THE Russian Government is to break up the country’s biggest oil company in what is widely seen as a move to punish Mikhail Khodorkovsky, its billionaire founder, for challenging the authority of the Kremlin.

Yukos will be forced to sell its oil fields to an investor friendly to the Kremlin for less than their market value — effectively reversing the deal whereby Mr Khodorkovsky bought them on the cheap after the collapse of the Soviet Union.

The Justice Ministry announced the plan yesterday as Mr Khodorkovsky, 41, stood trial on charges of tax evasion and fraud that are also considered to be part of a Kremlin vendetta.

The announcement sent shockwaves through the business community, which has accused the Kremlin of undermining the rule of law amid fears that the campaign could now be directed at other Russian tycoons.

Yukos shares fell by 10 per cent after the announcement, prompting a temporary suspension of trade in its shares on the Moscow stock market.

"This is the worst-case scenario," Steven Dashevsky, head of research at Aton Capital brokerage, said. "Yukos is now going to experience privatisation in reverse, seeing its prized asset being sold at likely pennies on the dollar."

The Justice Ministry said in a statement that bailiffs were planning to sell off the Yukos subsidiary, Yuganskneftegaz, to help to cover a £1.8billion bill for back taxes from 2000 that Yukos failed to pay last month.

Yuganskneftegaz, which accounts for 60 per cent of Yukos's oil output, is worth almost ten times that amount, according to Yukos, and at least £6billion, according to oil industry experts.

The Tax Ministry has also claimed £1.8billion in back taxes for 2001 and further bills for 2002 and 2003, making a combined total of about £5.4billion. But the later claims have yet to be upheld by the courts.

Yukos had offered to pay all its tax arrears over time if the Government released assets frozen during the investigation into Mr Khodorkovsky, who had offered to give up control of the company.

But the Government rebuffed all attempts at a compromise, apparently determined to break up Russia's most successful and transparent company and transfer its assets to an investor controlled, directly or indirectly, by the state.

That way, it will effectively recoup the losses incurred when Mr Khodorkovsky bought Yukos in 1995 for just £189million in an auction organised by his own bank, analysts said.

The Justice Ministry did not say to whom or for how much Yuganskneftegaz would be sold. "After valuation, the share stake in Yuganskneftegaz will be handed over to a special organisation for sale," its statement said. Bailiffs have already recovered £97.3million from Yukos, the Ministry added.

Yukos said that it expected its subsidiary to be sold for just £943million, directly to a buyer rather than via auction, by July 30 in what it called a "direct violation of the law".

Overseas firms are not considered among the potential purchasers, as there could be more lawsuits relating to Yukos in the next few months. As the Kremlin is reluctant to let foreigners control strategic assets, the main contenders are Yukos's Russian rivals, Surgutneftegaz and the state-controlled gas monopoly, Gazprom, analysts said. Surgutneftegaz is the front-runner as it is based near Yuganskneftegaz's oil and gas fields and its management is held up as a model of responsible corporate citizenship.

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