It seems like a compelling story: Rosneft's oil reserves are vast, its costs are low by international standards, and the fact that it will remain majority-owned by the Russian state after the flotation will ensure it receives preferential treatment at home. And the company claims it's playing by Western rules; a veteran European banker has joined the board, and the firm uses U.S. accounting standards. Rosneft's
404 Not Found
Try telling that to Mikhail Khodorkovsky, a former Russian oligarch currently serving a jail sentence in Siberia. The Kremlin broke up his oil company, Yukos, in 2004 with a combination of criminal fraud charges against executives and massive back-tax claims that far exceeded the firm's revenue. Yukos' main oil-production unit was auctioned off to a single low bidder that turned out to be a front company for Rosneft. Those confiscated Yukos assets now constitute about 70% of Rosneft's oil production and reserves. The company's initial public offering (ipo) prospectus lists more than $47 billion in outstanding legal claims relating to the Yukos affair, and Khodorkovsky's lawyer, Robert Amsterdam, decries Rosneft as "the handmaiden of expropriation."
Security
Even some investors who are bullish on Russia are concerned. "The Russian legal system is not a credible one, and that has a visible impact on the safety of investments in the country," says Karina Litvack, the head of corporate governance and socially responsible investing at the London investment firm F&C Asset Management, who urges investors to "tread carefully" before buying the stock.
That's sound advice. The gap between comforting words and troubling deeds is one reason why there is a deep ambivalence in Europe, the U.S. and Asia about Russia's entire energy policy at a time of growing concern over the security of future energy supplies. Russia lost much of its global clout with the dissolution of the Soviet Union 15 years ago, but after successfully reversing a production slump in the early 1990s, it has re-emerged as an energy superpower. Last year it was the world's second largest oil producer after Saudi Arabia. In gas, it is the undisputed world leader, with proven reserves almost double those of second-place Iran. For the rest of the world, that spells a welcome opportunity. Europe has long relied on Russia to fill its growing energy demands, and in the aftermath of Sept. 11, many in the U.S. began looking to it as a potential major alternative energy source to the Middle East. Now the Chinese, too, are clamoring for much larger deliveries of Russian oil and gas.
But dependence on Russian energy comes at a political price. Russian President Vladimir Putin doesn't hide his ultimate goal. Russia "must aspire to claim world leadership in the realm of energy," Putin told his Security Council last December. For the Kremlin, energy security equals Russian national security, and it won't shy away from making oil and gas significant tools of its foreign policy. The clearest sign came last winter, when the state-controlled gas behemoth Gazprom shut off supplies to Ukraine for several days, in what the Russians described as a price dispute but Ukraine and many others took to be a crude political move to punish Kiev for embracing Western institutions such as nato.
More recently, Russian government officials have talked tough with West European leaders, raising the prospect that they might divert energy supplies to China and the U.S. if the Europeans don't meet their demands for better access to Western markets, including ownership of some refining and distribution operations. The Russians have barred William Browder, a leading Western investor in Russia who has been a big critic of Russian corporate practices, from re-entering the country, after he was denied entry last November without explanation. And just last month, Russian officials refused to participate in a meeting in Tbilisi, Georgia, sponsored by the International Energy Agency (iea), which discussed diversifying energy sources, and put pressure on other delegates from Western Europe not to participate either, or at least not to say anything that might offend Russia. "People were jittery," according to one person who attended.
Resources
Behavior like that does not go down well in the U.S. In a speech in the Lithuanian capital of Vilnius in May that provoked a furious reaction in Moscow, U.S. Vice President Dick Cheney warned Moscow against using energy as "tools of intimidation and blackmail." One conservative Russia watcher, Ariel Cohen of the Washington-based Heritage Foundation, says that "Russia had a very good opportunity to become a major alternative exporter [to the U.S.] in 2001 and 2002, but it has missed that opportunity by not behaving as a civilized partner." In Europe, the rhetoric is less pointed, but the concern runs even deeper: the European Union depends on Russia for about one-quarter of its oil and gas, and when Gazprom shut off supplies to Ukraine in January, several West European countries briefly felt the impact, too.