#2 - JRL 7059
February 12, 2003
Sale Puts Russia Into New Stage
By Valeria Korchagina and Victoria Lavrentieva
BP's spectacular $6.75 billion commitment to Russia reverberated throughout the corporate community Tuesday as business leaders and economists alike called it a pivotal event that could open the floodgates to further investments across the economic spectrum.
"This is a landmark event that puts Russia into a new stage," said Valery Nesterov of Troika Dialog investment bank.
"First there was the era of privatization conducted mostly with the use of domestic capital," he said. "Now it is time for Western companies and money to enter the scene."
With a single stroke of a pen, BP matched all foreign direct investment in the country in the last three years combined, said economist Christof R?hl, the World Bank's top Russian specialist.
"This deal is a vote of confidence to put significant money into any sector," he said. "[Until now,] foreign investors were not willing to take a concentrated ownership position in Russian businesses."
R?hl said that although direct investments in Russia have always been low, and although foreigners have been interested in natural resources, there has always been the opinion that Russia needed to create markets in these sectors first before it could attract serious investors. "But with this agreement, the Russian oil sector has become 'normal,'" he said.
The deal for 50 percent of an expanded TNK will create Russia's third-largest oil company and put BP, the world's third-largest oil company, on par with ExxonMobil and Royal Dutch/Shell in terms of proven hydrocarbon reserves.
The new-found optimism generated by BP's investment -- roughly equal to 1.5 percent of Russia's gross domestic product -- has already spread to the markets.
The benchmark RTS index has gained nearly 10 percent since Friday, when word first leaked that the deal would be announced this week.
The biggest beneficiaries have been other oil companies, such as Yukos, whose shares soared 5.2 percent on Tuesday alone. "BP paid a 25 percent premium over the average value of other Russian oil stocks, thus a positive re-rating of Russian oils is imminent," said Leonid Mirzoyan, oil and gas analyst with Deutsche Bank.
Tuesday's announcement also drove Russia's sovereign bonds to record highs as investors in emerging-market debt continue to see them as a safe haven from global uncertainties.
Russia is now the second-largest component of J.P. Morgan's benchmark Emerging Markets Bond Index Plus (EMBI+) after Mexico, accounting for around 22 percent of emerging-market debt, which many investors hold.
But the implications of the deal may go well beyond the oil sector and financial markets.
"I am confident that BP's example will attract new foreign investments into other sectors, too," said Irene Commeau, managing director of the European Business Club.
"This deal is very good news for all foreign investors working in Russia."
Mirzoyan of Deutsche Bank, however, said a wave of mergers and acquisitions with other foreign oil majors is unlikely to follow.
"This particular deal was most likely blessed by the country's leadership," he said. "There is probably room for one or two similar deals, but the issue is what share of production the state would be willing to let slip into foreign hands."
Troika's Nesterov said the most likely targets for acquisitions -- Sibneft and Yukos -- are not yet ready for a BP-TNK type of deal and have no serious need of a major foreign investor.
Nonetheless, Nesterov praised the deal for increasing competition in the most valuable sector of the Russian economy.
"From now on it won't just be smaller companies breathing down the necks of LUKoil and Yukos, but serious competitors like BP," he said, adding that companies such as Surgutneftegaz, Tatneft and state-owned Rosneft had better rethink their long-term strategies if they want to survive in the new atmosphere.
While critics of the deal were hard to find, experts warned that the economy still suffers from overdependence on commodities, a major factor keeping international rating agencies from putting Russia in their "investment grade" category, which would mean the economy is seen as stable over the long term.
"The deal is good news that highlights how attractive the Russian oil sector is for foreign investors. But the fact itself is not bringing Russia closer to investment grade," said Konrad Reuss, managing director of sovereign ratings at Standard & Poor's in London.
"I would not conclude based only on one transaction that there has been a complete climate change and that it will open the way to investments into other sectors," Reuss said.
Reuss stressed that structural reforms in many areas, including natural monopolies, civil service and banking, are crucial to reducing dependence on oil and gas.
"Greater diversification of the economy, which would underpin the sustainability of growth in Russia, will only come with acceleration of these reforms," he said.
Chris Weafer, chief strategist at Alfa Bank, wrote in a recent research note that "no single country that is considered to be dependent on any single source of income has ever seen a substantial flow of investment into their economy outside 'that' source of economic reliance. Never."