[A-List] Russian economic "success"

[Keaney Michael]

John Lloyd was the FT's Moscow bureau chief when Yeltsin sent the tanks
in to sack the Duma in 1993. Lloyd portrayed this as a triumph for
democracy. He has since recanted a bit, but has also wormed his way into
the New Labour/Policy Network entourage that features other ex-FT
staffers like Charles Leadbeater and Simon Buckby. Lloyd's successor at
the FT, Robert Cottrell, seems to have no need for self-effacement as he
unabashedly celebrates the fruits of shock therapy and the pillage that
has been "transition". Perhaps BP's flagged involvement tells us
something of why this should be:


Russian oil promises rich prospects
The country's privatised petroleum industry has proved such a success
that foreign rivals may be tempted to take a stake, writes Robert
Cottrell
Financial Times, February 1, 2002

It was scandalous. Grotesque. The looting of a nation. Or so said many
people when Russia privatised much of its oil industry in the mid-1990s,
letting a clique of financiers grab the best bits for next to nothing.

But, a few years on, the results are looking quite respectable. The
proprietors have learnt how to manage their assets. They have discovered
corporate governance. They have grown secure enough in their ownership
to reinvest profits in new fields and new technology.

And, as a result, they are extracting enough oil to give the
Organisation of Petroleum Exporting Countries nightmares. As the world's
second biggest oil producer after Saudi Arabia, Russia exports about 4m
barrels a day of crude oil and refined products, accounting for about 10
per cent of global oil trade, says United Financial Group, a
Moscow-based investment bank.

At the same time, under President Vladimir Putin, Russia has become a
more reliable and inviting place to do business - all the more so when
measured against other big oil-producing countries, such as Indonesia.
There are still big problems with the Russian investment environment but
the bandit era has passed.

Small wonder, then, if foreign oil companies are looking at Russia with
renewed optimism. John Browne, chief executive of BP, recently called it
"a place where we could deepen our interests".

His statement was all the more striking, given that BP knows more than
most about risk in Russia. In 1997 it put $571m into Sidanco, a Russian
oil company - and wrote off $200m barely a year later. It has since
nursed Sidanco back to health, restructuring its debts and regaining
control of crucial assets after years of legal argument.

Last week a team of directors from the the French-Belgian giant
TotalFinaElf was in town signing a deal with Yukos, Russia's second
biggest oil producer, to explore a portion of the Russian Black Sea
shelf. Yukos has called it one of "a number of possible joint projects"
under discussion with TotalFinaElf.

Yukos has denied market rumours that it stands poised to sell
TotalFinaElf a strategic stake in its share capital. TotalFinaElf has
also denied plans for any such deal, at least in the foreseeable future.
But investment analysts agree that the prospect of a foreign oil company
bidding for a big stake in a Russian oil major, or even outright
ownership, is no longer so far-fetched.

The foreigners may have little choice. The top Russian oil companies
have cornered the best reserves. They can choose to embark on joint
ventures with partners that bring something new in technology or
connections. But the real next step is to sell themselves - once the
price is right.

On average, Russian oil companies are being valued in the stock market
at four times last year's earnings. The international majors are being
valued at 12 times earnings. That is the gap the Russians want to close
and they will succeed only by making themselves attractive to foreign
buyers.

They are getting there. Most people in the industry would agree with
Lord Browne's implied judgment that Russian companies are better managed
and better behaved than they were in 1997.

The real surprise is the manner in which that improvement has been
achieved. It is the tycoons, who seemed at first to be the riskiest
prospects, who have emerged at the top of the pile.

The new stars are the one-time "brats" of the business - the oil
companies snapped up by the new-rich tycoons who helped Boris Yeltsin to
be re-elected president in 1996. In exchange, the tycoons were allowed
to cherry-pick cheaply the assets of the state.

Yukos was among the companies privatised in this way. So too was
Sidanco, the company in which BP invested.

The tycoons made a bad start - quarrelling with one another, ducking tax
bills, squeezing out minority shareholders and squirrelling away cash in
offshore companies.

Between 1998 and 2000, however, the owners pulled themselves together,
chastened by the double shock of a financial crash and a change of
president. They had been clever enough to grab the companies and they
proved in the end that they were clever enough to run them.

Yukos, with Sibneft - another creature of the 1996 privatisations - now
post some of the highest growth rates and lowest production costs in the
industry. In most respects Yukos has overtaken Lukoil, the largest and
oldest of Russia's integrated oil companies, as industry leader.

"Lukoil is now prepared to accept that it is no longer Russia's number
one oil company and that it needs to do something about it," James
Henderson, oil and gas analyst with Renaissance Capital, a Moscow-based
investment bank, told clients after visiting the company recently.

Lukoil plans, among other things, to reduce operating costs by 15 per
cent a barrel this year and it has invited Mark Mobius, a prominent US
fund manager, to join its board, as a sign of its commitment to better
corporate governance.

A thriving and competitive private oil industry is something to which
the Russian government is still adjusting. Though not a member of Opec,
it agreed reluctantly last month to enforce export cuts of 150,000
barrels a day for the first quarter of this year. The promise was easily
given, since Russian exports usually fall in the first quarter for
climatic reasons.

It is far from clear that Russia will renew that promise when spring
approaches. A mild winter means the country is awash with oil already.
And Russia has much less to fear than Opec does from a sharp fall in
world oil prices.

The Russian government would suffer a loss of tax revenues. A very low
oil price might cause it problems servicing foreign debt - but it has
mended its relations with the west to the point at which it could count
on a sympathetic hearing, should things reach that pass.

As for the Russian oil industry, the weaker companies would squeal in
pain. But they would be cannibalised readily enough by the stronger
ones. And for the boldest of foreigners, it might even count as a buying
opportunity

Full article at:
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3W6KOW4XC

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney at mbs.fi