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Russia: Petroleum Industry Moves To Western Markets

  • Michael Lelyveld

Russia may be opening a new period in economic relations with a Lukoil share sale on the U.S. market. So far, there has been little controversy over the company's goals in the Caspian Sea region, but attitudes could change if tensions rise over differing U.S. and Russian policies. Our correspondent Michael Lelyveld reports.

Boston, 29 December 2000 (RFE/RL) - The Russian petroleum industry is making a major move into Western markets with a U.S. share offering by Lukoil, but the step could raise political questions that have yet to be addressed.

In recent days, the Russian government has said it expects to earn $ 800 million by selling part of its interest in the country's biggest oil company on the New York Stock Exchange. Last week, President Vladimir Putin set the process in motion with a decree to allow the sale of 6 percent of Lukoil on Wall Street. The government now owns about 15 percent.

Lukoil has also been pressing ahead with preparations for the sale of American Depository Shares by adopting Western accounting standards. Despite delays, the company now seems set to release an unprecedented amount of audited information in order to sell its shares in the United States. Lukoil recently surprised analysts by reporting its earnings for the first half of the past year in an audited Western-style form.

Lukoil has long held a lead among Russian petroleum companies in pursuing international corporate norms, but the new standards require far greater transparency. Britain's BP oil company is a major shareholder in Lukoil as a result of its acquisition of U.S.-based ARCO, which bought an interest several years ago. In the past month, Lukoil also broke new ground by buying a controlling interest in the Getty Petroleum Marketing company, which operates 1,300 gasoline stations in the United States. The purchase could raise U.S. consumer contact with Russian companies to a new level.

There also seems to be little doubt that the Russian government is using its most advanced and presentable company to crack open the U.S. market. If the offering is successful, sales of other American Depository Shares in firms like Gazprom could follow. The sales will not only raise funds for the government. They may also help to raise the valuations of Russian companies, which are seen as artificially low. The financing through share sales could help Russia to invest in its own resources and infrastructure, providing a boost for the entire economy.

But along with the positive possibilities, there are also questions about how Russian companies will behave and how they will be received in this new financial era. As American interests increase, for example, will the companies continue to serve the political will of the Russian government? And what will happen when Russian and U.S. policies conflict?

Such a conflict did take place in 1997, the Lukoil owns a share in the "contract of the century," as well as other projects in last time a Russian petroleum company tried to raise funds on U.S. markets. The controversy came when Gazprom decided to sell $1 billion in bonds, with the help of the Wall Street investment firm Goldman Sachs. The deal was attacked by conservative senators in the U.S. Congress because Gazprom was helping to develop a major gas field in Iran, despite U.S. sanctions. The bond sale was soon withdrawn.

So far, the plans for Lukoil's share offering have not sparked any similar outcry, even though Russia is currently negotiating arms sales to Iran despite U.S. objections. The United States has generally applauded Russian efforts to adopt Western accounting standards and to improve shareholder rights and corporate governance. Apparently, no link has been drawn between those goals and any other Russian policies.

But it remains to be seen whether that separation will be maintained if Russian oil companies and the U.S. government pursue opposite courses in the Caspian region. Lukoil has refused to join a sponsor group for the Baku-Ceyhan pipeline, which has been one of Washington's policy goals.

Azerbaijan and major oilfields in the northern Caspian. But it has made clear that it will ship its oil only over Russian routes, following the government's policy of discouraging the development of Baku-Ceyhan.

There has been relatively little friction over the disagreement, while U.S. officials have tried to persuade Russia to change its position on Baku-Ceyhan. But attitudes could harden if both sides promote their policies with determination, and if it appears that Lukoil is raising funds in the United States to oppose U.S. goals.

In recent months, Russia and the United States have established a businesslike relationship, which would presumably allow business interests to flourish despite policy differences. But the division is a fine line that could be crossed again if passions rise over the issue of Caspian routes and if Russian companies are seen as pursuing government strategies.