Dresdner Bank releases Yukos documents
Novaya Gazeta ^ | October 18th, 2004 | Aleksey Polukhin, Sergey Mikhalych
Original title:
PLUG THE FOUNTAIN!
THE MARKET ECONOMY IN RUSSIA IS NO MOREDresdner 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
