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MAY, 2002
Anatomy of an Oil Company Sell-Off
By Anna Raff, The
Moscow Times, 30 May 2002
Last week's sale of a Siberian oil company was an overlooked
epilogue to Russia's history of privatization. While the days
of selling the state's most valuable assets for a song are
over, Russia continues to suffer from the consequences, says
an official with the Audit Chamber. The process of transferring
Eastern Oil Co., or VNK, from state to private hands was a
tortured one that began in 1995 and only ended Friday, when
oil major Yukos acquired the last government stake of 37 percent.
Yukos paid a premium of $400,000 over the starting price of
$225 million. The sale of VNK probably won't go down in the
history books the same way the loans-for-shares auctions in
the mid-1990s did. But its sale was just as poorly handled,
said Vladislav Ignatov, one of the 12 head auditors at the
chamber. If you count from start to finish, the government
lost out on half a billion dollars from the sale, and most
of the blame lies with the Property Ministry, Ignatov said
in an interview. "I have no idea what those people in
the Property Ministry actually do," he said. While the
Property Ministry's spokesman was unavailable for official
comment, another ministry source brushed off Ignatov's accusations,
saying the auditor has long complained about the way the ministry
functioned. "His qualms have always fallen on deaf ears,"
said the source, speaking on condition of anonymity. "While
there have been complaints about our work, the Duma has yet
to do anything about it. No criminal cases against us have
been opened."
The Audit Chamber is the State Duma's watchdog agency, overseeing
budget flows as well as the man-agement of government stakes
in corporations. Ignatov supervised the VNK audit, which was
required in the run-up to the sale, originally scheduled for
December but subsequently delayed. The Audit Chamber collegium
approved the audit on May 21, and its conclusions are scheduled
to be published this week. The government's 37 percent interest
in VNK was not properly managed, and this can be attributed
to a design flaw inherent in the workings of the Property
Ministry, Ignatov said. "Ministry officials are sup-posed
to look after each piece of government property as if it was
their own," he said. "Only when they figure out
how to properly look after them will the government budget
receive what it's already entitled to - revenues for the use
of this property." For example, 1996 was the last year
the government saw dividend revenues from VNK. While low oil
prices could explain this phenomenon in 1997 and 1998, their
comeback during the last three years didn't result in dividends,
he said. By that time, Yukos had installed its own management
at the company. "There are a number of cases where minority
shareholders - with stakes smaller than ours was in VNK -
had company assets frozen when the company failed to pay dividends,"
Ignatov said. A company can artificially deflate profits to
avoid paying dividends.
While Yukos spokesman Hugo Erikssen conceded allegations
were made in a preliminary Audit Chamber report, Yukos subsequently
submitted documents to the chamber that showed it was not
artificially de-flating profits. "If Ignatov made such
allegations in public, then we will sue Ignatov," Erikssen
said. "If The Moscow Times makes such accusations independent
of Ignatov, then we will sue The Moscow Times." Erikssen
also noted that all sales of oil from VNK were made on a tender
basis and that VNK had debts of $400 million at the time of
acquisition. VNK's privatization was difficult from the start.
As planned, about 15 percent of the company was sold at a
special cash auction in 1995. The next step should have been
the sale of a 34 percent stake to the bidder that offered
the most comprehensive investment program. Instead, the government
- pressed to plug a billion-dollar gap in the budget deficit
- made an unprecedented move in putting 84 percent of VNK
on the block all at once. In 1997, VNK via its Tomsk-neft
subsidiary was Russia's 11th largest crude producer. The sale
was divided into a cash auction for 50 percent minus one share,
and an investment tender for 34 percent. The cash auction
went reasonably well: 48.28 percent of the company was sold
to companies affiliated with Yukos for $800 million. The two
participants in the investment tender both recalled their
applications at the last minute. Another tender was scheduled
for January 1998, but no buyers were found. By this point,
Yukos had accumulated 54.78 percent of the company and a new
board of directors was elected in March 1998. Eleven of the
19 seats were taken by representatives of the now-defunct
Rosprom holding company, then led by Mikhail Khodorkovsky,
now Yukos CEO.
The government was then left holding a 34 percent stake
that no one particularly wanted because Yukos already had
control of the whole company. Ignatov said that if the controlling
stake had been saved for last, bidding for VNK would have
been more fierce, and the final price would have been higher.
Fast forward to December 2001. The controversy began when
Ignatov asked State Property Fund head Vladimir Malin to delay
the VNK sell-off until the audit, begun in October, was completed.
Ignatov said he wrote Malin a letter because he wasn't certain
exactly what the fund was selling. Yukos had taken Tomskneft
assets, funneled them to five wholly owned subsidiaries and
then legally sold those sub-sidiaries to third parties. Yukos
had returned these assets to Tomskneft's balance sheet as
of May 14, and the sale was given the green light. "These
assets didn't completely disappear thanks to Yukos,"
Ignatov said. According to Ignatov, former VNK managers had
artificially inflated Tomskneft's debt to $120 million and
threatened to take its assets by court order. Although government
officials questioned its actions once they were brought to
light, Yukos kept Tomskneft from losing its value, he said.
With VNK firmly in private ownership, Ignatov has turned his
attention to the privatizations of other 10,000 or so state-owned
companies, which include other oil companies Rosneft and Slavneft.
Slavneft is slated for auction this fall. He combs through
these companies with one resounding principle in mind. "The
government needs to be an active shareholder," he said.
"It should be actively managing its assets."
Source: The Moscow
Times
BP to invest over 13bn dollars in Azeri economy
Text of report by Azerbaijani news agency Bilik Dunyasi
Baku, 29 May: "BP and its partners will invest more
than 13bn dollars in the Azerbaijani economy in the near five
years," BP's upstream executive Richard Oliver told a
Bilik Dunyasi correspondent. He said that the company had
not invested this amount of funds in any other country within
such a period.
Oliver noted that BP will invest in large-scale projects
such as the Azari-Ciraq-Gunasli oil field, the Baku-Tbilisi-Ceyhan
and the Baku-Tbilisi-Arzurum pipelines, the expansion of Sangacal
terminal, the reconstruction of Israfil Huseynov pipe laying
ship and the crane-barge Azarbaycan.
The implementation of these projects will sharply increase
the level of production in Azerbaijan. It will make up about
7 per cent of oil extracted by the company globally.
Source: Bilik Dunyasi news agency, Baku, in Russian 0938
gmt 29 May 02
BBC Mon TCU 300502 ha/vz
Kazmunaygaz Flexes Its Muscles
(Astana, Kazakhstan) Kazakhstan is looking to its new national
energy company to ensure foreign oil majors do not have it
all their own way in the race to cash in on the Caspian Sea's
massive untapped oil and gas reserves. President Nursultan
Nazarbayev puzzled many in February when he decreed that the
state oil company Kazakhoil and the national oil and gas transportation
firm TransNefteGaz would merge into the new Kazmunaygaz. Some
analysts said the creation of a vertically integrated national
company would boost the efficiency of Kazakhstan's oil sector,
which produced 40 million tons of crude last year and aims
to triple output by 2015. Others said the move was an attempt
by the veteran leader to further raise the prominence of his
family clan in the resource-rich ex-Soviet state of 15 million
people. Timur Kulibayev, the head of TransNefteGaz and one
of Nazarbayev's sons-in-law, was made first vice-president
of Kazmunaygaz. But it now appears that the goals of the new
giant holding company will be even more far-reaching. "The
leadership and government have ordered us to bid in all new
oil projects and acquire shares of no less than 50 per cent
(in them), aiming to become their operators," Kazmunaygaz
President Lyazzat Kiinov told Reuters. The Central Asian state's
oil sector remains heavily dominated by Western oil majors,
and Kazakhoil produced just 6.6 million tons last year. The
bulk of some $18 billion invested by foreigners in Kazakhstan
since 1991 has gone to the oil sector, a sum Kazmunaygaz can
hardly compete with. But Kiinov said that Kazmunaygaz, which
has inherited all state-run stakes in existing projects and
is estimated to have assets of over $3 billion, would aggressively
defend "state interests" in the oil sector. He said
the state holding would respect contracts with investors that
had already been signed, but aspired to become as powerful
and influential a player in the national oil sector as Statoil
in Norway, Malaysia's Petronas or Venezuela's PDVSA. "These
are the state-run national companies that not only work successfully
but also shape the oil and gas policy of their states, which
creates most favorable conditions for the national economy,"
Kiinov said. He said that to be able to compete with foreigners
in tapping the country's oil riches, Kazmunaygaz would try
to attract the billions of dollars deposited by Kazakhs in
local banks and pension funds. He said the company was also
considering borrowing on international financial markets but
gave no detail. Kazmunaygaz will complete work on its detailed
development program by mid-July.
Source: Caspian
Business Report
Azeri opposition wants answers about 40m dollars intercepted
en route to Turkey
Text of report by Azerbaijani news agency Bilik Dunyasi
Baku, 27 May: Azerbaijan's opposition newspapers are continuing
to ponder about the 40m dollars picked up on the border with
Turkey, which was allegedly being transferred to Turkey by
people who are close to the authorities. "The official
authorities are neither confirming nor denying this fact.
Given the current social condition of the Azerbaijani population
and the existence of one million refugees, the transfer of
such a sum of money is a serious crime against our own people.
This sum is equal to salaries for three months," Musavat
party leader Isa Qambar said.
The Democratic Congress discussed this issue at its session
today. Party leaders asked whether the money transferred to
Turkey was the same 40m dollars the State Oil Fund recently
allocated for refugees.
"The Democratic Congress demands explanations from the
authorities on this issue. All such decisions and operations
must be transparent," Qambar said.
Source: Bilik Dunyasi news agency, Baku, in Russian 1407
gmt 27 May 02
BBC Mon TCU 270502 aed/ra
USA to retaliate to Kazakh revision of contracts with
investors
Text of report by Kazakh Commercial TV on 21 May
[Presenter, over video of US scenes] The US administration
has threatened to apply the Foreign Corrupt Practices Act
against Kazakhstan which may lead to an investment drain from
our country.
The USA is ready to apply this normative act, if the Kazakh
government approves a new law on investors and, in so doing,
starts to revise contracts concluded earlier.
The Foreign Corrupt Practices Act divides money transactions
into legal and illegal ones. Any investment in the Kazakh
economy which does not meet the financial interests of an
investor will be regarded as a bribe. Thus, the main investors
who are US companies will simply stop investing money in
the Kazakh economy.
Source: Kazakh Commercial Television, Almaty, in Russian
1030 gmt 21 May 02
BBC
BP set to expand social programmes in Azerbaijan
Baku, May 17, 2002. (CNA). The company BP is working out
programmes to develop and improve living conditions of the
population in the area of the Sanqacal terminal [south of
Baku] and around the Baku-Tbilisi-Ceyhan MEP [main export
pipeline] and the Baku-Tbilisi-Erzurum gas pipeline (up to
the Georgian border), the BP press service has told Turan.
Social investments will be aimed at covering education in
local schools and universities, upgrading the sewage system
in villages and implementing micro-crediting projects to encourage
local entrepreneurs.
These programmes will focus on three directions - attracting
a labour force for a long-term period, regulating revenues
and use of energy sources, strengthening the main directions
of BP policy and reporting to the public about them. They
will include the fields of health and safety, protection of
the environment, business ethics, relations with shareholders
and employment.
Caspian News Agency: www.caspian.ru
Statoil Invested $530 Million in Azerbaijan Over 10 Years
(Compiled from Asia Africa Intelligence Wire news agency
sources) May 16, 2002
Norway's Statoil, which was one of the first Western, commercial
gas companies to enter the Azerbaijan market in 1992, announced
that over the last 10 years it has invested almost $530 million
into the country's oil-and-gas industry. Statoil is participating
in a number of energy development projects, including the
Azeri-Chirag-Gyunashli (8.6 percent), Shah Deniz (25.5 percent),
and Araz-Alov-Sharg (15 percent) oil fields. Statoil is a
member of the sponsorship group that is currently constructing
the Baku-Tbilisi-Ceyhan (BTC) pipeline with a 6.45 percent
ownership share. Statoil has also announced its intention
to participate in the Baku-Tbilisi-Erzurum pipeline project.
Source: Azerbaijan
Weekly Update
Kazakh Corruption
RFE/RL, Crime and Corruption Watch 09 May 2002
By Roman Kupchinsky
In early April, international press agencies reported that
Kazakh Prime Minister Imanghaliy Tasmagambetov told the Kazakh
parliament that the government had secreted in a Swiss bank
account some $1 billion in profits from the sale of 20 percent
of the Tengiz oil field in 1996. On 16 April, Kazakh President
Nursultan Nazarbaev told the "Financial Times" that
he saw nothing wrong in the creation of this fund and that
no money had disappeared. The money in the bank account allegedly
was in the name of the president himself, though Kazakh authorities
were quick to claim that neither the president nor his family
benefited from it. Kazakhstan's Central Bank Chairman Grigorii
Marchenko defended Nazarbaev's decision, saying that, "As
an economist and banker, I can only say this was the right
decision from an economic point of view," (see "RFE/RL
Business Watch," 30 April 2002). Marchenko went on to
say that $880 million from this fund was spent in 1997-1998
to pay off huge pension arrears and to support the budget
during a sharp fall in revenues due to lower oil prices. He
also stated that by 15 April, $212.6 million had been transferred
to the country's national fund for oil income since the start
of the year. No documentation was provided to confirm any
of these statements. Kazakhstan has long been suspected of
being one of the most corrupt countries in the former Soviet
Union. According to Transparency International, in 2000, Kazakhstan
received a rating of 84 out of a possible 99, leaving only
Kyrgyzstan and Azerbaijan higher in terms of the level of
corruption among former Soviet republics. On 2 July 2000,
"Newsweek" reported that, on the basis of documents
leaked from the U.S. Department of Justice, an investigation
was under way into the transfer of millions of dollars from
American oil companies to accounts overseen by Kazakh officials,
including Nazarbaev.
According to the Justice Department, payments totaling $115
million were transferred from the accounts of numerous U.S.-based
oil companies to a private account in New York held by a Swiss
bank via several offshore locations. From this account, at
least $60 million was transferred to Swiss accounts held by
Nazarbaev, former Prime Minister Akezhan Kazhgeldin, and his
successor, Nurlan Balmgimbaev, who currently heads the state-owned
energy company Kazakhoil. The main focus of the Justice Department
investigation has been the alleged role played by James Giffen,
the Manhattan-based operator of the private merchant bank
Mercator, and head of the American Trade Consortium: an organization
created by Giffen to promote regional trade and investment
during the final days of the USSR. Giffen could face charges
under the Foreign Corrupt Practices Act, which forbids U.S.
companies from paying bribes in order to close deals abroad.
And while a grand jury has been called to examine the allegations
against Giffen, both ExxonMobil and BP-Amoco are cooperating
with the government, while Phillips has maintained silence.
Phillips is allegedly the source of $21 million of the $60
million transferred to the Swiss accounts. Oil is not, however,
the only source of money that is feeding corruption in Kazakhstan.
According to a report by the Canadian Security Intelligence
Service in September 2000, high-ranking Kazakh officials sold
40 Soviet MiGs to North Korea in 1999, allegedly for private
gain. On 11 June 2001, the "Los Angeles Times" reported
that Choi Soon Young, former chairman of Korea Life Insurance
Company, told a Seoul appeals court that he ordered a subordinate
to give $10 million in bribes to Nazarbaev in 1996 in order
to promote business in that country. Choi's lawyer told the
court that his client believed the bribe would help start
his businesses in Kazakhstan. The current admission by the
Kazakh government that a secret fund did exist raises a number
of intriguing questions: Was this the only secret fund held
by the president?; Why was it held in Switzerland and not
in another country?; Was it because of the Swiss banking laws
on secrecy in place at the time?; Will documentation be presented
to the Kazakh parliament to confirm that these monies were
indeed used to pay off pensions and sent back to Kazakhstan?;
Why was this "a right decision from an economic point
of view."
World Bank official compliments Azeri president on management
of State Oil Fund
Text of report by Azerbaijani news agency Turan Baku, 8 May:
Azerbaijani President Heydar Aliyev and the World Bank's
regional director for the South Caucasus countries, Judy O'Connor,
discussed expanding cooperation between Azerbaijan and the
World Bank at a meeting today. After reporting on her mission
in Azerbaijan, O'Connor expressed her satisfaction with Azerbaijan's
achievements in securing macroeconomic stability and in structural
reforms. She especially commented upon Azerbaijan's successful
management of the State Oil Fund and ensuring its transparency.
The World Bank approves of the idea of spending part of the
State Oil Fund on education, reducing poverty and raising
the living standards of the rural population in Azerbaijan,
O'Connor said. In turn, Aliyev assured O'Connor that the State
Oil Fund would continue to be transparent. Aliyev said that
part of State Oil Fund's money was spent on refugees and internally
displaced people. O'Connor positively assessed the government's
activity in seeking to develop the non-oil sectors of the
economy. Speaking about developing businesses, O'Connor said
that the World Bank supported business start-ups through financial
tools. One of them is the micro-credit lending bank, the creation
of which has been delayed by Azerbaijan for several months
already. O'Connor said that she was sure this question would
be decided soon. Aliyev expressed his readiness to take into
consideration the World Bank's recommendations when conducting
economic reforms in Azerbaijan. Source: Turan news agency,
Baku, in Russian 1530 gmt 8 May 02 BBC Mon TCU 080502 at/ra
Kazakh prosecutor-general's office uncover money laundering
by officials
Text of report by Interfax-Kazakhstan news agency Astana,
2 May: The Kazakh Prosecutor-General's Office has revealed
cases of money laundering by certain [Kazakh] officials in
offshore zones. Also, as the country's deputy prosecutor-general,
Askhat Daulbayev, told journalists in Astana today, the prosecutor's
office has established cases of converting funds into cash
by "dishonest" Kazakh officials in offshore zones. However,
Daulbayev, refused to give the details of the cases, saying
that they "are a secret of preliminary investigations". He
only noted that the "illegal sums" discovered were about 10m
dollars. Source: Interfax-Kazakhstan news agency, Almaty,
in Russian 0833 gmt 2 May 02 BBC Mon CAU 020502 va/qu
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