Russia floats its assets abroad

10.05.06

MOSCOW. (RIA Novosti economic commentator Nina Kulikova)

Russian state-owned oil major Rosneft, which is planning an initial public
offering (IPO) this summer, has been severely criticized in the last
fortnight. The Western, primarily British, media are playing to bring down
the price of the Russian concern.

But Rosneft's potential is huge and it has chosen a very good time for an
IPO, which promises a high demand for its papers.

The company is to float an undisclosed number of securities in Moscow and on
the London Stock Exchange (LSE) in July. Its board of directors is to
determine the volume soon, but experts assess it at $10-$20 billion, billed
as the world's largest float. The IPO may become the largest Russian
offering since the first Russian listing on LSE, accounting for a
considerable amount of the exchange's inflow.

Last year Russian companies' IPOs attracted about $5 billion on LSE, or 14%
of the site's total. No wonder that the leading British media, such as the
Financial Times and the Economist, have been publishing information about
Rosneft and its IPO in the last few weeks. Unfortunately, the majority of
these articles are critical, their authors warning against buying Rosneft's
shares or suggesting a boycott of the company's LSE IPO.

These criticisms can be divided into two parts. Some were provoked by the
Yukos case and the "non-transparent acquisition" of Rosneft's main oil
producing asset, Yuganskneftegaz, from Yukos. The press writes that
investors should be worried over Rosneft's insufficient transparency,
questionable ethics, and the risk of legal problems.

F&C Asset Management, one of the biggest British investment institutions,
has called for boycotting Rosneft's IPO because the Russian legal regime is
not transparent and difficult to find one's bearings in.

Another aspect that worries potential investors is the strengthening of the
Russian state in the economy. By floating shares abroad, they say, Moscow
wants to legitimize its attempts to regain control of the oil industry,
leaving foreign companies the role of minority partners bringing money and
technology.

"The question is, should an IPO be allowed to go forward without disclosing
the pertinent information; indeed, should it be allowed to go forward at
all? To argue that it will improve transparency ignores the fact that
Rosneft is an instrument of state that will always serve the political
objectives of Russia in preference to the interests of the shareholders,"
George Soros, a famed economist and philanthropist, writes in the Financial
Times.

Investors' concerns are understandable. Foreign listing of one of Russia's
largest state-owned companies is a new thing for the West. Its reaction is
divided because of Russia's growing energy influence on the global market,
and especially because Russia and the West cannot agree on a mechanism of
regulating the global energy market or settle their differences over the
European Energy Charter.

But this tsunami of public criticism before Rosneft's initial public
offering looks like an aggressive PR campaign designed to bring down the
cost of its assets.

The majority of critics worry because Rosneft is a state-owned company. When
AFK Sistema, the largest private company operating on the consumer services
market of Russia and the CIS with over 50 million customers, conducted an
IPO a year ago, the response of the British investment community was quite
positive. Does not a state company, despite its problems, have a right to
attract investments, especially if it is using transparent market
mechanisms?

Western economists have been harping on for years on the inadequacy of
Russia's liberal economy. The Kremlin has decided to make use of a market
mechanism, though it finds it difficult to introduce Western standards and
improve transparency. But now that it has offered state assets on foreign
markets the West calls for boycotting its attempts.

As a state-owned company, Rosneft will remain "an instrument of the state."
State-run companies are made to advance national interests on foreign
markets, or are British state-owned companies an exception to this rule?
Therefore, the attempts of potential investors to pressurize Russia into
giving them access to the management of Rosneft are another proof of the oil
company's attractiveness.

Possible Yukos-related legal discussions cannot frighten off investors. The
planned initial public offering gives them a unique chance to buy into
Russia's huge oil wealth. Rosneft controls giant oilfields with over 30
billion bbl in oil equivalent, which makes it the world's largest oil
company in terms of reserves. It has enough reserves for 28 years, whereas
the world's average is 11 and Russia's average 21 years.

Rosneft produces 1.5 million bbld and its management plans to increase
production. The concern hires Western managers, plans to invite Western
directors on its board, and has a firm financial standing. Its 2005 revenues
were $23.9 billion against $5.3 billion year on year. It was announced the
other day that Rosneft's board of directors had decided to set the market
value of one ordinary share at 151.45 rubles ($5.59), which will increase
its capitalization to more than $50.5 billion.

Even if investors see some ethical problems in Rosneft's operation, few of
them will refuse to consider investing in the oil giant, especially when
Russia's eastern partners are not acting critical at all. In March, the head
of the China National Petroleum Corporation (CNPC) proclaimed support for
Rosneft's IPO "for strategic considerations."

Rosneft has chosen an opportune moment for an initial public offering. Oil
prices are breaking records and Russia, unlike the Middle East, is a stable
region with a 6% GDP growth and a rapidly developing stock market.

The success of Rosneft's IPO will mostly depend on organization, because
foreign markets' interest in its assets is extremely high. -0-