Standard & Poor's Ratings Services said its 'CCC' long-term corporate credit rating on YUKOS Oil Company remains on CreditWatch with negative implications, after the company lost its appeal on a $3.4bn tax claim. Now YUKOS has to pay $3.4bn (RUR 99.3bn) in back taxes for 2000. The rating has been on CreditWatch with negative implications since April 27, 2004, the agency said.

"The rating and CreditWatch status reflects Standard & Poor's concerns that the loss of the appeal escalates the company's liquidity crisis," said Standard & Poor's credit analyst Elena Anankina. It also increases the risk of stress scenarios such as an announcement of an event of default by the company or its creditors, whereby debt becomes due and payable (according to YUKOS's loan documentation), the instigation of insolvency procedures, the forced sale of core assets (if the court lifts the freeze on the assets), or the effective nationalization of the company's assets. The tax claim cannot be met by the company's cash reserves, despite strong cash flow generation in the currently favorable oil price environment, or by selling assets, because the assets of YUKOS’s parent company were frozen in April 2004.

The risk of a liquidity crisis adds to uncertainty over ownership rights on key cash-generating assets, any additional tax claims relating to other fiscal years, and governance, due to mounting political pressure on the company. At the same time, Standard & Poor's notes that the operating subsidiaries of the company are currently not banned from continuing their cash-generating operations or from selling their assets to repay the debt and meet the tax claim.

According to Standard & Poor's, YUKOS's future will largely depend on actions taken by various arms of the Russian government. The oil company faces an unpredictable judicial system and an adverse political environment, in the opinion of S&P analysts. "In particular, we will focus on whether the government, or YUKOS itself, will decide on bankruptcy, or whether a negotiated agreement will be reached, and whether the company will be allowed to sell its assets to repay debts and taxes," Ms. Anankina said. "We will also closely monitor whether the creditors will trigger an event of default and whether the company will legally be able to continue debt payments," she added.

YUKOS has recently prepaid about $300m of $2.6bn in total financial debt ($1.6bn of which is a loan from the company's core shareholders).