#11
Financial Times (UK)
25 October 2001
Yukos chief tries to show he is no wolf in sheep's
clothing: Many Norwegians are concerned about Mikhail Khodorkovsky's intentions
for his Kvaerner investment
By VALERIA CRISCIONE and ANDREW JACK
When Mikhail Khodorkovsky, head of the Russian oil group Yukos, met Harald Arnkvaern, chairman of Kvaerner, in Oslo yesterday, he did so against a background of Cold War-style hostility.
When Yukos was simply a large Kvaerner customer, relations were healthy. With the acquisition of a 22 per cent stake in the struggling Anglo-Norwegian engineering group, it has struck a national chord of suspicion about the Russian's motives, echoed in aggressive Norwegian media reports.
For those discovering Yukos for the first time, there are plenty of skeletons relating to its past operations that trigger expressions of concern, as there are at many Russian companies that emerged or survived through the 1990s. But for those who have observed the evolution taking place within Russia, there is a more positive slant that makes any final judgment ambiguous.
In the past two years, Yukos has shifted from corporate pariah to darling of the local investment community.
"Leopards may not change their spots, but rational company owners may realise that it is in their commercial interests to do so," says Stephen O'Sullivan, head of research at the Moscow brokerage UFG.
Mr Khodorkovsky was typical of a small breed of politically well connected entrepreneurs in Russia, who emerged in the past decade to become "oligarchs". He came to public prominence in the mid-1990s at the time of Yukos's privatisation.
He acquired the Russian government's majority stake in Yukos during the controversial "loans-for-shares" privatisations, auctions that amounted to cut-price sales to insiders. He won with a tender a fraction more than the minimum threshold.
In a business environment characterised by widespread corruption and inefficiency, he set out to consolidate his control. In the process he squeezed out minority shareholders from Yukos's principal operating subsidiaries, Yuganskneftegaz, Samaraneftegaz and Tomskneft.
The methods used included dilutive rights issues, and shareholder meetings switched at impossibly short notice to alternative venues many miles away, preventing those targeted from attending.
Disrespect for minority shareholders was, and is, widespread in Russia, but Yukos's alleged abuses were given a particularly high profile because one victim was the vocal and tenacious US foreign investor Kenneth Dart.
Bolstered by revenues from higher oil prices, Yukos reached an undisclosed settlement with him at the end of 1999, triggering a turning point for the company.
With his control over Yukos assured, Mr Khodorkovsky was among the first to see the need for longer-term investment in his company.
Ahead of his competitors, Mr Khodorkovsky was hiring a significant number of Western expatriates to senior positions within the company and drawing on the expertise of others through secondments and co-operation agreements with international contractors including Schlumberger and Kvaerner.
There have been continuous US GAAP accounts for Yukos since 1999. He has also promised quarterly reporting and a dividend policy to boost support. He actively promoted his company, began talking about the need for corporate ethics, and settled outstanding debts incurred by businesses within Yukos's orbit.
Most importantly, Mr Khodorkovsky sensed the changing rules of business under Russian President Vladimir Putin, with less scope for interference by companies in politics. Mr Khodorkovsky put an end to transfer pricing by consolidating Yukos's profits onshore, triggering record profits and payouts to all shareholders - and correspondingly large tax payments to the state.
The company has been rewarded richly. Yukos's stock-market performance has outstripped former-star rivals Lukoil and Surgutneftegaz, both now judged to be lagging behind in corporate governance and cultivation of minority shareholders.
For now, the question is whether a further drop in oil prices - or a halt in rewards from the stock market for perceived corporate governance improvements - will stop the company maintaining investor-friendly policies. Mr O'Sullivan warns: "It was an opportunistic conversion. Yukos could still backslide."
All eyes are now on the company's involvement with Kvaerner. Yukos has said it has no intention of taking control and that it wants to work with Kvaerner and develop the businesses in order to maximise its investment.
As Mr Khodorkovsky is fond of saying: "Investors have forgiven us once. They will not forgive us again." His handling of Kvaerner may prove an important litmus test. Additional reporting by Valeria Criscione in Oslo.
Next Issue