April 2006

April 30, 2006: Beware the Bear; Business Focus: Last week in London, politicians and experts alike advised investors to steer clear of Rosneft, saying it carried unacceptable legal and corporate-governance risks. The growing power of Russian business has presented politicians and investors with a conundrum – whether it is wise to welcome the embrace of the Russian bear. What worries politicians is Britain's potential over-reliance on Russian gas, and whether Putin might be prepared to use energy to hold the UK and the rest of western Europe hostage. Britain is increasingly reliant on gas imports from Europe – and by extension, Russia – as North Sea reserves have run down more quickly than expected. The problem was brought home in January, when Russia briefly cut off gas to Ukraine amid a price dispute. More recently Putin warned that if western Europe was unwilling to play ball on the expansion plans of Gazprom and other Russian energy groups, Russia would simply switch its focus to Asia, and take its precious oil and gas with it. A Department trade and Industry committee plans to open an inquiry into the UK gas market, including the growing power of Gazprom, on May 9.

A case in point is Rosneft which has been transformed, thanks to the intervention of the Kremlin. It was the main beneficiary when Yukos, the oil group created by Mikhail Khodorkovsky, collapsed in 2004 after he was jailed for fraud. Rosneft acquired Yukos' Yuganskneftegaz field, its main operating asset, after an auction, won by an unknown Russian company that sold itself within days to Rosneft. The field now accounts for 70% of the group's output. Some see the Rosneft and Gazprom situations as part of the same problem: Russia's willingness to use business for its political ends. Cedric Brown, former chairman of British Gas said, "This is a version of the Great Game, the struggle for control of central Asia that was played out by the imperial powers 200 years ago. In a sense nothing has changed, and we need to be involved in that Great Game." (Source: The Sunday Times)

April 28, 2006: F&C Threatens to Boycott $15bn Rosneft Listing: F&C Asset Management, one of the UK's biggest investment institutions, yesterday took the unusual step of threatening publicly to boycott the planned London listing of Rosneft, the Russian state-owned oil giant, which is expected to raise at least $15bn. Karina Litvack, head of corporate governance and socially responsible investment at F&C, said the initial public offering raised serious questions of governance and legal risk. "Investors should tread carefully when considering investing in Rosneft. The Russian legal regime is opaque and difficult to navigate." She added, "We don't pretend to understand it and if we cannot understand something, we won't invest in it. Unless Rosneft can provide us with credible assurances that it has identified, and made adequate provisions for, any liabilities stemming from the acquisition of its Yuganskneftegaz assets, we won't be interested." F&C's statement highlighted how much is at stake for the London Stock Exchange (LSE) if UK institutions, which make up the bulk of investors in the series of Russian companies that have floated or hope to float in London, decide to follow suit. It also helped explain why Clara Furse, the LSE's chief executive, wrote to the Russian president urging him to reconsider the "arbitrary" ban on William Browder, who runs Hermitage Capital Management, one of the biggest investors in Russia, from entering the country. UK investors look on Mr. Browder's situation as an indication of attitudes to shareholder rights in Russia. (Source: Financial Times)

April 21, 2006: Kudrin Expects Support in YUKOS Minority Shareholders’ Lawsuit: Russian Finance Minister Alexei Kudrin reportedly hopes that Russian officials will win support in U.S. court hearings of a lawsuit filed by YUKOS minority shareholders vs. Russia and a number of government officials. “There are lawyers who represent the interests of the Russian government and me personally, because the lawsuit mentions me together with some other [Russian] officials,” Kudrin said. “I do not know why I was put on that list, but I hope that lawyers will find that out.” The lawsuit was filed in an American court last fall. A group of holders of ADR–bonds distributed alongside company shares–think that the YUKOS bankruptcy breached their rights and they are demanding compensation. (Source: ITAR-TASS World Service)

April 21, 2006: YUKOS Suit to be Settled in Russia's Favor – Minister: Russia's finance minister said Friday he was confident the YUKOS minority shareholders suit, launched against Russian companies and government officials, would be settled in Russia's favor. "I have no doubts that Russia's position will be supported," Alexei Kudrin said at a news conference in Washington, D.C. Twelve YUKOS minority shareholders filed a suit in a D.C. court against Russia, energy giant Gazprom, oil major Rosneft, its state-owned parent company Rosneftegaz and a number of government officials, including Kudrin, on October 24, charging them with a coordinated attack on YUKOS aimed at renationalizing the company.

The shareholders are contesting the legality of the sale of a 76.79% stake in YUKOS production unit Yuganskneftegaz by the federal property management fund on December 19, 2004, in lieu of YUKOS’ tax arrears for 2000 and 2001. Several days later, Rosneft purchased the unit from Baikal Finance Group, the shadowy group that won the auction. (Source: RIA Novosti)

April 19, 2006: Reserves and Reservations: How Controversy is Dogging Rosneft: Rosneft's IPO highlights a growing concern for the Russian economy: the nationalization of private assets in favor of companies with close ties to the Kremlin and the possibility of their subsequent partial sale in the interest of a small group of powerful bureaucrats. Once considered to be a basket for oil assets left over after the privatization of the 1990s, Rosneft has been transformed by the Kremlin through the de-facto confiscation of the main production unit of YUKOS oil. "It is an extremely problematic deal. Some investors will be asking a simple question: 'Why should I buy a company which I already used to own and which was called YUKOS?'" says a Moscow representative of a U.S. bank.

Rosneft already faces a lawsuit in the U.S. from holders of YUKOS’ American depositary receipts, who blame Rosneft, among others, for destroying the value of their investment. Tom Johnson, an attorney with Covington and Burling, represents 12 holders of ADRs who, in total, claim losses of $3.4m as a result of the dismantling of YUKOS. Johnson says: "This suit is just the tip of the iceberg. If it is successful, it would open the floodgates for more suits." The total losses alleged to have been suffered by ADR holders are $6bn. If they are joined by other minority shareholders, total claims could reach $30bn. "YUKOS was a publicly traded company and Rosneft was a participant and a beneficiary in the nationalization of YUKOS, so it is a principal target of our litigation," Johnson says.

Jean Melchior, a retail investor in Belgium, says he bought YUKOS ADRs shortly before the arrest three years ago of Mikhail Khodorkovsky, who ran the company. Melchior saw the holding as part of his pension savings. "I thought that as ADRs, they were governed by universal financial rules and there was no reason for me to doubt that ethical and legal standards would be respected." Melchior says he has lost $123,000 as a result of the attack on YUKOS. Like others, Melchior is considering joining U.S. investors in their legal action. (Source: Financial Times)

April 17, 2006: A NEW OILIGARCHY? As Kremlin plans Rosneft IPO, foreign investors return to fold - Pedigree troubles many Russian-market veterans: Greg White of The Wall Street Journal Europe reports comments by various investors during Sergei Bogdanchikov’s presentation on Rosneft IPO in London in February, who was advised by Morgan Stanley and J.P. Morgan Chase & Co. So many fund managers and analysts turned up that some had to stand through lunch. At the London presentation, Mr. Bogdanchikov pitched Rosneft's unique reserves – more crude in the ground than Exxon Mobil – and steadily rising production as proof that a state-run company can compete with the world's best privately owned ones. Participants say none of the guests raised the specter of OAO YUKOS, Yugansk's former parent and a onetime favorite among foreign investors in Russia. "Effectively, they've just repackaged Yuganskneftegaz," says Agne Zitkute, a fund manager at Pictet Asset Management in London. "I do have a moral problem with that, but does that mean we're not going to look at the investment? No." "At the end of the day, everyone's out to make money, and the Kremlin knows it," says Harvey Sawikin, a principal at Firebird Management, a New York hedge fund heavily invested in Russia. "This company's (Rosneft) whole history is checkered with abusive behavior towards minority shareholders and the spirit of the law," says Ivan Mazalov, a Moscow-based director at Prosperity Capital Management, a Swedish investment fund with $2.2 billion in assets, mostly in Russia. (Source: The Wall Street Journal Europe)

April 17, 2006: Ministry approves Rosneft IPO schedule – Gref: RIA Novosti reports the Russian Economic Development and Trade Ministry approved the schedule and procedure for the upcoming IPO of state-owned oil company Rosneft at the end of last week, the head of the ministry said Monday. German Gref confirmed that the IPO, through which Russia's No. 2 crude producer could float shares worth $3bln in Russia and $12-billion on the London Stock Exchange, would take place in the third quarter of 2006, but did not specify details. (Source: RIA Novosti)

April 10, 2006: A Deal Both Tempting And Troubling; Oil giant Rosneft has vast reserves, but its controversial past has investors wary: Investors are wary of Rosneft’s upcoming IPO due to suspicions over its role in the YUKOS affair. Even though the company looks impressive on paper, Rosneft’s rise to prominence in 2004 owes much to the Russian state’s dismantling of Mikhail Khodorkovsky’s YUKOS empire. The Kremlin makes no secret of its ambition to boost the value of its big state energy companies, Rosneft and natural gas provider Gazprom. In Rosneft's case, to make that happen, the company needs to move beyond its controversial past. Now, says former Putin economic adviser and current Kremlin critic Andrei N. Illarionov, the main aim of the Rosneft IPO “is to have a so-called Western stamp of approval on all this business [with YUKOS].” However, the YUKOS affair is making investors apprehensive. “If Rosneft had grown in a normal manner, people would be rushing to snap it up,” says Stephen O'Sullivan, head of research at Moscow investment bank Deutsche UFG. “The issue is the potential legal overhang from YUKOS.” (Source: BusinessWeek)