#38 - JRL 2006-221 - JRL Home
Russia Profile
October 2, 2006
The Stereotypical Champion
What Rosneft Says About Russia’s Economic Strategy
By Ivor Crotty

In the aftermath of Rosneft’s much-vaunted IPO, the phrase “national champion” has become indelibly associated with contemporary Russia, but the idea behind the term, as well as Rosneft’s position in the category, require a more detailed explanation than is usually given in the media.

In order to understand the background of the concept of national champions, the 1999 issue of the Journal of the St. Petersburg Mining Institute is a good place to start. The lead article is by Vladimir Putin, and it outlines how Russia’s natural resources, hydrocarbons in particular, should form the basis of Russia’s economic development. The article proposes that the state should closely regulate and develop the natural resources sector through creating companies with close links to the power vertical, making the firms big enough to compete with multinationals. These companies would become “national champions,” representing the state’s interest in international commerce.

Following Rosneft’s emergence onto the global economic landscape in the first half of 2006, the phrase “national champion” became commonplace, and discussions of its meaning increased in the economic community. At a Moscow investors’ conference in June, Arkady Dvorkovich, head of the presidential expert board, said that “Russia must create national champion companies if it is to develop its economy.” He went on to say that such champions will be controlled by the state through a transition period and would then be privately owned but will receive state support, particularly for exports.

In addition to its champion-style companies in the oil and gas sector, Russia is developing national champions in aviation, energy transport and metallurgy. United Aircraft Corporation is being developed as a national champion in aerospace through the merging of Sukhoi, Irkut, MiG, Ilyushin, Tupolev and Yakovlev, while Aeroflot is expanding its reach through the acquisition of regional airlines, and Vneshtorgbank’s recent acquisition of 5% of EADS, Airbus’ parent company. In the field of energy transport, Transnefteprodukt, where Vladislav Surkov, deputy head of the presidential administration, is on the board of directors, could become a champion through a merger with state-pipeline monopoly Transneft, the world’s largest pipeline company. RAO UES, the state power producer with a market capitalization of over $30 billion plans to privatize all thermal power generation under ongoing reforms.

The idea of the national champion is thus very much a part of Russia’s economic restructuring. It would be wrong, however, to characterize the champion companies only as giant puppets controlled by strings held in the Kremlin, though in the case of Gazprom, this is probably true, but in other areas the champions are competing in developing markets whose regulatory structure are still in their infancy, such as banking.

In the international energy sector, there is nothing novel or particularly Russian about the national champion idea, particularly as far as Rosneft is concerned. The top 13 oil companies in the world by proven reserves are also “national champions,” with varying degrees of state presence on their boards.

The controversy surrounding Rosneft’s status as a national champion had more to do with the scrutiny that the company underwent in the run-up to the IPO, rather than its uniqueness as a semi-state oil company. This attention reflected western analysts’ discomfort with investing in a Kremlin-supported company almost entirely dependent upon a subsidiary (Yuganskneftegaz) acquired when Yukos (the largest privately owned firm in Russia at the time) was systematically dismembered by the state.

The coverage of the IPO in Western media was laden with suspicions and stereotypes borrowed from cold-war vocabulary, yet raised issues relevant to the offering. In the months prior to the IPO, The Economist advised “prospective buyers inclined to heed their consciences” to ignore all upcoming oil IPOs in Russia. Similarly, Der Spiegel pointed out that Rosneft remained “under the control of a club of Moscow power brokers” and as such represented bad business for investors. In turn, the September 12th announcement that the FSB trained son of FSB head Nikolay Patrushev had been appointed advisor to Rosneft Board member, and Presidential Aide, Igor Sechin, did little to allay international and domestic doubts in relation to corporate governance at Rosneft.

Significantly, however, the IPO demonstrated that the intense speculation on the ethics behind Rosneft’s offering was not enough to dissuade strategic investors from potential access to resources and an opportunity to curry favor with the Kremlin. The decision by the British Financial Services Regulator to reject Yukos’ dramatic last-day appeal against the IPO, which smacked more of desperation rather than conviction, also served to insulate Rosneft from further legal claims in relation to its takeover of Yuganskneftegaz. The IPO order book was oversubscribed by a factor of 1.5, following offers from BP ($1 billion), Petronas ($1 billion), CNPC (a $2.5 billion bid yielded a $500 million stake) and widely reported $1 billion offers from oligarchs Roman Abramovich, Vladimir Lisin, and Oleg Deripaska.

In commenting on the IPO, BP’s CEO Lord John Browne revealed the edge a national champion has over an ordinary corporation by telling the press: “I think it’s good to support Rosneft, it’s about enhancing our relationship with a country.” BP is a partner with Rosneft on Sakhalin-5. They will become a partner to Gazprom when the giant, as is widely anticipated, takes over TNK next year and are probably anxious to avoid the PSA related difficulties being encountered at teh Shell dominated Sakhalin-2 project.

However, some additional complications arise when considering Rosneft as a national champion. Although mineral resources provide 50 percent of Russia’s GDP and account for 70 percent of its export revenues, Rosneft’s contribution to this is negligible when compared to Gazprom’s 8 percent, and as such the 'national champion' mantle becomes questionable. Recently, Presidential Aide Igor Shuvalov has also publicly stated his belief that the company will eventually be fully privatized, though this may simply represent a more liberal voice within the Kremlin. A full privatization however, would not necessarily mean that Rosneft would have no ties to government officials, and as such, regardless of whatever plans the Kremlin makes for Rosneft, it will be known for better and for worse as a national champion.

Like many of the Kremlin’s policies, no matter how nebulously conceived or well intentioned, the national champion model and the Rosneft IPO arose from top-down strategic restructuring in the Russian economy. This liberalization of ownership through the IPO, occurring as overall control in the company is consolidated by the power vertical, points as much to Russia’s future as to its past.