Russia's Oil Barons Say Era of Wildcatter Capitalism Is Finished

Stephen E Philion philion at hawaii.edu
Tue Dec 28 10:51:39 PST 1999


NYT December 28, 1999

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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