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The Guardian: Putin's grand plan triggers governance backlash

Putin's grand plan triggers governance backlash

Investors harbour anxieties about standards of eastern bloc firms listing in London

Terry Macalister and Jill Treanor
Friday April 28, 2006
The Guardian

Vladimir Putin's ambitions for state-owned energy companies such as Gazprom and Rosneft to become global giants is triggering a backlash in western countries, including high-level complaints about the way foreign investors are being treated in Russia.

Clara Furse, head of the London Stock Exchange, which could host a flotation in July by the Russian oil company Rosneft, has written in support of the institutional investor Hermitage Capital Management, whose boss has been barred from visiting Russia for the last four months.

F&C, a top City investor, cautioned yesterday that the Rosneft flotation raised serious questions of governance and legal risk, reflecting wider concerns in the investment community about governance standards of eastern bloc companies floating in Britain.

The billionaire investor George Soros joined the chorus of disapproval against the actions of both the state-owned Rosneft and Gazprom, which cut off gas to Ukraine in January and now has ambitions to expand in Britain.

Rosneft, which bought the assets of the now-jailed oligarch Mikhail Khodorkovsky, is preparing for a $15bn-$20bn (£11bn) stock market listing in London. But the circumstances in which Rosneft bought its main assets – which were seized from Khodorkovsky's former company, Yukos, in exchange for unpaid taxes – have raised concerns about the float.

Karina Litvack, head of corporate governance and socially responsible investment at the fund management group F&C, warned investors to tread carefully when considering investing in Rosneft.

“The Russian legal regime is opaque and difficult to navigate. We don't pretend to understand it, and if we cannot understand something, we won't invest in it. Unless Rosneft can provide us with credible assurances that it has identified, and made adequate provisions for, any liabilities stemming from the acquisition of its Yuganskneftegaz assets, we won't be interested.”

Mr Soros argued that Rosneft's float would legitimise Russia's moves to renationalise parts of its oil and gas industry and damage Europe's energy security. The float “raises serious ethical and energy security issues”, he said in an article published in the Financial Times. Rosneft is at the head of a queue of other companies considering floating in London such as the food retailer Dixy, the finance house Rosbank and another oil group, Russneft.

They follow last year's floats of the conglomerate telecoms and services group Sistema, the steelmaker Evraz and the gas producer Novatek. The LSE is trying to lure companies from Russia and other fast-developing countries such as China and India at a time when investors fear a possible hit to the City's reputation should they run into trouble.

While investors make it clear they are supportive of expansion, they harbour anxieties about the standard of internal checks and balances with some of the companies listing in London. Only companies incorporated in Britain are obliged to follow the combined code of corporate governance, which sets out requirements on disclosing executive pay and the structure of boardrooms. Some investors are concerned that a two-tier system may develop in Britain.

Peter Butler, head of governance at Owners, a new investment house, said: “I'm not sure how many people understand that … different rules apply to different companies on the exchange. Instead of looking at it as a plc we should call it something different. There's going to be a problem. It's one of tomorrow's problems we are flagging today.”

F&C has written to the Financial Services Authority to call for all London listed companies to follow the code regardless of where they are domiciled.

Ms Litvack said: “We welcome the arrival of new companies on to the LSE, especially from rapidly growing overseas markets. We are in this for the long haul, and want to buy into well-governed, transparent companies. London has a well-deserved reputation as a leading financial centre. This risks being undermined by the current influx of foreign issuers whose standards fall short of investor expectations. Rosneft is welcome, but must sort out its legal problems before going public in London.”

The FSA requires non-UK domiciled companies to set out how they comply with their own domestic regulations and how these differ from British standards. Corporate governance standards vary so much from one country to the next that it is difficult to compare. One investor who asked not to be named said: “My own fear is that there's been a slow cultural consensus that has grown over the last 20 years [with the development of the combined code] that all of a sudden seems likely to change because of a group of companies sweeping in.”

The LSE insists it is selective about the companies it tries to convince to come to the City. Hugh Sandeman, a senior manager at the Exchange, said: “We don't go marketing to people and to places we don't think belong on the exchange.”


Rosneft's emergence from minor oil firm to carbon colossus has triggered surprise but also law suits. The state-owned firm was transformed in 2004 when it acquired Yuganskneftegas – the main production arm of Yukos, then Russia's No1 oil group. Yukos was established by Mikhail Khodorkovsky, who fell foul of the Kremlin over his political ambitions. It was not long before Khodorkovsky was jailed for alleged tax evasion and Yukos faced multibillion-pound tax demands, widely seen as being trum-ped up by Vladimir Putin. The state seized Yuganskneftegas and sold it for $9.4bn (£4.9bn) to a shell company called Baikal Finance. A few weeks later Rosneft bought Baikal. Yuganskneftegas accounts for 70% of Rosneft's assets.
Terry Macalister

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