Total 100% 53.7% 44.6% Injunction against transferring

the YUKOS block issued

Source: Group Menatep, Troika Dialog

Merger put on hold

without consent or

counsel of board,

management or minority

shareholders

At present, market

does know names of

Menatepís owners ñ

this may soon change


66

DE*MERGER MAKES YUKOS A BETTER COMPANY?1. Investor relations recover

For two weeks after the arrest of Khodorkovsky, the YUKOS website provided coverage of hisand his fellow Menatep shareholdersí struggle with the authorities, or, as Khodorkovsky once putit, with ìconservative forces within the Kremlinî. It is hardly acceptable for a companyís publicrelations department to be pressed into the service of a single group of shareholders, but YUKOScan certainly plead extenuating circumstances: Khodorkovsky was for some time after his arrestboth shareholder and CEO, and a company does have a right to defend its CEO. We wouldtherefore treat this backsliding leniently, the more so as, when Khodorkovsky resigned, YUKOSmanagement, at the instance of the board, did dissociate itself from the core shareholders andput the investor relations department back into the service of the entire company.

2. Majority ownersí grip on management loosenedIn fact, shortly after Khodorkovsky resigned as CEO, the board replaced several topmanagers, both for the tactical purpose of limiting Menatepís influence over the day5to5dayrunning of the company and for the strategic one of reducing political risks for YUKOS andits outside shareholders. The transition of power was smooth and well executed.

Top Menatep shareholders removed from top managerial positions at YUKOS

Position Date of departure Successor

Mikhail Khodorkovsky CEO, YUKOS November 3, 2003 Simon Kukes, YUKOS

Oil Company (resigned) chairman, ex5CEO of TNK

Vasily Shakhnovsky CEO, YUKOS Moscow October 25, 2003 Stephen Theede,

(responsible for (replaced) ex5SEO of ConocoPhillips

coordinating the groupís

operational activities)

Mikhail Brudno CEO, YUKOS R&M February 3, 2004 Peter Zolotarev,

(downstream) (replaced) Brudnoís deputy

Source: Company, Troika Dialog

3. Management structure improvesWe argue that YUKOS is emerging from the crisis with a better management structure andless Menatep influence on the operational level.

Before the conflict, YUKOSí command and control structures were not transparent enough,and decision5making heavily depended on one man, Khodorkovsky, associated too closelywith the controlling shareholder, Menatep. Now all operational issues are coordinated by amanagement board, none of whose seven members owns shares in Menatep. There is,nevertheless, sufficient continuity at the executive level, as all top managers except SimonKukes and Steven Theede are seasoned YUKOS officers.

YUKOS management board established on November 4, 2003

Simon Kukes CEO

Bruce Misamore Vice president, economics and finance

Yuri Beilin Deputy chairman, president of YUKOS EP

Peter Zolotarev President of YUKOS R&M (since February 4, 2004)

Steven Theede Managing director, president of YUKOS Moscow

Alexander Temerko Senior vice president of YUKOS Moscow

Mikhail Trushin Senior vice president of YUKOS Moscow

Source: Company, Troika Dialog

YUKOS is emerging from

crisis with less Menatep

influence on operational

level


77

YUKOS corporate governance profile

Summary of changes New Old

Ownership structure and transparency High (watch list) High

Supervision and board accountability Fair Good

Management and investor relations Adequate Efficient

Information disclosure and financial discipline Fair Strong

ìSteel trapsî in charter and contingent risks Adequate Adequate

Governance track record Flawed Flawed

We are changing YUKOSí rating for shareholder exposure to corporate governance risk fromìLowî back to the mid52001 level of ìFair to Vulnerableî, following a downgrade on three counts:

1. Supervision and board accountabilityThe composition of the board no longer reflects the ownership structure, as the blockingshareholder, Millhouse, has no directors to represent it.

2. Management and investor relationsThe new management team led by Kukes has failed to achive the operational integration agreedby its predecessor.

It is also deplorable that YUKOSí corporate website seemed at one point to have been used toservice a single shareholder; investor relations efficiency deteriorated during merger preparationand approval, possibly because Kukes has yet to find his bearings in a corporate governanceenvironment so widely different from the one that he has been used to. Kukes was TNK CEObefore he joined YUKOS, presiding over a company with less than 5% of its equity publiclyheld. As quite a closed structure, TNK could more easily dispense with an efficient investorrelations policy. YUKOS cannot.

3. Information disclosure and financial disciplineYUKOSí production plans for 2004, approved by the board on February 26, do not accountfor the expected operating performance of Sibneft, a 92%5owned subsidiary. YUKOS blamesthis on Sibneft, which ìhas not yet provided YUKOS with the information necessary toconsolidate the Sibneft operating and capital expenditure plans for 2004 or the results of 2003î(Source: www.yukos.com). Be that as it may, YUKOS shareholders are not getting the fullpicture of the groupís operations, hardly a sign of good information disclosure. Naturally,should the merger be unwound, our objections would no longer hold.

YUKOS is alleged to have put Group MENATEP ahead of other shareholders in line toreceive 9m03 dividends. YUKOS and Bank Menatep St. Petersburg, the dividend paymentagent, have denied the rumor but Menatepís nominee, Trust Bank, has indirectly confirmedit to the Vedomosti daily (January 23, 2004).

While neither of these slips in information disclosure and financial discipline would justifya downgrade on its own, they do warrant one on aggregate.

Ownership structure and transparencyWe have put YUKOSí ìhighî transparency rating on a watch list, pending disclosure by GroupMENATEP of its new ownership structure. There may be negative developments.

In February, sources within the group were quoted as saying that Menatep would thenceforth listlegal entities rather than individuals as its owners. We take this to mean that Menatep will nolonger disclose its ultimate beneficiaries, stopping instead at the nominee level. If our suspicionsare confirmed, we may downgrade YUKOS on transparency, as it would no longer be possibleto determine the ownership of a 44.6% (53.7%) stake in the company.

We are downgradingYUKOS under threecriteria: (1) supervision and board accoutability(2) management andinvestor relations (3) information disclosureand financial discipline

We are also placing itstransparency rating on awatch list with a view to apossible downgrade


88

YUKOS

OWNERSHIP STRUCTURE AND TRANSPARENCY

Voting stock

26%

52%

Privately owned22% Publicly owned

CPO

SUPERVISION AND CONTROL STRUCTURE: ACCOUNTABILITY TO SHAREHOLDERS

Board of directors

100.0%CPO

MANAGEMENT AND INVESTOR RELATIONS

INFORMATION DISCLOSURE AND FINANCIAL DISCIPLINE

Effective as on March 2004 Executive/Outside NominatedChairman: Simon Kukes EXE CPOYuri Golubev, freelance consultant NED CPORaj Kumar Gupta, freelance consultant NED CPOBernard Loze, president, Loze & Associes NED CPOAlexei Kontorovich, director, Institute of Oil NED CPO

and Gas GeologyJacques Kosciusko5Morizet, manager, Kajis Sari NED CPOSarah Collins Carey, head of CIS practice, Squire, NED CPO

Sanders & Dempsey LLPYuri Pokholkov, provost, Tomsk Polytechnic University NED CPOMichel Soublin, treasurer, Schlumberger Limited NED CPOFrancois Buclez, director, GM Investment NED CPO

Investorsí contactAlexander GladyshevPhone: 7 (095) 788 0033 [email protected]

Location: 31A, Dubininskaya Street, Moscow

Accounting standards GAAP (since 1998) Auditor: PricewaterhouseCoopersRAS Auditor: PricewaterhouseCoopers

Independence of internal auditor Low

Disclosure record with FCSM Good

Level of ADR program Level 1Listing of ADR OTC

Listing of local stock RTS MICEX

Registrar M5Reestr, MoscowRegistrar risk Moderate

Dividend history Consistent

High

Degree of transparency

Moderate

Low

Good

Degree of accountability

Fair

Poor

Efficient

Investor relations

Adequate

Inefficient

Vulnerable to high


Fair to vulnerable

Low to fair

Strong

Financial discipline

Fair

Weak

Governance track record Flawed

Steel traps in charter

Contingent risks Adequate

Policy for corporate conduct

BoD formal written mandate \/General meeting protocol \/Audit commission written charter \/

Incentives for good corporate governance

Corporate governance charter YesPending ADR/Eurobond program None

ë00 ë01 ë02 9m03Dividend declared \/ \/ \/ \/Dividend paid \/ \/ \/ \/

CORPORATE CONDUCT

Management company: YUKOS MoscowCEO: Simon Kukes (1946), in this post since November, 2003199852002, CEO, Tyumen Oil CompanyWebsite: http://www.yukos.ru, http://www.yukos.comWebsite information value: High

Management structure and accountabilityThe new management team, led by the new CEO, has failed to complete the deal agreed by their predecessors and allowed itself to be sidelined byMenatep in talks on merger suspension and reversal. However, YUKOS is emerging from the crisis with a better management structure and lessMenatep influence on the operational level. Top Menatep shareholders have been removed from top management positions and the command andcontrol structures no longer depend on one man, Mikhail Khodorkovsky. Management is accessible and open to outside shareholders. There issufficient continuity at the executive level.

Structure as of March 2004 No. of shareholders 47,755

Owners and affiliatesCPO: Group MENATEP.Public owners include ADR holders (14.2%).Private owners: Millhouse Capital.Owned by YUKOS

Yuganskneftegaz 100.0%Tomskneft VNK 98.7%Samaraneftegaz 100.0%Arctic Gas 100.0%YUKOS Finance BV 100.0%Angarsk Refinery 100.0%Eastern Oil Company (VNK) 97.0%Tomskenergo 25.0%Ost5West Handelsbank (Frankfurt) 7.7%


99

Sibneft: High Affinity with Ex$Shareholders

Small shareholders put at risk, majority shareholder (YUKOS) left out in the cold

MERGER PREPARATION

Sibneftís merger with YUKOS effectively required neither Sibneft board nor shareholder approval.The only time that Sibneft minority shareholders found themselves directly involved in the processwas when they were asked to give up their right to demand fair buyout terms from YUKOS.

In July 2003, YUKOS offered to purchase Millhouse Capitalís stake in Sibneft; 20% was to bebought for cash ($3.11 per share) and 72% swapped for YUKOS shares at a rate of 5.3 SIBN :1 YUKO (valuing Sibneft shares at $3.13 per share, a 35% premium to the market). As buyer ofmore than 30% of the equity, YUKOS should have followed up with an offer to buy outSibneftís minority shareholders at market prices. However, a Sibneft EGM on August 18released YUKOS from this obligation, at the recommendation of the board. This was done bymeans of dropping an anti5takeover provision from the charter. Minority shareholders werethrown on the tender mercies of YUKOS (which, to do it justice, promised to swap them outlater on the same terms as had been offered to the core ones).

By scrapping the anti5takeover provision, Sibneft not only deviated from best corporategovernance practices but also increased the risk inherent in its charter. When (and if) themerger is reversed, this clause ought to be re5inserted. Until then, we will consider that Sibneftminority shareholders would run a great risk of having their rights infringed, should Millhousedecide to sell its stake, as they would not be entitled to demand that the purchaser of 30% andmore offer them a cash exit and fair compensation.

Three components of YUKOS�Sibneft merger

Source: YUKOS, Troika Dialog

Share owned

$3 bln

17.2%

8.8%

Millhouse Capital

Other shareholders

Group MENATEP

92% 52%

8%

Other shareholders

22%

20%

57.5%

15.0%

Sibneft YUKOS

New share issue under court scrutiny

Component 1: CASH DEAL

Component 2: STOCK DEAL 1

Component 3:STOCK DEAL 2

Sibneftís minority

shareholders have

faced greater risk since

anti7takeover provision

was scrapped


1010

We are also concerned at the stance taken by the Sibneft board. It advised minority shareholdersto waive their right to sell their shares to YUKOS, a recommendation which not only served tomake such shareholders forego an advantageous deal but also put them at considerable risk. Thisreflects rather poorly on the independence of Sibneftís three outside directors.

MERGER APPROVAL/OPERATIONAL INTEGRATION

As Sibneft went into a corporate war with YUKOS, its investor relations deteriorated. Sibneftgenerally reports the results of a shareholders meeting within 24 hours of its completion, butthose of the December 16 EGM were only made public on December 30. The shareholderswere to have dismissed management and prepare the ground for transferring operationalcontrol to YUKOS Moscow. These motions were not carried, but it was much later that ananxious market learned so.

Sibneftís investor relations service has not only allowed its disclosure to slip but has also letitself be used by a former shareholder. Rather than putting across the views of a YUKOS5controlled Sibneft, it has been a mouthpiece for those whom it chooses to call ìthe original coreshareholders whose interests are represented by Millhouse Capitalî, albeit those ìoriginal coreshareholdersî have not held a stake in Sibneft since October 3. It is through Sibneftís publicrelations department that the market has been kept abreast of Menatep and Millhouseís talks.

OPERATIONAL INTEGRATION

Sibneft management has offered little help to the new owners, YUKOS, in establishing controlon the operational and supervisory levels.

On November 27, Sibneft subsidiary Barnaulnefteproduct failed to let YUKOS take it over, asSibneft managers, who had been given a proxy to vote for YUKOS, did not show up at themeeting, claiming poor weather conditions. Similarly, YUKOS failed to replace Sibneftís ownboard of directors at three EGMs. On December 16, it was because Sibneft managementallegedly failed to carry out YUKOSí voting instructions. On December 30, it was becauseSibneft management, which still had the proxy, did not turn up, so that a quorum could not bemustered. Finally, on March 28, it was because in its capacity as counting board, ROST, didnot count the YUKOS votes. The result of this lack of cooperation was that Millhouse Capitalcontinued to exercise its influence on Sibneft, which makes us suspect a strong affiliationbetween Sibneft management and Millhouse. The March 28 EGM has again raised gravequestions about the independence of Sibneftís registrar, ROST, confirming our view thatregistrar risk at Sibneft is dangerously high.

It is certainly bad corporate governance that the registered owner of a 92% stake in a companyshould be prevented from establishing control over that company.

MERGER REVERSAL

Millhouse Capital, although technically no shareholder of Sibneft, has effectively continued toact as if it were its owner. Apparently, it has set in train de5merger talks without consultingminority shareholders. And Sibneft management is playing up to it: the Sibneft public relationsdepartment has continued to inform the world of progress on the de5merger talks betweenMillhouse and Menatep.

Sibneftís investor relations

department faithfully

served a former

shareholder but was

rather remiss in

performing its main duties

Sibneft management

did little to help YUKOS

take over


1111

Sibneft: emerging from de$merger

MILLHOUSE OWNS SIBNEFT, BUT WHO OWNS MILLHOUSE?Millhouse ownership structure remains obscure. It is widely believed that Chukotka GovernorRoman Abramovich has a controlling stake in Millhouse Capital, while some of its smallershareholders are top managers of Sibneft.

However, Millhouse disclosure does not go beyond nominees, so it is impossible to say just howclosely affiliated Sibneft management is with Millhouse and how much influence Millhouse mayexercise over the running of Sibneft. The signs are that this influence is very great indeed.

Millhouse Capital discloses only nominal owners

Nominal owners Stake in Millhouse Capital Current stake in YUKOS* Former stake in Sibneft

1. Marthacello Co. 14.58% 3.79% 13.42%

2. Kindselia Holdings 14.40% 3.75% 13.25%

3. Heflinham Holdings 14.40% 3.75% 13.25%

4. White Pearl Investments 28.81% 7.49% 26.50%

5. N.P. Gemini Holdings 27.80% 7.23% 25.58%

Total 100.00% 26.01% 92.00%

* Until Moscow Arbitration Court ruling (see Reversal and its Risks) takes effect.

Source: YUKOS, Troika Dialog

Probable beneficiary owners of Millhouse Capital

Name Current position Background

Roman Abramovich Governor of Chukotka Region Former president of Sibneft

Evgeny Tennenbaum Director of Millhouse Capital UK Former Sibneft CFO

David Davidovich Head of Millhouse Capital UKís Rosneft CFO (1997)

Moscow office RusAl deputy CEO (2000)

Slavneft director (2003)

Evgeny Shvidler President of Sibneft In current position since 1999

Source: Press


1212

Sibneft corporate governance profile

Summary of changes New Old

Ownership structure and transparency Moderate Moderate

Supervision and board accountability Poor Fair

Management and investor relations Inefficient Efficient

Information disclosure and financial discipline Strong Strong

Steel traps in charter and contingent risks High Low

Governance track record Poor Flawed

We are downgrading Sibneft on shareholder exposure to corporate governance risk from ìFairîto ìVulnerable to Highî following downgrades on four counts:

1. Supervision and board accountabilityWe have downgraded Sibneft on board accountability following YUKOSí failure to establishcontrol on the supervisory level and the boardís defiance of YUKOS by what amounted to arefusal to step down at the December 30 EGM.

For ex5owners to continue supervising a company six months after selling out runs counterto best practices. Yet this has been the case at Sibneft, where all the current directors areMillhouse nominees, while YUKOS, the owner, is not represented on the board.

When it recommended that minority shareholders waive their right to sell their shares toYUKOS for cash and failed to enforce agreements reached between YUKOS and Millhouse,including a corporate governance strategy (adopted on August 6), the Sibneft board wasacting in the interests of its core shareholders and to the detriment of current minorityshareholders. This reflects badly on the degree of board accountability and raises questionsabout the independence of the three outside directors.

2. Management and investor relationsManagementís policy towards outside shareholders. We have downgraded Sibneft onmanagement policy towards outside shareholders following repeated demonstrations ofits allegiance to a single, former shareholder.Investor relations. We have downgraded Sibneft on investor relations because its publicrelations service has been used by a former shareholder to make announcements.

3. Steel traps in charter and contingent risksIn our view, the risk inherent in the Sibneft charter rose significantly when the companydropped the anti5takeover provision, making minority shareholders much more vulnerable toabuse, specifically to a corporate takeover without fair cash compensation on a par with thatoffered to majority shareholders. We have downgraded Sibneft on risks inherent in its charter.

4. Governance track recordSibneft management has not helped the new ownersí efforts to establish operational controlover Sibneft and its subsidiaries and on several occasions, such as the Sibneft EGMs(December 16 and March 28) and the Barnaulnefteproduct EGM on November 27, overtlyopposed those efforts. We have therefore downgraded the company on governance trackrecord.

We are downgrading

Sibneft under four criteria:

(1) supervision and board

accountability

(2) management and

investor relations

(3) steel traps in charter

and contingent risks

(4) governance track

record


1313

Sibneft

OWNERSHIP STRUCTURE AND TRANSPARENCY

Voting stock

92.0%

7.5% Publicly owned

CPO

0.5%Privately owned

SUPERVISION AND CONTROL STRUCTURE: ACCOUNTABILITY TO SHAREHOLDERS

Board of directors

100.0%CPO

MANAGEMENT AND INVESTOR RELATIONS

INFORMATION DISCLOSURE AND FINANCIAL DISCIPLINECORPORATE CONDUCT

Owners and affiliatesCPO: YUKOS Owned by Sibneft

Barnaulnefteproduct (Barnaul) 69%Moscow Refinery (Moscow) 37%Noyabrskneftegaz (Noyabrsk) 100%Omsk Refinery (Omsk) 100%Sib Finance BV (Rotterdam) 100%Sibneft5Chukotka (Anadyr) 100%Sibneft5Ugra (Khanty5Mansiisk) 50%Sibneft5Ural (Ekaterinburg) 100%

Effective as on March 2004 Executive/Outside Nominated Chairman: Konstantin Potapov, SEO, Sibneft EXE MillhouseEvgeny Shvidler, president, Sibneft EXE MillhouseAlbert Gavrikov, SEO, Aton Brokerage NED MillhouseEvgeny Poltorak, SEO, Sibneft EXE MillhouseIvan Tyryshkin, president, RTS stock exchange NED MillhouseMikhail Vinchel, CEO, Prospekt Brokerage NED MillhouseTatiana Breeva, CFO, Sibneft EXE MillhouseValery Oif, SEO, Sibneft EXE MillhouseVladimir Novikov, SEO, Sibneft EXE Millhouse

CEO: Evgeny Shvidler (1964), in post since 1999With Sibneft since 1996

Website: http://www.sibneft.ruWebsite information value: High

Investorsí contactViktor MishnyakovPhone: 7 (095) 777 3182 [email protected]: 85 ul. Oktyabrskaya, Lyubinsky Rayon 646160, Omsk RegionMoscow headquarters: 4, ul. Sadovnicheskaya, Moscow 115035

Accounting standards GAAP Auditor: Ernst & YoungRAS Auditor: Ernst & Young

Independence of internal auditor Low

Disclosure record with FCSM Good

Level of ADR program Level 1Listing of ADR OTC

Listing of local stock RTS MICEX

Registrar Registrator ROSTRegistrar risk High

Dividend history Good

High

Degree of transparency

Moderate

Low

Good

Degree of accountability

Fair

Poor

Efficient

Investor relations

Adequate

Inefficient

Strong

Financial discipline

Fair

Weak

Governance track record Poor

Steel traps in charter

Contingent risks High

Policy for corporate conduct

BoD formal written mandate \/General meeting protocol \/Audit commission written charter \/

Incentives for good corporate governance

Corporate governance charter YesPending ADR / Eurobond program None

Management structure and accountabilityDuring the merger/de5merger, the management displayed a close affinity with the former core shareholder, Millhouse, and effectivelyprevented a takeover of control by YUKOS. It offered little assistance to the new owners in establishing operational control, witheld financialand operating information from them and continued to service the former core shareholders, to the extent of issuing press releases on theirbehalf.

ë00 ë01 ë02 9m03Dividend declared \/ \/ \/ \/Dividend paid \/ \/ \/ \/

Structure as of March 2004 No. of shareholders 13,939

Vulnerable to high


Fair to vulnerable

Low to fair


1414

YUKOS: Menatep sidelines management, board and minority shareholders

What went wrong Management Directors Core shareholder (Menatep)

Merger Preparation: BuybackAugust 6 ñ September 5, 2003The lack of clarity about the buyback offerput public shareholders at a disadvantage.

Merger Approval/Operational IntegrationSince October 24, 2003The new management failed to complete thedeal agreed by its predecessors.YUKOSímanagement policy towards outsideshareholders deteriorated due to an abruptchange in management team.

Merger SuspensionNovember 28 ñ January 31, 2003/04The reorganization was put on hold withoutthe consent or even knowledge of minorityshareholders.

Merger ReversalSince February 2, 2004The merger is put on hold without theparticipation of management, board orminority shareholders.

Was not very articulate about the procedures of the buyback.

ADR holders received explanations with a four5week delay.

Failed to execute operational integration.

Information disclosure deteriorated ahead of the November 28 EGM. The proposedcharter amendments were posted on theYUKOS site only two days before themeeting.

Allowed itself to be sidelined by Menatep intalks on merger suspension and reversal.Management as good as confessed to beingìout of the pictureî when it declared, at theNovember 28 EGM, that it was unaware ofany agreement to put the merger on hold.

Continued to distance itself from the de5merger talks instead of endeavoring toengage in them to the companyís benefit.

Approved the buyback on July 4 but didnot explain their reasons for doing so.

By replacing management, limitedMenatepís influence on operations butnot on merger negotiations.

During the November 28 EGM,professed ignorance of any agreementto put the merger on hold, whichsuggested that they had been sidelined.

The offer to buy back 10% of YUKOS stock did not comefrom the company itself but was made by its subsidiary,YUKOS5M, and handled by a nominal owner of 60.5% ofits equity, Trust Bank, closely associated with Menatep.

The buyback was announced three days after the recorddate.

Unbeknown to minority shareholders (and, apparently,management), continued talks with Millhouse even afterthe merger technically took effect on October 24. At theNovember 28 EGM, the core shareholdersí authorizedpersons abstained from voting, thereby scuppering approvalof charter amendments designed to finalize the merger.

Despite being disassociated from running YUKOS, usedthe YUKOS corporate website to advertise the plight of itsown shareholders for two weeks following MikhailKhodorkovksyís departure.

Reached a separate agreement with Sibneft to put themerger on hold. This was communicated by Sibneft inwhat it chose to call a ìjoint announcementî by itself andYUKOS, which, however, denied being party to any suchagreement. Menatep obviously continued to identify itselfwith the whole of YUKOS and speak in its name.

On February 2, signed a protocol of intent to reverse themerger without consulting other shareholders. Did notdisclose or discuss the terms of the de5merger.


1515

Sibneft: management reveals its close affinity to Millhouse

What went wrong Management Directors Core shareholder (Millhouse)

Merger PreparationApril 22 ñ October 24, 2003Risks inherent in the Sibneft charter increased.

Merger Approval Since October 24, 2003The merger stopped dead in its tracks.

Operational IntegrationSince November 28, 2003Sibneft impeded takeover of control by thenew owners.

Merger ReversalSince February 2, 2004 Sibneft management has displayed closeaffinity with the former shareholders.

Accepted detrimental charter amendmentswithout demur ahead of the August 18EGM, dropping the anti5takeover provision.

On behalf of the former owners circulated aìjointî press release that threw into turmoilYUKOSí November 28 EGM and effectivelyburied the merger.

Offered little assistance to the new ownersin establishing operational control.

Disregarded the corporate governancestrategy agreed on August 6.

On December 16, blocked an amendmentto the charter, proposed by the controllingshareholders, which would have led to itsdismissal.

Allowed information disclosure to slip,announcing the results of the December 16EGM 14 days later than usually.

March 28 EGM: Management and YUKOSfollowed with conflicting statements.Operational integration further delayed.

Has continued providing service to formercore shareholders, to the extent of issuingpress releases on their behalf.

Recommended releasing YUKOS fromthe obligation to buy out Sibneftísminority shareholders, thereby puttingthese shareholders at risk.

Failed to enforce managementíscompliance with the merger terms andcorporate governance strategy agreedon August 6.

Turned down the controllingshareholdersí candidates to the boardon December 30 (source: YUKOS).

Defied the controlling shareholder byrefusing to step down on December 30.

No follow5up on March 28 events

After getting an offer to sell their stake in Sibneft toYUKOS, pushed through a charter amendment releasingYUKOS from an obligation to buy out minorityshareholders at fair market value.

Apparently set in train de5merger talks without consultingminority shareholders and without being a Sibneftshareholder itself.

Although no longer a Sibneft shareholder, continued toinfluence management and the board and use Sibneftíspublic relations resources.

Although no longer a Sibneft shareholder, continued usingSibneftís public relations resources.


1616

Reversal and its Risks

Since we do not know the exact structure of the YUKOS5Sibneft merger and de5merger, whatwe offer below is our private opinion. The three scenarios outlined we consider to be the mostìrepresentativeî, but others are possible.

The difficulties of unmerging

The merger was a three5in5one, six5month5long transaction. De5merger looks set to be evenmore complicated and time5consuming. All of the three original deals have to be reversed.

Merger components Assets exchanged/sold

Cash Deal 20% of Sibneft for $3 bln

Stock Deal 1: new YUKOS shares used 57.5% of Sibneft for 17.2% of YUKOS

Stock Deal 2: YUKOS treasury shares used 15.0% of Sibneft for 8.8% of YUKOS

The Moscow Arbitration Court has recently declared null5and5void the YUKOS share issue usedin Stock Deal 1. These shares, 17.2%, must be restored to YUKOS to be cancelled. YUKOS, forits part, must return to Millhouse 57.5% of Sibneftís shares. YUKOS has said that it will appealagainst the decision. What the court ruling means for the de5merger is discussed below. In ouranalysis, we assume that Menatep and Millhouse have indeed agreed and will execute a de5merger. We regard the court ruling as paving the shortest, least painful way for a de5merger.

SIBNEFT

Sibneft does not have to take any corporate action to unwind the merger. Since October 24,when the merger became effective (on paper), the company has undergone no reorganization,seen no changes to its organizational structure, outstanding equity or charter. It has preservedits pre5merger management and board of directors. If Millhouse intends to press ahead with thede5merger, not even Sibneft board approval will be required.

Three merger components to be reversed

Source: Troika Dialog

Millhouse YUKOS

57.5% SIBN 17.2% YUKO

15.0% SIBN 8.8% YUKO

Stock Deal 1 reversed

Stock Deal 2 reversed

Treasury stockto be cancelledafter 12 months

To be cancelledimmediately by

court order

20.0% SIBN

Cash Deal reversed

Cash Deal reversed

$3 bln

17.2%

8.8%

Three scenarios outlined

we consider to be most

ìrepresentativeî, but

others are possible

De7merger has legal and

corporate governance

implications for YUKOS

but not for Sibneft


1717

YUKOSBoard approval seems to be needed for at least two reversals, those of the Cash Deal andStock Deal 2.If the court ruling to cancel 17.2% of YUKOS shares is overturned by a higher court, boardand EGM approval must be sought to reverse Stock Deal 1.

It is not altogether clear how YUKOSí ownership structure will change following the de5merger.We consider three scenarios, always assuming that YUKOS gets back all the 26.0% of its sharescurrently owned by Millhouse beneficiaries.

Scenario 1. Court order to cancel 17.2% of YUKOS shares is successfullycontested

This would leave YUKOS and/or, depending on the structure of the merger (and de5merger) deal,its affiliates in possession of 28.3% of YUKOS shares (2.3% already held as treasury stock plusa total 26.0% returned by Sibneft). We rate the probability of this scenario as increasingly low.

1. It is very doubtful that the ruling will be contested. The full benefits of the court ruling to YUKOS and Sibneft are discussed in Scenario 2.

2. The deal may be technically complicated.The deal may be technically complicated, as Russian law does not allow a company to acquirefor its own books more than 10% of its shares, unless this is done expressly in order to reducethe equity capital. Besides, while we assume that canceling treasury stock would appeal toYUKOSí core shareholders, Menatep, as the fastest way to rebuild their stake in the company,this would pose a considerable financial risk. The law provides that if a company is going tocancel any of its shares outstanding, it must notify its creditors who could then demand an earlyrepayment of debt. Such demands could be a severe setback for YUKOS at a time when it has$2.3 bln in outstanding debt and is still threatened with a tax penalty in excess of $3 bln.

RISK. The 10% restriction can be circumvented, if all or some of the returned shares areparked with a YUKOS subsidiary, where they can remain indefinitely. In this casethey will be ìcross5owned sharesî rather than real ìtreasury stockî. In corporategovernance terms, this is the worst scenario. Our long5standing objection to cross5owned shares is that management can use them to its advantage. Indeed, while thelaw prevents treasury shares from voting and receiving dividends, it makes no suchprovision with regard to cross5owned ones. Also, there is a threat that cross5ownedstock will be sold in a clandestine manner for less than fair compensation, whichwould dilute other shareholders. To be fair, this risk does not seem to be high inthe case of a corporate governance champion like YUKOS, but it cannot becompletely discounted.

Scenario 2. Court order to cancel 17.2% of shares is obeyed

This would leave YUKOS (and/or, possibly, affiliates) possessed of only 13.5% of YUKOSshares (the current 2.3% plus the 8.8% returned by Sibneft; this total of 11.1% rises to 13.5%after the 17.2% block is cancelled). We view this as a probable scenario, as we do believe thatthe court order canceling 17.2% of YUKOS shares will be upheld. This would painlessly untiea very unpleasant legal knot.


1818

WHY THE PARTIES NEED THE COURT ORDER

No two Russian companies have ever sought a divorce while halfway through a merger. Thelegal aspects of the case are therefore unclear. But whereas a divorce by mutual consent maybe fraught with juridical complications, a divorce all but enjoined by a court should be fairlystraightforward.

A court order reversing one part of the merger gives the YUKOS board a face5saving reasonto recommend unwinding the entire deal. Without such an order, the board, if it didrecommend the divorce, would be seen to be doing the bidding of one shareholder, Menatep.

A merger unwound because of a court ruling would shield the YUKOS board from suits byminority shareholders (which potentially might argue that a reverse deal involving theexchange of 57.5% of Sibneft for 17.2% of YUKOS destroys YUKOSí shareholder value andshould not enjoy the boardís recommendation).

While we claim no knowledge of the terms of the Menatep5Millhouse protocol, the issuanceof just such a court order could very well be the agreed trigger for the reversal of all the othertransactions constituting the merger.

Clearly, the March 1 court ruling is a very good way out of a very bad legal quandary. Moreover,it obviates the need to seek board or shareholder approval for reversing Stock Deal 1.

RISK. Shareholders do run some corporate governance risk, as at least 3.5% of thereturned shares would have to be parked with a YUKOS subsidiary and becomecross5owned. This is the difference between a total of 13.5% being returned andthe 10% that YUKOS can legitimately list as treasury shares. Management can putthe cross5owned shares (though not the treasury stock) to its advantage by votingthem. Moreover, if we are wrong in supposing that Menatep will want to rebuildits stake in YUKOS fast, YUKOS need put no shares at all on its own books but parkup to 13.5% with a subsidiary. However, even in this case dilution will be muchsmaller than in Scenario 1, and there is no risk of creditors demanding their moneyback, as the company will not be canceling any of its stock. Therefore, while thecorporate governance risk in this scenario ranges from fair to substantial, thefinancial risk is nil.

Scenario 3. Court order to cancel 17.2% of shares is obeyed, the other 8.8%returned by Sibneft is also cancelled

This would re5establish the status quo before the merger, with YUKOSí treasury stock reducedto 3.8%.

This is what things may come to in the end, if Menatep does go ahead with canceling treasuryshares to re5build its own stake. However, one cannot expect this result to be achieved for12 months after the 8.8% block is returned to YUKOS, as the law does not provide for earliercancellation without EGM approval. In this case, YUKOS will probably have to settle for thedefault option: automatic cancellation of treasury shares within 12 months of their acquisition(or rather, semi5automatic, as an EGM will have to be called for the purpose).

RISK. The risk in this scenario is purely financial, as cancellation of treasury stock, evenif prescribed by law, empowers creditors to demand early repayment of debt.


1919

ATTEMPTS TO DELAY THE DE*MERGER WOULD BE WORSE THAN USELESS

But what if YUKOS delivers on its promise to contest the court ruling and succeeds? In ourview, this would be worse than useless. It would not stop Millhouse and Menatep fromreversing the merger, if they were so determined, but it would prevent YUKOS from improvingits position vis5a5vis Sibneft and might cause its board to resign.

1. Once the court ruling takes effect, Millhouseís stake in YUKOS will go down from a blockingminority to less than 10%, not even enough to call an EGM, while YUKOS will still own asubstantial enough stake in Sibneft (35%) to have some supervisory control and call EGMs.If the ruling is overturned, then YUKOS will be just where it is now: unable to exercisecontrol over Sibneft, despite owning 92% of the stock, while always at the risk of having itsown operations paralyzed by Sibneftís choosing to exercise its blocking control.

2. It would not stop a de5merger but only force Menatep and Millhouse to do it the hard way.

In this case, Menatep/YUKOS will have to take the following steps:Menatep files a proposal to reverse the merger with the YUKOS board.The board endorses/turns down the proposal.Menatep calls an EGM The EGM approves the proposal.

Here, board approval is desirable but dispensable. Consequently, if Millhouse and Menatep dostick to their protocol, the merger can be reversed without approval by the YUKOS board.However, the market would see it as a corporate governance setback if an EGM approved whatthe board had rejected and would be greatly dissatisfied should the board resign over the issue.

To sum up, all the extra trouble and expense (the calling of an EGM, possible board resignationand, not least of all, legal fees) could be saved if only the court ruling were left uncontested.

YUKOS’ ownership structure: past, present… and future?

Before During merger After merger reversal

merger preparation/execution Scenario 1 Scenario 2 Scenario 3

After buyout After new Court order contested 17.2% treasury 17.2% treasury stock

Sep 8, ë03 share issue No treasury stock cancelled cancelled by court order;

Oct 24, ë03 stock cancelled by court order 8.8% cancelled by law

Free float 25.9% 23.0% 19.1% 19.1% 22.9% 25.5%

Treasury 3.8% 13.8% 2.3% 28.3% 13.5% 5.1%

Millhouse 0.0% 0.0% 26.0% 0.0% 0.0% 0.0%

Veteran Petroleum 10.0% 8.9% 7.4% 7.4% 8.9% 9.8%

Menatep 60.5% 53.8% 44.6% 44.6% 54.0% 60.1%

Total shares issued, mln 2,237 2,237 2,700 2,700 2,237 2,013

Source: Troika Dialog


2020

Merger Calendar

2003

April 22

In a joint statement, YUKOS and Sibneft announce that their core shareholders have agreed

in principle to combine the two businesses. Effectively, this means the takeover of Sibneft by

YUKOS. The statement notes that YukosSibneft will subsequently make a fair offer to the

minority shareholders of Sibneft after receiving a fairness opinion from an internationally

recognized investment bank.

May 14

Sibneft core shareholders and YUKOS sign a definitive agreement to merge their assets.

May 27

A YUKOS EGM approves the takeover of Sibneft and votes to issue 1 bln new shares to

facilitate the process. This entails a sellback option for shareholders opposed to the merger.

May 28 ñ July 10

YUKOS offers a cash exit to dissenting shareholders at R297 ($10.42 at the current exchange

rate).

June 30

The YUKOS BoD agrees on financial parameters for the merger (cash and stock component

valuations): YUKOS will buy Sibneft shares at R95 ($3.11) and sell new stock of the merged

company to Millhouse at R558.37 ($18.31) per share.

July 4

The YUKOS BoD decides to buy back up to 223,696,457 YUKOS common shares, or 10% of

the share capital, from the street at R505 ($16.7).

The Sibneft BoD recommends that YUKOS be released from the obligation to buy out

minority Sibneft shareholders during the merger.

July 7

YUKOS makes a public offer to Millhouse Capital: it will buy 20% (minus one share) of

Sibneft at R95 ($3.11) and swap a further 57% for a 26% (minus one share) stake in the

merged company.

The Trust Bank posts an offer to purchase up to 223,696,457 YUKOS common shares at R505

on behalf of YUKOS5M. The offer, to commence on August 6, is extended to holders of record

as of July 4.

July 22

The FCSM approves YUKOSí additional 1 bln shares. Part of the issue is to be placed at

R558.37 ($18.31) via closed subscription to Millhouse Capital. Existing YUKOS shareholders

can buy in at 502.53 ($16.61).


2121

July 23

YUKOS CEO Mikhail Khodorkovsky publicly denounces the conflict as a confrontation with

ìconservative forces within the Kremlinî and anticipates the possibility of yet more charges

being brought against Menatep.

Sibneft issues a statement to the effect that the merger with YUKOS will be completed by year

end, as planned.

July 28

The Sibneft BoD declares a $1 bln dividend for 1H03. Record date ñ July 21.

August 5

Deutsche Bank follows up with a press release, inviting ADR holders into the August 6

buyback program.

August 6

Trust Bank starts accepting applications from YUKOS shareholders under the July 4 buyback

program. Applications will be accepted through September 8.

Millhouse Capital and Menatep agree on a corporate governance strategy and promise to pay

out 40% of the US GAAP profits of the merged company in dividends.

August 14

The Antimonopoly Ministry approves the merger.

Trust Investment Bank and Deutsche Bank co5host a conference call to explain the R505

share buyback to YUKOS ADR shareholders.

August 18

A Sibneft EGM waives YUKOSí obligation to offer a cash exit to minority shareholders.

September 3

Trust Investment Bank stops buying back shares on behalf of YUKOS5M under the July 4

buyback program.

September 12

The cut5off date for existing YUKOS shareholdersí pre5emptive right to buy into the new share

issue.

September 15

Sibneft distributes $1 bln in 1H03 dividends.

September 18

YUKOS announces the results of its stock repurchasing program and confirms the buyback

ratio: 11.2%. A total 6,439 shares were placed to shareholders using their pre5emptive right.

September 19

The YUKOS BoD sets September 25 as the record date for 9m03 dividends and promises to

announce the size of the payout in November.

September 25

YUKOS arranges a $1 bln loan through Citigroup, Commerzbank, Credit Lyonnais, Deutsche

Bank, HSBC, ING and SG Corporate and Investment Banking (SG CIB).


2222

October 3

Sibneft and YUKOS officially complete the merger. A 20% stake in Sibneft was thus obtained

for a total $3 bln in cash, the remaining 72% through the exchange of 702,397,159 YUKOS

shares (a 26.01% interest consisting of 463,517,826 new shares and 238,879,333 treasury

shares) for 3,413,735,740 Sibneft shares.

The General Prosecutorís Office raids the Menatep business center on the outskirts of Moscow.

October 8

In an interview with the New York Times, President Putin remarks that the government is

aware of the talks over a stake in YukosSibneft being conducted with a foreign multinational.

October 22

The General Prosecutorís Office arranges the launch of license investigations against YUKOS

and threatens to bring accusations against YUKOS executives. This marks a shift in focus from

core shareholders to the company itself.

Menatep St. Petersburg office is raided again.

October 24

The FCSM approves the results of the placement of 463.5 mln YUKOS shares with Sibneft.

The reorganization becomes a done deal.

October 25

YUKOS CEO arrested.

YUKOS BoD replaces YUKOS Moscow CEO Vasily Shakhnovsky with Stephen Theede.

Roman Abramovichís birthday.

October 28

The General Prosecutorís Office wins a court injunction banning the Trust Depository Bank

from transferring any stock from two accounts (a total 44.1% of the shares), allegedly

controlled by Group MENATEP.

The YUKOS BoD declares an interim dividend of $0.89. Record date ñ September 25.

YUKOS releases a list of board candidates for election on November 28. This includes three

Millhouse representatives, two Menatep officers and six independent directors.

October 30

The YUKOS BoD issues a public statement of support for the management and Khodorkovsky

personally for his significant contribution to the companyís achievements.

October 31

Alexander Voloshin resigns from his post as head of the presidential administration. His

deputy, Dmitri Medvedev, takes his place.

Putin meets with the major domestic investment houses and offers a reassuring message: no

campaign to be waged against business. He presents the YUKOS story as an attempt to ìclean

upî the Russian business environment and introduce the rule of law.

In his address to the cabinet, Putin warns law enforcement agencies to stay within the law.


2323

November 3

Khodorkovsky resigns, a decision that was prompted, he says, by a desire to shield the

company from the personal attack on him and his business associates. YUKOS chairman and

former TNK CEO, Simon Kukes, is appointed in his stead.

November 5

YUKOS promises to get an offer to Sibneft minorities by end 2003, according to CFO Bruce

Misamore.

A management board is proposed for YukosSibneft, to be responsible for coordinating the

operating and financial activities of the merged businesses and maintaining operational

control over the merged assets.

November 12

The Natural Resources Ministry inspects YUKOSí production licenses.

November 13

The General Prosecutorís Office brings tax charges against YUKOSí Tomskneft.

The new YUKOS CEO, Kukes, dissociates the company from the current political wrangling,

stating publicly that it would not be taking a stance in the conflict between the former CEO,

Khodorkovsky, and the government.

November 20

Sibneft approves 3Q03 dividends of R 6.92 bln ($247.22 mln), or R1.30 per share. Record

date ñ September 25.

November 24

YUKOS releases 3Q03 operating results, as well as preliminary 2004 targets for YukosSibneft,

the combined company.

November 26

YUKOS posts a draft charter on its website, two days prior to the EGM charged with

approving it.

The pre5trial investigation into the Khodorkovsky case is complete: he stands convicted of

fraud, failure to comply with a court order and individual and corporate tax evasion.

November 27

A Barnaulnefteproduct EGM blocks YUKOSí attempts to execute operational integration. The

Sibneft managers charged with voting on behalf of YUKOS blame their failure to show on bad

weather.

November 28

The first joint EGM of the merged company (YUKOSSibneft) declares 3Q03 dividends of

R59.9 bln ($2 bln), or R26.78 per share. Sibneft and YUKOS issue conflicting statements on

the status of the merger and abstain from renaming YUKOS as YUKOSSibneft.

Sibneft sends around a press release on behalf of Millhouse Capital, declaring a halt in the merger.

Kukes says that the merger will continue as per the earlier agreed schedule. Millhouse Capital

gets no seats on the board of the merged company.


2424

December 15

The Tax Ministry launches a tax audit of YUKOS. This is the first real attack on YUKOS itself

(as opposed to its core shareholders).

December 16

A Sibneft EGM votes on changes to the charter, designed to follow up on the merger with

YUKOS. Sibneft promises to publish the results on December 30.

YUKOS proposes to transfer full executive powers from the management board to the Sibneft

president, himself pending appointment by the board of directors.

December 17

YUKOS announces at a press conference that de5merger negotiations are under way. This is

the managementís first public admission of the fact since the Sibneft press release of

November 28 declared the merger halted.

December 18

President Putin supports higher taxes for the oil industry.

December 22

YUKOS announces preliminary 2003 operating results and guidance for 2004 as a standalone

company.

December 23

Sibneft releases a BoD candidate list mirroring the existing BoD composition, meaning that

there are no YUKOS5nominated directors running for a seat. This contradicts statements from

YUKOS that it has nominated representatives.

December 29

The Tax Ministry completes the tax audit of YUKOS and asserts that the company owes

R98 bln ($3 bln) in arrears and penalties on underpaid taxes for 2000.

YUKOS rejects the tax evasion charges and provides detailed objections to the Tax Ministry.

December 30

A Sibneft EGM scheduled to elect YUKOS representatives to the board does not go ahead due

to lack of a quorum. YUKOS gets no seats on the board. The results are reported the same day.

Sibneft also reports the results of the December 16 EGM: YUKOS fails in its attempt to

dissolve the Sibneft management board.

The Sibneft management representative, authorized to vote shares belonging to YUKOS, appears to fail on both occasions to vote according to YUKOS instructions.


2525

2004

January 13

YUKOS returns with a fresh attempt to change the Sibneft charter and replace its board: it

appeals to the Sibneft BoD to convene another EGM.

January 20

Six years ago, in 1998, Khodorkovsky was appointed president of the YUKSI holding. The

idea was abandoned after a few months, although YUKOS and Sibneft agreed to continue to

work together on specific projects.

January 23

The BoD chairman of YUKOSí Kuibyshev Refinery is arrested for tax evasion, but released

shortly afterward.

The Vedomosti daily, citing a source within Trust Bank, reports that YUKOS has paid $1 bln

in dividends to Group MENATEP ahead of payouts to minority shareholders. However, neither

YUKOS nor Bank Menatep SPb, the dividend payment agent, would confirm this.

January 28

Two Cyprus5registered offshore companies, one of them being Millhouse5related Nimegan

Trading, file an appeal against the FCSM in an attempt to reverse the results of the new share

issue used in the merger.

February 2

Sibneft reports that Millhouse Capital and YUKOS have agreed terms and conditions for a

reversal of the merger. The companyís investor relations service sends round a press release

on behalf of Millhouse.

February 3

A YUKOS manager, Yuri Beilin, confirms that representatives of Menatep and Millhouse

Capital have signed a protocol on the execution of de5merger transactions and reiterates

YUKOSí intention to follow the appropriate corporate procedures.

February 5

Vasily Shakhnovsky, owner of a 7% stake in Menatep, is found guilty of tax fraud, relating to

his personal income taxes. Court drops tax case after he pays $1.8 mln in back taxes and fines.

February 10

Commenting on the release of Shakhnovsky, who stepped down as YUKOS Moscow CEO in

December, Kukes rules out the possibility of his return to the management post.

March 1

Basmanny Court rules the YUKOS share issue illegal.

March 15

Switzerland blocks accounts of Group MENATEP and co5owners of YUKOS worth $4.9 bln at

the request of the Russian General Prosecutorís Office.

March 18

Moscowís Basmanny Court upholds an appeal by the General Prosecutorís Office to have

Khodorkovskyís pretrial detention period extended for two months from March 25.


2626

March 20

Nimegan Trading admits to collusion with Menatep. The competition watchdog launches an

investigation.

The European Court of Human Rights agrees to examine alleged judicial abuses.

March 28

Sibneft EGM is cancelled for lack of a quorum. YUKOSí operational integration of Sibneft

further delayed.

April 2

Licensing authorities withdraw their claims against YUKOS, according to Natural Resources

Minister Yuri Trutnev.

April 6

Sibneft BoD to convene an EGM with the purpose of changing the companyís legal address

and fix the oil trader consolidation results in its charter.

to be schedulled

The competition watchdog to revisit the YUKOS/Sibneft merger.

May 25Tentative end of pre5trial detention of Mikhail Khodorkovsky and period for his defense tofamiliarize itself with the case documents.

This report was prepared by Elena Krasnitskaya who certifies that: all of the views expressed in this report accurately reflect her personal views about thesecurities and issuers covered in this report; and no part of her compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this report.

This research report is prepared by TROIKA DIALOG or its affiliate named herein. It is being distributed in the United States by TROIKA DIALOG USA,which accepts responsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein shouldcontact TROIKA DIALOG USA, not its affiliate. This information herein has been obtained from, and any opinions herein are based upon, sources believedto be reliable, but no representation is made that it is accurate or complete and it should not be relied upon as such. All such information and opinions aresubject to change without notice. From time to time, TROIKA DIALOG USA or its affiliates or the principals or employees of its affiliates may have positionsor derivative positions in the securities referred to herein or make a market or otherwise act as principal in transactions in any of these securities or mayprovide investment banking or consulting services to or serve as a director of a company being reported on herein. This information does not constitute anoffer to buy or sell securities. Further information on the securities referred to herein may be obtained from TROIKA DIALOG USA upon request. This reportmay not be reproduced, copied nor extracts taken from it, without the express written consent of TROIKA DIALOG.

© TROIKA DIALOG 2004

President,Chief Executive Officer

Ruben Vardanian

Managing Director, Capital Markets

Jacques Der Megreditchian

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Evgeny Gavrilenkov

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Sergei Skvortsov

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Documents

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