June 2006

June 14, 2006: Rosneft Flotation Hit by Legal Threat: Investor Unease Grows Over Controversial Sale of Shares in State-Owned Russian Oil Giant: Chairman of Rosneft, Igor Sechin, was served yesterday in Moscow with papers from a U.S. lawsuit over the company's acquisition of Yugansk, its biggest asset. The lawsuit is another example of legal action that has made many Western investors nervous about buying shares in Rosneft. Mark Mobius, an emerging markets fund manager at Franklin Templeton said, "Frankly, we're not interested at all. We just don't see any reason why we should be owning a company subject to legal disputes."

Yugansk used to belong to Rosneft's rival YUKOS, but it was forced by the Kremlin to sell the asset allegedly for a fraction of its real value. The latest lawsuit has come from a dozen U.S. investors in YUKOS, who own American Depository Receipts (ADRs) in the company. Tom Johnson, lead attorney on the case at Covington & Burling, said, "If we prevail, it could lead to an enormous number of additional claims. The loss of value just related to the ADRs is $6bn. If you look at the publicly traded YUKOS ordinary shares, that is another $20 - $30 billion." Agne Zitkute, a London-based fund manager at Pictet Asset Management said, "This IPO smells bad. Frankly, I have a moral problem with buying back something that was stolen from me." (Source: The Independent)

June 13, 2006: Some Investors Give Rosneft Float the Thumbs-Down: As the Russian oil giant Rosneft's IPO comes to market, some global money managers are giving it a cool reception. Rosneft's share issue, which cleared one more hurdle on Monday when the company announced its intention to float, will rank as one of the world's biggest ever IPOs. But Mark Mobius, an emerging markets fund manager at Templeton, was skeptical of Rosneft's IPO and the valuation of more than $100 billion. "Frankly, we're not interested at all. We just don't see any reason why we should be owning a company subject to legal disputes," Mobius told Reuters.

Most of Rosneft's assets are in Yugansk, once the core unit of YUKOS which was ripped out of it after a crushing back tax bill and sold at a state auction at end-2004. Portfolio investors have been burnt as YUKOS' market capitalization crumbled from a peak of $40 billion. Some of those investors are suing for alleged expropriation of assets, such as U.S.-based holders of YUKOS ADRs including former U.S. National Security Adviser Richard Allen. "This IPO smells bad," said Agne Zitkute, fund manager at London-based Pictet Asset Management. "Frankly, I have a moral problem with buying back something that was stolen from me," Zitkute told Reuters. (Source: Reuters)

June 13, 2006: Officials Served With YUKOS Court Papers: Kremlin deputy chief of staff Igor Sechin, First Deputy Prime Minister Dmitry Medvedev, Gazprom CEO Alexei Miller and other leading Gazprom board officials have been served with an expropriation lawsuit filed by U.S.-based YUKOS shareholders, according to court filings in Washington.

The senior officials were served by mail after Irish private investigators were unable to hand the papers over by hand during a tense game of cat-and-mouse across Moscow. The hired agents, who have previously served members of former Yugoslav President Slobodan Milosevic's entourage and the Irish Republican Army with lawsuits, were followed by state security agents across town and could not reach their targets, the U.S. District Court for the District of Columbia was told in papers filed late Thursday. (Source: The Moscow Times)

June 12, 2006: Investors Wary of Murky Waters Around Rosneft IPO: Upfront risk factors associated with Rosneft’s pending IPO should keep oil on troubled waters featuring a jailed Russian oligarch and seemingly arbitrary application of laws. Rosneft officials working on the IPO offering have promised that investors' concerns about potential legal and corporate governance risks would be made a priority in documentation. One of the biggest issues – the acquisition of Yuganskneftegaz from YUKOS Oil, under questionable circumstances – will lead the list of "risk factors" in the company's prospectus. Several investment institutions in the UK, including F&C Asset Management, have said that they are unlikely to participate in the IPO unless adequate provisions are made for liabilities stemming from the Yugansk asset. Richard Segal, chief strategist at Argonaftis Capital Management, said "There is a good chance the deal will struggle since they are trying to raise so much money when sentiment is poor and there is so much controversy surrounding it. There is a lot of concern about the way that YUKOS was taken over. Many people don't want to be associated with that." "It will be a tough sale," said another manager. "There has been a lot of criticism of Rosneft, and investors want a discount, but the government does not want to sell Rosneft cheaply." (Source: The Financial Times)

Fund managers and lawyers say the IPO is surrounded by legal, political and market risks – hence the more than 30 banks involved in the issue. "Good luck to them," said one Western banker. "This is a risky investment. I also wonder who will buy it when money is being redeemed from emerging markets funds." Yugansk's ex-owners have threatened a lifetime of litigation, while a lawsuit by U.S.-based holders of YUKOS ADRs including former U.S. National Security Adviser Richard Allen is seeking damages for alleged expropriation of assets. The litigation risk is worrying for investors, said Martin Taylor, hedge fund manager at London's Thames River Capital with $8.5 billion of assets under management. "Investors would be worried that the former owners of YUKOS could get an injunction on Rosneft assets or its shares," Taylor said. "Property could be forcibly seized outside Russia's jurisdiction. There is always a risk that might happen." Brian Zimbler, partner in the Moscow office of U.S. law firm LeBoeuf Lamb Greene & MacRae added, "It will be interesting to see how much detail they go into…If they disclose all the legal risks, it is good practice. But this would be uncomfortable for the Russian government." (Source: Reuters)