http://execout.blogspot.com/2007/02/very-interesting-russian-story.html Thursday, February 01, 2007 A Very Interesting Russian Story... Russia: Russneft in the Kremlin's Crosshairs
The Russian Interior Ministry announced Jan. 29 that prosecutors are investigating private Russian oil firm Russneft and three of its subsidiaries for tax evasion. At first glance, this looks like the Kremlin making another energy consolidation move, as it did with Yukos and Slavneft. The move shines light on a particularly shady area of Russian politics that clearly identifies Russia's next fallen oligarch and reveals a previously obscured player in Russia's ongoing transformation. Russneft President Mikhail Gutseriev has prided himself on flying below the Kremlin's radar while building his oil empire, though his moves actually fly in the face of the Kremlin's energy powers -- Gazprom, Transneft and Rosneft. Other oligarchs have been squashed for doing less. Gutseriev's oil career began in 2000, when he became president of Slavneft, a Russian-Belarusian state-owned oil firm. Toward the end of his tenure, some Slavneft assets went missing (and later resurfaced as part of Russneft). In 2002, Moscow and Minsk sold half of Slavneft to TNK and the other half to Russian oligarch Roman Abramovich's Sibneft. Gutseriev, who left Slavneft shortly before the privatization, created Russneft. Since its creation, Russneft has massively expanded its operations to become Russia's ninth-largest oil producer -- its 2006 output hit 340,000 barrels per day -- and also owns 9 percent of Russia's gasoline retail market. The tax evasion investigation probably originated with Gazprom, Russia's mammoth state energy flagship. In 2005, Gazprom acquired Sibneft and integrated it with its existing oil holdings to create Gazprom Neft. Gazprom has had more than a year to examine Sibneft's books and most likely discovered some discrepancies, including the "missing" Slavneft assets that formed the seed from which Russneft has grown. Additionally, Russneft is allegedly interested in buying some Belarusian energy assets (former Slavneft assets) that Gazprom is after. Any moves toward those Belarusian assets would anger Gazprom and infuriate Moscow, which wants to make sure that nobody throws the Belarusian government a lifeline. Russneft also has attempted to get ownership of chunks of the Druzhba oil pipeline network that ships Russian crude to Europe -- something that would at best annoy Transneft, the Russian state oil pipeline monopoly, and Rosneft, the Russian state oil company, which are both bidding for the line.What is most surprising is that Gutseriev has not only survived thus far, he also has apparently been successful in running Russneft to date. The firm's oil output has expanded by triple digits in percentage terms for three years running, and Russneft has embarked on an acquisitions spree that would make even the supermajors blush. Yet, unlike many other Russian businessmen, Gutseriev does not owe his success to ties with the Kremlin. In fact, he is neither a friend of Russian President Vladimir Putin's inner circle, nor the pawn of a larger Russian oligarch. Gutseriev's secret is a foreigner: Marc Rich. Rich first rose to notoriety in the 1980s when he was charged with making illegal oil deals with Iran during the 1979-1980 hostage crisis. After fleeing the United States for Switzerland (supposedly renouncing his U.S. citizenship along the way), he gained a reputation as a freewheeling dealmaker. Supposed deal partners included -- but were certainly not limited to -- locales as unsavory as Hussein-era Iraq, North Korea, Libya, apartheid-era South Africa, Cuba and Venezuela. Until he received a pardon from U.S. President Bill Clinton in the final hours of his presidency (after paying a $100 million dollar fine and after his ex-wife made some large donations to the Clinton library and the Democratic Party), he was broadly considered America's most-wanted white collar criminal and boasted a spot on the FBI's most-wanted list to match. And Gutseriev was Rich's man in Russia. Rich supported Gutseriev via Glencore, a Swiss holding company being run by two of Rich's first lieutenants in his secretive inner circle. Glencore supplied Gutseriev with the majority of the financing he needed to build Russneft into the firm it is today. Now -- whether due to Gazprom or Kremlin annoyance -- Russneft is going down a path similar to one that led to Yukos' destruction three years ago. Gutseriev's firm is headed for state dissolution and absorption, likely by Gazprom. Should Gutseriev not flee Russia in short order, he will most likely suffer the fate of Yukos President Mikhail Khodorkovsky (prison) -- or worse. The story with Rich does not end there, however, and the dealmaster has had an interesting decision to make. By dealing with Gutseriev, Rich was in the way of energy megafirm Gazprom and the Kremlin itself. For someone not backed up by a division or so of tanks, this is generally an uncomfortable place to be.In October 2006, Glencore merged with Russian aluminum giants RUSAL and The SUAL Group, creating the world's largest aluminum company. It could be that either Rich cut a deal, sacrificing Gutseriev and Russneft in order to work with the Kremlin on the RUSAL-SUAL merger -- which would open a new can of worms in Russian business -- or he is throwing in the towel in Russian business and walking away, handing Gutseriev and Russneft to the Kremlin in exchange for being left alone. If the latter is the case, then it shows that Russian business is too dangerous for even Rich to get involved in. The Possible Nationalization of Russia's Norilsk Nickel Russian billionaire businessman Mikhail Prokhorov announced Jan. 31 that he is leaving Interros, a holding company he runs jointly with oligarch Vladimir Potanin. The prize of Interros is Norilsk Nickel -- the world's largest producer of nickel and palladium. While there has been talk of restructuring Interros for almost a year now, the timing of Prokhorov's departure could indicate that things may soon change for Norilsk Nickel as well. Potanin and Prokhorov each hold 27.39 percent of Norilsk Nickel; Potanin will buy out his partner (the market value of Prokhorov's shares is approximately $7 billion, though the deal is likely to include some share swapping) and Prokhorov will leave his post as director-general of the company once his work on the current projects is completed. Potanin also will replace Prokhorov on the company's board of directors. Prokhorov has indicated that his future plans include forming his own holding company, comprised of some Interros assets, which will focus on energy innovation. Interros holds a 25.8 percent stake in Rusia Petroleum (a venture in which Russo-British energy company TNK-BP owns a majority stake), and Smart Hydrogen, a joint venture of Interros and Norilsk Nickel, bought 35 percent of U.S. fuel cell developer Plug Power in April 2006. However, Prokhorov's departure may have less to do with his desire to venture into alternative energy and more to do with Norilsk Nickel's fate. Several Russian officials have hinted at plans for state diamond giant Alrosa to buy Norilsk Nickel, effectively renationalizing the metals company. Although Alrosa is much smaller than Norilsk Nickel, it has the coffers of the Russian Federation behind it. Furthermore, if the Kremlin has its eye on the metals giant, it has many other vehicles through which to purchase the company. And if it wants to take control of Norilsk Nickel, the loyal Potanin would, of course, oblige. In the past, Prokhorov objected to any possible sale -- a disagreement between the partners that originally surfaced in 2005. Rumors of Prokhorov's imminent departure began flying earlier this month, when he was briefly detained in France on suspicion of participating in a prostitution ring. The more powerful of the two, Potanin appears to have won. Though the Kremlin will confirm no plans with regard to the metals company, now might be a good time for Potanin to sell, as nickel prices are at an unprecedented high. No matter what happens with Norilsk Nickel, Prokhorov likely will try to quietly drop off the Kremlin's radar. Russian oligarchs do not customarily exit their businesses unless they are under extreme pressure. Although Prokhorov was never very active in the Russian political scene, surviving -- much less prospering -- in Russian business requires, at the very least, good relations with the Kremlin. Thus, it appears unlikely that Prokhorov's exit from Interros will resemble the departures of Mikhail Khodorkovsky and Boris Berezovsky -- who ended up jailed or exiled after falling out with the Kremlin. Instead, he could go the way of another Russian oligarch, Roman Abramovich, who divested himself of a majority of his assets for a few billion dollars and now lives in London, on good terms with the Kremlin. The current trend in Russia is government consolidation of strategic assets, including natural resources. Russia derives much of its income and influence from its exports of metals and minerals, as well as oil and natural gas. The "divorce" of the two Interros partners could be the first step in placing Norilsk Nickel under government control, and the company would certainly make a handsome addition to the Russian power base.
