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On the other hand, there were some positive assessments as early as 2005. For example, in February of 2005, according to Standard & Poors, one of the most conservative rating agencies, ranked Russia at the B level with stable forecast (with the provision, however, that political decisions and actions of regulatory agencies are unpredictable), which provides for investments from long-term conservative investors. In spite of deteriorated investment environment for a certain part of business community, the RF Ministry of Economic Development and Trade has forecasted investment demand in 2005, which may potentially be created in high-tech industries and aircraft industry. Nevertheless, a negative balance of net foreign capital inflow is expected in 2005 as it was in 200418. The Experts analysts also presented a fairly optimistic forecast of a new wave of economic growth as based on According to . Illarionov, adviser to the RF President, in 2004 the amount of the export of capital made US $ 27 billion as compared with US $ 10 billion Registered in 2001. The Deputy Minister of Economic Development and Trade . Sharonov pointed out that in 2004 the capital outflow grew four times; however, in absolute terms the deputy minister evaluates the total amount of outflow at a more moderate level, US $ 8 billion.

Shokhina . Investoram neuyutno v Rossii (Investors Feel Uncomfortable in Russia) // Ekspert, 2005, No. 4, p. 43.

According to the data presented by the Association of Managers of Russia ( www.amr.ru ).

Press conference of . Klepach, the Head of Macroeconomic Forecast Department under the RF Ministry of Economic Development and Trade, February 1, 2005. ( www.economy.gov.ru ).

interpreting the data presented by the Russian Federal Statistics Service on investments in fixed assets in 2004. According to these analysts, there were two basic factors that worked for the recovery of investments in 2004: the government made its intentions more clear and transparent in regard to YUKOS and the economy at large (the government intends to gain control over the sector of raw materials exports as well as get compensation from the first wave tycoons who got hold of their assets on the tide of uncivilized privatization, which made a clear picture of most risky political areas as well as those economic areas under minimum risk: small and medium-size businesses, high-tech industries, and consumer sector), and substantial amount of idle funds in the economy19.

There is another significant aspect, which is worth mentioning. The transaction with Yuganskneftegaz equity demonstrated clearly that there was a, putting it mildly, non-economic issue (or the most important task) about the entire YUKOS affair. This was indicated by a fairly contradictive and poorly designed process of establishing a public oil company on the basis of the OAO Gazprom.

The idea of setting up a public oil company (conditionally named Gosneft) was discussed as early as at the beginning of the 2000s. This company (if established) was supposed to become a foothold for a direct participation of the government in the industry along with consolidation of all remained state owned assets in this industry. As early as 2003, the hypothetic Gosneft (as well as Rosneft and Surgutneftegaz) was considered by analysts as a future candidate for the management of the nationalized package of the YUKOS equity on behalf of the government.

In 2004 this idea was implemented in practice. In spite of a relatively wide range of options of increasing public share in the OAO Gazprom equity, the final choice was made in favor of combining assets of a number of companies with government participation. In September of 2004, a future acquisition of the OAO NK Rosneft was announced exchange of 100 per cent of the OAO NK Rosneft shares for 10.47 per cent of treasury stocks of the OAO Gazprom being on the balance sheets of its subsidiaries (presumably 4.83 per cent of the OAO Gazprom shares are on the balance of Gazprominvestholding, 3.64 per cent Gazprombank, 1.5 per cent natural gas producing enterprises, as well as 1.74 per cent out of 4.58 per cent of shares owned by Gazprom Finance BV). On November 1, 2004, the Chairman of the Board of Directors of the OAO Gazprom signed a founders decision on establishing the OOO Gazpromneft with a 100 per cent participation of the OAO Gazprom. Director of Rosneft20 S. Bogdanchikov was appointed as the Director General of the company. Oil and gas condensate production, transportation and storage were supposed to be core business of the company.

As far as it is known, the following scheme was officially approved by mid- December of 2004:

- an authorized agency acting on behalf of the Russian Federation establishes the OAO Rosneftegaz and invests 100 per cent of the shares in the OAO NK Rosneft owned by the federal government in its authorized capital;

- OAO Gazprom subsidiaries transfer 10.74 per cent of the OAO Gazprom shares owned by them to the OOO Gazpromneft balance;

- OAO Rosneftegaz transfer to the OOO Gazpromneft 100 per cent of the shares in the OAO NK Rosneft in exchange for 10.74 per cent of shares in the OAO Gazprom.

The implementation of this scheme was started by the end of 2004. The Russian Federation established the OAO Rosneftegaz. On December 7 of 2004, the RF President issued a decree, in which he excluded the OAO NK Rosneft21 from and included the OAO Rosneftegaz in the list of strategic enterprises and joint stock companies, as well as ordered to accept the proposal of the RF Government to invest 100 per cent shares of the OAO NK Rosneft owned by the federal government in the authorized capital of the OAO Rosneftegaz.

Khudsheye pozadi. Redaktsionnaya statya (The worse is behind. Editorial). // Expert, 2005, No. 4. p. 11.

The data are presented at the official web site of the OAO Gazprom www.gazprom.ru. The issues of corporate risks and assessment of combined assets are not considered.

The OAO NK Rosneft was included into the list of strategic enterprises and joint stock companies by Decree of the RF President No. 1009 On the approval of the list of strategic enterprises and strategic joint stock companies of August 4, 2004. Strategic enterprises and joint stock companies must not be privatized unless they are excluded from this list as stipulated by federal law No. 178 - FZ of December 21, 2001, On privatization of public and municipal property.

The scheme concerning the establishment of a public energy giant was supposed to be finalized by the purchase of a block of stocks of Yuganskneftegaz by the OOO Gazpromneft (and consequent reregistration of the former as a subsidiary of the OAO Gazprom) at an auction to be held on December 19, 2004. However, this scheme encountered a strong opposition of YUKOS shareholders and practically failed: in order to avoid potential legal risks abroad, the OAO Gazprom had to sell 100 per cent of its interest in the OOO Gazpromneft to unknown persons, which were not affiliated to the OAO Gazprom. The OAO Rosneft won the auction via an intermediary, which assumed all risks at the auction, therefore, the capitalization of the OAO Rosneft increased several times.

Further prospects of the merging of oil assets owned by the OAO Gazprom and Rosneft or of the making the government a majority shareholder of the OAO Gazprom still remain uncertain. 22 In spite of the large financial liabilities arisen from transactional payments (existing debts plus debts related transactional financing and the debts due to the Yuganskneftegaz), the OAO Rosneft may become a leading player in the petroleum industry (such position is enhanced by the major contracts on oil supply to China till 2010). However, there are possible various options: a 100 per cent integration of Rosneft into the OAO Gazprom without the block of shares of Yuganskneftegaz; exchange of shares between the OAO Gazprom and Rosneft taking into account the new value of the latter (at the same time, it may turn out that the OAO Gazprom will have a minority share); the establishing of direct control Gazprom Rosneft Baikal Finance Group Yuganskneftegaz; and the complete rejection of merger.

Thus, for instance according to the opinion expressed by the RF Ministry of Industry and Power Engineering, it would be feasible to single the assets belonging to the Yuganskneftegaz out of the respective joint stock company and transfer these shares in the ownership of an independent company, where the state would have the 100 per cent interest (probably, the earlier created Rosneftegaz).

Twenty per cent of shares of the new company may be sold to CNPC (a Chinese oil company). Gazprom should acquire Rosneft without participation of assets of Yuganskneftegaz. It is obvious that this scheme is intended to prevent legal risks abroad: the new state owned company may become an oil supplier to the domestic market, while Rosneft will become the key state owned oil exporter after integration into Gazprom23. On January 19, 2005, . Miller, the Chairman of the Board of the OAO Gazprom, announced that the development of the merger scheme as concerns Gazprom and Rosneft, which according to the available data made no provision for including Yuganskneftegaz assets, had been completed and that the blocks of shares should be ready for exchange at the end of January of 2005. However, early in February of 2005, the idea of Rosneft independency (in such a case Yuganskneftegaz should be retained in the composition of Rosneft) and its transformation into an important state owned oil exporter was reanimated again. In the framework of this option, Gazprom would not acquire the 100 per cent interest in Rosneft. Instead, the treasury shares of Gazprom would be assigned to the government in exchange for the minority share in the independent Rosneft 24.

By the end of April, 2005, none of these schemes reflecting a serous confrontation within the authority structures obtained the final priority. Moreover, it seems rather realistic that Rosneft and / or one of its subsidiaries, including Yuganskneftegaz may initiate YUKOS bankruptcy. According to the available data, in the beginning of April of 2005, the Moscow Arbitration Court basing on the claim submitted by Yuganskneftegaz ruled to arrest shares in 8 out of 11 largest oil YUKOS assets as a distress measure. The claim submitted by Yuganskneftegaz concerned the compensation for the losses incurred due to the transfer price formation (Rub. 163 billion) on the part of YUKOS and tax claims against Yuganskneftegaz (Rub. 141 billion in 1999 through 2003). Such a distress measure (taking See the news presented at www.lin.ru and the data published by such periodicals as the publishing house Kommersant, Vedomosti, and Finans in January through April of 2005.

This option was also presented by D. Medvedev, the Head of RF Presidents Administration on December 30, 2005 (see: Yuganskneftegazu prochat bolshoye gosudarstvennoye budushcheye (Yuganskneftegaz is predicted a great future as a state owned company) // Kommersant, January 11, 2005). The option proposed by the RF Ministry of Economic Development and Trade as presented in January of 2005 by G. Gref (privatization of Rosneft and Yuganskneftegaz), as well as the option proposed by . Illarionov, Advisory to the RF President, (Yuganskneftegaz is returned to YUKOS ) are very unlikely to be implemented in practice.

Press conference of S. Oganesyan, the Head of the Federal Agency for Power Engineering (a member of the Board of Directors of Rosneft, a former vice-president) held on February 1, 2005. ( www.lin.ru ).

into attention the fact that a significant portion of the blocks of shares has already been arrested in relation to the FTS claims anyway), first, prevents the possibility that there arise a situation similar to that of Yuganskneftegaz (i.e. the sale of blocks of shares by the bailiff service, second, makes Rosneft the major creditor of YUKOS, third (in the case there are initiated the bankruptcy proceedings against YUKOS) in fact prevents the deal between Rosneft and Gazprom (since in the case of bankruptcy proceedings Rosneft actually absorbs the major YUKOS assets thus radically changing its weight in the framework of its deal with Gazprom and in any case preventing the option, where the 100 per cent interest in Rosneft is acquired by Gazprom and singling Yuganskneftegaz out as an independent company).

Ultimately, there are three significant criteria to be relied on in selecting further options: the government should increase its stake in the OAO Gazprom up to the controlling interest in this company;

the key participants (on the part of the purchaser) in the events associated with Yuganskneftegaz should be protected from legal risks; and the balance of influences and interests in the RF Presidents administration and its projection on Gazprom and Rosneft should be maintained. Such balance is most likely to determine the crucial decision if Rosneft is going to become an independent oil player or not.

It is our opinion that this is the main problem, the existence of which determines, first, the prevalence of non-economic criteria in the planning of acquisition in prejudice of corporate interests (both for the OAO Gazprom and ROSNEFT); second, the incompetence demonstrated in the course of the takeover as reflected not in the use of illegal techniques, but in the inability to estimate genuinely economic effects and risks; third, it is the necessity to make responsible decisions (which are worth billions of dollars and reputation) in the fire-squad mode. Responsible strategic decisions, for which parties have to get prepared over years in the framework of usual international practices, are made and revoked within several hours subject to the current political situation and quite a flexible balance of administrative influences.

There was another essential trend that emerged in regard to the YUKOS case: the boundaries of international expansion of Russian corporate groups were determined quite explicitly, especially those where extracting industries of the economy are the core. The divide line is most likely to be represented by trans- or multinational nature of possible strategic international business alliances.

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