July 20 (Bloomberg) -- OAO Yukos Oil Co.'s largest oil unit, which accounts for two-thirds of the company's output, will be seized and sold as Russia tries to recover 99.4 billion rubles ($3.4 billion) in back taxes, the Justice Ministry said.

The business known as OAO Yuganskneftegaz pumps 1 million barrels of oil a day, equal to supplies from OPEC member Indonesia, and values its assets at $1.79 billion under Russian accounting rules. Shares of Moscow-based Yukos, Russia's No. 2 oil producer, fell 16 percent, the biggest loss since April 2000.

``If they sell Yuganskneftegaz in the end, it would be taken very negatively -- this is the worst-case scenario,'' said Tim McCarthy, who manages $500 million in Russian assets including Yukos shares at Moscow-based Troika Dialog Asset Management. Yukos ``was worth about $45 billion and now it is worth virtually nothing.''

The yearlong probe into Yukos and its biggest shareholder, Mikhail Khodorkovsky, increased the perception of risk regarding Russia, leading investors to pull billions of dollars from the country. World oil prices have risen on concern of reduced shipments from Russia, the world's second-biggest oil supplier after Saudi Arabia.

Yukos said July 7 that bailiffs might disrupt output as they sought to enforce the tax bill. Brent crude oil futures rose 3.2 percent the following day. Bailiffs are now appraising the value of Yuganskneftegaz, the Justice Ministry said in a statement.

``Yuganskneftegaz shares will be transferred to a special firm for sale after evaluation,'' the Ministry said.

The business to be sold is worth about $12 billion in a ``fire sale,'' according to a report by analysts including Stephen O'Sullivan at United Financial Group in Moscow.

No Timeframe Set

The government may instead sell Yugansk for about $1.75 billion by July 30, said a Yukos official who declined to be named. The sale may be direct and will be managed by Russia's Federal Property Fund, the official said. The property fund said no timeframe has been set.

``It's impossible to sell it that fast,'' Property Fund spokesman Vladimir Zelentsov said in a telephone interview. ``We don't have any documents yet. According to the law, Yukos will have the right to contest the valuation.''

The bailiffs can choose when and how to sell an asset and give orders to the fund, he said. The fund hasn't received any orders from the bailiffs, Zelentsov said.

Yukos's stock plunged 35.41 rubles to 191.80 rubles at 7:12 p.m. in Moscow, where it is down 56 percent since April 9.

Putin

The investigations into Yukos and shareholders including Khodorkovsky may allow President Vladimir Putin to bolster his influence over an industry that generates at least a third of Russia's export revenue.

The Russian central bank said the net outflow of capital was $5.5 billion in the first half of this year, compared with a net inflow of $3.9 billion in the same period of last year. The country's benchmark RTS index has dropped 25 percent since April 12 as the cases against Khodorkovsky and Yukos reached the courts.

The company has lost 54 percent of its market value, or $21.2 billion, since Khodorkovsky's arrest on Oct. 25. Yukos's market value peaked at $44.15 billion on Oct. 9, 2003.

Khodorkovsky's Menatep Bank bought a 78 percent stake in Yukos for $300 million in a loans-for-shares auction that was organized by Menatep in December 1995.

`Scary'

``If you sell Yuganskneftegaz, you are basically selling Yukos,'' said Jean-Louis Tauvy, who manages $200 million, including Yukos shares, at Atria Advisors Ltd. in Moscow. ``This is scary. Who in Russia has the money to buy this asset? And Yukos would become a very, very small company.''

Yukos's Russian rivals, such as OAO Surgutneftegaz, OAO Gazprom, OAO Lukoil and RAO Rosneft, may be interested in buying Yuganskneftegaz, analysts said.

``Surgut is a clear frontrunner with between $6 billion and $7 billion in its cash pile,'' said Steven Dashevsky, head of research at Moscow brokerage Aton. ``Surgut Chief Executive Vladimir Bogdanov recently visited the Priobskoye field, Yugansk's jewel.''

Surgut spokeswoman Raisa Khodchenko declined to comment on whether the company would be interested in acquiring Yuganskneftegaz. Lukoil's head of investor relations, Gennady Krasovsky, and Sergei Alexeev, first vice president at state-owned Rosneft, also declined to comment.

Yugansk Value

President Putin, 51, said last month the investigation of Yukos shouldn't bankrupt the company. Yukos has asked the government to reschedule its tax bill. Khodorkovsky, 41, is in jail on fraud charges that he denies as politically motivated and has proposed to give up his stake in the company.

Yuganskneftegaz's second-quarter financial report to Russian accounting standards valued the company's assets at $1.79 billion. The unit's oil reserves are worth $30.4 billion, according to auditor DeGolyer & MacNaughton, which evaluated the reserves under the Society of Petroleum Engineers rules and used a 10 percent discount, Yukos said in a statement. Yukos's total oil reserves are valued at $43.1 billion, the company said.

The company's total tax bill may reach $10 billion, as the tax ministry last week filed a $3.4 billion claim for 2001 and has said it is reviewing Yukos's operations in 2002 and 2003, said brokerages including Morgan Stanley.

`Overkill'

``Even if you think other tax bills are coming for Yukos, taking Yugansk is an overkill,'' said Ronald Smith, an analyst at Renaissance Capital in Moscow. ``This is a breakup of Yukos. It looks like the story about negotiations is over.''

Yukos last week said it would pay as much as $1.3 billion in cash toward the 2000 tax bill by the end of July, seeking to avert the seizure of assets.

Bailiffs already recovered 5.25 billion rubles from Yukos, the Justice Ministry said in its statement.

The Yukos affair is making some money managers reluctant to invest in Russia, according to investors such as Mark Mobius, who oversees $13 billion in emerging-market assets at Templeton Asset Management Ltd.

Yukos had held partnership talks with Exxon Mobil Corp. and other international companies before Khodorkovsky's arrest.

Khodorkovsky has said Yukos's battle with the state, which includes his arrest, the tax probes and a review of the company's drilling licenses, was politically motivated. He may be jailed for as long as 10 years if he's convicted.

The billionaire financed political parties opposing Putin, supported media and education projects and resisted government efforts to increase taxes on oil producers.

To contact the reporter on this story: Eduard Gismatullin in Moscow at egismatullin@bloomberg.net Vladimir Todres in Moscow at vtodres@bloomberg.net

Last Updated: July 20, 2004 12:59 EDT