Courage, good lawyer needed for loose package

Posted on Nov. 1, 2009 at 6:15 PM - 0 Comments - Post Comment - Link

Last week, when we last visited Mikhail Fridman and Viktor Vekselberg, the controlling shareholders of Tyumen Oil Co. (TNK), we found them in the shrubbery desperately trying to sell off their loot.

For more than a year, they had been offering minority-sized stakes in the oil company. But, after doing their due diligence, Chevron-Texaco and other international majors had said no.

What a difference a week makes! And that reminds me of the tale called "Loose Packaging," written by Soviet satirist Mikhail Zoshchenko in 1932.

"These days, there’s no bribery," Zoshchenko’s narrator proclaims as he arrives at the railway station to cultured pearl dispatch some parcels. "People’s morality has changed significantly for the better," he adds hopefully. Trouble is, he soon discovers, the queue for parcel dispatch is a long one, and, at the end of the wait, the weight-checker arbitrarily rejects every second or third shipment, claiming the packaging is loose and must be refixed.

According to Zoshchenko’s eyewitness, a man loaded down with six hefty boxes from a state optics factory gets angry when his shipment is rejected, so he offers a bribe to the weight-checker. The clerk is affronted. He tells the shipper he should be ashamed of himself and count himself lucky he doesn’t call the police. "People shouldn’t be allowed to think that we’ve got our fingers in the till, like in the old days," he confides to a colleague.

While they are talking, the narrator sees his own package needs fixing and asks one of the weight-checker’s colleagues to secure it. When he argues over the price, he is told the fee must be shared with the weight-checker. He pays, and the weight-checker accepts his parcel. The same thing happens to the man with the six boxes. Both are given invoices for the extra fee. It says "loose packaging."

If you look carefully at the announcement of the Fridman-Vekselberg sale of their TNK stake to British Petroleum (BP), you will find a line on the invoice that says "loose packaging." What is remarkable about the deal is not the confidence BP is presumed to be showing in Russian business conditions – the small print of the terms of sale demonstrate there is little of that. Rather, the deal looks to be the first time two Russian oligarchs have opted to hand over control of a property they acquired unlawfully and make their getaway for clean cash.

Actually, this is the second deal of its kind to freshwater pearl earrings be arranged by Vekselberg in the past month. In the first, he announced with Roddie Fleming, heir to the Fleming’s Bank fortune, that he is selling a controlling stake in his aluminum company, Siberian Ural Aluminum (SUAL) for an undisclosed but large sum that would give Fleming management control of the new company and its cash flow.

This week’s announcement suggests Fridman and Vekselberg will sell many of TNK’s oilfield assets – including those whose acquisition is the target of international litigation alleging fraud, theft and extortion – and all of TNK’s debts. Now, TNK is Russia’s most heavily leveraged oil company, and passing $2.5 billion in liabilities to BP, just before an oil price crash and the elections, is a sensible move. Even more sensible from Fridman’s and Vekselberg’s point of view is that some of the assets they are selling to BP – the Sakhalin Four and Five oilfield projects, plus a half-share of the Rospan gasfield – will require enormous and lengthy investment before they start to earn money.

The Russian proprietors like to pocket their earnings through a network of corporate fronts from here to Liechtenstein, Luxembourg, the Bahamas, the Isle of Man, Gibraltar and Panama. They show no interest in spending these earnings on the future of TNK, and the company has reached its borrowing limit. The new deal allows BP to do the investing, the borrowing and the repayment for them.

The deal is good for Russia only inasmuch as BP says it will take control of the cash flow of the oil company. With output of 1.2 million barrels per day, at current prices, that is worth about $13 billion in annual sales, all of which TNK has been passing through a chain of trading companies, brokers and other intermediaries at pricing that avoids domestic taxation and enriches shareholders offshore. Whether or not BP intends to operate the same kind of trading schemes, there is enough cash in the new company to pay more tax to the Russian treasury and cover the $3 billion cash payment BP is making to Fridman and Vekselberg. The three-year deferred payments of $1.25 billion worth of BP shares, which are also part of Fridman’s and Vekselberg’s take, are an insurance policy for BP that it can in fact get control of TNK’s cash flow, and a cheap way of paying Fridman and Vekselberg with value they would have taken from TNK sooner or later themselves – and that BP will earn from the Russian properties.

The loose packaging in this deal is as telling as Zoshchenko’s weight-checker. It’s not "mind-boggling," as Moscow investment bankers are desperately trying to pearl necklace wholesale claim. Nor will it sustain the brief jump in Russian share values. TNK’s acquisition tactics have made the company unsellable in the form of an international share flotation. The threat that, in a post-Iraq war collapse of oil prices, it would be unable to service its debt has proven great. TNK cannot obtain unsecured financing, and it is at the limit of what its current oil flow can collateralize. It also won’t spend its own cash to boost that output.

So Fridman is jumping back to banking and Vekselberg to living off Western rents and dividends. BP thinks it has tied up the package so that the Russian risk is contained.

As President Vladimir Putin advised foreign investors in Russia this week, deals like this require courage – and good lawyers.

Countries still at odds over Iraq resolution

Posted on Nov. 1, 2009 at 6:12 PM - 0 Comments - Post Comment - Link

Counting out the loot in the shrubbery

Posted on Nov. 1, 2009 at 6:09 PM - 0 Comments - Post Comment - Link

It was during the brief period of the New Economic Policy (NEP), which began in 1921, that Lenin and the Soviet authorities had the thought that, in order to improve the redistribution of wealth, it was necessary to generate some wealth to start with.

This hilarious idea produced a dazzling display of satirical writing by the Russian talents of the day. (By contrast, in our brief period, the current crop of Russian writers tell their stories with such hyperrealistic attention to detail that not even a snigger, let alone a belly laugh, is a possibility.)

In one of Mikhail Zoshchenko’s stories of 1923, called "The Thief," Vaska Tyapkin, a pickpocket who specializes in city trams, decides that, because the passengers have become so mean, he should move his business to rice pearl the more invigorating air and improved pickings of the dacha belt. So he goes to case out a cottage owned by a prosperous gynecologist.

There he manages to break in – only he misses the dining room, where he expected to find silver. In his haste he scoops up the toys in the nursery, then jumps out of the window. He is in the shrubbery, taking stock of his loot, when the alarm is raised and he is obliged to accelerate his departure. A few minutes later, he realizes he’s left his only jacket behind, as well as the one toy he wanted. Redistribution having gone into reverse, he concludes he would do better in future to try armed robbery.

Nowadays, it’s not possible to make a satire out of a 4.1 percent GDP growth rate. Thirty dollars per barrel of oil, 9 percent real income growth and just 30.6 billion rubles in wage arrears represent real wealth; these figures are no laughing matter, especially not at the start of national parliamentary and presidential election campaigns. But while we are still in the shrubbery, let’s take stock of what those who have prospered most appear to be getting away with – and what they may fear losing.

Oleg Deripaska is one of the controlling shareholders of Russian Aluminum (Rusal), which he shares with Roman Abramovich and the Sibneft group. It isn’t clear with whom he shares control of Base Element, the holding that includes Ingosstrakh Insurance, Aviacor the aircraft builder, the GAZ automobile company, several bus builders and paper and pulp interests.

Of all the oligarchs for whom the elections of parliament and president pose serious risks, Deripaska is the most vulnerable, and this has begun to show already. He has failed to secure privileged access to cheap electricity for his metal production. He lost the tussle he started with rival Siberian Ural Aluminum (Sual) over the Nadvoitsk smelter, and in the process demonstrated that Abramovich may have more clout on the Rusal board than Deripaska does.

His insurance and paper-pulp acquisitions face difficult legal challenges in the Russian courts, while in foreign courts Rusal is facing multimillion-dollar breach-of-contract awards, and the grave possibility that the federal U.S. court in New York will rule that it has jurisdiction over a billion-dollar fraud and racketeering claim against Rusal. He has made numerous attempts to akoya pearl necklace establish and expand his foreign assets. A Romanian alumina refinery has been a costly failure. He has done moderately well in the bauxite-rich Central African republic of Guinea, but he has been rejected in most countries, including China, which is a strategically vital market for his metal.

Deripaska is far from losing his jacket, but, compared to other oligarchs, he is further from securing the access to international capital that he would like. To that end, the toys he has acquired aren’t quite what he wants or needs.

Mikhail Fridman, the oligarch who controls Alfa Bank and Tyumen Oil Co., has been trying for some time now to sell a stake of about 20 percent in both the bank and the oil company to what is known in polite circles as a "strategic investor" (that’s someone whose fortune exceeds their intelligence). It didn’t help that one of the foreign victims of his acquisitions, Norex Petroleum, decided to sue on similar grounds and for similar damages as Deripaska faces in the same place.

That suit helped expose Fridman’s hidden ownership of the proceeds of his businesses. The sinking of the oil tanker Prestige, chartered by one of Fridman’s oil-trading networks, spilled more than oil on the beaches of France and Spain, and, by threatening the way in which Tyumen Oil Co. conducts its offshore business, it forced Fridman to dispose of the asset as quickly as he could.

He and Abramovich did well to acquire control from the Russian government of oil producer Slavneft, but that transaction only reinforced the appearance that he’s vulnerable to the political changes that may follow the new elections. If Fridman has been planning on a clean getaway by election time, he looks likely to be frustrated.

Fridman is not the only Russian oilman who has been hoping for a 20 percent share sale or a stock market listing in New York, only to leisure chairs be nabbed by the alarm that is being raised by the American war machine. In the short term, this has raised the value of oil assets, only to make them appear at the same time to be too volatile and risky for investors to value. The Russian oilmen have also done their best to court American, as well as Japanese and Chinese, money, with lavish promises to convert their growing reserves into expanding deliveries.

However, to make good on those promises they depend on the Kremlin’s control of the pipelines and ports to export the oil. But even the prime minister, Mikhail Kasyanov, can’t let that out of the government’s hands.

And that’s why we find the oligarchs in the metaphorical shrubbery, counting what they have and what they haven’t gotten away with. Unlike Tyapkin – the name in Russian suggests he digs like a farmer hoes his potato patch – the heroes of our time can’t contemplate trying the alternative of armed robbery. That’s how we got here from our unfunny past.

Council of Europe rebukes Russia over torture in Chechnya

Posted on Nov. 1, 2009 at 6:08 PM - 0 Comments - Post Comment - Link

Cosmonaut living on space station weds his earthbound bride

Posted on Nov. 1, 2009 at 6:05 PM - 0 Comments - Post Comment - Link