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Royal Dutch Shell Plc .com: Greed and morals at war in Rosneft float

From The Sunday Times
July 02, 2006

The making of this Russian oil giant has left many losers. Tracey Boles finds that avarice will have a big role in its flotation 
RICHARD ALLEN, a national security adviser to Ronald Reagan when he was US president, invested and lost $70,000 (£38,180) in the Russian oil giant Yukos. He is one of many litigants urging investors to snub the flotation of Rosneft, the rival Russian oil company. He said: “The average investor taking part in the float might as well invest in a crapshoot run by thugs if they are looking for cheap thrills. Or they can spend their money on a rollercoaster ride. Either way, they will lose their money.” 
Allen is telling potential investors: “Run — don’t walk — to the exit.” Like other holders of American Depositary Receipts (ADRs) in Yukos, Allen saw the value of his investment wiped out when Yukos’s assets were seized by the Kremlin and transferred to Rosneft via a controversial auction. He claimed: “It was grand theft on a major scale and (Russian) President (Vladimir) Putin is a grand thief.”

Allen is one of a dozen outraged US plaintiffs seeking $3m in damages from those they blame for the fall of Yukos, including Igor Sechin, Rosneft chairman, and Sergei Bogdanchikov, its chief executive.

Their claim is just the tip of the iceberg, with Russia — and Rosneft — facing what has been called “a lifetime of litigation” for the events that led to Yukos being broken up. The threat, which could result in billions of dollars in damages, is casting a long shadow across the flotation of state-owned Rosneft, scheduled for the middle of this month in Russia and London.

But despite the threat of litigation against Rosneft, most bankers believe the opportunity to make money from the float will draw in sufficient institutional investors to raise the $10 billion the company is looking for.

Allen, 70, decided to invest in Yukos after dining in Washington with the company’s founder, Mikhail Khodorkovsky. He put money into Yukos over several years, thinking he was buying into the modernisation of Russia, and that Yukos would achieve the stature of oil giants such as Exxon and Shell.

Allen said: “I was impressed by the company and some of the steps Khodorkovsky was taking to increase transparency and to introduce the style of a western company.” Khodorkovsky, with his clear dedication to the business, reminded him of a young Bill Gates.

In 2004 Yukos was forcibly broken up after Khodorkovsky mounted a political challenge to Putin. Its main production asset, Yuganskneftegaz, was transferred to Rosneft via auction, and Khodorkovsky was thrown in jail after being tried for fraud and tax evasion.

Allen said: “I was satisfied with Yukos’s progress until the intervention of totalitarianism, the decision to wreck Yukos and to silence Khodorkovsky in classic Russian tradition.”

He possesses a steely determination to see those he considers responsible in a US courtroom. He said: “I want to see the whites of their eyes.” Papers have been served on people such as Dmitry Medvedev, Gazprom chairman; Viktor Khristenko, energy minister; and Sechin, the Rosneft chairman. They have also been served on companies, including Gazprom and Rosneft.

Allen’s fellow ADR plaintiffs allege that Russia has in effect renationalised Yukos without compensating its owners. They say that US and global securities markets were falsely assured that the Kremlin did not intend to renationalise Yukos. The defendants counter that a US court does not have jurisdiction over the case.

Tom Johnson, the Covington & Burling lawyer acting for the ADR holders, believes a successful case could open the floodgates to claims worth up to $30 billion worldwide.

However, what could be the biggest of the Yukos lawsuits has been filed by investors seeking billions in damages against the Russian Federation itself. The case, to be heard in The Hague, may expose Rosneft to a substantial liability.

Tim Osborne, director of GML, formerly Group Menatep, which owns a 51% stake in Yukos and is the main plaintiff in the case, said claims against Russia could top $50 billion, but the lawsuit, under the energy charter treaty, could take until 2010 to resolve. The first hearing is likely to be in a year’s time.

Yukos is also seeking $14 billion in damages in Russia over the controversial auction that led to Yuganskneftegaz being sold to Baikal Finance Group for $9.3 billion. The mysterious company had just $350 in share capital and no employees before the auction. Afterwards, it was almost immediately bought by Rosneft. Yuganskneftegaz is now estimated to be worth $38 billion.

Rosneft points out that all claims heard to date in Russia have been dismissed, and is confident that the outstanding lawsuits have no merit.

Last month Bogdanchikov said: “We say that the Yuganskneftegaz case is closed.”

The company is countersuing Yukos for $17 billion under several separate claims, including $13 billion for losses relating to the sale of crude oil from Yuganskneftegaz at below market rates.

Shareholders were not the only losers when Yukos’s assets were frozen. Many Yukos directors and GML partners were left with the choice of fleeing the country or facing lengthy prison terms. Three GML partners are in exile in Israel.

The Russian state started to investigate Yukos in the summer of 2003. By December the company was being subjected to a rigorous tax inspection. As a result, it was hit with a back-tax bill of $3.4 billion and given just two days to pay. A day later an application was made to have its assets frozen. In October Khodorkovsky was arrested.

He is now languishing in a Siberian jail where he is serving a nine-year sentence. His main business partner, Platon Lebedev, has been sent to a remote penal colony located in the village of Kharp, north of the Arctic circle. He is three years into an eight-year sentence.

Experts say the men are political prisoners. One said: “The government is trying to break them, if not physically eliminate them. They are deliberately isolated from all people but their lawyers.” Their cases have been referred to the European Court of Human Rights.

At least five Yukos or Group Menatep staff are in jail.

Osborne said: “It is a situation nothing like we understand. The political set-up means that everyone does what the Kremlin tells them to do.”

Given the legal risks hanging over Rosneft, and the political controversy, it is no wonder that some City fund managers are wary of investing One analyst summed it up succinctly when he said of the flotation: “It will test the appetite of fund managers’ greed over morality.”

Rosneft has also been talking to oil companies that may invest. BP for one is unlikely to do so, partly because of price.

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