#17 - RW 270
Transitions Online
www.tol.cz
August 18, 2003
Russia: End of the Yukos Affair?
Authorities give the green light for Yukos to merge with Sibneft, creating
Russia’s largest oil company.
By Sergei Borisov

ULYANOVSK, Russia--The Russian Anti-Monopoly Ministry has approved the creation the merger of the oil giant Yukos with its smaller rival Sibneft. The decision creates the largest oil company in Russia and ends speculation that highly controversial investigations relating to Yukos could block the deal.

The merger was announced four months ago. The head of the Anti-Monopoly Ministry, Ilya Yuzhanov, told reporters that the process of decision-making had not been dragged out, an indirect response to suggestions that political intrigues had affected the decision-making process.

“This is one of the largest deals in the history of our office, so we had to shovel a heap of materials,” Yuzhanov told reporters.

The merger was also the largest in Russian corporate history, allowing Yukos “to purchase up to 100 percent in Sibneft Oil Company.” The merger should be completed this year.

It will create the world's fourth-largest oil producer behind British Petroleum, ExxonMobil and Royal Dutch Shell. The new company will be called YukosSibneft. Its daily oil output is expected at 2.06 million barrels, more than a quarter of total production of Russia, the world’s second-biggest oil supplier behind Saudi Arabia.

The new company will have total reserves of around 19.4 billion barrels of oil equivalent, the Associated Press reported. The deal, as well as creating a giant, appears a strong strategic move, as the two companies are dominant in different regions.

Yukos’s CEO and the richest man in Russia Mikhail Khodorkovsky will head the new oil company. The chair will be Sibneft’s president, Eugene Shvidler.

IN THE COUNTRY’S INTERESTS

Yukos spokesperson Alexander Shadrin praised the ministry’s decision, stressing it would remove one of the latest obstacles for creating a company with a market capitalization of some $36 billion.

Under the deal, Yukos could get 100 percent of Sibneft, paying $3 billion for an initial 20 percent stake. Sibneft shareholders could exchange the remaining shares for shares in the new company. In a statement published in Rossiiskaya Gazeta in late July, Yukos said it would start issuing new shares to help complete its $14.2 billion purchase of Sibneft.

Yukos’s board on 30 June agreed to issue the shares that were offered to Sibneft strategic shareholders in exchange for their equity in Sibneft. Strategic investors hold 72 percent of Sibneft. The largest owner is Roman Abramovich, the second-richest man in Russia behind Khodorkovsky.

The companies said they would make “a fair offer” to Sibneft minority shareholders, Reuters reported.

“We hope it will enter the league, I would say, of the very few leading international companies in terms of efficiency, profits, and everything else,” Alexander Korsik, Sibneft’s vice-president, told AP Television News on 14 August.

Korsik said the company’s joint potential could contribute to Russian economic growth. “My feeling is that the anti-monopoly committee approved the merger because they were sure it was in the best interests of the country,” he suggested.

But the new company will have to honor a set of special conditions stipulated by the Anti-Monopoly Ministry. Independent oil traders must be given access to markets where YukosSibneft has a dominant position. It must also give current and future suppliers unfettered access to its oil refineries.

The third condition requires other companies to be allowed to participate in funding new pipeline projects on the proviso that they pay a sum that reflects the amount of oil they intend to pump through the pipelines.

This requirement relates to a strategic oil pipeline from Siberia to the countries of Asian Pacific regions. Yukos CEO Mikhail Khodorkovsky is a lobbyist for the project.

If YukosSibneft blocks competition in any way, it could be forced to sell off its refineries in Omsk, Angarsk, and Achinsk, the ministry said.

Analysts believe the terms are acceptable for YukosSibneft. “The conditions are not overly tough, and it will be relatively easy for the companies to meet them,” an analyst with Prospect Investment, Vladislav Tropko, told gazeta.ru.

The business daily Kommersant described the conditions as a “present” to Yukos and Sibneft.

Executives in both companies expressed satisfaction. The conditions are reasonable, a Yukos representative told Vremya Novostei. “It would be strange if they said: ‘Do everything you want in the market,’” he said. “And we don’t intend to break these conditions.”

ALL’S WELL THAT ENDS WELL?

This was the start of a good weekend for Sibneft’s owner, Roman Abramovich, who over the weekend watched the soccer club he bought in England, Chelsea, kick off the season with an impressive away victory over Liverpool.

For Khodorkovsky, the decision might be followed by similarly welcome relief if, as some analysts believe, it marks the beginning of the end to the Yukos affair, which has seen charges of murder and embezzlement leveled at important figures associated with Yukos and tax inspections at the company.

Khodorkovsky himself told Britain’s Financial Times on 6 August that “the judicial campaign against the company has been triggered by its planned merger with rival Sibneft.”

Khodorkovsky suggested he had been caught in the middle of a battle within the Kremlin between liberal reformers and hardline security officials. "As a result [of the merger announcement], we saw the strengthening of one half of [Russian President Vladimir] Putin's inner circle--or at least that's how the second half perceived it. They decided to undertake a certain counter action."

Analysts believe the Anti-Monopoly Ministry would not have approved the merger if the Kremlin had not made the decision.

“It’s a very positive signal, which confirms that the merger goes ahead as planned. It also probably means that the conflict is dying down,” Leonid Mirzoyan of Deutsche Bank told Reuters “It is not fully clear yet, but I hope the worst has passed.”

However, a commentary in Vremya Novostei warned that Khodorkovsky had spoken about merger only as a trigger for the attack on him. The causes still remain, it argued.

The markets in Russia reacted immediately to the news. Yukos shares rose 2 percent, helping to lift the market by 2.5 percent. This, though, is only a small part of the sum wiped off the stock’s value by the crisis. The stock lost 7 percent immediately after the scandal broke and has continued to fall in subsequent weeks.

In early August, there were reports that ChevronTexaco, the second biggest U.S. oil group, was in talks to buy a 25 percent stake in Yukos should the merger falls through. Yukos’s chief financial officer, Bruce Misamore, at the time said he would not give the report “the dignity of any comment.”

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