By Nelson D. Schwartz

(FORTUNE Magazine) – WESTERN OIL EXECUTIVES WERE watching closely as former Yukos CEO Mikhail Khordokovsky took it on the chin in his long-running trial for fraud and tax evasion. But they told themselves that what happened to Yukos--dismemberment--could never happen to their companies. That's true, but with a guilty verdict for Khordokovsky expected in mid-May, it turns out that Big Oil might have more to fear from the Kremlin than it thought.

In mid-April the Kremlin hit BP's Russian joint venture with a notice for nearly $1 billion in back taxes. Now industry insiders are trying to figure out who might be next. "People are definitely worried about the tax authorities," says Laura Brank, a Moscow-based lawyer who has represented Russian oil giants, like Transneft and Rosneft, as well as GM and Citibank.

Though Putin himself publicly declared in late April that the "tax agencies must not terrorize business," that hasn't eased the anxiety. "Putin also said the Kremlin didn't want to bankrupt Yukos, and look where we are today," says Julia Nanay, senior director of consulting firm PFC Energy. BP execs insist they have nothing to fear from the tax notice--they point out that the claim is for 2001, two years before BP purchased 50% of TNK from three oligarchs for $7 billion. And under that deal, according to BP CEO John Browne, the trio indemnified the British energy giant for any tax claims from the pre-BP era.

Fresh from a meeting in Moscow with Putin, Browne told FORTUNE, "We are as optimistic about Russia as when we entered into this transaction." As for the tax notice, Browne says he was not surprised. "I can't think of one company that hasn't had notification of tax bills for open years. It's the normal course of business, and one has to go through it with the tax authorities and find appropriate levels of settlement."

At the meeting in the Kremlin, held in a stunning Czarist-era stateroom, the BP boss says Putin "gave tremendous support for TNK-BP, reviewed the track record, and encouraged us to continue to cause it to grow." Since BP teamed up with TNK, the combined company has paid the government $11 billion in taxes, and Browne says he's not worried about additional claims for this period. "We have made sure that we read, reread, and read again the tax code, and we've set up a conservative application of these codes."

Browne may be right about BP's liability, but his Russian partners could face new tax bills. Buried in the footnotes of a TNK bond prospectus from February 2003 are some clues to how TNK used then-legal tax shelters for companies registered in special Russian economic development zones to cut its "theoretical" tax bill by $250 million in 2001, $378 million in 2000, and $86 million in 1999. Those tax loopholes were later closed by the Kremlin, says Hermitage Fund analyst Denis Blank. "These kinds of tax shelters weren't exactly illegal but companies abused them," says Blank.

Even if the tax claims are settled quickly, there's an even bigger worry facing Western oil companies. The Duma is considering legislation that would make it much harder for non-Russian companies to explore promising new oilfields. That makes ConocoPhillips's recent $2.6 billion investment in Russia's Lukoil, for one, look riskier. Exxon Mobil, meanwhile, is on the verge of losing its license to explore a fresh area around Sakhalin Island off Siberia, with Russian bidders angling to snap it up. "The doors are definitely closing," says Sanford Bernstein analyst Neil McMahon. That's an especially painful loss to Royal Dutch/Shell, Exxon Mobil, and ChevronTexaco, which are desperate to pump more oil but are already shut out of state-dominated oil industries in places like Kuwait and Mexico.

The losers won't just be Western companies. Investments by foreign multinationals as well as Yukos helped Russia increase oil production by 50% between 1999 and 2004. That extra crude filled Kremlin coffers and benefited oil-hungry consumers around the world. With the Yukos collapse and the increasingly chilly climate for foreigners, daily Russian oil production has dropped by 172,000 barrels since September 2004. At nearly nine million barrels a day, Russia still pumps more oil than any country except Saudi Arabia, but as Larry Goldstein of Petroleum Industry Research notes, the trend is now going in the wrong direction. "In this situation," he says, "nobody wins. Not even the Russians." -- Nelson D. Schwartz