#19 - JRL 7062
February 14, 2003
OIL ON THE MOVE
But no sign of diversification
By Stanislav Menshikov
Of late, Mikhail Kasyanov has been stressing the point that the government, in its mid-term economic policy package, will concentrate on ways to lessen Russia's dependence on fuels and raw materials exports and increase the role of manufacturing industries. Early this week he assured the Duma that promoting manufacturing would be the centrepiece of his government's policies.
As he was speaking in parliament, BP, the third largest world oil conglomerate, and two Russian financial groups - Alfa (headed by Mikhail Fridman) and Access/Renova (headed by Viktor Vekselberg) announced a deal to form a new Russian oil concern. It would combine assets of the TNK (Tyumen Oil Company), Sidanco, Rusia Oil and other petroleum-related properties becoming the third largest oil conglomerate in Russia. BP and the Russian alliance (dubbed AAP) would each have a 50 percent share in the new company. Apart from contributing the shares it already owns in Sidanco and Rusia, BP will pay AAP an additional $3 billion in cash and $3.75 billion in its own stock in exchange for its share in the new company. It will also appoint the company's CEO while AAP will nominate its chairman. Management control will be in BP's hands.
If the deal goes through, it will be the largest piece of foreign direct investment (FDI) in this country, so far, adding $6.75 billion to $30 billion accumulated to date in all Russian industries. It could also help influence other international investors who are still reluctant to risk their money for various reasons. Even so, Russia may never catch up with China whose stock of FDI is ten times as large.
So far - so good. But the question remains as to how this deal conforms to the policy of lessening Russia's dependence on oil exports? With the exception of tobacco, beer, pharmaceuticals, and some other sectors, there has been no great interest shown by foreign companies in Russian manufacturing. Car assembly factories built by foreign firms so far are meant to produce tens of thousands of automobiles per year, which is minuscule in a market that totals 1.5 million. Plants bought by foreign businesses in various industries have been run into bankruptcy and closed down.
Despite complaints about the unsuitable business climate in this country foreign companies never turned down investment projects where expected returns were high even if it meant clashes with Russian competitors. The case of BP is a vivid illustration of this point.
BP first invested in Russian oil in 1997 buying 10 percent of Sidanco, then controlled by Vladimir Potanin. After the 1998 crisis, Fridman and Vekselberg succeeded in driving Potanin out of Sidanco and challenged BP's position. It took three years of severe fighting to reach a compromise. BP increased its share to 25 percent and retained its right to manage the company. Then, finally came the big deal described above.
What is BP's motivation? First and foremost, adding TNK's output and reserves to its own puts it on equal footing with global competitors Shell and Exxon Mobile. Also, BP would benefit from sharing the large superprofit created by the gap between Russia's low production costs and high world prices.
Of course, these considerations are not new. But since 1999, the Russian oil has changed drastically becoming a dynamic growth industry after a decade of stagnation. In the last three years, output of crude increased by 1.5 million barrels a day, i. e. by a quarter, and exports rose by a third. According to Mikhail Khodorkovsky, main owner of Yukos, Russia's largest oil producer today, exports may double by 2010. For BP, with its foothold in Siberian oil fields acquired years ago, missing that new big expansion would have been a fatal loss of business opportunity.
For the Fridman-Vekselberg group (AAP), an alliance with BP is not only a matter of boosting their international prestige and integrating into the world business community. By participating in the oil production boom, TNK has managed to substantially add to its capitalisation and succeeded to sell half of its shares for well over what is today considered an average price in the stock market. The $6.75 billion offered by BP is recorded as direct investment, but is actually buying securities, not investing in plant and equipment. What AAP does with those billions once they get them is anybody's guess.
The BP deal could also be a signal for selling controlling shares of other Russian oil companies to transnational concerns. Khodorkovsky's Yukos and Abramovich's Sibneft, which have seen their capitalisation rise handsomely in recent years, could be the first to follow. This would witness a major change in the acting players of Russian oligarchic football.
Mikhail Fridman duly praised Vladimir Putin and "Russia's political leadership" for active support in making the BP deal feasible. But what has all this to do with the stated government priority of reducing Russia's dependence on exports of fuels and raw materials? Will Fridman and Vekselberg use at least part of their newly gained billions for investment in the many capital-hungry sectors of Russian manufacturing industry? Hardly.