Sunday, April 30, 2006

Rosneft cuts back size of London float to 10 billion USD

THE Russian oil giant Rosneft is poised to halve the size of its controversial London float this summer, raising about $10 billion (£5.5 billion) rather than the £11 billion forecast.

Sources in Moscow said the company planned to have the deal completed by the end of July, with a prospectus likely to be published in June.

The float will lead to the state-owned company’s shares being listed in Moscow and London. It was expected to be the world’s biggest ever float, trumping the £9.9 billion raised by the Japanese company DoCoMo in 1998.

But it is understood the Russian government plans to sell only enough shares to repay a £4 billion loan taken out last year to buy a controlling stake in Gazprom.

Rosneft’s own fundraising requirements have also been eased by a recent refinancing that has cut interest bills by a third.

Rosneft flotation would spur Putin on - Soros

[Deleted previous related article]

Financial Times

The planned initial public offering of Rosneft, the Russian state-owned oil company, on the London Stock Exchange raises serious ethical and energy security issues.

The ethical issues are relatively straightforward. The main asset of Rosneft is the Yugansk oilfield that was acquired from Yukos when that company was assessed for back taxes and its assets were auctioned off. But it was not acquired directly. The auction was won by an unknown Russian company that sold itself within days to Rosneft.

The transaction was widely believed to have been engineered by President Vladimir Putin's powerful aide, Rosneft chairman Igor Sechin, and it was financed by compliant Russian banks. The unknown owners made an unknown amount of money on the transaction. Part of the IPO proceeds would go to repay the Russian banks.

The question is, should an IPO be allowed to go forward without disclosing the pertinent information; indeed, should it be allowed to go forward at all? To argue that it will improve transparency ignores the fact that Rosneft is an instrument of state that will always serve the political objectives of Russia in preference to the interests of the shareholders. Is Rosneft willing to put this into the prospectus?

The energy security issue is more complicated and requires some explanation. When the Soviet system disintegrated, the energy sector was privatised in a chaotic fashion. Devious transactions were perpetrated, such as the loan for shares scheme, and enormous fortunes were made. When Mr Putin became president, he used the power of the state to regain control of the energy industry. He put the president of Yukos, Mikhail Khodorkovsky, in jail and bankrupted the company.

Mr Putin put his own man, Alexei Miller, in charge of Gazprom and pushed out the previous management that had built a private fiefdom out of Gazprom's properties. The president did not dissolve the fiefdom, however, but used it to assert control over the production and transportation of gas in the neighbouring countries.

This led to the formation of a network of untransparent companies that served the dual purpose of extending Russian influence and creating private wealth. Billions of dollars were siphoned off over the years. The most valuable asset was the gas of Turkmenistan, part of which was resold by a company registered in Hungary at a multiple of the price at which it was bought. While the ownership of Eural Trans Gas was never disclosed, the decisions to give it contracts were made jointly by Mr Putin and the then president of Ukraine, Leonid Kuchma. I believe that was one reason why Mr Putin exposed himself so publicly in backing Mr Kuchma's nominee, Viktor Yanukovich, for president of Ukraine in 2004. After the Orange Revolution, the contract with Turkmenistan passed into the hands of RosUkrEnergo, a company with obscure ownership set up by Raiffeisenbank of Austria.

At the start of 2006, Russia cut off the gas supply to Ukraine. Ukraine, in turn, tapped into the gas that was passing through Ukraine on its way to the rest of Europe. This caused an uproar in Europe and forced Russia to restore supplies to Ukraine; but in the subsequent settlement Russia gained the upper hand. It promised gas supplies at reduced prices through RosUkrEnergo for six months, but Ukraine committed itself to fixing the transit fees for five years. After six months, Russia will be able to exert political pressure on Ukraine by threatening to raise gas prices. Russia already exercises considerable influence over Belarus.

The result is that Europe is relying for a large portion of energy supplies on a country that does not hesitate to use its monopoly power in devious and arbitrary ways. Until now, European countries have been competing with each other to obtain supplies from Russia. This has put them at Russia's mercy. Energy dependence is having a major influence on the attitude and policies of the European Union towards Russia and its neighbours.

It will serve the national interests of the member states to develop a European energy policy. Acting together, they can improve the balance of power. In the short run, Russia is in the driver's seat: an interruption of gas supplies disrupts European economies immediately while an interruption of gas revenues would affect Russia only with a delay. In the long run, the situation is reversed. Russia needs a market for its gas and few alternatives exist as long as Europe sticks together.

Europe could tell Russia that if it wants to maintain and increase its market in Europe, it must agree to a change in conditions by ratifying the European Energy Charter and the Extractive Industries Transparency Initiative. This would turn the pipelines into highways, break up the Russian gas monopoly and inhibit the currently prevailing devious arrangements.

Energy security is on the agenda of the forthcoming Group of Eight meeting in St Petersburg. If the Rosneft IPO went forward, it would consolidate and legitimise a state of affairs that is detrimental to Europe's energy security and weaken the EU's hand in negotiating better conditions with Russia.

Ukraine gas deal not yet signed

The Independent

The deal between Russian gas giant Gazprom and a Ukrainian trading firm that ended the European gas crisis in January has still not been formally agreed.

Energy analysts said that the agreement could unravel as it was not legally binding. This could again provoke Gazprom into turning off gas supplies to Europe, most of which go through Ukraine.

A Ukrainian diplomat in London confirmed that the Ukrainian parliament had still not ratified January's agreement between Rosukrenergo and Gazprom. Elections in the former Soviet bloc state last month took place before ratification.

The government has since been in a state of paralysis as President Viktor Yushchenko and former prime minister Julia Tymoshenko try to form a coalition government. Analysts said while the agreement remained unratified, both sides could try to renegotiate the terms.

Under the agreement, Gazprom has been selling gas to Rosukrenergo for the $230 per thousand cubic metres it had originally demanded in January. Ukraine had been paying around $60 per thousand cubic metres last year, which Gazprom said was below the market rate. Rosukrenergo will mix this gas with cheaper gas from Central Asia, selling all the gas on to Ukraine for $95 per thousand cubic metres. These prices need to be renegotiated in July.

Stephen O'Sullivan, co-head of research at United Financial Group in Moscow, said: "There is still the prospect of continued uncertainty over gas supplies from Russia because the agreement made between Rosukrenergo and Gazprom has still not been ratified by the Ukranian parliament."

More details of the ownership structure of Rosukrenergo em-erged last week. Half the company is owned by Gazprom itself, but a newspaper owned by the gas giant revealed that most of other half belongs to a Ukrainian businessmen, Dmytro Firtash.

Saturday, April 29, 2006

US seeks to limit Gazprom hold on Europe - FT

The Financial Times

The Bush administration is seeking to curb Moscow’s influence in the Caucasus and central Asia and weaken Gazprom’s growing hold over gas supplies to Europe with an effort to promote new oil and gas corridors that would bypass Russia and exclude Iran.

US intentions were highlighted on Friday when President George W. Bush welcomed President Ilham Aliyev of Azerbaijan to the White House, stressing the importance of their security and energy relationship.

Next week’s visit to Kazakhstan by Dick Cheney, the vice president, is further evidence that the US wants to shore up ties with key partners in central Asia, having lost access to a major military base in Uzbekistan last year. The vice president will use the visit to press for closer energy ties between Kazakhstan and Europe.

But analysts are concerned that an overall hardening of US policy towards Moscow could drive Russia and Iran, which together hold nearly half the world’s gas reserves, into an energy-based alliance.

A senior financier told the Financial Times that Iran, which is competing with Gazprom to provide gas to the Caucasus, was considering a switch in policy by selling its gas to Russia through central Asia because the US was blocking its access to Europe and India.

Lack of investment by Gazprom, which supplies Europe with about a quarter of its gas, means that Russia will be increasingly reliant on buying gas from central Asia or Iran to help meet its subsidised domestic needs and export commitments. Cliff Kupchan, analyst with the Eurasia Group consultancy, said he had a different understanding: that Russia and Iran would co-ordinate their gas export policies, with Moscow selling to the west and Iran to the east.

The stage is set for a bidding war between Russia, China and western energy companies over central Asian oil and gas.

Deals are proceeding at a bewildering speed. Turkmenistan signed a framework deal in Beijing this month to sell gas to China, while Nursultan Nazarbayev, Kazakhstan president, visited Moscow for an agreement to double the capacity of a major oil pipeline for exports to Russia.

But the US wants Kazakhstan to look in a different direction, with officials outlining their desire to see a gas pipeline from Kazakhstan’s Kashagan field across the Caspian, linking with Azerbaijan’s Shah Deniz field and then heading west to Europe via Georgia rather than north through Russia.

“The market is not working,” said Matt Bryza, US deputy assistant secretary of state, noting that Gazprom buys central Asia gas for $55 per thousand cu m then sells it for double that in the Caucasus and for $265 to Turkey.

However, US officials dismissed suggestions that they were trying to “clip the wings” of Gazprom.

The US has to tread carefully as its oil majors are competing for participation in Gazprom’s Shtokman project under the Barents sea. The US has already started buying LNG provided by Gazprom.

Russian IPO: A second wave of Russian companies will come to the market in 2006

Moscow rules

The Economist

AT $4.6 billion, the money raised by nine Russian companies through initial public offerings (IPOs) in London last year was little more than an eye-catching trickle. In 2006 there may be a flood. Provided there are no hiccups in investor sentiment, the value of shares that 20 or more Russian firms are expected to sell to international investors over the coming months is set to multiply at least fourfold, to $18 billion-25 billion. First in the queue is Comstar UTS, a telecoms operator, which this week announced plans to sell equity worth a total of $950m-1.2 billion in Moscow and London.

Comstar's final prospectus has not yet been published. However, in many circulars for previous Russian IPOs the “risk factors” run to a few dozen pages. Prospectuses warn of Russia's limited protection for minority shareholders, widespread corruption, incoherent tax code and inconsistent enforcement of the law by courts and regulators. Share dealing by insiders is not a crime, though it can attract modest “administrative” penalties if uncovered. Disclosure standards vary greatly. With such hazards, why are investors so keen?

Rapid economic growth and a vast potential consumer market, replies Gergely Voros, a managing director at Morgan Stanley. As Russia's GDP has grown rapidly in recent years—at an average annual rate of 7% since 1999—so some semblance of prosperity is spreading among a nascent middle class. There are more new Japanese cars than ever in Moscow and people talk about their mortgages in bars—unheard of five years ago.

The apparent enthusiasm of western investment funds for Russian stock is a cause of cheer to the companies' bosses (who are generally owner-managers). Last year they scooped more than $2 billion from placing their own shares. Besides cash, they may hope to gain insurance against the government's predatory behaviour. Companies out of favour can face fantastic tax demands or charges to prevent the withdrawal of necessary licences.

Managers believe that having foreign institutions on their register may discourage the state from taking unfriendly steps. One local economist questions this logic, describing minority shareholders as little more than “hostages” to managers' political conformity. The dismemberment of Yukos, an oil and gas giant once controlled by Mikhail Khodorkovsky, an uppity tycoon now in prison, seems to prove his point. Yukos, after all, had foreign institutions among its shareholders.

Even without state predation, investment in an emerging market like Russia is prone to volatility. For example, Pyaterochka, a supermarket chain in Moscow and St Petersburg, recently had a reversal of fortune. Last May its owners sold global depository receipts (GDRs)—foreign-listed instruments representing shares—worth $639m in its London IPO. The GDRs soared at first, to more than 80% above their offer price—only to plunge by 35% on December 9th. According to UFG, an investment bank, that was the biggest one-day drop for a Russian GDR.

What happened? In September Pyaterochka had indicated that its sales in 2005 would come to $1.6 billion. The company later marked its estimate down by 15%. Its managers' explanations did not avert a stampede. “This was a salutary lesson for us,” says David Noble, Pyaterochka's British chairman, who adds that even after the 35% drop the shares were still above their issue price.

To bolster confidence, some IPO underwriters have encouraged Russian issuers to appoint additional directors, preferably with experience at quoted companies. At more than one company, the absence of a common language means interpreters must provide simultaneous translation at board meetings. How such proceedings capture subtle cultural nuances is unclear.

The big test of demand for Russian assets is expected this summer. Rosneft, a state-owned oil giant chaired by Igor Sechin, one of President Vladimir Putin's closest aides, is planning to sell shares worth an estimated $9 billion-13 billion. This might surpass the $9.2 billion raised by China Construction Bank last October to become the biggest flotation yet by an emerging-market company.

A successful international offering could help deflect concerns about Rosneft's questionable acquisition at the end of 2004 of what used to be Yukos's main production asset and may also make its managers rich. If the IPO goes well, it could also signal the market's confidence in Mr Putin's ability to control the succession at the end of his term in 2008.

Cross-border investment promoting openness and accountability is wonderful, to be sure. But for the time being, investors averse to betting on politics and uncomfortable without western governance standards should probably stand back.

US trade rep spares Russia worst piracy label

WASHINGTON (Reuters) - The U.S. Trade Representative's office on Friday rejected an industry request to slap its harshest piracy label on Russia, but warned Moscow could lose trade benefits unless it closes pirated music web sites and takes other steps to curb copyright theft.

In a beefed-up annual report on global piracy, USTR also warned it could bring a World Trade Organization case against China for failing to enforce anti-piracy laws and announced it would conduct a provincial-level review of piracy problems in China this year for the first time.

U.S. movie, music and other copyright industry groups that comprise the International Intellectual Property Alliance urged the USTR's office earlier this year to label Russia as a "priority foreign country," a designation reserved for countries with the most severe piracy problems.

The industry groups also asked USTR to immediately suspend trade benefits for Russia under the Generalized System of Preferences, which allows developing countries to ship many of their goods to the United States without paying duties.

USTR instead kept Russia and China on its "priority watch list," its second most serious designation, and said it would continue reviewing whether to suspend GSP benefits for Moscow. The IIPA estimates U.S. companies suffered more than $4 billion in lost sales due to piracy in the two countries last year.

While sparing both Russia and China from its worst piracy label, USTR directed a large portion of the report at both countries and said it would be closely monitoring their anti-piracy actions throughout the coming year.

USTR for the first time also published a list of "notorious" pirate marketplaces, including the Russian web site, which it called the world's largest server-based pirate web site and urged Moscow to shut down.

Also listed were the Silk Street Market in Beijing and other markets in China, Russia, Mexico and South America where pirated and counterfeit goods are easily available.

The IIPA estimates global piracy losses for U.S. companies at $30 billion to $35 billion in 2005. Other estimates put total annual losses from world sales of pirated and counterfeit goods between $200 billion and $250 billion.

Eric Smith, president of the IIPA, welcomed USTR's plan to conduct an intensive review of anti-piracy enforcement activities at the provincial level in China.

But he criticized the government's decision not to name Russia as a priority foreign country and renewed the industry's call for an immediate suspension of Russia's trade benefits.

U.S. copyright groups also oppose Russia's entry into the World Trade Organization until Moscow does a much better job of stopping piracy, a view shared by many members of Congress who regret Washington did not push China harder on that point before Beijing joined the WTO in 2001.

"We see the potential of an ugly replay with Russia," said Rep. Adam Schiff, a California Democrat who is co-author of a congressional resolution opposing Russia's entry into the WTO as long as piracy problems remain unchecked.

The United States has been in intense talks with Russia on terms of its entry into the WTO and some industry officials believe the two sides are close to a deal.

Customer relations, Gazprom-style - The Economist

What's ours is ours, and what's yours is ours

The Economist

THREATENING customers who speak out of turn smacks more of a protection racket than civilised commerce. Yet Gazprom, Russia's state-controlled gas giant, seemed to do just that last week. Alexei Miller, Gazprom's chief executive, apparently linked a putative thwarting of his company's European expansion with a hint that exports could be redirected, say, to China. Misunderstanding? Hardly: this bullying tone seems to be official policy. Indeed, Vladimir Putin, Russia's president, repeated the threat on April 26th, when he spoke of “unfair competition in world markets”.

At the Russian economic forum in London this week, Alexander Medvedev, one of Mr Miller's deputies, snubbed Alan Johnson, Britain's trade and industry minister. Mr Johnson had suggested that Russia should ratify the Energy Charter Treaty (meant to ensure open and competitive energy markets). Peeved by European talk of alternative energy sources, Mr Medvedev declared the treaty “still-born”. Not many Russian bigwigs appeared in London: Igor Shuvalov, a presidential aide who did, said his colleagues think such pow-wows should be held in Russia (rumour had it they also feared meeting Mikhail Kasyanov, a presidential aspirant who wasn't there either). While denying that Gazprom had made threats, Mr Shuvalov affirmed the principle of “reciprocity”.

What “reciprocity” means is that Gazprom wants to buy more “downstream” assets in European countries—pipelines, distribution firms and so on—such as Britain's Centrica. The Financial Times reported recently that British officials had considered changing the law to block any Gazprom takeover of Centrica. The FT later backtracked on its story, but the Russians were already cross. Mr Medvedev admitted in London that Centrica was one among many “potential acquisition targets” (though he stressed no move was imminent). Meanwhile, Condoleezza Rice, America's secretary of state, issued another warning this week against over-reliance on Russian energy. And Transneft, Russia's oil-pipeline monopoly, predicted the construction of its new Asian pipelines would squeeze westward oil supplies.

Gazprom's position is not entirely consistent, to put it mildly. The Russians sometimes argue that, because foreigners can now buy Gazprom shares, their gas market has been liberalised. But whereas Gazprom demands unfettered access to European assets, access for foreign companies to hydrocarbon deposits in Russia is being circumscribed by a new law. And Gazprom has a monopoly on all Russian gas exports.

Gazprom needs European revenues too badly to think about switching off Europe's gas. Yet the Europeans know Gazprom's decisions can be governed by non-commercial motives—only some of them political. Another rumour this week was that RosUkrEnergo, a shady gas-trading intermediary part-owned by Gazprom, is being investigated by America's Justice Department (a Russian newspaper named two Ukrainian businessmen allegedly involved in it). Still, Gazprom and the Kremlin remain convinced they hold all the best cards.

AvtoVaz looses 2 billion rbs of profit in one quarter


The country’s high officials have explained the change of management at the AvtoVaz car-making company (which has produced 720 thousand cars last year), saying that it was made necessary after the company was suffering a ‘crisis’. The profit of company (RSBU) fell four times last year, which has also impacted the dividends.

Bill Browder, the barred investor in Russia who is a breed apart - FT

Financial Times

Everyone who invested in Russia during the past five years has made money, thanks to natural resources and the emerging markets boom that lifted Russian equities 83 per cent in 2005. But friends and competitors alike acknowledge that Bill Browder is a breed apart.

The chief executive officer of Hermitage Capital Management, the $4.1bn hedge fund that is the largest foreign investor in Russia, has attracted his fair share of publicity thanks to aggressive efforts to improve corporate governance at Russian companies. Since news broke last month that Mr Browder had been barred since November from entering Russia over national security concerns, he has become the news story at the centre of the debate about the Russian markets and corporate governance.

His PR coup, arguably, is prompting London Stock Exchange chief executive Clara Furse to write to Vladimir Putin, the Russian president, warning that the banning could do "significant damage to Russia's reputation". She led a series of political and business figures to lobby on his behalf.

The backing is the result of Mr Browder's relentless self-promotion and his extensive contacts. He lists among the backers of his funds a slew of high-profile US and UK investors, including HSBC, Goldman Sachs, UBS, Citigroup, Credit Suisse, JP Morgan and Rothschild.

In Moscow, Mr Browder is widely seen as having done more than almost any other market player to promote the development of the Russian market. After going to Russia in the early 1990s for Salomon Brothers, he decided Russian assets were undervalued. With $25m raised from private foreign investors, he launched his fund, Hermitage Capital, in April 1996.

He was one of the few investors to keep faith after Russia's financial crisis in 1998. His fund has owned Gazprom stock since 1996 but made a large investment in it in 1999 when Mr Browder says the Russian gas company - which is now among the world's top half-dozen companies by market capitalisation - was "ridiculously cheap".

Mr Browder has also been one of the biggest foreign supporters of the economic policies of President Vladimir Putin.

But his campaigns on corporate governance made him some powerful enemies.

Most recently, Hermitage has been involved in a lawsuit against Surgutneftegaz, an oil company close to the Kremlin, over alleged misuse of treasury shares by the management.

Many in Moscow suspect his exclusion from Russia could have something to do with this latest case. Surgutneftegaz has declined to comment. The Kremlin and Russia's foreign ministry have also declined any comment on the case. Mr Browder says he does not know why he has been barred.

Two US professors have studied Mr Browder's efforts at shareholder activism in Russia and have concluded there is a definite "Browder premium" in companies he owns.

"When Browder owns a stock and something bad happens to that company, there will be more coverage in the Anglo-American press and thus a greater likelihood that the problem will be rectified," said Luigi Zingales, a University of Chicago finance professor.

Peter Lusk, chairman of Carpe Diem Capital and former chief operating officer of Forstmann Leff who advised Mr Browder in the 1990s, said the visa denial was in keeping with the Russian way of doing things: "In the States, they don't take your passport away they just don't take another meeting with you."

US mulls nuclear cooperation agreement with Russia - Reuters

WASHINGTON, April 27 (Reuters) - The United States is discussing the possibility of a civilian nuclear energy agreement with Russia that could help wean Moscow away from cooperation with Iran, according to U.S. officials.

The move comes as Western powers are increasingly alarmed about what they say is Iran's determination to produce nuclear weapons.

Diplomatic efforts to persuade Tehran to reverse course so far have been frustrated, in part because of U.S. and allied differences with Russia, the only major power still engaging in lucrative nuclear cooperation with the Islamic republic.

In recent interviews, several U.S. officials said a possible nuclear energy accord with Moscow is under review. They spoke anonymously because the issue is sensitive and no final decision has been made.

Such an agreement would be a significant change in U.S. policy, which now prohibits most nuclear cooperation with Russia because of Moscow's pivotal role in building Iran's $800 million nuclear power plant at Bushehr.

A cooperation agreement is "something that we're actively evaluating" and have discussed with the Russians over the past two months, one official told Reuters.

"It would provide a foundation for greater (U.S.-Russia) cooperation but doesn't commit the sides to any particular project and could be a way of demonstrating to the Russians how much larger our market is than what exists in Iran," he added.

Russia has long defended its nuclear cooperation and conventional arms sales to Iran as a critical revenue source.


U.S. officials have intensified efforts to get Moscow to end both pursuits to penalize Iran for defying the security council, which has demanded Tehran halt uranium enrichment activities.

Mohamed ElBaradei, chief of the U.N. International Atomic Energy Agency, is widely expected to report to the security council on Friday that Tehran has not met the U.N. demands. Iran insists it only wants to produce energy, not weapons.

While Russia remains committed to Bushehr, U.S. officials say work has slowed and Moscow still has not delivered critical nuclear fuel for the reactor.

Robert Einhorn, a former top U.S. nonproliferation official, said a nuclear agreement with Russia is a sound idea "but whether by itself it will constitute a sufficient carrot for Russia to take a tougher position on Iran remains to be seen."

The United States has as much to gain from an agreement as Russia, and Moscow is unlikely to make major concessions just to get it, "but it does provide an incentive for Russia to want to benefit from cooperation with the U.S.," said Einhorn, of the Center for Strategic and International Studies.

A recent bi-partisan study by the Council on Foreign Relations concluded that Russia is "the only power that can effectively threaten Iran with nuclear isolation if it continues to build sensitive nuclear fuel-cycle facilities."

It urged Washington to negotiate a nuclear energy agreement, saying while "it should not be necessary to buy Russia's support, successful cooperation does have to rest on mutual confidence" and this can be strengthened by a stronger legal framework for cooperation on nuclear issues.

The nuclear deal will allow expanded cooperation, including the administration's Global Nuclear Energy Partnership Initiative, and "will reflect Russia's status as a major factor in nuclear commerce, from fuel supply and storage to reactor sales and advanced research," the study said.

Since the end of the Cold War, the United States and Russia have worked to reduce nuclear weapons risks, including a highly successful program under which Russia is blending down 500 tons of weapons-grade material so it can be used to generate electricity rather than for weapons.

The United States, backed by Britain and France, favors limited sanctions if Iran refuses to halt enrichment very soon. Russia and China, the Security Council's other two veto-holding permanent members, have so far opposed this.

Venezuela buys Russian oil to avoid defaulting on deals

Financial Times

Venezuela, the world's fifth-largest oil exporter, has struck a $2bn deal to buy about 100,000 barrels a day of crude oil from Russia until the end of the year.

Venezuela has been forced to turn to an outside source to avoid defaulting on contracts with "clients" and "third parties" as it faces a shortfall in production, according to a person familiar with the deal. Venezuela could incur penalties if it fails to meet its supply contracts.

Documentation obtained by the Financial Times shows that the state-owned Petróleos de Venezuela (PDVSA) made a financing arrangement this month with investment bank ABN Amro to facilitate the purchases of oil from Russia via Rotterdam.

PDVSA is believed to have dropped the Dutch bank after the Russian government agreed to provide Venezuela with an "open account" facility to buy the oil.

The Ruhr Oel refinery in Germany, in which PDVSA has a50 per cent stake, may be among the clients that are being supplied with the Russian oil.

PDVSA would not confirm yesterday that it was buying oil from Russia but said a statement would be issued today. The company said it would be "logical" that the Ruhr refinery was sourcing some of its oil from Russia because it would be cheaper than transporting it from Venezuela.

One US trader who deals in Venezuelan oil agreed, saying: "We have been expecting PDVSA to start buying [oil from the] Urals for the Veba system for some time. It is possible that they are trying to buy directly from Russian producers."

The move suggests a growing gap between Venezuela's declining domestic output and its expanding contractual obligations to international customers.

Luis Pacheco, a former planning director of PDVSA, said: "Why would Venezuela be buying crude oil from Russia? I would imagine it would be to meet obligations for light oil deliveries, but they are relatively small. Most of PDVSA's obligations are for heavy oil."

Under President Hugo Chávez, PDVSA's oil output has declined by about 60 per cent, a trend analysts say has accelerated in the past year because of poor technical management.

Mr Chávez's push to extend his influence throughout Latin America and the Caribbean with promises of cheap oil for friends and allies may be overstretching PDVSA's finances, however.

Venezuela currently supplies about 300,000 barrels per day of oil and products to Cuba, Nicaragua and others under favourable long-term financing arrangements.

This week, Venezuela signed a deal to send oil to town mayors in Nicaragua aligned with the leftwing Sandinista party.

Friday, April 28, 2006

F&C Asset Management threatens to boycott Rosneft listing

LONDON (AFX) - F&C Asset Management has taken the unusual step of threatening publicly to boycott the planned London listing of Rosneft, the Russian state-owned oil giant, which is expected to raise at least 15 bln usd, the Financial Times reported.

The newspaper cited Karina Litvack, head of corporate governance and socially responsible investment at F&C, as saying the initial public offering raised serious questions of governance and legal risk.

'Investors should tread carefully when considering investing in Rosneft. The Russian legal regime is opaque and difficult to navigate,' she is quoted as saying.

'We don't pretend to understand it and if we cannot understand something, we won't invest in it.'

Litvack said F&C wants 'credible assurances' that Rosneft has identified, and made adequate provisions for, any liabilities stemming from the acquisition of its Yuganskneftegaz assets.

Guardian: 'Russia has left the western orbit'

Missile deals with the 'axis of evil' are just the latest sign that Moscow is sick of kowtowing to the US and Europe, writes Tom Parfitt.

Moscow could be on the verge of clinching an arms deal with Syria or Iran that would send the US and Israel into pop-eyed rage.

A few days ago a Russian arms manufacturer let slip at an arms fair in Kuala Lumpur that his state-run weapons design bureau was close to sealing a foreign sale of Iskander-E missiles. The destination of the hardware was secret, he said, but the most obvious market is clear: the Middle East.

Last year, Israel was furious when it emerged that Moscow was planning to sell the Iskander to Damascus. The Iskander is like the Scuds that Iraq used during the Gulf war but many times more accurate and better equipped to avoid defensive weapons such as the Patriot missile. Syria - part of George Bush's "axis of evil" - would love to be able to trundle some of these short-range ballistic missiles (range: 180 miles) down to its southern border to point at Israel in the event of a conflict.

No doubt the Iranian regime of Mahmoud Ahmadinejad is also itching to get its hands on some of these weapons - whose sale is not restricted by any treaty. Earlier this month Iran tested an underwater missile that looked suspiciously like a Russian Shkval.

President Vladimir Putin, under pressure from the Israeli prime minister, Ariel Sharon, was forced to step in and reverse the Syrian missile deal. These days, one might surmise, he would not give a fig.

Everything about Russia's stance in the international arena suggests a new confidence that radiates "don't bully me". I is still possible the Iskanders will go to a less threatening client than the Middle Eastern bad boys - China, say, or India or Algeria. But the point is, they will go to whomever Moscow wants.

Russia has shown in recent months that western condemnation will not shake its resolve to play on the world stage as it likes.

Welcoming a Hamas delegation to Moscow last month - described by a minister in Jerusalem as "stabbing Israel in the back" - was one example. A second was the decision a few weeks later to give financial aid to the Palestinian Authority, against the wishes of the US and the EU.

In another robust move, the Russians have refused to back down on a recent $700m (£380m) deal to sell 29 Tor M1 mobile surface-to-air missile defence systems to Iran despite pressure from Washington.

"We hope and we trust that that deal will not go forward because this is not the time for business as usual with the Iranian government," grumbled the US undersecretary of state Nicholas Burns last week, as the UN geared up for its crucial report tomorrow on Iran's nuclear enrichment programme. But the complaint fell on deaf ears at the Kremlin.

While Russia's arms industry is growing fast, its new brassiness relies mostly on the billions of dollars it is raking in from hydrocarbon exports, on the back of high oil prices.

As an emerging energy superpower, Moscow is increasingly seeking to play off potential buyers of its oil and gas.

Last week Alexei Miller, the head of the Russian state gas monopoly, Gazprom, warned that attempts to limit his company's expansion in Europe would "not lead to good results". The company caused alarm at the British gas supplier Centrica when it emerged that the Russian firm saw it as a potential takeover target - Gazprom had turned off the taps to its neighbour Ukraine in January, in a politically charged dispute. Miller also said: "It should not be forgotten we are actively seeking new markets, such as North America and China."

President Vladimir Putin weighed in on the theme yesterday. "Despite the great demand for energy resources, any excuses are being used to limit us in the north, in the south, in the west," he said.

"We must look for markets, fit into the processes of global development. I have in mind the countries of the Asia-Pacific region, which are developing at great speed and need to cooperate with us."

Dmitry Trenin, an analyst at the Moscow Carnegie Centre, says Russia - fed up with pandering to the US and Europe - is undergoing a fundamental shift in foreign relations. Now it will focus on ties with countries, such as Brazil, India and China, that it sees as being on a similar path of development to itself.

"Russia has left the western orbit," Mr Trenin said. "It was circling it distantly for about a decade, Pluto-like. But now it's gone."

Thursday, April 27, 2006

Belarus opposition leader jailed for 15 days

MINSK (Reuters) - A court in ex-Soviet Belarus on Thursday sentenced main opposition leader Alexander Milinkevich to 15 days in prison for taking part in a big rally the previous day that police said was unlawful.

Milinkevich has become a focus for opposition to President Alexander Lukashenko, who is accused in the West of crushing dissent in his tightly controlled state.

Looking calm as the judge read out the sentence, the bearded Milinkevich denied he was guilty of any crime.

"This is a political action, a political sentence," Milinkevich told the courtroom. "Leaders of leading political parties are behind bars."

Other leading opposition activists were also given short prison sentences in an apparent crackdown by authorities after about 7,000 demonstrators took part in a rally on Wednesday.

The European Union said it was following the arrests in Belarus closely.

"We condemn any detentions that are for reasons of having taken part in a demonstration or any other political activity," said EU Commission spokeswoman Emma Udwin.

The EU has already imposed visa bans on top Belarus officials following a March 19 election won easily by Lukashenko that Western observers said was blatantly rigged.

"It is important that the Belarussian authorities take note of the fact that further action has not been ruled out ... we are not lowering our guard," said Udwin.

Milinkevich came a distant second in the presidential election. But the EU showed support for Milinkevich by inviting him for high-level talks in Vienna and Strasbourg.

Wednesday's rally was timed to coincide with the 20th anniversary of the Chernobyl nuclear disaster -- traditionally a focal point for anti-Lukashenko protests. Some demonstrators took a route police had warned was off-limits.


The court took about an hour to find Milinkevich guilty of taking part in an unlawful gathering. It heard from two witnesses, both of them police officers.

Later, Milinkevich was escorted from the rear of the court building to a bus, which was expected to take him to prison.

Activists said Vintsuk Vechorko, another veteran opponent of Lukashenko, was picked up on Wednesday night and was given a 15-day sentence for public order offences.

Sergei Kalyakin, a communist and senior figure in the opposition movement, was sentenced to 14 days.

Milinkevich was summoned to the prosecutors' office ahead of Wednesday's protest and told to stay away from October Square -- the site of big demonstrations last month against Lukashenko's landslide victory.

Demonstrators initially tried to gather at the square but later moved on to another site authorised by authorities.

Milinkevich told the gathering the opposition planned to turf Lukashenko out of office within two years by using civil disobedience.

Western countries accuse Lukashenko of crushing fundamental human rights during his 12 years in office.

Another opposition figure said he had been beaten when taken in for questioning on Wednesday at the offices of the national security service -- still known by its Soviet-era KGB acronym.

"My car was stopped, several plainclothes people dragged me out. They beat me in the stomach (and) in the back," Anatoly Lebedko, a Milinkevich ally who heads the small United Civic Party, told a news briefing.

He said he had been released after five hours. A KGB official said Lebedko's account was not credible.

Lebedko told reporters that Lukashenko's opponents will not be bowed by the wave of detentions. "We should fight this system. This regime is afraid," he said.

Morgan Stanley pulls out of Russia meat firm IPO-source

MOSCOW, April 27 (Reuters) - Morgan Stanley has resigned as a lead manager for the initial public offering of one of Russia's leading meat factories after a dispute over the value of its shares, a source familiar with the situation said on Thursday.

On Wednesday, Cherkizovsky announced a price range for its placement on the London Stock Exchange that valued the company at between $1.2 and $1.7 billion.

The price range was set at $14.75 to $20.25 per global depositary receipt, or $2,212 to $3,037.5 per share. One share covers 150 GDRs.

"Morgan Stanley, based on feedback from investors, has recommended a lower price range. Cherkizovsky did not accept that price range," the source told Reuters.

"Morgan Stanley understood that it does not want to participate in a deal which could end badly for Cherkizovsky."

Morgan Stanley said it had no comment.

Russian companies, encouraged by the stock market boom, have rushed to offer their shares to investors.

Seven Russian IPOs raised a total of $5 billion on the LSE in 2005, making Russia the biggest source of international primary offerings in London. Bankers estimate up to 25 flotations this year will raise several times that figure.

But some analysts and bankers have warned that many Russian IPOs are being prepared in haste without firms understanding why they are going public, a trend which could end badly for companies and investors.

The source said that Morgan Stanley, which has carried out a number of Russian IPOs and is now preparing an offering of shares in Russian television channel CTC, was not discouraged by the Cherkizovsky case.

"This is an isolated case. Most companies listen to banks they hire," he said.

No one at Cherkizovsky's London public relations company could immediately be reached for comment.

Other banks involved in the IPO are Troika Dialog, Renaissance Capital and Gazprombank.

FT Comment: Saying no to Rosneft

The planned stock market flotation of Rosneft, the Russian state-owned oil group, presents investors with an unprecedented opportunity to buy into Russia's oil riches. But it is an offer that raises profoundly uncomfortable political, legal and moral questions.

As George Soros, the financier, wrote in yesterday's Financial Times, Rosneft is above all an instrument of the Russian state, which will retain a majority stake and management control. The Kremlin will be happy to see Rosneft make money - but the drive to maximise profits will be tempered by pressure to achieve other policy aims.

The experience of Gazprom might persuade many investors the risks of state control are worth taking - that in Vladimir Putin's authoritarian Russia it is best to have Kremlin protection. Certainly, Gazprom shareholders have had little reason to complain, with the market value soaring from $10bn to $250bn (£139bn) in five years.

However, Kremlin protection comes at a price. State-controlled companies reserve the right to withhold crucial information, such as details of Gazprom's deal with Ukraine. Outside shareholders can expect to have little say in senior appointments, as top jobs go to political favourites such as Igor Sechin, the Rosneft chairman and Mr Putin's deputy chief of staff. Nor will investors have much influence if they find fault with these appointees, especially in questions of incompetence or corruption. The Kremlin alone will decide. Investors who question companies aggressively may be harassed and even barred from Russia, as William Browder, a fund manager and Gazprom shareholder, has discovered to his cost.

In the longer term, investors should not forget that state-owned industry has a baleful record nor that Russia is prone to dramatic political upheavals. The shareholders of the Yukos oil group profited greatly under former president Boris Yeltsin. Under Mr Putin, the company has been bankrupted and Mikhail Khodorkovsky, its founder, jailed for fraud. The state seized Yukos's main asset in lieu of unpaid tax and sold it to Rosneft.

Yukos shareholders have pledged to fight the Kremlin. It will be a hopeless battle, but it could mire Rosneft - and its future shareholders - in years of unsavoury litigation.

Investors must also consider the moral dimension. They will be denounced by Yukos shareholders as receivers of stolen goods. The charge is simplistic. Mr Khodorkovsky made his fortune through one arbitrary state act - an untransparent privatisation - and lost it in another - a Kremlin-orchestrated tax probe.

Both acts were unjust. The state first cheated the Russian people and then robbed Mr Khodorkovsky and his fellow shareholders. Now, in an equally arbitrary way, it is inviting outsiders to share in the spoils. It will indeed be a fabulous feast. But there will be unquiet spirits at the table.

RusUkrEnergo beneficiaries are revealed


The people who share billions of Gazprom’s profit from selling gas from the Asiatic countries have been revealed as Dimitry Firtash (previously linked with Eural Trans Gas) and Ivan Fursin. Although the Gazprom representative said to not know who these beneficiaries were, he is known to be a personal acquaintance of Mr. Firtash.

Ivan Firtash heads the real-estate company High-Rock Properties, which has been linked by foreign press to the Ukrainian gangster Mogilevich, currently wanted by the FBI for many offences including money laundering and racketeering.

Member of the Ukrainian Parlament Alexandr Gudema still maintains his opinion that the two men work for people in the high posts of the Russian government.

LSE head in written warning to Putin

The head of the London Stock Exchange has taken the extraordinary step of writing to Vladimir Putin, Russia's president, on behalf of Russia's largest foreign investor, who has been denied permission to enter the country since November.

In her letter, a copy of which has been obtained by the Financial Times, Clara Furse, LSE chief executive, warns that Moscow's decision to bar William Browder, who runs Hermitage Capital Management, an investment fund, may do "significant damage to Russia's reputation".

The UK financier manages the largest investment fund in Russia and had been a longtime resident of Moscow until he was prevented from passing through immigration at the capital's international airport on Nov 13.

Russia justified the move by asserting its right to refuse a visa to anyone deemed a threat to 'national security, order or public health'.

Furse, however, warned that Browder's exclusion 'could have a negative impact on Russia's image as a country that welcomes foreign investment, and on the ability of Russian companies to raise capital outside Russia'.

She added: 'If the single largest investor in the Russian market can be arbitrarily denied entry into the country, that would send a very negative signal to other parties seeking to invest in Russian companies.'

Browder's fund has a reputation for defending investors against the notoriously corrupt practices of giant Russian energy conglomerates.

But the investor's expulsion from Russia is surprising because of his open support for the Putin administration.

The letter comes just months before Rosnef, Russia's state-owned oil and gas company, floats on the London Stock Exchange in what is expected to be the largest ever initial public offering, the Financial Times said.

Financial Times & Forbes

Wednesday, April 26, 2006

Russia should switch energy focus to Asia-Putin

MOSCOW, April 26 (Reuters) - President Vladimir Putin on Wednesday said Russia, the world's second biggest oil exporter, was struggling with "unfair competition" on energy markets, and should focus on supplying Asia.

"Despite the great demand for energy resources, any excuses are being used to limit us in the north, in the south, in the west. We must look for markets, fit into the processes of global development," he was quoted by Russian news agencies as saying.

"The countries of the Asian-Pacific region are developing at great speed and need to cooperate with us," he added.

Many European countries have grown uneasy about their growing dependence on Russian energy imports, especially after Moscow cut supplies to Ukraine over the New Year in a dispute over price rises seen by many as politically driven.

State-controlled gas giant Gazprom said last week it would sell its gas elsewhere if its European expansion plans were blocked. This prompted anger in Europe until it backtracked and said it had not meant to make threats against its customers.

Putin said the construction of a giant oil pipeline that will carry 1.6 million barrels a day to the Pacific coast was a key project to allow Russia to diversify its supplies.

"One of our biggest projects is the pipeline system to the coast of the Pacific Ocean. We have to stuggle against unfair competition too often," he told a council on developing Siberia in city of Tomsk.

He was due to meet German Chancellor Angela Merkel in the city later on Wednesday when themes of energy security were likely to be high on the agenda.

The goverment will raise its expectation of oil prices to increase state investment - Vedomosti


The Budget Commission’s plan for the next three years, where it has predicted the decreasing export of oil and gas and shrinking tax (all of which come to a spending correction of some 240bln Russian Rubles), has angered the Ministry of Economic Development which has accused them of trying to decrease the state investment. With this in mind, the expected oil price has been corrected from 54USD for 2006 and 49USD for 2007 to roughly 60USD (for both years).

Russia relies too much on oil and gas- Vedomosti

(Vedomosti) Oil and gas contributes two thirds to the total tax payment. Without them, Russia would have a budget deficit of 5.2% (up from 3.5% in 2004, 4.5% in 2002-2003). According to the Deutsche UFG economist Yaroslav Lisovolik, any figure higher that the defacto European standard of 3% deficit is dangerous since it shows that the country is adverse to macroeconomic risks. The Ministry of Finance disagrees with the following valuation.

Gazprom rejects "stillborn" energy charter

By Tom Miles

LONDON, April 25 (Reuters) - Russia's Gazprom (GAZP.MM: Quote, Profile, Research) (OGZPY.PK: Quote, Profile, Research) on Tuesday rebuffed pressure from the European Union to surrender its monopoly on gas exports to Europe, with each side accusing the other of politicising an economic dispute.

The EU wants Russia to ratify the International Energy Charter, which would mean opening up its gas pipelines to competition, but Alexander Medvedev, Gazprom's deputy CEO in charge of exports, called the treaty "a stillborn document".

"It doesn't reflect the true conditions of the current market," he told the Russian Economic Forum in London.

Medvedev said Europe's appetite for gas is set to expand in the next decade, taking Gazprom's share of the market from 26 percent now to around 33 percent by 2010, and companies needed to sign long-term contracts if they wanted to lock in supplies.

"It's not possible to have your cake and eat it. You should decide what your long-term attitude is to gas supply in Europe."

Medvedev's comments carried forward exchanges which began last week when Gazprom CEO Alexei Miller warned the European Union that any attempts to politicise the gas market "would not bring good results".

An EU diplomat told Reuters that the tough talk was designed to bully European firms into long-term contracts that were favourable to Gazprom, but Medvedev said EU rules were being used to discriminate against his firm.

"Administrative actions by the European Union to manage the gas market cannot but arouse concern," Medvedev told a plenary session of the forum, where he was flanked by British Trade and Industry Minister Alan Johnson.

Johnson repeated the EU's call for Russia to ratify the Energy Charter and the Transit Protocol, which would effectively require it to allow third party access to Gazprom's jealously-guarded export pipeline network.

"I cannot think of a better signal that Russia could send than by ratifying these two treaties during its presidency (of the Group of Eight industrialised nations," he told the Forum.

The EU wants Russia to accept the treaty in order to break Gazprom's monopoly and increase efficiency and transparency in the sector, but Medvedev said that was a bad idea.

"There are two concepts available to the world: a weak Russia or a strong Russia. And the same is applicable to Gazprom. A strong Gazprom is good for the world," he said.

"Energy is always political but politicising the economic side of the business is very dangerous."

He said the energy charter had twice been shown to be flawed in recent months. In the first case it had done nothing to help Ukraine, which has ratified it, in price disputes with Gazprom.

In the second, he cited a tender to expand a pipeline between Austria and Italy, when 150 companies applied, most of which had no experience or position in the gas market.


Medvedev also criticised the British press reaction to reports that Gazprom, which supplies a quarter of Europe's gas, may want to buy the UK's largest gas distributor, Centrica.

"Instead of supporting our entry, the British press created a hysteria -- I cannot find a better word," Medvedev said. "They keep writing that 'The Vikings are at our door!' Well, the 'Vikings' have been here for quite some time."

He said that Gazprom was planning to acquire European companies and to create joint ventures, but he dismissed media reports that it was in talks with Centrica (CNA.L: Quote, Profile, Research), a firm Medvedev has previously said Gazprom might be interested in.

"Besides Centrica, we are analysing other targets in the UK and not just in the UK. But yes, I can't hide that Centrica is a potential acquisition target for us. With our current financial strength it's very difficult to find a company that's not on our watch list."

He also said Britain was a "lead destination" for a new gas pipeline which Gazprom is building under the Baltic to Germany in partnership with BASF (BASF.DE: Quote, Profile, Research) and E.ON (EONG.DE: Quote, Profile, Research). Medvedev said another partner could be added by the start of July.

President Vladimir Putin has put energy security at the top of his agenda for the G8 summit in St. Petersburg. The issue has become a hot potato since Russia briefly cut gas supplies to Ukraine in a pricing dispute, disrupting deliveries to Europe.