Russian IPO Is A Hazy Mix of Oil and Politics

On sale now, for a limited time only: shares of a company whose secretive chairman is a former KGB member who steers clear of foreigners; whose crown jewel was, in effect, expropriated from another company; and whose future hinges on the power of Russian politicians scheduled to leave office in two years.

Despite all that, investors are lining up to get in on the deal. And some of the biggest names in international banking -- J.P. Morgan Chase, Morgan Stanley, ABN AMRO Rothschild, Dresdner Kleinwort Wasserstein and Goldman Sachs -- are helping to bring it to market.

The company is OAO Rosneft, a Russian state-owned oil and gas company with assets that have been estimated at more than $60 billion and which is chaired by Igor Sechin, deputy chief of staff to Russian President Vladimir Putin. Yesterday in Moscow, the company's president, Sergei Bogdanchikov, met with investors and released details of a draft prospectus to raise $11.6 billion in an initial public offering on the London Stock Exchange.

The offering would be the fourth-biggest ever, but its significance goes far beyond mere investment decisions. The sale of Rosneft marks another step in the evolution of Russia, which has gone from Communism to a period dominated by freewheeling corporate oligarchs to an era in which Putin has overseen a reconsolidation of state power over the economy, especially the oil sector.

Now Putin and his closest aides are looking abroad to turn Russian companies into major international players. In the process, they will convert assets seized from the oligarchs into cash and get big Western institutions to buy into the Kremlin's renationalization of much of the Russian oil industry; about $8 billion of the proceeds from the offering will pay off loans used to bolster Russian government control over the state gas monopoly OAO Gazprom.

Eager to curry favor with the Kremlin or to get a slice of the potentially lucrative Russian oil industry, many foreign companies are expected to take part even though Russia just declared that foreign investors could own no more than minority stakes in key oil companies. "The level of interest is very large," Bogdanchikov said yesterday, Bloomberg News reported.

"The story is that Sechin is the most trusted man in the presidential administration," said Clifford Gaddy, a senior fellow at the Brookings Institution. "A guy in this position has a potential advantage over his competitors. If you're an investor not trying to control the company but just make profits, this will be very sensible investment."

But it is a controversial investment. Last year, Rosneft tripled its oil output to 1.6 million barrels a day by buying assets once owned by OAO Yukos Oil Co., a private firm that the Kremlin forced into bankruptcy by handing it a gigantic $30 billion bill for alleged tax evasion. The chairman of Yukos, Mikhail Khodorkovsky, who had become a political critic of Putin, ended up in jail. Meanwhile, the bankruptcy court sold off Yukos's prize asset, the Yuganskneftegaz unit, in an auction with only one bidder, which a few days later sold it to Rosneft for $9.3 billion.

"Rosneft is little more than a receiver of stolen property and 70 percent of its value consists of stolen property," said O. Thomas Johnson, a lawyer at Covington & Burling who represents Yukos shareholders suing Rosneft.

Because of questions about how Rosneft acquired its oil fields, the company is not selling or promoting its shares in the United States. And even in Europe, the offering raises questions about whether any Russian oil and gas company can withstand the legal scrutiny that Western stock exchanges and investors ordinarily expect from publicly traded companies. The United Kingdom Listing Authority is still examining the draft prospectus.

Rosneft says in its draft prospectus that it "faces several risks" from four lawsuits brought by Yukos shareholders, but Rosneft president Bogdanchikov said he does not expect any "significant damage" from the cases, Bloomberg reported.

The timing of Rosneft's stock sale seems designed to discourage too much scrutiny. In just three weeks, the leaders of the Group of Eight leading industrial nations will meet in St. Petersburg, and energy is scheduled to be on the top of the agenda. Shares of Rosneft are expected to begin trading on July 14, the day Putin meets President Bush and the day before the G-8 session starts.