Russia's Oil Barons Say Era of Wildcatter Capitalism Is Finished
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By MICHAEL WINES
M OSCOW, Dec. 26 -- On its face, it is no great shakes that Russia's
sixth-biggest oil company, Sibneft, unveiled a spiffy new
green-and-blue logo in April. What makes it a symbolic symbol indeed
is the logo's two flavors: traditional Cyrillic, for Russians -- and
English, for most everyone else.
For an industry that has exemplified this nation's hand-on-the-throat
style of business, there may be no better metaphor. Russia's oil
tycoons largely founded their empires through dark-of-night political
deals and squeezing out competitors, and until lately they have run
their companies pretty much the same way.
But now, if the barons themselves are to be believed, the era of
wildcatter capitalism is over. The new mantra of Russian oil companies
is the same one invoked in the worsted-wool realm of Western business:
corporate strategies, transparent finances, independent directors,
professional managers.
"Russia is following the world trend," Sibneft's Fordham-educated
president, Yevgeny Schvidler, said in a recent interview. "Sometimes,
it is in front of the trend."
There remains but one hitch: just as with spiffy new logos, not
everyone is ready to believe that the transformations are much more
than symbolic.
Sibneft is in some ways a test case of whether the industry can
reinvent itself -- or whether it really wants to. From their
European-style offices on the very toniest stretch of downtown's
Moscow River bank, executives say they are remaking the company in the
image of global business -- and, to an extent, experts agree.
In recent months, the company has issued Russia's first corporate
governance charter, a document that sets out rules for treating all
shareholders fairly, and agreed to give outsiders two seats on its
board. And in the spring it began selling its shares on secondary
international markets in the form of American drawing rights. The
company is gunning for full listing on foreign exchanges in the years
ahead.
Sibneft is one of a handful of Russian companies whose books are
audited according to "generally accepted accounting practices,"
meaning that results are reported using the same rules that apply to
foreign companies. And unlike other big Russian oil companies, it
pledges to make public the identities of major shareholders, probably
next year.
"Russia's most progressive oil company," Sibneft boasts in an
advertisement that ran recently in one local newspaper. And analysts
say that could be true.
The problem, they caution, is that the competition is not especially
stiff. Russian oil companies, Sibneft included, are saddled with such
murky and occasionally devious pasts that international business rules
are still a novelty for many. And even well-run companies are enmeshed
in Russia's treacherous politics, where a single misstep can have
serious consequences.
Russia has its share of well-run companies: Lukoil, the biggest, is
also making strides toward more open operations, and Surgutneftegaz,
No. 3, is seen as downright conservative. But Western investors know
from bitter experience not to take them at face value.
The country's second-biggest oil company, Yukos, used stock issues to
move much of itself offshore earlier this year in an attempt to skirt
creditors and minority shareholders, including the American financier
Kenneth Dart.
BP Amoco sank $571 million into Russia's No. 5 oil company, Sidanko,
in 1997, only to discover that its books concealed huge debts. The
company went bankrupt, and a politically attuned Russian oil company,
Tyumen, has since picked off some of Sidanko's most valuable assets in
what skeptics say is a rigged bankruptcy court. Last week, though, it
agreed to return a prized Siberian oil field to BP Amoco's control.
The industry is legendary for its schemes to launder oil money,
mislabeling products and manipulating sales prices to move profits
into offshore banks and away from shareholders and government
authorities.
Such behavior may not be excusable, analysts say, but it is explained
easily enough.
"You have to remember that this is an industry where the primary
interest, at least until a couple of years ago, was to get the cash
and run," Vittorio Juncker, a petroleum analyst for the World Bank in
London, said in a recent interview. "Oil was one of the best ways in
which you could accumulate financial reserves outside Russia. A lot of
private fortunes have been built on that."
It is precisely that sort of reputation that Sibneft officials say
they are leaving behind. And for good reason: increasingly, being a
traditional Russian oil company can be dangerous to one's corporate
health.
Sibneft is only about four years old, but already its past is not
pretty. Like a number of leading oil companies, Sibneft sprang from a
now-notorious program called "loans for shares," in which the Kremlin
handed out stakes in major industries -- almost always to insider
friends -- as collateral for loans it never repaid.
In Sibneft's case, a company tied to Boris Berezovsky, the tycoon and
political lightning rod who was Boris Yeltsin's re-election campaign
financier, won the rights to 51 percent of the stock in 1995. In
return for a $100 million loan, he got control of a company then
valued at roughly $600 million, including Russia's best oil refinery
and proven petroleum reserves larger than those of Texaco.
Several insider deals, a lawsuit and a hotly disputed auction later, a
single group -- unidentified, so far -- controls some 90 percent of
the company. Both Sibneft and Mr. Berezovsky now insist that he has no
financial interest in the company, which seems to be dominated by an
equally wealthy Berezovsky associate and friend of Mr. Yeltsin, Roman
Abramovich.
Shareholder or not, Mr. Berezovsky seems lashed to the company in the
eyes of his enemies. As prime minister last February, the most
prominent of those enemies, Yevgeny M. Primakov, engineered a
nine-hour police raid on Sibneft's headquarters, seizing surveillance
equipment to bolster charges that Mr. Berezovsky spied on political
figures. Mr. Berezovsky denies the allegations.
Mr. Yeltsin fired Mr. Primakov last summer, and he is now seen as a
major contender in next June's presidential elections. That could bode
ill: Mr. Primakov's allies in the Otechestvo party have talked of
revoking the supposedly rigged loans-for-shares deals, with Sibneft
dead in their sights.
"Their basic problem of the controlling shareholders is that they're
very sensitive to the political environment," said Ivan Mazalov, an
oil-industry analyst at Troika Dialog, a Moscow brokerage firm. "They
have lots of powerful friends. And they have quite a few enemies who,
should they come to power, would certainly make efforts to settle
scores."
Sibneft's president, Mr. Schvindler, says he is well aware of the
hazards of hitching a company's fortunes to politicians, and has
erected a corporate barrier between politics and business that is
"higher than a Chinese wall."
Sibneft nevertheless continues to benefit from government favors like
its inclusion in a food-for-oil exchange with Iraq. News reports
suggest that it could receive more favored treatment in a looming
selloff of government oil assets, an apparent pre-election move by the
Kremlin to shore up corporate political backing.
Sibneft also supplies petroleum from its Omsk refinery to an
oil-trading company run in part by Mr. Yeltsin's son-in-law, Leonid
Dyachenko. Mr. Schvindler says the relationship began well before
Sibneft took over the Omsk refinery and, in any case, that the
dealings are at arm's length.
Still, Sibneft has moved with growing speed to convince foreigners of
its legitimacy since Mr. Schvindler took over the top job in 1998. And
"at some point you have to allow a company a chance to become a good
corporate citizen," said Eric Wigertz, an analyst in the Moscow office
of Brunswick Warburg. "Sibneft is taking some good steps, at least on
paper."
Significantly, the company settled a venomous dispute this spring with
Mr. Dart, perhaps the industry's most vociferous critic, by giving him
representation on Sibneft's board in exchange for agreement to roll an
oil-extraction subsidiary -- and Mr. Dart's shares in it -- into the
larger company.
Mr. Schvindler also has plans to halt a financial slide that some
credit to a lack of oil-knowledgeable management during the early and
mid-90's. Oil production in Sibneft's fields has fallen almost every
year this decade, and will remain low in 1999. Investment has sunk to
half its 1996 level in the wake of last year's economic crash.
But the company will also pay down nearly three-fourths of its debt by
the end of this year, analysts say, and it has teamed up with the
international oil services company Schlumberger to tease more oil from
aging wells.
Sibneft has also announced plans for a network of more than 1,000
retail gas stations -- still a novelty in Russia, where most stations
are literally mom-and-pop operations. Most will be in Siberia, where
the company has a natural monopoly. Experts say that owning the
stations will allow Sibneft to maintain cash flow and profits even
when oil prices fall.
But Sibneft, they add, still has to settle two important matters. One
is that its major partner in petroleum exports is a Gibraltar company,
Runicom, which is not only owned by Sibneft management, but which
itself owns 10 percent of Sibneft.
That leaves Sibneft open to the charge that it has funneled profits to
managers by selling its oil to Runicom at a discount; such internal
transactions are not public. Mr. Schvindler says the company does not
manipulate oil prices now, if it ever did, and adds that the general
figures in its latest audit back that.
The second is Sibneft's still-secret ownership, which some critics say
could be disclosed in short order if the company were genuinely
committed to openness. Mr. Schvindler says it is not that easy. In
Russia, the wealthy are marked people, by criminals and government
alike, and pulling back the veil on ownership is a long and complex
process.
Some suspect that process began early this month, when more than 40
percent of Sibneft shares were shifted from a company believed to be
controlled by Mr. Berezovsky to a Russian bank. Others say the shift
was a defensive move to prevent Mr. Primakov from linking Mr.
Berezovsky to Sibneft in the presidential campaign.
This is how business is conducted in Russia, at least for the moment.
"They're moving in the right direction," James Henderson, director of
research at Renaissance Capital, a Moscow investment bank, said of
Sibneft's managers. "But an investment community which has become
very, very cynical about Russia -- and with good reason -- will be
very skeptical about whether they're really playing by the rules or
just putting up a facade."
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