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Russia: Failed Rosneft Tender Constitutes Crucial Test For Kiriyenko

  • Floriana Fossato

Moscow, 27 May 1998 (RFE/RL) -- The new government of Prime Ministerucial test in its first month on the job. It will need to keep all its cool and mobilize all possible support, if it wants to overcome Russia's latest budget-squeezing economic crisis, worsened by yesterday's failure to obtain bids for the long-waited tender of the Rosneft oil company.

Major Russian shares continued to plunge today, as the government unsuccessfully scrambled to reassure jittery investors and to control the crisis, deepened by gloomy forecasts by some Russian observers that the government could be forced to devaluate the ruble. Russia's stock market has fallen by nearly 50 percent since the beginning of the year, after finishing 1997 as the world's best-performing emerging market.

In a powerful blow for the new cash-strapped cabinet, the deadline for the sale of a controlling stake in Rosneft, Russia's largest oil company which is still state-owned, passed yesterday evening. Not a single bid was received from several consortia of Russian and foreign potential bidders. All the potential buyers complained in the last two months that the starting price tag of $2.1 billion for the 75 percent plus one share in Rosneft was too high. The government had also established a further obligation that the winner would have to spend another $400 million in settling tax debts and further investment in the oil company

Kiriyenko, who had repeated that "for reasons of principle" the government would not lower the price or the stake offered for sale, admitted yesterday evening, after the tender was closed, that bidders "may be right."

Government officials, counting on the proceeds of the Rosneft sale to ease its budget deficit, had hoped the tender would prove the fairest and most lucrative in the history of Russia's privatization, and were reported to have already included revenues from the auction in the 1998 budget.

Kiriyenko last night announced that the auction would be declared invalid. However, anxious to ease the impact of the failure, said new terms for the sale of an unchanged stake in Rosneft would be set by Monday (June 1).

First Deputy State Property Minister Aleksandr Braverman told reporters today that the starting price of the new auction would be set at the level recommended earlier by Dresdner Kleinwort Benson, a company that, after carrying out an evaluation of Rosneft's assets at the request of the Russian government, had indicated $1.6 - $1.7 billion as a fair price. Braverman said the next deadline for new bids would probably be set for mid-June. He added, he hoped that, by the beginning of August, the government could obtain an injection of much-needed cash from the auction.

Expressing confidence that the setback could be mitigated, Kiriyenko said yesterday he expects that "interest in buying this stake could even grow, and a new auction could even be more attractive for potential buyers."

Potential buyers, included a consortia of Russia's gas giant Gazprom, oil major LUKoil and Royal Dutch Shell. Recent reports suggested that the government had tried to put pressure on Gazprom to purchase Rosneft, as part of a backroom deal in which the company would receive a tax break on the back taxes it owed to the government.

Other reports said Kiriyenko had discussed the sale with Gazprom head Rem Vyakhirev and Vladimir Potanin, the head of the Oneximbank-Interros group. Potanin had joined forces with British Petroleum, creating another potential bidder.

But the rumors of pressure by the cash-strapped government have proved wrong, as cabinet officials have made clear they intend to carry out further privatizations without the help of sweet-heart deals from Russia's controversial and powerful businessmen.

Meanwhile, another potential buyer, Yuksi, disappeared this week, when oil majors Sibneft and Yukos, who announced in January a merger to form Russia's largest oil company and prepare for the Rosneft tender, called their deal off.

World oil prices, which reached a nine-year low while the sale was in progress, weakened the potential bidders. And, perceived political insecurity after the March government reshuffle further contribute to create a difficult climate for the new cabinet and antagonize relations with some of the potential buyers.

The dailies "Nezavisimaya Gazeta" and "Kommersant," financed by some of the business tycoons who had been included in the list of Rosneft's potential buyers, continued today to forecast a possible devaluation of the ruble, a move that Kiriyenko defiantly refused as part of his attempt to reassure investors.

Eric Kraus, chief strategist at Regent European Securities told RFE/RL that "the failure to carry out the Rosneft auction as scheduled was clearly a setback for the government" However, he added that "it is not likely to have a crucial influence on Russia's financial markets, since the overall situation is already extremely ugly and yesterday's failure was widely expected by market operators." Kraus, expressing the feelings of most market operators, said that "only additional funds from the International Monetary Fund or new loans from other major financial institutions would help the government at this stage." President Boris Yeltsin yesterday approved $10 billion in spending cuts, equaling about 12 percent of the 1998 budget, but even this measure appeared unlikely to restore investor confidence.

Russian officials had expected the International Monetary Fund (IMF) board of directors to decide this week on the release of a $670 million installment under its more than $10 billion loan deal with Moscow. However, Martin Gilman, the IMF mission head in Moscow, said a decision in any direction was unlikely this week. He also denied Russian officials' announcements that the Russian government was consulting the IMF on a separate debt-restructuring plan to retire short-term T-bills.

However, the IMF seemed to react in a more encouraging way. After expressing caution at the beginning of the week, Gilman said today that Kiriyenko had spoken by telephone with IMF Managing Director Michael Camdessus. Gilman did not give details of the conversation, but told Reuters news agency that Kiriyenko and his government "have provided firm assurances that the government is fully committed to implementing its action plan."

The IMF issued a statement in Washington late yesterday, welcoming Russia's announced budget cuts. Russian Finance Minister Mikhail Zadornov said today that the IMF response had been positive.

And, Gilman said Moscow "is moving rapidly to finalize the government program, so that we can make a determination as to its appropriateness in terms of the current situation."

Gilman said further steps, including a timetable for further IMF support, would be discussed during a visit to Moscow by a top IMF official, John Odling-Smee, who arrives in Moscow tomorrow.