As war in the Middle East continues to dominate headlines and drive up oil prices, the biggest news in global energy markets this week continues to be OAO Rosneft’s initial public offering. Rosneft is largely a creation of the Kremlin. Until two years ago, the company was an afterthought in the Russian oil market, a state-owned pigmy next to the privately-owned giants Lukoil, Yukos and Sibneft.
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. Khodorkovsky tried to sell his company to American and multinational oil companies and buy influence in the West, portraying himself as a champion of the 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 in London and Washington, D.C. 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. Roman Abramovich, the 37 year-old oligarch who built Sibneft from assets he had also stolen from the USSR, drew the correct lessons and sold his $30 billion company to the Kremlin for less than half its market value. Now Abramovich contents himself with his billions and writing a book about his ownership of the English Premier League Chelsea Soccer Club.
Last winter, Rosneft executives announced that they wanted to raise $8.5 billion, then this figure became $11 billion – this in spite of billionaire George Soros’ widely reported criticism that investors would be buying stolen assets. However, the Kremlin views the acquisition of Yukos and Sibneft as the state taking back assets that were bought in rigged auctions by the oligarchs during the so-called “privatization” of the 1990s.
Today some London-based analysts believe 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 Abramovich sold his company to 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 British 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. 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 cronies with their billions. In Russia, state-owned 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 Wall Street majors J.P. Morgan and Morgan Stanley.
Besides billion dollar offers from BP, Malaysia’s Petronas Bank, and Petrobras (Brazil’s state oil company), China Daily reported this week that the China National Petroleum Corporation is offering Rosneft $500 million. However, this public proposal is just the tip of the iceberg of Chinese investment in Russian oil projects. Last year, when the Kremlin needed $10 billion cash to buy Yukos for a third of its market value in rigged auction, they turned to Beijing. Now the Chinese are being paid back with Siberian crude locked at 2005 prices – a very favorable deal if oil prices continue to climb.
Nonetheless, the Chinese recognize that the brief season of bartering with a Russian pariah that cannot find any other strategic partners is over. The Kremlin wants to legitimatize its seizures by publicly bringing in foreign capital, thus insulating “national champions” Rosneft and Gazprom from future lawsuits in U.S. and European courts over the plundering of Yukos.
Rosneft is in the unprecedented position (for a Russian company) of getting to pick from among its many foreign suitors. CNPC was the first, but probably not the last, major investor to come away disappointed. Even so, Rosneft is pressing ahead on plans to buy gas stations in China and move beyond selling crude to reap profits directly from consumers in the world’s fastest growing automobile market. In the U.S., Lukoil already owns many gas stations in the Northeast, and there has been speculation about Gazprom’s interest in liquefied natural gas terminals (LNG) at ports on the Gulf of Mexico.
Whether George Soros or other prominent critics of the Kremlin like it or not, Russia is the world’s largest producer of oil and gas and will remain so for the foreseeable future. In a perfect world, U.S. investors and leaders could afford to spurn investing in companies based on looted assets – but with Hezbollah’s war machine greased by Iranian oil, we are clearly not living in that world. Very soon, when President Bush is denounced by both conservatives and liberals inside the Beltway for allegedly being too soft on the Kremlin, the increasingly PR-savvy Russians will reply, “Would you Americans rather buy LNG from us, or buy it from Qatar and fund Al-Jazeera?” Would America rather deal with a scowling Mr. Putin, or a smiling Saudi prince?
Charles Ganske is a writer for the Discovery Institute in Seattle and the editor of Russia Blog (www.russiablog.org).