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Sep 14, 2004 | 18:14 GMT

6 mins read

Russia: Bringing Yukos Home

Summary
The Russian government said Sept. 14 its behemoth natural gas firm, Gazprom, would acquire state-owned oil company Rosneft in the first step toward liberalizing the energy sector. In actuality, the step removes one of the final obstacles to the renationalization of Yukos, the country's largest oil firm.
Russian Prime Minister Mikhail Fradkov said Sept. 14 state-managed natural gas giant Gazprom would wholly acquire state-owned oil firm Rosneft. Sources in the Russian government indicate that the decision has already been made to roll part of Yukos, the country's beleaguered private oil major, into the mix as well. The government owns all of Rosneft, as well as 38 percent of Gazprom. Via a number of indirect means, the state holds another 17 percent of Gazprom. In a meeting with Russian President Vladimir Putin, broadcast by state-run Pervyi Kanal television, Fradkov said the merger is designed to hasten share liberalization of Gazprom. The portion of Gazprom not held by the state is traded in two tiers separated by a "ring fence" that creates different rules for the price of shares at home and abroad, complete with differences on voting rights for those shares in Gazprom decision-making. In other words, the Russians fear that without limits on how foreigners can purchase or use their shares in Gazprom, foreigners could end up controlling the company. Merging a partially state-owned firm (Gazprom) with a wholly state-owned firm (Rosneft) creates a mostly state-owned company (that sources indicate will be called something creative, like Gazprom with a subsidiary named Gazneftprom). What this means is, the Russian fear can now no longer be realized, so the "ring fence" to limit foreign ownership can be eliminated and Gazprom(-Rosneft) shares will soon be able to freely be traded equally in Russia and abroad. The net result should be a surge of international interest in Gazprom shares. Most mutual-fund managers would find it silly to not hold a bit of the world's largest natural gas firm and Europe's primary supplier. The official explanation is indeed the truth, but this being Russia there is, of course, a riddle wrapped in the enigma. The government is about to renationalize Yukos, the country's largest oil firm. The government began its in June 2003 as part of its efforts against former CEO Mikhail Khodorkovsky, an oligarch who attempted to cross from business to politics against Putin's will. Putin wanted to ensure that Khodorkovsky not only would be permanently removed from the political playing field, but also that Yukos could never again be used to launch another political career.
Beyond those broad guidelines, Putin granted very little guidance to his staff — and it went to town. Much of the confusion that has bedeviled market watchers is because of the no-holds-barred knife fight between the various Kremlin insiders over Yukos' assets. Some want it broken up and sold to Russian interests. Others would prefer a foreign buyer. Still others think it should be nationalized. The Sept. 14 announcement makes it very likely this last group is emerging triumphant — 15 months after the saga began. Gazprom and Rosneft have expressed interest in obtaining Yukos — all or parts of it — but neither is an appropriate match. Gazprom has the size, but produces very little oil and so lacks the expertise to run Yukos assets effectively. Rosneft is an oil producer, but produces fewer than one-fifth that of Yukos. However, the two combined create a state entity with the size and expertise to take a huge chunk of Yukos under its wing, if not swallow it whole. The most likely course of events will land Gazprom-Rosneft with Yuganskneftegaz, Yukos' primary subsidiary, which produces about 1 million barrels per day. The two men who seem to be carrying the day are Gazprom CEO Alexei Miller and Rosneft President Sergei Bogdanchikov. Both hitched their stars to Putin's rise early in his presidency, and both steadily have increased their hold over their respective companies — while remaining eagle-eyed for new opportunities. For foreigners, this is far from the best-case scenario. Renationalization of Yukos indicates massive direct state intervention in the economy, and raises fundamental questions about the sanctity of property rights, judicial independence and the level of corruption throughout the Russian system. But taking all that as a given at this point, bundling the whole mess into one gigantic Gazprom-Rosneft-Yukos conglomeration, could be the best of a bad series of choices. Few brave souls will be interested in directly investing in Russian assets or firms, but many will be interested in taking smaller risks such as lending the new company money, or purchasing shares outright. The only questions now are, how long will the process take, and how long will the calm last? The first answer is easy. Now that the government has a method of moving Yukos into the post-Khodorkovsky era, the details could be sewn up in a matter of weeks. Those details, of course, are hardly minor. Sources within Gazprom and the Russian Energy Ministry indicate that other Kremlin players such as Surgutneftegaz, yet another Russian oil firm, as well as other players, which might even include foreigners, have not yet given up on getting their own piece. But the fundamental decision to break up the company and parcel it out — possibility via auction — already has been made. All that remains is to decide who will be arranged to win what at the auction. Luckily, there are plenty of assets to go around such as major subsidiaries Tomskneftetgaz and Samaraneftetgaz. The second question is easier to answer. Miller and Bogdanchikov come from two fundamentally different schools of thought, and pools of Putin-allies. Miller worked under Putin during his days in the civilian administration in St. Petersburg, while Bogdanchikov is an old hand in the security service. The two do not see eye-to-eye on the role a state-run firm should play in either foreign or economic policy. Miller will start out in control because he runs the more powerful entity, but Bogdanchikov's assets will be assimilating anything the pair scavenges from Yukos. He is certainly the one to watch. Bogdanchikov was one of the key players in the government assault against Yukos from the beginning. Khodorkovsky's political death might simplify Russia's corporate map, but the Kremlin remains as inscrutable as ever.

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