May 2006

May 26, 2006: Investors Say Rosneft IPO Risky, Demand a Discount: Investors worried about possible lawsuits, a global market downturn and Russian political risk say they will only buy shares in state oil firm Rosneft's IPO if they are offered at a big discount. The politically-charged IPO, Russia's biggest, is touted as a symbol of a resurgent Russia riding high on an oil price boom. But a harsh market correction is making investors recalculate the risks as criticism of how Rosneft acquired its core asset Yugansk grows ahead of the planned July IPO. Rosneft, whose key asset Yugansk was ripped out of the now-jailed oligarch Mikhail Khodorkovsky's YUKOS oil firm, has been dogged by controversy and Yugansk's ex-owners have threatened a lifetime of litigation. Rosneft's poor corporate governance record is another worry, in addition to the political risk. Rosneft, the Kremlin's top oil vehicle, is headed by Igor Sechin, President Putin's right-hand man and part of a so-called "siloviki" clan of ex-KGB men running Russia. Political analysts say Rosneft could be vulnerable in any shakeout in the wake of the March 2008 presidential elections when Putin must step down under the Russian constitution. "This company is run by bureaucrats, not oilmen. It serves a variety of political interests, not shareholders," said Firebird fund manager Ian Hague. Rosneft's formal pitch to investors via its prospectus may highlight some of the risks from its controversial past. Among them is a lawsuit by U.S.-based holders of YUKOS ADRs including former U.S. National Security Adviser Richard Allen who are seeking damages for alleged expropriation of assets. "People will be scrutinizing the prospectus and looking for holes," said Brian Zimbler, partner in the Moscow office of U.S. law firm LeBoeuf Lamb Greene & MacRae, noting such lawsuits "will deter some conservative investors from taking part in the IPO." (Source: Reuters)

May 26, 2006: Russian Stabilization Fund to be Converted into Foreign Currencies, Could be subject to attachment by YUKOS Minority Shareholders: Russian Finance Minister Alexey Kudrin announced the conversion of the stabilization fund at the forum of state debtors in St. Petersburg yesterday, estimating it at close to 2 trillion rubles. The Finance Ministry has plans to open currency deposits at the Central Bank – 45 percent to be placed in U.S. dollars, 45% in euros and 10% in British pounds. The ratios may change depending on the current dynamics of exchange rates. Russian Deputy Prime Minister Alexander Zhukov said at the CIS prime ministers summit that “the placement of the money of the stabilization fund in stocks of overseas companies may be agreed upon by the end of 2006.” The government is also considering transferring a part of the fund to the management of banks with international jurisdiction. However, there are concerns that the stabilization fund may become a target of the West if money from the fund is placed in the shares of international companies, as the risk of them being arrested becomes higher. The precedent might be set in a Washington D.C. court, which will consider the case of the YUKOS U.S. minority shareholders. The U.S. jurisdiction allows considering if the ruling of the YUKOS case complies with Russian legislation. If the lawyers of the YUKOS shareholders manage to win, the immunity of the Russian stabilization fund might not be guaranteed. (Source: Kommersant)

May 25 2006: Russian Oil: Thou Shalt Not Steal - Western Investors Should Not Endorse the Kremlin's Rapacity: The privatization of the oil industry in the early 90s was a tragedy. Now, under Russian President Vladimir Putin, history has repeated itself as farce. The Kremlin's campaign against Mikhail Khodorkovsky and YUKOS, once Russia's leading oil firm, has been economically damaging and politically embarrassing. The final act in this sordid drama will be the listing by Rosneft, a state-owned oil company that bought most of YUKOS’ main subsidiary, through another corrupt auction at the end of 2004. Western investors should be aware.

If it is ever to become a democratic country with a functioning market economy, Russia needs stable property rights and an impartial legal system. Instead, Putin made an example of YUKOS, overseeing a capricious application of the law that reversed improvements in the judiciary and fostered corruption. The pursuit of YUKOS also transferred a mainstay of the economy from what had become an efficient private business to opaque state control.

Since the fall of communism, Russian businessmen, including Khodorkovsky, have repeatedly gambled on the amnesia of foreigners—betting that the greed of investors and a bit of public relations would obscure memories of malfeasance and instability. In general, they have been vindicated. Just as in Soviet times rivals and renegades were airbrushed out of photographs, Rosneft and the Kremlin are now hoping that what they did to YUKOS can be erased from history. This time, the gamble should fail. (Source: The Economist)

May 25, 2006: Moscow Court Cuts 4bn Dollars from Rosneft Unit's Tax Bill: Rosneft has had a tax claim against its key production unit reduced by 4 billion dollars, according to the company's financial statement released ahead of its planned initial public offering. Christopher Weafer, chief strategist at Alfa Bank said Rosneft's planned IPO values Yuganskneftegas, which account for two-thirds of Rosneft's production, at about 30 billion dollars. Mr Weafer said, "It is clear that judges don't look at Rosneft in the same way as they did at YUKOS, when they needed to justify the confiscation of its assets." In its financial statement, Rosneft said, "The various legislation and regulations are not always clearly written and their interpretation is subject to the opinions of the local, regional and national tax authorities. Instances of inconsistent opinions are not unusual." (Source: The Financial Times)

May 24, 2006: Rosneft Too Risky, Putin Insider Says: Former Putin advisor Andrei Illarionov says Russia meets only one criterion for membership of the Group of Eight (G8) of the leading industrialized democracies – the size of its economy. He says the G8 summit can only be interpreted as a sign of support by the world's most powerful organization for Russia's leadership – a stamp of approval for its violations of individual rights, freedom of speech and the rule of law, its discrimination against NGOs, nationalization of private property, use of energy resources as a weapon, and aggression toward democratically oriented neighbors. The G8 summit will serve as an inspiring example for today's dictators and tomorrow's tyrants. In a separate article the newspaper quotes Illarionov as saying the planned flotation of state-owned oil giant Rosneft would see "the London Stock Exchange being used to distribute stolen assets". He says: "This is a crime which will be investigated by a new government and reversed," he said in the latest salvo against the controversial initial public offering. His comments follow denunciations of the sale by investors including George Soros and Foreign & Colonial, which recently raised a warning flag over Russia's corporate governance practices. (Source: The Daily Telegraph)

May 19, 2006: Russians in YUKOS Response: Two of Russia's top government officials, the bosses of state-owned companies Rosneft, Gazprom and Rosneftegaz, and the Russian Federation have sent a joint reply to a U.S. district court after each was served a summons following a YUKOS lawsuit filed last October. Individuals on the list include Russia's Energy Minister Viktor Khristenko, Finance Minister Alexei Kudrin and Rosneft president Sergei Bogdanchikov. In their reply, the defendants said that the U.S. court has no jurisdiction over them. The civil lawsuit was filed at a Washington, D.C. district court by U.S. law firm Covington & Burling on behalf of a group of 12 YUKOS shareholders for "de facto denationalization of YUKOS without payment of any compensation to its owners," lawyers said. (Source: Upstream)

May 4, 2006: U.S. Vice President Says Russian's Putin Restricting Rights: Russia under President Vladimir Putin has recently "unfairly and improperly restricted the rights of the people," U.S. Vice President Cheney told a conference of Eastern European leaders Thursday, cautioning that similar actions could begin affecting relations with other countries. "No legitimate interest is served when oil and gas become tools of intimidation or blackmail, either by supply manipulation or attempts to monopolize transportation," Cheney said. "And no one can justify actions that undermine the territorial integrity of a neighbour, or interfere with democratic movements." (Source: Associated Press)

May 4, 2006: Rosneft Fights Back as Criticism Mounts: Rosneft, poised for a controversial London flotation, plans to answer its critics in a wide-ranging prospectus expected to be published in the next few weeks. The state-owned group will run through all the issues relating to its acquisition of the main assets of Yukos, so that investors go in with their "eyes wide open," according to well placed sources. Rosneft is expected to launch its initial public offering (IPO) on the London Stock Exchange in July. It plans to raise cash to pay for the Yuganskneftegas business it bought after the Kremlin forced Yukos to sell the assets. But the oil producer has faced a wave of criticism over the circumstances of its asset purchase. Bruce Misamore, the former chief financial officer of Yukos, said a London float of Rosneft was the moral equivalent of Nazi Germany stock-listing the shares of a company forcibly acquired from Jewish owners. (Source: The Guardian)

May 3, 2006: Institutional investors in Rosneft IPO Must Face These Ethical Issues: Bruce Misamore, Former Chief Financial Officer of Yukos Oil Company, wrote a letter to the Financial Times addressing the moral and ethical issues raised by the Rosneft IPO. Read the full letter »

May 2, 2006: A Word About Rosneft Stock: Nyet: Newsweek's Wall Street editor, Allan Sloan, commented on Rosneft IPO, stating that there's no better time to examine the new thing that Russia's state capitalists hope to unveil later this year – the world's biggest stock offering. To wit, the proposed initial public offering of shares in Rosneft, Russia's state-owned oil company. Should Russia succeed in selling investors a stake in Rosneft for the widely predicted $20 billion or more, the deal would get top billing in Thomson Financial's IPO rankings, topping the $18 billion that NTT Mobile Communications of Japan raised in 1998. Sloan says, “Normally, I'd wait to see some documents, crunch some numbers, and call the company and get the usual ‘no comment’ before writing anything. But this isn't a normal situation. So here's my opinion about owning this stock: nyet. No. Don't touch this unless you're a professional investor or a connected insider or you just happen to enjoy playing Russian roulette with a pistol that has five loaded chambers and one empty one instead of the other way around.”

Sloan also commented that unless investors “assume that the rule of law will take root in Russia overnight – fat chance! – buying into Rosneft isn't like buying into British Petroleum when Britain privatized it. Gazprom and Rosneft answer to the state and are of enormous strategic importance to it. No matter how many non-Russians end up on Rosneft's board, you can bet that when push comes to shove, Rosneft will act in the Kremlin's geopolitical interests rather than in its own financial interests. (Source: The Washington Post)

May 1, 2006: Oil Kremlin Scales Back Float After London Interference: The London Stock Exchange (LSE) is starting to feel the wrath of the Kremlin after Russian oil giant Rosneft axed plans to launch the world's biggest stock float this summer, opting instead for a much smaller sale. The move comes days after the LSE took the rare step of intervening in Russian politics by questioning the treatment of William Browder, chief executive of Hermitage Capital Management and the biggest foreign investor in Russia, who has been stripped of his Russian visa after pushing Western-style shareholder activism. Rosneft, which now has more proven oil reserves than Exxon, is slashing the float from $20bn to nearly $8bn, according to company sources, just enough to cover debts to Western banks. The move raises doubts about other Russian companies lining up to list in London over the next year, including Vneshtorg Bank, Gazprom Bank, and the aluminium group Rusal.

The LSE now has to walk a tightrope, holding on to lucrative business from emerging economies while being careful not to let in companies with skeletons in the closet. U.S. billionaire George Soros last week called on investors to boycott Rosneft, calling the state-owned company a strategic arm of "a country that does not hesitate to use its monopoly power in devious and arbitrary ways''. Britain's F&C Management said it planned to shun the float unless Rosneft put aside "adequate provisions'' for liabilities stemming from its purchase of Yukos properties. Rosneft vaulted into the top tier of energy groups by snapping up Yukos assets on the cheap after the Kremlin destroyed Yukos founder Mikhail Khodorkovsky in a tax investigation, which he claimed was politically inspired. The Yukos Shareholder Coalition is pursuing a pounds 3.3bn claim for damages in U.S. courts. (The Daily Telegraph)