Kremlin plans to halve size of Rosneft's London float as City doubts persist

Rise in oil price allows Russians to reduce offer
· Investors voice legal and ethical fears about listing

Mark Milner, Industrial editor
Monday May 1, 2006
The Guardian


Rosneft is set to slash back dramatically the size of this summer's planned London flotation amid City concerns about Russian corporate governance standards.
The oil giant was expected to sell up to £11bn of shares through an initial public offering that would have seen up to 49% of the company's equity offered to investors but is now planning to reduce the figure to about £4bn-£5.5bn, according to reports this weekend.

The Kremlin is expected to sell only sufficient shares to cover the £4bn cost of its purchase of a controlling stake in another Russian energy group, Gazprom. It is believed it took the decision to limit the size of the flotation because of the positive impact of the high oil price on Rosneft's finances.


Rosneft is expected to publish its offer-for-sale prospectus next month before an late July flotation that will see its shares listed in London and Moscow.
London has become a destination of choice for an increasing number of Russian companies keen to cash in on investor enthusiasm for the natural resources sectors. However, there is concern about corporate governance standards and the way foreign investors are treated.

Last week it was revealed that the head of the London Stock Exchange, Clara Furse, had written to Russia's president, Vladimir Putin, in support of William Browder, the head of Hermitage Capital Management, the largest foreign investor in Russia. Mr Browder, a critic of Russian corporate governance, has been barred from entering Russia since late last year.

Ms Furse warned that the exclusion could do "significant damage to Russia's reputation" and that it could have "a negative impact on the ability of Russian companies to raise capital outside Russia".

Her warnings have been reflected in comments from one of the City's leading investors, F&C. It has cautioned that the Rosneft flotation raised serious questions of governance and legal risk. "The Russian legal regime is opaque and difficult to navigate," said Karina Litvack, F&C's head of corporate governance and socially responsible investment. "We don't pretend to understand it, and if we cannot understand something we won't invest in it."

George Soros is another disapproving voice. In an article published in the Financial Times, the billionaire investor wrote that Rosneft's float "raises serious ethical and energy security issues".

One area of concern is Rosneft's acquisition of the assets of Yukos, which were seized by the Russian government from the now-jailed oligarch Mikhail Khodorkovsky in lieu of unpaid taxes.

Governance is not the only corporate issue straining relations between the Kremlin and London. The deputy head of Gazprom, Alexei Miller, delivered a pointed warning to European Union ambassadors last month that any attempts to block the company's expansion in Europe would "not lead to good results". His comments followed reports that the British government was concerned about a possible bid from the Russian energy group for Centrica, the parent company of British Gas. The British government has since made it clear that it would expect any approach from Gazprom to be dealt with by the competition authorities, not by ministers.

Yesterday Centrica shrugged off a report that it was holding talks with Gazprom about a deal that would see it take a stake in the Baltic pipeline project, which will bring more Russian gas to western Europe in exchange for a stake in the British company.

A spokesman declined to comment on the report of the asset swap. "If you are trying to secure gas supplies for the UK you have to talk to every company out there," he added. "We are talking to Shell, to BP, to all the big players."