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Russia: Sale Of Oil Company Recalls Privatization Scandals

  • Michael Lelyveld

Russia's controversial sale of the Slavneft oil company may have solved the government's debt-payment problem, but, analysts say, it has darkened the outlook for transparency and investment. The result is a reminder of past privatization scandals and a warning that little has changed, despite claims of reform.

Boston, 20 December 2002 (RFE/RL) -- This week's sale of the Slavneft oil company may not rank as the most scandalous privatization in Russia's history, but analysts say it deserves a place on the list.

The government's long-awaited sale of nearly 75 percent of Russia's ninth-largest oil company will bring $1.86 billion to the state's coffers in time for next year's debt obligations. A joint investment firm backed by fifth-place Sibneft and fourth-place Tyumen Oil Company (TNK) made the winning bid.

The price was slightly higher than the government's minimum of $1.7 billion but far less than the $3 billion valuation estimated by the Audit Chamber of the State Duma. RIA-Novosti reports that after the auction on 17 November, Audit Chamber Chairman Sergei Stepashin downplayed the result, saying it was not "disastrous." But Finance Minister Aleksei Kudrin said, "It is a pity that the shares were sold at such a price."

Presidential adviser Andrei Illarionov said the sale could have fetched more if fewer bidders had been barred. Duma Speaker Gennadii Seleznev went further, calling it "a failure." Seleznev added, "Those who had said that it was going to be a fake instead of a competition proved to be right."

After weeks of reports on the expected competition, the auction was finished in four minutes, leaving analysts to wonder whether privatization in Russia has really changed at all over the years.

The winning companies praised the results in a joint statement. Sibneft President Yevgenii Shvidler said, "The joint efforts of Sibneft and TNK to privatize Slavneft testify to the successful development of the oil industry in Russia."

But the sale could hardly be called a triumph for transparency. At least six bidders were disqualified or forced to withdraw at the last minute under circumstances that bordered on the bizarre.

Marshall Goldman, associate director of Harvard University's Davis Center for Russian Studies, told RFE/RL, "If you knock out bidders, then it's not as transparent as it would seem." Yesterday, "The New York Times" said, "The sale, once expected to be the most open and competitive in recent Russian history, instead gave new meaning to the word opaque."

The China National Petroleum Corporation (CNPC) dropped out after a Duma resolution made clear that a foreign interest was unwelcome. RBC News quotes an unnamed senior Russian official as saying: "As far as I know, the Chinese were offended. CNPC was formally invited to take part in the auction, but later it came under pressure to withdraw the bid." The Chinese interest had been expected to drive the price as high as $3 billion.

The Federal Property Fund excluded state-owned Rosneft, based on a court ruling that it had failed to follow "required procedure." The company said it would sue over the decision, adding that it had been prepared to pay $2.5 billion. A government source told RBC that a sale to Rosneft would only have meant passing money from one state pocket to the next.

But a more questionable move came when Property Fund Chairman Vladimir Malin announced that he had shut out four bidders, including TNK, "on grounds that they are facing executory process suits," RIA-Novosti reported. According to AP, the suits challenged the solvency of the oil firms.

There was no other explanation of the legal problems or the reason why TNK was still allowed to participate with Sibneft through its joint ownership of Invest-Oil, the registered winning bidder. The collaboration was not formally announced until after the auction closed. Rosneft's bidding entity, Finansprofit Expert, had been barred on the grounds that it was owned by Rosneft.

But even more questions were raised by the presence of two unidentified young women, clad in boots and furs, who were allowed to bid. AP said they refused to reveal their affiliations, but "The Moscow Times" reported on 19 December that one blurted out, "We're from Invest-Oil." The paper concluded that all the surviving bidders were somehow linked to Sibneft and TNK.

Goldman, of Harvard, says the Slavneft sale may not sink to the level of the infamous loans-for-shares scheme in 1995, when oil assets were sold at a tiny fraction of their value. But he compares it to the 1997 sale of a 25 percent share in the telecom giant Svyazinvest, which the government initially saw as successful because it brought in $1.8 billion. Months of recriminations and charges of bid rigging followed, leading to dismissals from the government of former President Boris Yeltsin.

Goldman said, "It's a little bit better than under Yeltsin, but it's still corrupt."

Julia Nanay, director of Petroleum Finance Company, a Washington-based consulting firm, said the outcome is a measure of how much Sibneft founder Roman Abramovich, the governor of the arctic Chukotka Autonomous Okrug, wanted to add Slavneft to his assets. Sibneft has been buying up blocking stakes in Slavneft subsidiaries for months. Earlier this month, Sibneft also paid Belarus $213 million for its 11 percent share of the company, making rival bids nearly pointless.

On 19 December, Prime Minister Mikhail Kasyanov was still stressing the positive, telling a cabinet meeting that Russia's debt problem next year has "practically been solved" with the sales of Slavneft and shares of LUKoil earlier this month. But Russia's campaign to improve its investment image has suffered another blow that could prove more costly in the long run.

Nanay said: "Among the Russian companies, there's an understanding that this is how business is done. Is it clear to us in the West? No. Will it ever be clear? Probably not."

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