The Daily Reckoning: Polonium 210 in the stock market

…Polonium 210 didn’t get much press before last week, but now it’s everywhere – at the Itsu sushi bar in London…on two British Airways planes…in the Sheraton Park Hotel…offices in Mayfair and Marble Arch…and in the dead body of a former KGB spy. Polonium 210 might poison the Western world’s hottest stock market, too. Investors holding AIM stocks in London take note…

Sitting at No.84 in the Periodic Table, Polonium 210 kept a low profile until it killed ex-Russian agent Alexander Litvinenko last Thursday. Discovered by Marie Curie back in 1897, it can be used to help cut static charge in textile factories and remove dust from photographic film. Also known as “Radium F”, it’s acted as a neutron trigger in nuclear weapons. And now it’s become the poison-of-choice for killing awkward Russian dissidents.

Why should you care? Because a tiny dose of Po-210 killed Mr.Litvinenko…and a tiny dose of Russia’s radioactive politics could make the London Stock Exchange look very sickly indeed.

“Mr Litvinenko travelled to Israel just weeks before he died to hand over evidence to a Russian billionaire of how agents working for President Vladimir Putin dealt with his enemies running the Yukos oil company,” reported the Australian Times this week. “He passed this information to Leonid Nevzlin, the former second-in-command of Yukos, who fled to Tel Aviv in fear for his life after the Kremlin seized and then sold off the $US40 billion company.”

Polonium 210 in the stock market: Yukos

Yukos used to be one of the largest privately-run oil companies in the world. It produced 20% of Russian oil…some 2% of total global output. Created during the robber-baron chaos that followed the Soviet Union’s collapse, Yukos was formed from two enormous State-owned petroleum businesses. They were privatised for a fraction of their true worth.

The major shareholders then formed an offshore holding company, Menatap, to dodge Russian taxes. They also had to dodge bullets, car bombs and poison attempts, too. But according to the Moscow law courts, they gave as good as they got.

The former security chief at Yukos, Alexei Pichugin, has now been sentenced to more than 20 years in jail – twice – for multiple murders. Prosecutors say he acted on the orders of Leonid Nevzlin, the No.2 shareholder in Yukos…and the man that ex-Russian agent Alexander Litvinenko visited in Israel last month…just before he was poisoned with Polonium 210.

Nevzlin was also a great friend of Mikhail Khodorkovsky, the Yukos No.1 jailed for 9 years on tax evasion charges in May 2005. According to the Moscow courts, Pichugin gave Khodorkovsky a special present on the oligarch’s 35th birthday. He murdered the mayor of Yugansk, an oil-rich province, who had vehemently opposed Yukos’s expansion in the region.

But who to believe? There’s plenty of evidence that these show-trials were bent. The courts’ final verdicts often repeated – word for word – the initial claims of the prosecution, according to Khodorkovsky’s supporters. And the Kremlin’s attack on Yukos’s business assets, first chasing it for back-taxes and then forcing it into bankruptcy, enabled it to expropriate one of the company’s main subsidiaries, Yuganskneftegaz, in October 2004.

In mid-December that year, Yuganskneftegaz was sold at auction for $9.3bn to Baikalfinansgrup, a company founded just two weeks earlier with only $358 in share capital. Baikalfinansgrup then became part of the State-owned oil giant Rosneft…which part-floated on the London Stock Exchange in July 2006 for $80bn.

“Yuganskneftegaz was expropriated from Yukos…” complained a group of Yukos shareholders to the UK’s Financial Services Authority this summer, “under unlawful proceedings which would not be recognised by or enforced by the English courts.” But so what? UK oil & gas giant British Petroleum put $1bn into Rosneft when it floated. Last week the two companies signed a $700m deal to explore for oil off the coast of Sakhalin Island. Funny, but in September BP’s competitor Shell had its Sakhalin licenses revoked by the Moscow authorities.

Polonium 210 in the stock market: Russian companies and the LSE

Since the Russian government part-floated Rosneft in London, its value has risen as high as $100bn. And the London Stock Exchange just can’t say no to the flood of new Russian stocks, most especially on its lightly-regulated AIM market. “Russian companies are looking to raise £2.5bn on the London Stock Exchange by the end of this year,” reports the London Times, “delighting some investors but renewing fears that the reputation of the City could be hit by a scandal.”

Corporate governance in Russian companies has never looked solid since the Yukos affair. Now the aluminium group Rusal wants to list in London before 2009, even though it’s facing a court battle in the city over allegations of fraud and computer crime. One group of leading City institutions wrote to the London Stock Exchange late last year, asking for the rules on new AIM flotations to be tightened. So far, no dice. But they can vote with their feet…or at least, with their investors’ money.

The Co-operative Insurance Society, one of Britain’s biggest funds, has said it’s concerned about the quality of Russian and East European companies now floating in London. It’s notably failed to invest in two of the largest London floats this year – Rosneft the oil group, and Kazakhmys, the Kazakh copper mining group.

“How on earth can you understand them?” asks Ian Jones, head of responsible investment at the CIS. “People investing in these are speculators, not savers.”

“The City of London is storing up reputational problems,” agrees Peter Butler of the Governance for Owners investment house, “because it just seems left up to individual investors to make their own minds up about new market entrants.”

Polonium 210 in the stock market: Assets at risk

Meantime back in the motherland, Russian assets are still at risk from the Russian government’s loose interpretation of property rights. “Russia wipes £130m from gold miner by threatening to revoke licences,” said The Guardian on Thursday, after the Moscow authorities were reported to be looking at 5 gold mining licences belonging to Peter Hambro Mining Plc. A star of London’s AIM stock market, the British-run gold miner has so far failed to exploit these licenses. The Kremlin seems to think that’s reason enough to take them back.

Or in the words of Oleg Mitvol, deputy head of Russia’s environmental watchdog: “They put the reserves on their balance sheet, don’t do anything with them, the government doesn’t get any taxes and the company lists its shares in London.”

Lists its shares in London, eh? Just like Rosneft then. Only difference is, the Russian government doesn’t own a stake in Peter Hambro…

Regards,

Adrian Ash
for The Daily Reckoning

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