Russian Synergies - YukosSibneft

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

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April 24, 2003

YukosSibneft Oil - the outcome of the announced merger of Yukos Oil and Sibneft, two of Russia's prominent energy behemoths - will pump 2.06 to 2.3 million barrels of crude a day. This is more than Kuwait, Canada, or Iraq do.

With 19.3 to 20.7 billion barrels in known reserves (excluding Slavneft's), 150,000 workers, $15 billion in annual revenues and a market valuation of c. $36 billion - YukosSibneft is, by some measures, the fourth largest oil company in the world behind only ExxonMobil, Royal Dutch/Shell and British Petroleum. Its production cost - around $1.70 per barrel - is half the average outlay of its competitors. The merger offers no synergies - but, in oil, size does matter.

The listing of Yukos stock on the New York State Exchange, slated for the end of this year, will have to be postponed. Still, its American Depository Receipts shot up by 10 percent on the news. In contrast, Sibneft's barely budged, up 3 percent.

Having been shelved in 1998, the annus horribilis of the Russian economy, the deal was successfully struck two days ago. Yukos will pay $3 billion and dole out 26 percent of the combined group to Sibneft's "core" shareholders - namely the oligarchs Roman Abramovich and Boris Berezovsky. Minority stock owners are to be made a "fair offer" backed by a valuation produced by "an internationally recognized bank".

This would be Citigroup. Citibank placed $900 million of Sibneft's corporate debt in the past 5 quarters. It also advised Sibneft in its controversial acquisition, with Tyumen, of the government's stake in Slavneft. The purchase of Lithuanian oil company Mazeiku Nafta by Yukos was virtually designed by Citibank.

Yukos, owned 36 percent by Khodorkovsky, may also distribute a chunk of its $4 billion cash trove either in the form of a dividend or through a share buyback.  Whatever the future of this merger, the magnate-shareholders seem to be eager to cash in prior to the expected plunge in oil prices.

Such mergers have become a staple of the sector in recent years. Spurred to consolidate by dropping oil prices and wild competition from Latin America, Central Asia and the Middle East - the giants of the industry mate fervently. Mikhail Khodorkovsky, the chief executive officer of YukosSibneft, is already eyeing acquisition targets to expand retail operations abroad.

Yukos has recently acquired refineries and pipelines in Lithuania and the Czech Republic, for instance. The combined outfit owns, in Lithuania, Belarus and Russia, ten refineries with a total capacity of c. 2 million bpd and more than 2500 filling stations.

The merger - coupled with British Petroleum's takeover of Tyumen Oil in February - depletes the pool of investments available to Western corporate suitors. It also cements Russia's dependence on energy. Oil accounts for close to one third of the vast country's gross domestic product and one half of its exports.

Production in the oil segment has been growing by annual leaps of 20 to 30 percent - compared to a standstill in the rest of Russian industry excluding energy. Reflecting this disparity, YukosSibneft's market value amounts to one half that of all other listed Russian firms combined.

Contrary to congratulatory noises made by self-interested Western bankers and securities analysts, the merger is not good news. It rewards rapacious oligarchs for the unabashed robbery of state assets in the 1990s, keeps much-needed foreign competition, management and capital out and reinforces Russia's addiction to extracted wealth. It spells another orgy of asset stripping and colossal self-enrichment by the junta of former spooks and their business allies.

This is the first time that the Putin administration approves of cooperation between oligarchs. The Kremlin also permitted Yukos to build the first private pipeline to the northern port of Murmansk, the export gateway to the lucrative American market. The avaricious elite sees no reason to share this bonanza with foreigners.

Vladimir Katrenko, the Chairman of the State Duma's Committee on Energy, Transport and Communications confirmed that "by uniting their capital, leading Russian oil and energy companies are trying to stand up to international corporations which exploit every opportunity to squeeze out competitors".

Furthermore, with a parliamentary vote by yearend and presidential elections looming next March, Putin, like president Boris Yeltsin before him, may be discovering the charms of abundant campaign finance and mogul sponsorship in the provinces. Yukos contributes heavily to political outfits, such as the Communist Party, the Union of the Right Forces (SPS), and the Apple (Yabloko) party.

Kohodorkovsky even announced his presidential ambitions in the 2008 campaign. Should he team up with the Family - the inner core of the Yeltsin-era crony machine - The Kremlin would justly feel besieged.

In a thinly-veiled allusion to Khodorkovsky's political aspirations, Deputy Chairman of the State Duma Budget Committee, Sergei Shtogrin, mused that "certain people in Russia have a great deal of influence in national politics and economics. At the moment it is still unclear what the policy of the new management will be and whether or not it will support the government in developing the economy or not."

Not surprisingly, therefore, Kremlin involvement is ubiquitous. It virtually micro-manages the oil sector. Putin leaned heavily on Sibneft not to conclude a deal with foreign suitors such as TotalFinaElf, ExxonMobil and Shell and to favor Yukos. Abramovich is said to be impotently seething at the loss of control over Sibneft. The merger was also a way to denude the outspoken Berezovsky, much-hated by the Kremlin, of his last assets in Russia.

The disgraced tycoon - whose extradition from the United Kingdom on fraud charges has been officially requested by Russian authorities last month - bought Sibneft for a mere $100 million in the heyday of Yeltsin the corrupt, in 1995-6. Asia Times reported, based on Moscow "banking sources", that Yukos has hitherto refrained from going public in New York due to Kremlin pressure. The firms have been hitherto closely held with the free floats of Yukos and Sibneft equal to less than one quarter and one seventh of their capital, respectively.

While it maintained Yukos' rating as is, Moody's Investors Service kept Sibneft under review for a possible downgrade:

"Moody's sees significant benefits of the transaction in terms of scale, the limited cash financing of the merger, and the good underlying reserve quality and operational efficiency of the two companies ... The enlarged group's intention (is) to maintain a moderate level of leverage and a strong working capital position. (But) the new entity's activities will remain wholly concentrated in Russia ... (and) while positive changes are being promised, corporate governance is also likely to persist as a constraining rating issue. This reflects the ongoing discussions with TNK regarding the split of the assets of Slavneft acquired in late 2002 by the two companies and Sibneft's practice of making high dividend payments."

These civil understatements disguise an unsettling opaqueness as to who exactly owns Sibneft. Nor are its frequent dealings more transparent. It recently sold its stakes in oil company Onaco and its chief production subsidiary, Orenburgneft, to Tyumen Oil - yet, no one knows for how much. Another imponderable is Gazprom, now a formidable and superbly connected direct competitor - with state-owned partner Rosneft - for energy reserves in eastern Siberia.

The YukosSibneft merger is in the worst of Russian traditions: self-dealing, self-serving and murky. This offspring of political meddling, egregious profit taking, insider trading, backstabbing and xenophobia it is unlikely to produce another Shell or BP. It is the venomous fruit of a poisoned tree.

Also Read:

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The Axis of Oil

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