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#6
Sunday Times (UK)
May 18, 2003
Investors pile in to Russia
Huge oil deals have paved the way for more general investment as Moscow encourages foreign involvement.
By Lucinda Kemeny

FIVE YEARS AGO Russias economy was in crisis and it defaulted on its government debt. Today the country appears to be staging a remarkable recovery. Foreign investment is starting to pour in and last Thursday a consortium led by Shell announced the biggest single foreign investment in Russia, unveiling a 6 billion project on the island of Sakhalin. Many international companies, such as BP, have had to write off large amounts of capital from aborted Russian investments but they now appear ready to start again. Last February BP unveiled a 4.3 billion investment when it set up a joint venture with TNK, one of Russias largest oil companies.

Since that deal two of Russias largest oil companies, Yukos and Sibneft, have joined forces to create a 13.7 billion giant. Shell is pushing ahead with its mammoth deal, estimated to be the single biggest integrated oil and gas project ever undertaken.

Russia has huge natural resources and as traditional oil and gas areas such as the North Sea dry up, companies having been looking north and east.

Yet Russia has always been seen as risky and, given BPs own history and the crash in 1998, banks and companies have been nervous.

According to statistics from Citigroup, which has worked with both Yukos and Sibneft, foreign direct investment fell from $5 billion in 1997 to less than $3 billion in 1998, sinking further by 2001.

But BP has changed all that. Citigroup estimates that new direct investment levels of up to $8 billion a year are likely to be sustained.

The change has not come overnight. Political and economic instability have weighed heavily on Russia but analysts say the government has done much to encourage foreigners, particularly in oil and gas development. Here outsiders have been offered lucrative profit-sharing agreements.

More oil and steady prices for it have meant a stable economy. Several Russian companies are now looking to expand, using capital raised in Europe and America.

It started with fixed-income investors. Jay Collins, head of corporate finance and investment banking for the region at Citigroup, says going through the fund-raising process has transformed the largest companies and made them more attractive to western investors.

Russian eurobond issuers brought $1.9 billion worth of paper to the market in the last quarter of 2002 and demand remains high. Yukos and Alrosa, the diamond company, are among those that have already stuck their toes in the water.

Then companies including Tatneft, the giant Lukoil and Gazprom, one of the worlds largest gas producers, moved to list on the London Stock Exchange.

Bankers have their eyes on at least another 45 companies that could be seeking to raise new equity or debt or even float. Conservative estimates put the amount of money that could be raised at 6 billion.

The newly combined Yukos/ Sibneft is already examining an overseas listing. Norilsk Nickel and Ilim Pulp are tipped to be looking for cash.

Interest in Russia is moving beyond these traditional sectors, according to Mattias Westman, chief investment officer of Prosperity Capital, Russias second-largest fund manager.

Prosperity has a list of more than 70 institutional clients and the return on its largest fund has been more than 22% a year over the past seven years.

Westman says privatisation has brought commercial sense to Russian companies that previously had no incentive to streamline and make money. Consumer-goods companies have sprung up and, with none of the shackles of former state ownership, they provide good investment opportunities.

Cynics still worry that the investment bubble will burst, leaving the same devastation as in 1998, but analysts disagree.

They say long-term oil prices are expected to remain at about $18.50 a barrel and in such circumstances there is little risk of a crash. The issue, they say, is more likely to be which sectors will provide the next opportunities and which British companies and investors will take the plunge.

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