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The Times: Is the jamboree that Yeltsin started really at an end?

April 25, 2007
European briefing: Carl Mortished

Slumped in a mood of foreboding and grim anxiety, the audience at this year’s Russian Economic Forum were treated to a blast from the past as news of Boris Yeltsin’s death echoed through the concrete of the Queen Elizabeth II Conference Centre in Westminster.

More than anybody else, Yeltsin created this annual jamboree of Russian business and politics. Not only did he dismantle the Communist state but he made the oligarchs, not just liberating a generation of entrepreneurs but giving a leg-up to the spivs and hustlers who took over large chunks of the Russian economy and then spent lavishly in London.

The mood was funereal even before a ghostly Boris Yeltsin staggered into the conference centre; a gaggle of Kremlin-sponsored businessmen — including the chief executives of Rosneft and Transneft and the deputy chief executive of Gazprom — had cancelled at short notice. Offshore cavorting is no longer in favour, it seems, and nor is Britain as long as it harbours men like Boris Berezovsky, a tycoon wanted by Russian prosecutors for alleged fraud and who absurdly declared war on the President a fortnight ago.

Those at the forum wanted to know whether the party is really over or just changing its style and venue. A staggering amount of money has been earned in the Russian market over the past decade, a point made dramatically by Bill Browder, who runs Hermitage Capital Management. In 1999, the year after Russia’s financial crash, its stock market was valued at $19 billion, at which point Amazon was worth $16 billion and Bill Gates $72 billion.

Today, the Russian market is worth a trillion dollars and those who spotted the hidden value in Gazprom, valued in 1999 at 2 cents per barrel of oil and gas, have enjoyed a fabulous ride.

Such rates of return won’t be repeated and there are some, such as Hans-Joerg Rudloff, chairman of Barclays Capital, who fear the pricking of a credit-inflated bubble, rather than a gentle slowdown. Mr Browder sees an interesting queue of Russian public offerings, a torrent of paper due to hit the market this year. Renaissance Capital, the investment bank, expects some 70 Russian IPOs to tap the market in 2007. Russians used to hang on to their shares, now they are sellers.

The message from Russian investors seems to be: take the money and run. It coincides with a different message emanating from Moscow that the London frolic is no longer amusing to those who wield power. Those looking for signals in the fug of Russian cigarettes and complimentary whisky at the forum may find it useful to exit for a breath of fresh air.

You won’t necessarily find clear air in Siberia where foreign investors continue to struggle to reach an accommodation with their host. How can the “bad deals” done during the Yeltsin era be transformed into good deals without too great a loss or humiliation for either side? TNK-BP is just beginning this process, unless you take the view that the process started when BP made its first (ill-fated) investment in Sidanco in 1997 and acquired the giant Kovytka gasfield in eastern Siberia, one of the assets at issue, but not the only one.

The outcome of Shell’s struggle in Sakhalin is not an appropriate model for sharing Kovykta for two reasons. Shell bought into a production sharing agreement (one of the world’s most generous, some say) and has since invested many billions — tangible assets that Gazprom, Shell’s new partner, could not ignore. With gas sales contracts signed and infrastructure in place, the project’s cashflow can be forecast, discounted and valued. In TNK-BP’s case there is very little investment in Kovykta, no customer for the gas and, from Gazprom’s perspective, no value in the gas. It makes little difference that Kovykta could in due course become a hugely valuable resource, exporting gas to China. Right now, it is not and TNK-BP will be asked to give up Kovykta for a peppercorn.

It may do that in the hope of preserving what it already has in western Siberia which is a great deal, much of it undeveloped and underexplored.

BP’s Russian venture suffered a weak first quarter, affected by falling oil prices and seesawing tax rates. Russian oil is less profitable — it sells at a $4 to $5 discount to Brent, is heavily taxed and incurs heavy transport costs. However, the good thing about Russian oil is that there is lots of it.

TNK-BP is BP’s future, providing almost all of the new replacement barrels last year, rescuing the company from a badly shrinking resource base, and many in the industry believe the company has not even begun to properly exploit the Russian resource. It has 7.8 billion barrels of proven reserves under SEC rules and 9 billion using standard industry definitions. Some reckon, the real resource in the ground could be twice as large. At 9 billion barrels, BP’s associate has the oil and gas resources of ConocoPhillips, one of America’s major energy enterprises.

There lies the problem. It is too big and BP will be asked to give some of it back when its current oligarch partners sell their interest to Rosneft or Gazprom. Will the sacrifice of Kovykta be enough or will BP cut a deal, swapping part of its precious Angolan or Trinidad interests to smooth Kremlin feathers and keep the peace?

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http://business.timesonline.co.uk/tol/business/columnists/article1701307.ece

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