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Russia: Oil Companies Gain In Rankings, But Questions Persist

A new global survey says Russia's petroleum giants have risen in market value to join the world's largest companies in the past year. But their true value remains hard to assess as long as Russia's government continues to exert control over the energy sector and export monopolies.

Boston, 14 May 2002 (RFE/RL) -- Russian oil and gas companies have vaulted into the ranks of the world's biggest firms, according to a popular ranking released last week.

The rise of Russia's fortunes was one of the most remarkable events in world markets during the past year, said the "Financial Times" in its annual FT 500 survey. The London-based daily newspaper lists the largest companies by their value, based on market capitalization, or the price of all their issued shares.

The newspaper said, "Russia has benefited on two counts: First, its general rehabilitation after the domestic debt default crisis of 1998; and second, its preponderance of natural resources groups." It noted that no Russian company made the list in the previous three years.

Four Russian firms were valued at a total of $61.7 billion. First was Yukos, the second-biggest Russian oil company by annual revenue. It was followed by gas monopoly Gazprom, Surgutneftegaz, and Lukoil, which is usually regarded as Russia's largest oil company. The value of Yukos at $18.7 billion places it as the 227th company in the world, ahead of such well-regarded competitors as U.S.-based Conoco, Statoil of Norway and Repsol of Spain. Gazprom is ranked at No. 250, placing it right in the middle of the top 500 firms.

Despite the significant measure of Russia's recovery in the eyes of investors, there are obvious problems with reading too much into them. While Yukos is ranked above Conoco, for example, it has only about one-fourth of its annual revenues. Markets may value companies accurately. They can also be wrong, as in the case of the collapsed U.S. energy giant Enron, which came in 89th on the previous list but disappeared completely this year.

Even with its rise in the rankings, Gazprom could still be grossly undervalued at $17.3 billion. The world's biggest company controls one-fourth of global gas reserves but is said to be worth 17 percent less than Nintendo, the Japanese maker of video games.

Market values of Russian companies may also be hard to compare with counterparts because of trading restrictions on the overheated Russian market and their separate foreign offerings through issues known as American Depositary Receipts.

In the case of Gazprom, foreign investors have complained for two years that they have been barred from trading openly in the company's stock on the Russian market. The curbs force them to pay a premium for foreign shares, while holding back the value of the Russian companies.

Investors have made removal of the "ring-fence" around Russian shares in Gazprom a test of market reform. The major reason for the ring-fence seems to be fear of foreign control. The Russian government owns 38 percent of Gazprom.

In March, Gazprom's deputy chairman, Dmitrii Medvedev, told the "Financial Times" that the ring-fence may be dropped before the company's annual meeting in June. But there has been no hurry to do so, or to proceed with a promised restructuring.

For their part, foreign investors have had fewer recent complaints because their shares in Gazprom have climbed about 50 percent since the start of the year. The market's enthusiasm for Russia's recovery is a primary reason.

On the other hand, Gazprom is chronically short of cash, unable to fund needed investments, and saddled with government-set tariffs on the domestic market that may be less than its production costs.

Doubts have also been raised about Gazprom audits, asset stripping, and accountability.

The higher values for the Russian petroleum companies in the past year may reflect their ability to grow despite government inaction on one side and over-regulation on the other. In the case of Yukos, for example, the company raised oil output by 17 percent in the first quarter, despite the government's pledge to the Organization of the Petroleum Exporting Countries that it would curb exports.

But oil companies must still contend with the limits of an unreformed, state-owned pipeline monopoly, while values of their gas resources suffer from Gazprom's control over export routes.

The rising prices of the Russian companies are seen as a sign of expectations that conditions will improve. But accurate valuations may be impossible as long as regulation of the energy sector is both arbitrary and rigid. Russia's oil giants are climbing in world rankings, but their real value on world markets may still be anybody's guess.