Rosneft CEO Sergei Bogdanichikov with his picture of Putin
As the war in the Middle East continues to dominate the headlines and drive up oil prices, the biggest news in global energy markets this week continues to be OAO Rosneft's initial public offering.
As Austin, TX based Strategic Forecasting notes, until two years ago, Rosneft was an afterthought in the Russian oil market, a state-owned pigmy next to the privately-owned giants Lukoil, Yukos (Mikhail Khodorkovsky) and Sibneft (Roman Abramovich). Then Mikhail Khodorkovsky tried to sell his company to several multinational oil companies while buying influence in the West, portraying himself as the champion of opposition to Putin. The Kremlin responded to Khodorkovsky's hubris by dismembering Yukos and banishing the oligarch to a Siberian prison, far away from the friends he thought he could buy on Capitol Hill. Now the same oil majors Khodorkovsky thought would protect him from the Kremlin are buying shares in the empire he built, based on assets the oligarch stole from the Soviet Union.
Rosneft's offices facing the Kremlin
Rosneft originally announced last year that they wanted to raise $8.5 billion, then this figure became $11 billion - this in spite of billionaire investor George Soros' criticism that investors would be buying stolen assets (true enough, but every major asset in Russia today was stolen from someone). Now some analysts think that Rosneft could get more than $17 billion from foreign investors. With the value of Yukos pegged conservatively at $30 billion in 2004, and with Rosneft acquiring chunks of Sibneft from Gazprom after Roman Abramovich cut his deal with the Kremlin, the estimated value of the company has increased by an order of magnitude (from $8 billion to $80 billion) in barely two years.
While some analysts are calling this the IPO of the decade, Rosneft is only allowing foreigners to buy 2% shares, for a total of 49% foreign ownership. The Russian state will continue to have total control over the company - but it seems that the world is so desperate for oil that even powerful multinationals like BP will agree to this one-sided arrangement, and trust Mr. Putin's associates with their billions. Domestically - no surpise here - Gazprom Bank and the energy giant's corporate pension fund is the single largest investor in Rosneft, followed by $750 million from other Russian private investors. In Europe, Dresdner Bank is putting up $300 million, and this is also not much of a surprise, considering Gazprom's recent hiring of former German Chancellor Gerhard Schroeder. The IPO reportedly is also being underwritten by ABN Amro Rotshild, DrKW, J.P. Morgan Securities, Morgan Stanley and the Bank of the Russian Federation.
Besides billion dollar offers from BP, Malaysia's Petronas Bank, and Petrobras (Brazil's state oil company), China Daily has confirmed Stratfor's earlier report that the China National Petroleum Corporation is offering Rosneft $500 million. However, this proposal is just the tip of the iceberg of Chinese investment in Russian oil development. As Russia Blog reported last year, when the Kremlin needed $10 billion cash to buy Yukos in a rigged auction for 1/3rd of its value, they turned to Beijing, and the Chinese are being paid back in crude locked in at 2005 prices.
Nonetheless, even the Chinese are seeing that barter is of limited value and that the Kremlin wants to legitimatize the state's seizures by publicly bringing in foreign capital, thus insulating the "national champions" Rosneft and Gazprom from future lawsuits in U.S. and European courts over the plundering of Yukos. Now Rosneft is in the unprecedented position of getting to pick from among its suitors.
UPDATE: Another version of this article has been posted Monday, July 24 on the Real Clear Politics website.
Comments
Sometimes I think just how different Russia would look without Putin. Khodorkovsky would have bought off the Duma and given the US control of Yukos. Then he would have made deals with Gusinsky and Berezovsky to buy the presidency via their media outlets. After that they would have given Chechnya independence and let Europe have Gazprom and the pipelines for a song. In the end he and his cohorts would encourge the breakup of Russia into two or three pieces. He could have been America's greatest hero. Too bad for him Putin was looking out for the Russians.
Posted by: Rob | July 20, 2006 10:37 AM
Oh come now Rob, Americans don't want to see Russians suffer or be unhappy. Americans want the whole world to acheive the American Dream, because people who are living the American dream won't be bothering us, flying planes into buildings, etc. One way to accomplish this is to invest money and capital into other countries to improve their infrastructure which increases tax revenues. If Americans happen to make money while doing so, so much the better. It is a win-win situation for all.
If western countries had been allowed to heavily invest in Yukos, oil production in Russia would be much more efficient and profitable. That means that both the western companies, Russian companies, and Russian government would be making more money today.
Unfortunately, Russian ethnocentrism and xenophobia got the upper hand in the matter, and as a result, oil and gas production in Russia is still being horribly mismanaged, resulting in untold waste.
Posted by: Jason Herr | July 21, 2006 11:57 AM
"Unfortunately, Russian ethnocentrism and xenophobia got the upper hand in the matter"
Jason, forgive my lapse in memory but can you remind me how the Chinese bid for Unical went. Or maybe the Dubai ports deal?
Yes, Americans are so altruistic and open minded. All they care about is spreading freedom with stealth bombers and economic embargos.
What I really find irritating is why the world just doesn't love us. We are just so misunderstood.
On the oil front as an investor in Lukoil, Surgutneftegaz, Tatneft, and Gazprom I have been quite pleased with their efficiency as well as my returns.
Posted by: Rob | July 21, 2006 7:13 PM
Congrats on landing on Real Clear Politics!
Great piece!
Posted by: Brendan Steinhauser | July 24, 2006 6:58 AM
Rob,
Okay, so I generalized a bit. That said, I think it is fair to say that the American public in general wants to be left alone to live their own lives. When other countries or foreign entities won't let that happen, we have no choice but to get involved. History has shown that isolationism doesn't work, at least not for the US.
I should also mention that I think our politician’s (both sides) handling of the Dubai deal was despicable. UAE is basically our only true ally in the Middle East, and we stabbed them in the back. I won't get into the China/Unocal thing other than to remind you that China is not of friend of the US.
Americans gave up on that "love me" mentality after 9/11. Now its more of a "get out of the way and let us fix this" sort of mentality.
Posted by: Jason Herr | July 24, 2006 11:45 AM
"Everything changed in early 2004 when Mikhail Khodorkovsky's, the richest man in Russia, decided that he would make Yukos transparent, and stop "sharing" (paying kickbacks and bribes) off the books with the Kremlin and other powerful Russians....."
That’s a pretty naive comment – Charlie. Not only did Khodorkovsky continued to “pay,” he was doing it on a gigantic scale – he was buying entire fractions of parliament. And if you do your research, Charlie, you’d find out, that he was supporting the “Communist party” – pretty hypocritical for an individual trying to position himself and a fighter for freedom and democracy, don't you think?
Posted by: Tim | July 25, 2006 6:51 AM
Tim, I didn't say that Khodorkovsky stopped sharing at all, just with the most important people.
I agree with you that the Communist Party left in Russia is a joke, almost as big a joke as Zhirinovsky.
Posted by: Charles Ganske | July 25, 2006 12:12 PM
Tim,
Sponsoring parties isn't sharing. What good would it do to pay anti-Kremlin folks if you are trying to settle down a deal with the Russian government or get out of jail? It's like sending a check for a late electric bill to your mother, rather than, lets say, the city of Seattle...
Posted by: Yuri Mamchur | July 27, 2006 5:57 PM