It was standing room only last Monday at the Queen Elizabeth II Centre, the conference venue in the heart of Westminster. In a graphic display of the Russo-mania that has gripped the City, more than 1,000 City bankers, lawyers and accountants jammed themselves into an 800-seat auditorium for a rare public appearance by Sergei Bogdanchikov, chief executive of the Russian oil group Rosneft.
Bogdanchikov, a 48-year-old with swept-back hair and piercing blue eyes, is one of Russia’s most powerful but least well-known oligarchs. He fought his way up through the ranks of the state-owned oil sector and has a reputation for doing things his own way. Three years ago he cancelled a business trip to Britain after Special Branch officers dared search his bags when his jet landed at Biggin Hill.
To London’s financial community, Bogdanchikov means one thing — money, and lots of it. Rosneft will raise about $10 billion this summer by listing its shares in London. It will be one of the biggest floats ever in the UK, and bring fees of perhaps $100m (£55m) for British bankers, lawyers and accountants.
If the assembled suits expected clues to Rosneft’s plans, they were to be disappointed. Bogdanchikov spoke for just 15 minutes, and said nothing about the float. When members of the audience threw questions at him about the deal, he brushed them off. “It wasn’t in my speech,” he said.
But some in the City have refused to follow the herd, and are raising questions about the wisdom of giving the Russians the red-carpet treatment. F&C Asset Management, one of the UK’s largest fund managers, last week advised investors to steer clear of Rosneft, saying it carried unacceptable legal and corporate-governance risks.
Politicians, too, are having second thoughts about Russia’s creeping influence, particularly when it comes to its powerful energy companies, which have thinly veiled designs on some household British names.
Gazprom, the gas group that is a stablemate of Rosneft in the Kremlin’s collection of energy giants, is considering a bid for Centrica, the utility company that includes British Gas. That may not be the end of its UK ambitions; executives have dropped heavy hints that it may buy up other British companies, with Scottish Power thought to be a target.
The growing power of Russian business has presented politicians and investors with a conundrum — whether it is wise to welcome the embrace of the Russian bear.
VLADIMIR PUTIN, the Russian president, thinks the West’s fear of a Russian business invasion is hypocritical. “When European companies come to us it’s called investment and globalisation, but when we go there it’s called expansion by Russian companies,” he said last week after a meeting with Angela Merkel, the German chancellor.
Russian executives put flesh on Putin’s observations last week during the Russian Economic Forum, a glitzy annual bash that draws oligarchs and western investors to London for a three-day marathon of conferences and parties. Bogdanchikov was the keynote speaker on Monday, and on Tuesday it was the turn of Alexander Medvedev, deputy chief executive of Gazprom.
Where Bogdanchikov was guarded, Medvedev was ebullient. He opened with a verse from the Bible that gave little doubt about the company’s intentions. “He who has ears, let him hear,” Medvedev said, quoting Matthew.
He gave a robust defence of Gazprom’s credentials as a gas supplier, before driving home exactly how dependent Europe has become on its supplies. “The media will say the barbarians are coming, they are not — they are already here,” he said.
His comments did little to quell unrest about Russia’s power in the energy market. Gazprom is a goliath, with a third of the world’s natural-gas reserves and an annual production of 563 billion cubic metres of gas from proven reserves of 22 trillion cubic metres. It provides a quarter of all Europe’s gas, and wants to increase that to one third within five years.
It supplies only 2% of the UK’s gas, but hopes to raise this to 20% by 2015. It can do this slowly, through gas-trading agreements or asset swaps with North Sea fields, or more quickly with an acquisition of a gas-marketing company such as Centrica.
The acquisition of Centrica would allow Gazprom a quick route to the Holy Grail of the energy business — the control of the production chain from the gas field right to the end customer. The high price tag — Centrica has a stock-market valuation of £10 billion — would not be a problem.
Tim Lambert, energy analyst at consultancy Wood Mackenzie, said: “Cash is not an issue for them because they are making a lot of money in the European market. They can afford to look at a range of targets. The issue is not money, it’s business focus.”
What worries politicians is Britain’s potential over-reliance on Russian gas, and whether Putin might be prepared to use energy to hold the UK and the rest of western Europe hostage. Britain is increasingly reliant on gas imports from Europe — and by extension, Russia — as North Sea reserves have run down more quickly than expected.
The problem was brought home in January, when Russia briefly cut off gas to Ukraine amid a price dispute. More recently Putin warned that if western Europe was unwilling to play ball on the expansion plans of Gazprom and other Russian energy groups, Russia would simply switch its focus to Asia, and take its precious oil and gas with it.
Brian Wilson, the former energy minister, recently told The Sunday Times the Ukrainian episode had confirmed his fears over Britain’s dependence on one fuel — gas. “Our chickens have come home to roost. Being very dependent on one fuel is a security-of-supply issue. And even if supply is maintained, our control over price is limited.”
WHEN Gazprom’s interest in Centrica was revealed earlier this year, it provoked a panic at the Department for Trade and Industry. Officials met ministers eight times to advise on the “impact of the proposed takeovers on the British energy sector”, information obtained under the Freedom of Information Act shows. “Security of supply” and “gateways for ministerial intervention” topped the agenda. Alan Johnson, the trade and industry secretary, was told he would need to pass secondary legislation to block a Gazprom bid.
The apparently protectionist reaction angered Russian politicians, and Tony Blair stepped in last week to calm the situation. He said Britain would remain an open market, and would not stand in the way of Gazprom’s plans.
Other politicians are taking a similarly sanguine line. Peter Luff, the Conservative MP who is chairman of the trade and industry select committee, said: “There is a lot to be said for locking Gazprom into the British market. Of course Gazprom’s relations in Ukraine will worry some. They need to prove that they are a rational business.”
The committee plans to open an inquiry into the UK gas market, including the growing power of Gazprom, on May 9.
Industry executives say the paranoia is overdone. Cedric Brown, the former chairman of British Gas, who has long experience of central European gas trading, points to Russia’s lengthy history as a dependable supplier to Europe.
“Russia has been supplying gas to western Europe for perhaps 40 years without any noticeable hiccups that I can remember, apart from the Ukraine situation this year. Even in the height of the cold war, and in the chaos of the break-up of the Soviet Union, the gas kept coming.”
Politicians’ worries about Gazprom are echoed in the concerns of professional investors about the flood of Russian companies listing in London. Some wonder whether the Russian way of doing business will sit comfortably with the norms of the London market.
Rosneft is a case in point. Although its float will be a lucrative deal for the City, many are uneasy about the company’s turbulent past. Until a few years ago, it was considered to be among the second tier of Russia’s oil groups — a simple holding pen for those government oil assets left over after the wave of privatisations in the 1990s that created the first rank of super-wealthy oligarchs.
But Rosneft has been transformed, thanks to the intervention of the Kremlin. It was the main beneficiary when Yukos, the oil group created by Mikhail Khodorkovsky, collapsed in 2004 after he was jailed for fraud. Rosneft acquired Yukos’s Yuganskneftegaz field, its main operating asset, after an auction, won by an unknown Russian company that sold itself within days to Rosneft. The field now accounts for 70% of the group’s output.
Some of the American investors who lost £3.3 billion when Yukos was made bankrupt are pursuing a claim in the US courts. The claim, brought by the Yukos Shareholders Coalition, faces a key test on May 15 when the defendants, including the chairmen of Rosneft and Gazprom, will argue that a US court does not have jurisdiction.
Karina Litvack, head of corporate governance at F&C, warned investors to tread carefully with Rosneft. She said: “The Russian legal regime is opaque and difficult to navigate. Unless Rosneft can provide us with credible assurances that it has identified, and made adequate provisions for any liabilities stemming from the acquisition of its Yuganskneftegaz assets, we won’t be interested.”
Rosneft yesterday rejected the criticism. “All the relevant information for investors will be disclosed in the prospectus for the listing.” The company has retained Deloitte, the accountant, to go through its books ahead of the flotation.
Some see the Rosneft and Gazprom situations as part of the same problem: Russia’s willingness to use business for its political ends. Brown said: “This is a version of the Great Game, the struggle for control of central Asia that was played out by the imperial powers 200 years ago. In a sense nothing has changed, and we need to be involved in that Great Game.”
The hush-hush billionaire
DMYTRO FIRTASH has had many roles in his life. Apprentice train driver, meat trader, second-hand-car dealer, and now billionaire.
His latest incarnation is not one he likes to advertise, however. The 40-year-old Ukrainian did not acknowledge his co-ownership of RosUkrEnergo, the secretive company that controls gas supplies from central Asia to Europe, until last week.
RosUkrEnergo is considering a London flotation to raise capital for investments in gas-supply infrastructure, both in transit and storage. The Swiss-registered group is owned by Gazprom, Firtash and his junior partner, Ivan Fursin.
Firtash made his fortune from trading with the energy-rich state of Turkmenistan, supplying food and other goods in exchange for gas that was then sold to Ukraine. By 2004, Gazprom wanted a more direct stake in the trade and secured an arrangement with Firtash in the form of RosUkrEnergo.
Firtash kept a low profile so he could build the company up without negative attention. It now buys 56 billion cubic metres of gas a year from Turkmenistan, Uzbekistan and Kazakhstan and sells it on to a joint venture between itself and Naftogaz for onward sale.
