Russian Roulette for Unflinching Investors

Ah, May, that glorious month when spring is upon us. A month that used to start with Russia's unveiling its newest and biggest weapons at an enormous parade celebrating communism. So there's no better time for us to examine the new thing that Russia's state capitalists hope to unveil later this year: the world's biggest stock offering. To wit, the proposed initial public offering of shares in Rosneft, Russia's state-owned oil company. Should Russia succeed in selling investors a stake in Rosneft for the widely predicted $20 billion or more, the deal would get top billing in Thomson Financial's IPO rankings, topping the $18 billion that NTT Mobile Communications of Japan raised in 1998. Normally, I'd wait to see some documents, crunch some numbers and call the company and get the usual "no comment" before writing anything. But this isn't a normal situation. So here's my opinion about owning this stock: nyet. No. Don't touch this unless you're a professional investor or a connected insider or you just happen to enjoy playing Russian roulette with a pistol that has five loaded chambers and one empty one instead of the other way around.

To be sure, the world's most prestigious investment bankers, lawyers and accountants are lining up to embrace the Rosneft offering. But remember that financial markets (and financial professionals) are frequently blinded by money—and there's enough money here to blind anyone. The fees on a $20 billion stock offering could approach $1 billion. Then there are all those profits for firms that will trade the stock for their own accounts, create derivatives based on it and work on its financing and takeover deals. For this kind of dough, Wall Street would happily persuade itself to certify rotgut as premium vodka.

The Rosneft risk isn't hard to see—you just need to open your eyes. First, despite brief periods of liberalism, Russia remains an autocratic country whether its rulers call themselves tsars, communists or Vladimir Putin. Second, this is a country that defaulted on its own ruble bonds in 1998. Third, a major reason that Rosneft's prospects are so rosy is that only two years ago, the Russian government essentially confiscated the prime assets of Yukos, a publicly traded company whose chief executive, Mikhail Khodorkovsky, had annoyed the Kremlin. So the government, using imaginative enforcement of Russian law, such as it is, asserted that Yukos had enormous tax obligations, then took over Yukos's assets to satisfy those obligations. Yukos's shareholders screamed, but to no avail. Khodorkovsky went to jail, Yukos went broke. I've got no sympathy for Khodorkovsky, whose fortune was based on buying state-owned assets ridiculously cheaply in deals that smelled like rotten herring. What matters is that the Kremlin showed no respect for the rights of Yukos's public shareholders. So why should you expect it to show any respect for the rights of Rosneft's shareholders? Still not convinced? In January, publicly traded Gazprom, Russia's natural-gas monopoly, cut off shipments to Ukraine because the Kremlin

was displeased with political developments there. Brief as the cutoff was, it didn't exactly enhance the firm's reputation or long-term prospects.

Unless you assume that the rule of law will take root in Russia overnight—fat chance! —buying into Rosneft isn't like buying into British Petroleum when Britain privatized it. Gazprom and Rosneft answer to the state, and are of enormous strategic importance to it. No matter how many non-Russians end up on Rosneft's board, you can bet that when push comes to shove, Rosneft will act in the Kremlin's geopolitical interests rather than in its own financial interests. Rosneft shares may well run up after the offering, and I'm sure the stock will look cheap relative to the ExxonMobils of the world. But beware. We're already hearing complaints from shareholders of Rosneft affiliates that the price being offered for their stakes is way too low. As they say in Moscow: good luck, tovahshchi.

THE TIME EUROPE, 21.12.05.

Date: 2015-12-11; view: 852