The planned initial public offering of Rosneft, the Russian state-owned oil company, on the London Stock Exchange raises serious ethical and energy security issues.
The ethical issues are relatively straightforward. The main asset of Rosneft is the Yugansk oilfield that was acquired from Yukos when that company was assessed for back taxes and its assets were auctioned off. But it was not acquired directly. The auction was won by an unknown Russian company that sold itself within days to Rosneft.
The transaction was widely believed to have been engineered by President Vladimir Putin’s powerful aide, Rosneft chairman Igor Sechin, and it was financed by compliant Russian banks. The unknown owners made an unknown amount of money on the transaction. Part of the IPO proceeds would go to repay the Russian banks.
The question is, should an IPO be allowed to go forward without disclosing the pertinent information; indeed, should it be allowed to go forward at all? To argue that it will improve transparency ignores the fact that Rosneft is an instrument of state that will always serve the political objectives of Russia in preference to the interests of the shareholders. Is Rosneft willing to put this into the prospectus?
The energy security issue is more complicated and requires some explanation. When the Soviet system disintegrated, the energy sector was privatised in a chaotic fashion. Devious transactions were perpetrated, such as the loan for shares scheme, and enormous fortunes were made. When Mr Putin became president, he used the power of the state to regain control of the energy industry. He put the president of Yukos, Mikhail Khodorkovsky, in jail and bankrupted the company.
Mr. Putin put his own man, Alexei Miller, in charge of Gazprom and pushed out the previous management that had built a private fiefdom out of Gazprom’s properties. The president did not dissolve the fiefdom, however, but used it to assert control over the production and transportation of gas in the neighbouring countries.
This led to the formation of a network of untransparent companies that served the dual purpose of extending Russian influence and creating private wealth. Billions of dollars were siphoned off over the years. The most valuable asset was the gas of Turkmenistan, part of which was resold by a company registered in Hungary at a multiple of the price at which it was bought. While the ownership of Eural Trans Gas was never disclosed, the decisions to give it contracts were made jointly by Mr. Putin and the then president of Ukraine, Leonid Kuchma. I believe that was one reason why Mr. Putin exposed himself so publicly in backing Mr. Kuchma’s nominee, Viktor Yanukovich, for president of Ukraine in 2004. After the Orange Revolution, the contract with Turkmenistan passed into the hands of RosUkrEnergo, a company with obscure ownership set up by Raiffeisenbank of Austria.
At the start of 2006, Russia cut off the gas supply to Ukraine. Ukraine, in turn, tapped into the gas that was passing through Ukraine on its way to the rest of Europe. This caused an uproar in Europe and forced Russia to restore supplies to Ukraine; but in the subsequent settlement Russia gained the upper hand. It promised gas supplies at reduced prices through RosUkrEnergo for six months, but Ukraine committed itself to fixing the transit fees for five years. After six months, Russia will be able to exert political pressure on Ukraine by threatening to raise gas prices. Russia already exercises considerable influence over Belarus.
The result is that Europe is relying for a large portion of energy supplies on a country that does not hesitate to use its monopoly power in devious and arbitrary ways. Until now, European countries have been competing with each other to obtain supplies from Russia. This has put them at Russia’s mercy. Energy dependence is having a major influence on the attitude and policies of the European Union towards Russia and its neighbours.
It will serve the national interests of the member states to develop a European energy policy. Acting together, they can improve the balance of power. In the short run, Russia is in the driver’s seat: an interruption of gas supplies disrupts European economies immediately while an interruption of gas revenues would affect Russia only with a delay. In the long run, the situation is reversed. Russia needs a market for its gas and few alternatives exist as long as Europe sticks together.
Europe could tell Russia that if it wants to maintain and increase its market in Europe, it must agree to a change in conditions by ratifying the European Energy Charter and the Extractive Industries Transparency Initiative. This would turn the pipelines into highways, break up the Russian gas monopoly and inhibit the currently prevailing devious arrangements.
Energy security is on the agenda of the forthcoming Group of Eight meeting in St Petersburg. If the Rosneft IPO went forward, it would consolidate and legitimise a state of affairs that is detrimental to Europe’s energy security and weaken the EU’s hand in negotiating better conditions with Russia.