Financial Times: Nest of deals triggers ownership questions

By Catherine Belton
Published: August 20 2007 03:00 | Last updated: August 20 2007 03:00

The mystery surrounding the buyer of Yukos’s last big asset last week brought the curtain down on the dismantling of what was once the nation’s biggest oil major with a final bizarre flourish.

In a deal inside a deal, reminiscent of Russian matryoshki or “nesting” dolls, US businessman Stephen Lynch has laid claim to ownership of the former Rosneft unit, Promneftstroi, that won the final lot of Yukos assets. They went under the hammer last week for $305m, in a lot that included the oil major’s Dutch subsidiary Yukos Finance BV.

But amid complex legal wrangling in Dutch courts over control of the subsidiary, which holds an estimated $2bn-$2.5bn in Yukos’ foreign assets, people close to former Yukos management say Mr Lynch is nothing more than a “straw man” acting for much bigger interests.

Mr Lynch’s tangled involvement in the final sale exemplifies a bankruptcy process that has been filled with smoke and mirrors. A number of foreign companies including Eni and Enel have participated in the auctions only to cede control to Russia’s state energy giants. Analysts and former Yukos managers say Mr Lynch looks likely to be continuing that practice by acting on the ultimate behalf of Rosneft, a charge that Mr Lynch denies. Rosneft denies any involvement in the sale.

“This set of auctions is a constant test of how far they can push the envelope,” said Robert Amsterdam, an international defence lawyer for Mikhail Khodorkovsky, the former head of Yukos, who is serving a jail sentence for fraud and tax evasion. “Having a US buyer of these assets is one further test . . . If Mr Lynch wants to be part of it he assumes his own risks but the engineer is the same.”

In spite of the participation of global luminaries, such as BP’s Russian unit TNK-BP and Eni and Enel, Rosneft has emerged the victor in a bankruptcy process it dominated from the start.

Rosneft, one of Yukos’s biggest creditors, has snapped up Yukos’s main production units and refineries at knockdown prices and faced little competition along the way as rival bidders bowed out early.

Analysts say the Kremlin has actively encouraged western firms to participate in the sell-off as it seeks legitimacy for the bankruptcy that has transformed Rosneft into the country’s number one oil major.

Yukos’s bankruptcy – prompted by more than $33bn in back-tax claims – marked a turning point toward greater state control of the economy. It has opened the way for state attacks on other private companies, including the claims of environmental damages by Royal Dutch Shell that forced it to cede control in its Sakhalin-2 oil and gas venture to state-run Gazprom.

Tim Osborne, managing director of GML, Yukos’ majority owner, says the involvement of foreign companies in the Yukos bankruptcy has made little difference in the end. “Our position has always been that our assets have been stolen by the Russian government. The fact that it was bankrupted doesn’t make it any more legitimate,” he says. “Yukos was destroyed unnecessarily and to the detriment of its shareholders.”

Mr Osborne said GML was likely to raise between $28.3bn and $50bn – the amount it is currently suing the Russian government for in the Hague under the terms of the international energy charter for expropriation of its company.

“The way the oil prices have gone we estimate the claim will be over $50bn by the time we’ve finished,” he says. Former Yukos vice-president Alexander Temerko echoes that claim. Mr Temerko says that if Yukos’ creditors committee had approved a debt restructuring plan forwarded by Yukos former management, the oil major could have been worth some $80bn by now. In fact its remains were sold off for little more than $30bn. Mr Temerko points out that Yukos debt levels and reserves at the time it was bankrupted were approximately the same as Rosneft’s now, which has racked up some $25bn in debt to fund its participation in the Yukos auctions and is now worth some $80bn. “This shows that politics has dominated this process,” Mr Temerko said. “This had nothing to do with economics or the law.”

However, analysts note that Rosneft has a high market value precisely because of the political benefits it would receive, while Yukos had little chance of surviving against the might of the state. “Yukos’ valuation was restricted because of the threat from the state. Rosneft is in the entirely opposite situation: it is going to get preferential treatment,” says Chris Weafer, chief strategist at Alfa Bank.

Rosneft is also likely to soon receive a substantial reduction of $10bn in the $25bn in debt it took on the purchase of Yukos assets as one of Yukos’s biggest creditors. Now the onus is on Rosneft, analysts said, to prove it can manage efficiently the assets it has won. “They want to draw a line under this phase,” says Mr Weafer. “This is true not just for Rosneft but for the entire country.”

“The last political term has focused on reversing a number of the privatisation of the 1990s,” Mr Weafer goes on. “Now they have to concentrate on developing the economy. We know a lot about what the Kremlin’s plans are, we just don’t have any evidence as yet they will be efficient in doing so.”

Valery Nesterov, oil and gas analyst at Troika Dialog, says political uncertainty still surrounds Rosneft’s future. As presidential elections loom, Rosneft’s current patrons could fall out of favour. Rosneft is chaired by Igor Sechin, currently deputy head of the Kremlin administration.

“Rosneft’s standing still depends on the political forces behind Russia’s energy giants,” Mr Nesterov said. “It’s not clear whether there will be another attempt to merge Rosneft into Gazprom.”

Copyright The Financial Times Limited 2007

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