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Thursday, July 06, 2006

What's ROSNEFT? A sucker play, like most things Russian

The Washington Post's Steven Pearlstein reports on the Rosneft IPO, barely able to keep a straight face (truly, the days when Russians could dupe the West are long, long gone):

For comic relief, you can't get much better than yesterday's prospectus from Rosneft, Russia's energy giant, seeking $10 billion from Western stock investors gullible enough to believe that Russia can now be trusted as a reliable business partner.

Never mind that the company is a financial house of cards, or that its assets have largely been stolen, or that its chairman's day job is as President Vladimir Putin's deputy chief of staff. In fact, it says right there in black and white that, because of its ultimate control by the government, the company may, from time to time, "engage in business practices that do not maximize shareholder value" and cause it to "take actions that may not coincide with the interests of minority shareholders."

But newly minted investors in Rosneft won't be alone in falling for the Russian con game.

They will join an earlier group of investors who saw as much as $30 billion of their assets expropriated by the Kremlin on a trumped-up tax charge, passed through a couple of shady intermediaries and eventually sold for a song to Rosneft.

They will join many of the world's major oil companies that have already sunk billions into joint ventures, only to be told last month that they'll have to hand control of these projects to their Russian partners and accept minority investor status. The move was justified on the basis of a Russian Academy of Natural Sciences report that found -- get this -- that putting control in local hands was necessary to increase efficiency and avoid costly delays and cost overruns.

The new Rosneft investors will join William Browder, arguably the country's largest Western investor, whose reward for years of evangelizing on Russia as an investment opportunity has been an order barring him from entering the country again -- presumably until he calls off his campaign against insiders who strip their companies of valuable assets or unilaterally dilute the stake of minority shareholders.

They'll have something in common with the major countries of Western Europe, which relied on Russia for much of their natural gas until the Kremlin turned off the spigot during a cold snap last winter as part of a game of geopolitical chicken with one of its former satellites in Eastern Europe, which had the temerity to challenge the Kremlin.

They will have something in common with the free-trade-at-any-cost crowd within the U.S. business community, who continue to push for Russia's entry into the World Trade Organization despite daily evidence that Putin and his cronies don't have any intention of respecting the rule of law.

And they'll be partners-in-gullibility with J.P. Morgan Chase, Morgan Stanley and Goldman Sachs, which, for the usual exorbitant fees, have rented out their good names to the Rosneft stock offering but won't be anywhere to be found when investors are left holding the bag.

Finally, Rosneft investors will be able to feel a certain kinship with President Bush and the other leaders of the Group of 7 industrialized countries who prematurely invited Russia to join their club on the notion that it would hasten the country's embrace of capitalism and democracy. Now that it has had precisely the opposite effect, with Putin's allies agitating to make him president for life and the Kremlin extending its economic reach beyond the energy sector to create "national champions" in any number of new sectors, Western leaders will have to bite their tongues as Putin proudly presides over next month's G-8 summit in St. Petersburg.

While making no apologies for rigging markets or demanding Russian control of Russian firms, Putin makes a stink whenever he spies what he thinks is "anti-Russian bias" preventing Russian firms from freely investing in other countries. His henchmen complained when Britain hinted that it might block the purchase of its gas supplier, Centrica, by Gazprom, the Rosneft of natural gas. And just this week, Russian politicians were in high dudgeon about Arcelor's decision to accept a takeover by India-born steel entrepreneur Lakshmi Mittal rather than hook up with Russia's Severstal -- a deal that would have left Severstal boss Alexei Mordashov, a Putin favorite, as controlling shareholder of the new company.

It should tell you something that both Vice President Cheney, the pit bull of the right, and George Soros, the sugar daddy of the left, have recently suggested that it's time to stop acquiescing to Putin's political and economic power grab. But I most like the advice recently offered by chess champion Garry Kasparov, who argued that the only way to deal with a bully like Putin was to throw him out of the club and stop the flow of investment capital.

"Western leaders can express regret, concern, even 'grave concern' all they like," Kasparov wrote last week in the Financial Times, "but this is not a language the Kremlin understands."
Forcing Rosneft to withdraw its stock offering would be a mighty good place to start.

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