Dresdner Bank releases Yukos documents

Novaya Gazeta ^ | October 18th, 2004 | Aleksey Polukhin, Sergey Mikhalych

[struwwelpeter]

Original title:
PLUG THE FOUNTAIN!
THE MARKET ECONOMY IN RUSSIA IS NO MORE

Dresdner Bank sends Yukos documents to Novaya Gazeta
       

    
       The 'Yukos affair' has reached its culmination. The government's attempt to cover up the opinions of western businessmen during their de facto nationalization of the company has resulted in an international scandal.
       The result is that Russia has lost her business standing, including her ability to attract investment. She has demonstrated to the entire world that the laws of the marketplace do not take precendence to the political and personal interests of those who consider themselves the government.
       The German Dresdner Bank, which conducted an audit of the oil giant Yuganskneftegaza' before its sale, disclosed a net worth much greater than that given by the Russian justice department.
       As a result, Dresdner Bank made an unprecedented decision to publish confidential documents in order to save its business reputation. Now the entire world business community knows the approximate value that the Russian government wants to receive for Yukos - a company which, by the way, has many international shareholders. The Russian government could care less about its reputation, the laws of the free market, or the rules of business etiquette. They explained only that they would sell the firm in the way they felt like.
       Representatives of the Dresdner Bank would not give their estimate of the prevailing situation over the telephone, but expressed their main points. They offered to go over their estimates after first sending Novaya Gazeta an electronic message containing a summary of their audit, which, it turns out, the Russian government had used improperly. From the electronic message of Dresdner Bank (DKW):

       
       
       "Our opinion is based exclusively on economic and marketplace conditions, as well as other circumstance, as we evaluated them at the time of the audit.
       "We concerned ourselves only with an audit of the business itself, and we expressed no views or recommendations relative to any of the actions relating to YuNG (Yuganskneftegaza). In particular, we did not concern ourselves with any of the basic business decisions regarding the separation of YuNG from Yukos, or other such transactions.
       " Furthermore, we did not concern ourselves with the solvency of YuNG in case of its function as a separate enterprise.
       "DKW considered the potential advantages of introducing more advanced methods of oil production worldwide, in order to more effectively evaluate the information provided by Yukos. Such methods were incompletely reflected in the last independent audit of YuNG's production and reserves estimates, but are reflected in the current plans of Yukos's management.
       "Besides the basic task of estimating YuNG's value as an independent enterprise, DKW consulted with the Russian ministry about the potential value of the government's packet of YuNG shares. Upon analyzing their minority packet, one could expect control of YuNG to continue to be exercized by the majority stockholders, and that the government's minority packet would in this case be non-liquid. We assumed certain factors, such as minority shareholder rights, corporate administration, company structure, and limitation of investments costs, would cause the proportional cost of a controlling interest to be discounted, in comparison with a minority packet.
       "DKW considered three scenarios, the basic parameters being the total quantity of oil and gas stockpiles and corresponding increases and reductions in production.
       
       "CONCLUSIONS
       "We estimated YuNG's value, in conjunction with independent estimates of its resouces at the end of 2003, to be US$14.3 billion, which in the opinion of DKW, is an overly conservative scenario for estimating YuNG's net worth as an independent enterprise. After deducting approximately US$2.9 billion in estimated obligations, including Yukos debts which YuNG guarantees, the value of YuNG's joint-stock basis is US$11.4 billion. A scenario assuming the enforcement of a tax liability against Yukos would lower the joint-stock value to US$10.4 billion. In DKW's professional opinion, YuNG net worth as an independent business entity ranges from US$18.6 to US$21.1 billion. After deducting estimated obligations of approximately US$2.9 billion, including Yukos debts assumed by YuNG, YuNG's joint-stock value ranges from US$15.7 to US$18.3 billion. If the assumed tax claim against YuNG enters into law, then its value would drop to a range of $14.7 to $17.3 billion US dollars."

       
       
       When a serious bank publishes what it was forbidden by contract from revealing, this indicates that: one) it is severing all relations with its contractor, since it now considers the contractor's behavior to be unacceptable for continued business, and two) that it is attemping to salvage its reputation.
       When the Russian ministry agreed to this, it meant that it disregards the opinions of a western business association and its professional estimates.
       And so, it seems that news of the Russian government's latest wheeling and dealing will mean a further blow to the nation's business reputation.
       What has occurred is not just a scandal. It is much worse. It is, in fact, a conscious refusal to economically integrate with the developed nations, and, quite probably, the refusal of decent businesses to integrate with us.
       
       Following a political revolution, there is an economic one. The government's decision relative to Yuganskneftegaz is that they would sell it however they wanted, to whomever they wanted, in spite of its estimated net value. This means that the market laws in Russia from now on have been declared non-existant, and it will not be surprising if, somewhere in Moscow, a building appears with a plaque reading: 'Gosplan' or 'Goskomtsen' (trans note: communist economic entities). We have already gone through the day when the rubel was valued at more than the dollar, but only because dollars were not used for anything - there was no free market. Just like today. The collection of ciphers which the government will pay itself from the private firm has, in concrete numbers, no real meaning.
       This transaction, in which the buyer and price are known in advance, cannot be called business. The buyer - in reality the government in the form of Gazprom - has dramatically understated the company's value, since money does not mean a thing. It is nothing more than nationalization, concealed from the view of the West, and hidden almost negligently - since our non-market bureaucrats do not understand that reputation is capital. They could care less, when they can do it without cost.
       Any regime can adapt to international standards, if it wishes, but international standards under a vertical government are as useless as trying to drink the ocean.
       
       The scandal concerning Yuganskneftegaz's value is the first obvious manifistation of the long-awaited collision of Russian bureaucracy with western market institutions. When Russia was in a state of 'wild' capitalism, no one really expected us to play the game according to international rules, or even to obey our own laws. This is why no serious transnational players came to us with long-term plans. The only ones who looked into Russia were speculators, equally prepared to lose a lot of money as they were to realize unprecendented profits. In a word - Russian roulette.
       A change of 'elites' was at first perceived to be positive. Until 2000, it was as if Russia was set 'on default', but fortunately it brought into force standardized macro-economic indices. Up until 2003, the politicians' influence on business was insignificant in comparison to the Yeltsin era, and business had grown strong after ten years of freedom, developing dynamically.
       Russia at last became an interesting destination for investors, and they believed that, if not now, perhaps in three to five years there would be no difference between Moscow, New York, or London. Accordingly, western firms began building their infrastructure here. They opened offices and branches, invited their partners in, and began to work closely with local companies and government agencies. For the time being, they were prepared to endure a certain non-confomity to western standards, which they chalked up to the sins of youth and specific to the character of the locale. China is the mecca for investment. Here the communist party zealously protects the economic rights of foreigners, even to the point of expelling from the party bureaucrats who fine foreign companies in order to pinch their capital.
       The first warning is the 'Yukos affair'. If, at a certain point, it is perceived to be an internal razborka (shakedown) by the political underworld, it will force the west to reexamine its relations with Russia, especially with regards to private property.
       Other alarming symptoms have presented themselves. For example, there have been lawsuits by Yukos's foreign investors, relating to their monetary losses. Now here the foreigners are on guard, for it is a clear threat to THEIR own money which they have invested in Russia.
       The Dresnder Bank (DKW) story has shown us that the russian government is ready to brush off their western partners, to ignore their opinion, to act exclusively according to their own concept of business. This has momentarily returned Russia, in the foreigner's eyes, back to a stage of 'wild capitalism', only this time with a government face.
       
       The reason for everything is Yukos. Not the firm itself, but the irrational desire by the president and his inner circle to punish disgraced oligarch Khodorkovskiy for plundering Russia. By lowering the oil giant's capitalization by means of absurd criminal cases and made-up tax claims, invariably comfirmed by their own courts, the leadership of this country is trying to convert foreign investors into investors from the government. This is nationalization. The buyer is already known - Gazpromneft. For just this purpose, a 'daughter' company of the gas monopoly was created, and for just this purpose they collected incredibly high production figures (so much black gold has never before been seen in Russia, and never will). For just this purpose, all market-based solutions to the Yukos problem were swept aside, including proposals by western companies.
       The chief business enterprise of Yukos, Yuganskneftegaz, has become the main piece to be swallowed up (by the government). Arguments about its value are extremely serious. The western partners of Yukos are following the potential sale closely, and the company's management is not going to give up without a fight. For this reason, it was necessary to come up with an independent estimate of the firm's value. Dresnder Bank was selected by the government of the Russian Federation, and both signed a confidentiality agreement.
       The practice of closed audits is typical of Russia, especially with respect to government business entities. One must somehow camouflage the ineffectiveness of bureaucratic management, so that it did not become a subject of public or parliamentary debate. Closed audits have been performed for Gasprom and the Russian Central bank, as well as many others.
       There was no sense in this. It was merely to observe the rules of the game, in the eyes of the western business community, and allow the government to enter into negotiations with 'clean boots and a hanky'. The documents were primarily for internal use, for departmental evaluation. Western investors knew whom they could trust with their money and whom they could not, and what were the guarrantees.
       But DKW falls into a special situation. It has become one of the main players in a spectacle which the whole world has been following for more than a year. Accordingly, the risks to the nation's reputation have been aggravated to the limit. In the West, reputation is a basic capital. The bank, therefore, made a 'disloyal' decision with regards to its customer, and gave an estimate (of the oil company's net worth) which more or less corresponded with reality. DKW, moreover, immediately specified that its report was not to be used for further actions with regards to Yuganskneftegaz, but as something more along the lines of an analytical summary. Covering their tails as much as possible, the Germans sent the estimate to their customer (the Russian government).
       What followed, however, can only be called a set-up. According to the government: "The head of the justice ministry's main directorate in Moscow, Aleksandr Buksman, officially declared that the independent estimate perfomed by German auditors at Dresdner Kleinwort Wasserstein (DKW) showed the main oil-producing 'daughter company' of Yukos (Yuganskneftegaz) to have a value of 10.4 billion dollars." (By the way, there are rumors that foreign news agencies attributed this statement not to the unknown Buksman, but personally to Putin's press secretary Gromov.)

       Focus your attention here: DKW is named as the author of Yugansk's sale price. Furthermore, the 10.4 billion figure is the low value, which the Germans termed 'overly conservative'. Naturally, western business 'could not understand' DKW's act - many had already performed their own estimates. The Germans, in turn, 'could not understand' the justice ministry, who had just struck a blow to their business reputation.

       Naturally, it is a serious struggle, but one which is hidden from the public. As a result, the justice department has reached an unprecedented decision, to sanction the publication of this confidential report. DKW, meanwhile, took an even more unprecedented step, they published the entire document. In the report's finale, Dresdner Bank wrote: "The given opinion is governed exclusively in accordance with Russian law". Who knew, other than the justice ministry (!), that in signing this agreement, that Russian laws would only be enforced according to government whim.
       Commentary from Russian officials soon followed: yes, they estimated it this or that way, but we will sell it for $10.4 billion anyhow. This confirms once again that the DKW report was merely a fig leaf, and since the government did not succeed in doing this (the sale) without witnesses, they now state it openly. After falling for this small provocation, moreover, the justice ministry has gone onto a bigger one - 68.7% of Yugansk stock will now be sold at a 60% discount as a 'minority' packet. (On exactly how a packet of stock greater than the controlling majority can be a minority, the market laws are silent.) As a result, the firm will fall under the complete control of Gazprom-affiliated businesses for a mere 4 billion dollars.
       No one really expected Yugansk to be sold at a fair price, not even desperate idealists. In this context, it would be better if Yugansk were priced analogous to the government company FAUFI, everything would then remain at the level of a Russian razborka, in which the firm had endured a series of everyday troubles. Now the scandal has gone international in the full meaning of the word.
       From now on, every foreign company is right to fear that contacts with the Russian government will cast a shadow over their reputation. The 'Iron Curtain' has appeared once again, not from that side, but from ours. Consider the government's growing penetration into the economy, and their growing desire to find enemies outside our borders who just want to bite off a 'bigger piece' of us.
       Today's pseudo-elite thus far are only weakly realizing that they have convinced themselves of an illusion. A vertical strengthening of the nation's internal structures automatically extends beyond the borders. Attempts to export our politico-economic system are doomed to failure - the West has already run into similar exports during the days of the USSR, and will therefore take asymetrical and rigid measures against it. Long ago, they learned how to get by without us.
       A high-stakes game does not pay attention to such trifles, however. The talk is not just about the banal, though very large, properties of a fallen oligarch being converted for use by some government elites. The attack on Yukos it seems is similar to the cannon shot from the Aurora, and the sale of its greatest asset, Yuganskneftegaz (or more likely, its transfer from one hand of the government to the other), is like the storming of the Winter Palace. People afterwards found themselves waking up in a different country.
       There is not just a virtual democracy in our country, but a virtual free market as well. After Yugansk, it is now possible to do anything, even to foreigners. Focus your attention on this - DKW was not simply thrown away, but cynically used and later brushed off. Yes, they made their report, now we will just do it our way.
       So, it seems that the western journalists were correct: the Yugansk story is the regime's existential choice. A choice for a closed and opaque economic policy, for something like a subsistence economy with only one milk cow in the form of the gas monopoly.
       If this is this case, then the West will treat us like a milk cow. It is likely that Russia will now face many long years of integrating with international business, either through the WTO, or the European Union. Our investment rating, which not too long ago caused such national euphoria, is nothing more than a derivative of the petroleum situation. No businessman will pay attention to this rating, knowing that he can be cast off, or in general simply used like toilet paper.
       The end of the Yukos affair, judging from everything, is now at the point of no return. The West will cease to trust the Kremlin's economic policies, and this trust is needed in the long run. To build a mere 'economy of the pipeline', as in Venezuela, no free market is needed. All that is needed is to manage the labor battalions.
       
       Aleksey POLUKHIN, Sergey MIKHAILYCH

[struwwelpeter]

Normally I discount Novaya Gazeta, knowing their anti-Putin bias, but this article seemed to big to ignore.

Excuse the roughness of this quicky translation.

[struwwelpeter]

(ping)

[Askel5]

This is fascinating ... let me read it another time or two.

The result is that Russia has lost her business standing, including her ability to attract investment. She has demonstrated to the entire world that the laws of the marketplace do not take precendence to the political and personal interests of those who consider themselves the government.

Here's hoping this kind of thinking applies ONLY to the Rest of the World.

I'd hate to see what Uncle Sam's credit rating is these days, for starters.

[Askel5]

=== but international standards under a vertical government

By "vertical" ... is that like "top-down"?

[Askel5]

For the time being, they were prepared to endure a certain non-confomity to western standards, which they chalked up to the sins of youth and specific to the character of the locale. China is the mecca for investment. Here the communist party zealously protects the economic rights of foreigners, even to the point of expelling from the party bureaucrats who fine foreign companies in order to pinch their capital.

This reminds me of listening to the Chinese woman EXPLODE at the window of the chequer at how Chinese Communists are with-it where capitalism's concerned but Russians yet cling to their commissar ways and have no clue how to run a business.

It was fascinating to hear. Particularly for the way it implied that sort of essential unity of a sort (from a 50-some year old plebe's mind, no less) that belies the whole Sino-Soviet split.

[Askel5]

=== Today's pseudo-elite thus far are only weakly realizing that they have convinced themselves of an illusion.


All things considered of late ... particularly Putin's latest on Iraqi terrorism ... you have to wonder about those in the West as well who are not fully illumined already. Does this bode a Great Awakening or will it just be drowned out by the cheers for Putin?

I know you don't like their slant but I sure like their colorful sort of writing. What's this clean boots and hanky business?

[struwwelpeter]

Clean boots and a hanky? Some sort of colloquialism that I haven't heard before, I suppose meaning a clear conscience, or perhaps the appearance of cleanliness. Boots and hanky are clean, even if your undershorts aren't?

Novaya Gazeta has its own style, that's for sure, but one journalist who can really turn a phrase is Politkovskaya. If I can get through her last article without smashing the monitor, I'll translate it for you.

As far as China, I think that capitalism (or at least the marketplace) is in their blood. Here's an article (no online version, alas) about Chinese capitalists that caught my eye.

[struwwelpeter]

(Ping)

[ruready4eternity]

Bank for International Settlements (BIS)Centralbahnplatz 2, Basel, Switzerland.

You put the facts together
You read this and decide what the outcome will be.

Taiwan Central Bank Pledges to Curtail Run on Fund
Bloomberg, Asia, July 16, 2004 04:52 EDT:

Taiwan's central bank said it may step in to ensure stability in the island's NT$2.9 trillion ($86 billion) mutual funds industry after investor withdrawals forced five funds to halt redemptions. An estimated NT$240 billion worth of bond funds have been redeemed this week, according to the Commercial Times. The rush is ``irrational'' and sufficient money will be made available to provide ``liquidity to stabilize money markets,'' the bank said in a statement. The government didn't release any figures on size of redemptions. The problem ``was probably caused by Procomp,'' Jong Huey- jen, deputy director-general at the Securities and Futures Bureau, said in a phone interview. She was referring to Procomp Informatics Co.'s default on a bond payment due on June 16. ``Everybody now panics when hearing about bonds. This is an issue of confidence.''

(First Russian Banks, Now Taiwan)

Nervous Depositors Make Run on Banks
The Moscow Times, By Denis Maternovsky, Thursday, July 8, 2004. Page 1:

Rumor fueled fear and fear fueled panic, sparking the biggest run on Russian banks since the 1998 crisis. Spooked by the closure Tuesday of mid-sized Guta and reports that top-tier Alfa was on the ropes, depositors descended on banks in droves Wednesday, intensifying a trend that has seen an estimated $5 billion, or about 10 percent of all household savings, taken out of the system in the last two months. "It's like 1998 all over again," Nikolai, a travel agency manager in his mid-40s, said as he squeezed into a packed Alfa Express branch near Sokol metro station. "I don't have much money here, but I am going to cash out just to be safe."

After three bank closures in as many months -- each bigger than the last -- intervention and reassurance by the Central Bank was not enough to calm growing concerns that a full-fledged crisis was in the making. Hit hardest of all was Alfa, the nation's largest private bank. "We have never had so many people here," said a security guard at Alfa's Sokol branch. "There were lines already when we opened the bank in the morning."

B.I.S -the boys running the "money System"- you know the famous Family and investors...

is shutting the Russian financial system down, in a tit-for-tat as Putin shut down the "family" & Investors interest Yukos Oil. This is a serious power and finance war between the west & the Russian Communist Party .Putin shut down the western controlled Yukos Oil, making a phonecall to the bank UBS here in Zurich to freeze about $5 billion in Yukos cash.

The elite insiders at the top of this western group pretend to be mad, and threatened the Russian Communists -- who are beginning to thump the war drums -- with expulsion from the G8; which they were only just two years ago invited to join (formerly called G7).

This is being blamed on the “Russian” central bank (actually a branch office of the BIS in Basel, Switzerland), and involving a seemingly unrelated Yukos Oil bankruptcy, on false tax charges, which Yukos could not pay, because the Boys in Switzerland froze their assets (which were more than enough to pay the “liability”), funds which were not in Russia, but in Swiss banks, controlled by (UBS Warburg, etc).

The BIS in Basel has a branch office in Moscow called the Russian Central Bank. It is not a secret that it isn't Russian, yet the newspapers fool the public by saying RUSSIAN central bank...

You piece this yourself -what do you think?

A Russian showdown with the US? The RUssian bear is arming up!

[ruready4eternity]

The Russian crisis is from a growing pile of our worthless US dollars, which us inAmerica are forcing foreign countries to accept at a financially deadly overvaluation. This is called exporting inflation am I correct on this?
(borrowing or printing worthless dollars)?

[ruready4eternity]

The Federal Reserve is not American, but a branch of the Bank for International Settlements (BIS) in Switzerland. Neither is the Chinese central bank Chinese, but a branch office of the BIS, as well. So the BIS is perfectly willing to gives orders to the office in China to buy debt from the branch in the U.S., even if it means that China will eventually be destroyed by doing so. There is zero competition between central banks, because they are one corporation, run by one board of owners.

I am beginning to understand how the money flows.

[SlowBoat407]

By "vertical" ... is that like "top-down"?

More likely a reference to "vertical integration", in which an entire production process is controlled by one entity. Classic example is the old Hollywood Studios, which owned production, distribution, movie houses, even the farms where the popcorn was grown. Advantage is, you can integrate your resources more thoroughly, drawback is, you open yourself up to charges of monopolistic practices, even though it's technically a different issue.

[A. Pole]

The result is that Russia has lost her business standing, including her ability to attract investment.

How Khodorkovsky managed to become a billionaire "investor" within a couple of years?

[struwwelpeter]

[A. Pole]

Look, if the last Tsar (or Temporary Government) had stronger police and harsher policy against the criminals and terrorists like Lenin and Trotsky, tens of millions of people would not die.

"There is a gentleness/naiveness worse than a murder." Russia needs a strong leader in order to be free and prosperous, like France needed De Gaulle or Spain needed General Franco. Sorry, such is life.

[struwwelpeter]

I agree. Russia needs law and order, more than they've had during the halcyon days of Clinton & Yeltsin. Mr. Putin is probably between a rock and a hard place: reigning in semi-autonomous robber governors in the provinces brings out the "USSR IS BACK" crowd in force. Leaving things decentralized results in corruption and bardak.

Khodorkovskiy's crimes are well-documented, what got him busted is that he broke the Putin commandment: If businessmen don't mess with politics, than politicians won't mess with business.

It displeases several on this site that Russia seems to side with North Korea/China/Iran/France/whomever against the US. That's their perogative as an independent nation.

I don't see Russia becoming a great friend or enemy of the US. As Disraeli said: "Nations have no permanent friends or enemies, only permanent national interests."

Russia will probably settle down to be a big, cold France eventually.

My primary loyalty, however, will always remain with the US, whose constitution I have given a sacred oath to defend. Against ALL enemies, foreign and domestic.

My constitutionally-elected president states that Mr. Putin is a friend of the US. Until Mr. Bush says otherwise, that is sufficient for me.

[A. Pole]

My primary loyalty, however, will always remain with the US, whose constitution I have given a sacred oath to defend. Against ALL enemies, foreign and domestic.

And the true loyalty usually requires speaking truth. Truth is good for everyone (in a special good sense).