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Russia: Oil Companies Merge To Form Powerhouse

Moscow, 20 January 1998 (RFE/RL) -- Creating a political and economic powerhouse, two of Russia's leading business magnates have announced plans to merge their oil companies, creating the world's third largest oil company by production.

The merger, announced yesterday, unites Mikhail Khordokovsky, a high-profile banker who heads the Yukos oil company, and Boris Berezovsky, a tycoon who is believed to control the Sibneft oil company. Officials said the new company, to be called Yuksi, will be the world's largest public company by proven reserves and the third biggest company by oil production, behind only Royal/Dutch Shell and Exxon.

Khordokovsky said: "The objective of this combination is to create a world-scale and world-class integrated oil company with strategically located operations throughout Russia." He added that the merger reflected a trend towards consolidation in the oil industry to create more efficient and competitive oil companies of world stature.

Yuksi will become Russia's largest oil company, pushing oil major Lukoil into second place in terms of production. The companies which comprise Yuksi last year accounted for more than one-fifth of Russia's oil production, churning out 1.3 million barrels per day.

The merger also puts Yuksi in a strong position to make a winning bid at the auction of Rosneft, the last major oil company still in state hands. The sale, which has attracted worldwide interest, is expected to fetch up to $1.5 thousand million when it is sold later this year. Yuksi is searching for an international partner to help finance its bid.

Russian oil company Sidanko, controlled by Vladimir Potanin's Uneximbank, last year formed an alliance with British Petroleum to take part in the auction. And Lukoil has teamed up with national gas monopoly Gazprom and Royal/Dutch Shell to make a bid.

The merger strengthens Yuksi's chances of capturing Rosneft, but it also has drawn a stark dividing line among Russia's once united bankers. Berezovsky, who has bragged that Russia's top seven financiers joined forces to bankroll President Boris Yeltsin's re-election in 1996, is now in fierce competition with Uneximbank's Potanin and a vocal critic of the government's reform effort, led by First Deputy Prime Minister Anatoly Chubais.

Berezovsky, who has never confirmed his stake in Sibneft, attended yesterday's signing ceremony, sitting alongside two of Russia's other leading bankers, Vladimir Gussinsky, founder of MOST Bank, and Alexander Smolensky, founder of Stolichny Bank (now SBS-Agro). Russian public television (ORT) said the show of unity was meant to dispel rumors that there was infighting among the bankers.

Analysts have also noted that the ceremony, chaired by Prime Minister Viktor Chernomyrdin, reflected the growing divisions within the Russian government over reform policies. Chernomyrdin recently took over responsibility for overseeing the Russian fuel and energy ministry, replacing First Deputy Prime Minister Boris Nemtsov. The cabinet reorganization was widely seen as an attempt by the prime minister to clip the wings of his two deputies, Nemtsov and Chubais.

Chernomyrdin, believed to be close to Berezovsky, gave his seal of approval to the merger, saying it would help attract foreign capital into the Russian oil industry. Acknowledging that the new oil company might try to influence the government, Chernomyrdin nonetheless urged the financiers to focus its efforts on strengthening the new company.

Yuksi will have address a host of issues to complete the merger of the new company, which includes four oil fields, five refineries and other reserves. Sibneft will hold 40 percent of the new company, while Yukos will hold 60 percent. Khordokovsky will become the company's new chairman.

But already analysts are warning that the merger could spell doom for minority shareholders in the two companies. Khordokovsky pledged to give minority shareholders a good deal, but no details of the merger have been announced.

Until the merger is completed later this year, Yuksi will be a holding company bringing together four firms: Yukos and its recently acquired stake in Eastern Oil Company, as well as Sibneft, which controls the East Siberian Oil and Gas company. The vast resources of the new company is expected to attract the interest of foreign oil majors looking to get into the Russian market.

The merger reflects not only the economic and political weight of the companies and individuals involved, but also the changing face of the Russian oil industry.

Multinational oil companies have tried in the past to enter the Russian oil industry through production sharing agreements - special tax and legal conditions guaranteed by the Russian parliament. But they faced stiff opposition from the State Duma. Now foreign oil majors are focusing on forming strategic partnerships with Russian oil companies.