Russia economy: Bungling the Yukos asset disposal

The Economist Business Unit ^

[Alex Marko]

The Russian government says it, rather than gas monopolist Gazprom or auction winner Rosneft, will take control of Yuganskneftegaz, the main oil subsidiary of Yukos, and that China's CNPC may subsequently take a one-fifth stake. The move, taken in response to legal challenges abroad by Yukos shareholders, underlines the lack of strategic planning over Yukos. With the government improvising as it goes along, another plan for Yuganskneftegaz may yet emerge. Yet given the legal liability surrounding the oil company, state ownership may be the only viable solution.

In the space of two weeks in December, the prime beneficiary of the Yukos affair has changed three times. Yuganskneftegaz, the company's main 1.06m barrels/day oil producer, was sold at auction on December 19th. On December 30th Russia's industry and energy minister, Viktor Khristenko, said that the 76.8% controlling stake in Yuganskneftegaz would be transferred into a 100% state-owned company. He added that up to 20% may subsequently be offered to the China National Petroleum Corporation (CNPC), a Chinese state-owned company.

Plan A: Gazprom

In the run-up to the December 19th auction, state-controlled gas monopolist Gazprom – via its oil producing arm, Gazpromneft – was the favourite to win. One week before the auction, it was the only recognised bidder. It is inconceivable that Gazprom would have applied to participate without having first gained the approval of the Kremlin; the fact that the monopoly was given permission signalled that the Kremlin had decided that Gazprom should acquire Yukos's prime oil asset. The acquisition would have made Gazprom, which is in the process of absorbing 440,000 b/d state-owned oil company Rosneft, one of the top two petroleum producers in Russia without output of around 1.7m b/d.

Gazpromneft's bid, which was reliant on the financial support of Deutsche Bank (Germany) and JP Morgan Chase (US), was scuppered by legal action from Yukos shareholders. On December 15th, just four days before the auction, Yukos shareholders applied for bankruptcy protection under US law in a Texas court, which ordered the temporary suspension of the auction. Faced with the prospect of legal action in US courts, Gazprom and its financiers were forced to withdraw.

In the event, the December 19th auction was won by an unknown vehicle, Baikal Finance Group (BFG), with a bid of US$9.3bn. A few days later, state-owned Rosneft announced that it would buy BFG and therefore become the majority owner of Yuganskneftegaz. As a fully state-owned company without business exposure to the US, it was assumed that Rosneft would not be vulnerable to legal action from Yukos shareholders in US courts.

Plan B: Rosneft

Although many assumed that the switch to Rosneft was a solution to the government's Yuganskneftegaz dilemma, this was never likely to be the case. First, Rosneft is due to be absorbed into Gazprom, at which point the gas monopoly would once again have been vulnerable to attacks from Yukos shareholders in western courts. While Gazprom's presence on the US market is limited, it generates the majority of its revenue in EU countries.

Second, the acquisition of Yuganskneftegaz dramatically alters the valuation of Rosneft – and thus undermines the terms on which Gazprom was to take over the state-owned oil company. The government hatched the merger plan – swapping its 100% shareholding in Rosneft for the 10.7% of Gazprom stock held by the gas monopolist as treasury shares – as a way of gaining a majority shareholding in Gazprom without paying cash. It is widely accepted that this is the major prerequisite for the long-awaited lifting of the ring-fence on Gazprom shares, after which foreigners will be able to increase their exposure to the Russian blue chip company.

The government's problem, initially, was that Rosneft was not considered valuable enough to be worth the 10.7% stake in Gazprom. An assessment by Dresdner Kleinwort Wasserstein (DrKW) valued the state oil company at US$5bn-6bn, equivalent to 6-7.5% of Gazprom stock. Even though a later assessment by Morgan Stanley brought better news for the government – it valued Rosneft at US$7bn-8.5bn and Gazprom at US$60bn-72bn – the authorities were nevertheless offering make-weights to close the deal.

With Yuganskneftegaz under its wing, however, Rosneft is far too valuable to swap for 10.7% of Gazprom – even if the state oil company has to increase its debt by US$9bn in order to finance the acquisition of BFG. Acting on instructions from the Russian government, DrKW valued Yuganskneftegaz at US$15-18bn; some analysts reckon it is worth closer to US$20bn.

Plan C: the state

Mr Khristenko's announcement on December 30th that Yuganskneftegaz would be held separately by a fully state-owned company, enabling the Rosneft-Gazprom merger to go ahead as planned, should be seen in this context. It is another reaction to events which have not turned out as the government would have hoped. The minister added that the potential involvement of CNPC, as a 20% shareholder in the venture, had been envisaged in established Russian-Chinese agreements on strategic co-operation in the energy sphere.

The use of the word "strategic" is perhaps unfortunate, for this latest move underlines the lack of strategy underpinning the government's approach to Yukos for the past 18 months. If the government had, at the outset, intended to strip the company of its prime asset and give that asset to Gazprom, it would surely have anticipated the possibility of a move by Yukos shareholders in the US courts and planned accordingly. Instead, Gazprom was forced to back down at the 11th hour and the government turned in desperation to Rosneft – a move that undermined the financial logic of the merger with Gazprom, without offering any way out of the legal liability problem.

Is there a Plan D?

Rather than acting according to a strategic plan, the authorities have improvised their way throughout the Yukos affair. The initial motive was simply to punish Mr Khodorkovsky for his political activities and ambitions, and only in its latter stages – perhaps once a struggle for supremacy among competing Kremlin factions was decided – did the legal assault take on a form that was designed to re-order the Russian oil sector in a manner that promoted the interests of the state. The CNPC link is only the latest of a number of tactical improvisations: by giving China a stake in Yuganskneftegaz, Moscow may hope to soften the blow it will deliver by opting to build an oil pipeline from eastern Siberia to its Pacific coast rather than to Daqing, the centre of the Chinese oil industry.

Given the absence of a grand plan, it is too early to assume that the Yuganskneftegaz will rest in the lap of the government, rather than being passed on to another party considered loyal to the state. However, the legal liability surrounding Yuganskneftegaz sharply limits the number of suitors willing to take it on. With Yukos shareholders having the money and the determination to pursue their grievances through western courts, for any privately-owned company Yuganskneftegaz may prove to be a poisoned chalice rather than a great prize.

[Leo Carpathian]

Remember Lenin's NEP (New Economic Plan)?
He lured west to invest and build in USSR, then when things got running, commies nationalized (stole) everything and then run it down by putting loyal, stupid apparatchiks in charge. The rest is history (which tends to repeat, without lesson being learned).