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. Last Updated: 07/27/2016

THE ANALYST: Sidanko Squabbles Give Investment a Bad Name




Events unfolding around the insolvency and management of the oil company Sidanko, if not rectified immediately, threaten to deal yet another knock-out blow to Russia's economy. The financial and industrial world is watching the process with alarm, and it doesn't like what it is seeing. If an investor as powerful as BP Amoco is shafted in Russia, there is little hope for anyone.


Perhaps because very little legal precedent exists for it, bankruptcy proceedings in Russia, should they be implemented with frequency, are well-nigh designed to be massively abused. The most logical result of this could be a significant redistribution of assets throughout the country, which for many is a temptation too good to pass up. Sidanko, Russia's sixth largest oil company in terms of crude production, has been standing at bankruptcy's door for months due to a default on part of its $400 million in outstanding debts. It was to be the country's first major non-financial bankruptcy.


However, once it became known that Sidanko was faltering, a number of entities jumped at the chance to rip it apart. Rumors circulated that the Fuel and Energy Ministry, regional governments and a couple of leading oil companies had varying designs on the moribund oil major. Ultimately, it was a suit by Beta-Eko, an unknown creditor with a $20,000 claim, that pulled the one-time oil leader into court. Strange as it may seem, many speculated that Sidanko's largest shareholder - Vladimir Potanin's Interros - was behind this laughable litigation, since bankruptcy would essentially give the company the right to postpone debt payments and prevent a fire-sale of its assets.


Sergei Generalov, former Fuel and Energy Minister, summed up sentiment in the sector when in January he was quoted as saying that "the inactivity of [Sidanko's] shareholders has in fact ruined one of the best oil companies in the country." BP Amoco, which controls 20 percent of Sidanko and did indeed underestimate the magnitude of the problems both at the holding and at several of its subsidiary companies, finally decided to up the ante and risk its reputation on saving Sidanko in its entirety. If creditors would agree to back off for a time, the world's largest privately-owned oil company would take over all aspects of management of Sidanko, from production to marketing, and would even recapitalize the company. Generalov, who knew he dare not refuse BP Amoco, approved the plan.


Still, things spun out of control. In February 80 percent of creditors supported a proposal to have Sergei Sereda, an executive at Arthur Andersen, take over as outside manager of Sidanko. But in a surprise move, a Moscow regional court on March 2 delayed the appointment of an outside manager on the request of the acting external manager, Sergei Kitin. Seeing danger ahead, BP Amoco consolidated managerial authority by taking three seats on the 11-person board, including the chairmanship, and in an effort to stave off bankruptcy, appeared to have achieved a high degree of consensus among both shareholders and creditors (many of whom are one and the same).


In the end, it made no difference. Despite the wishes of a majority of creditors, who were reportedly in the middle of compiling a complete settlement and needed an extra month, the same court convened on May 18 and declared Sidanko bankrupt. Moreover, it allowed Kitin to remain in charge of the company's day-to-day affairs since creditors were unprepared. Bizarre parochial interests gained the upper hand over the majority's interest, and thus the Kremlin intrigue of the past two weeks has trickled down into the courts - going against the grain and handpicking one's own people to protect one's financial interests.


To crown it off, Chernogorneft, Sidanko's core production association, may forever leave the holding structure. An external manager appointed by 98 percent of creditors (such as the European Bank for Reconstruction and Development and French financial institution Societe Generale) was dumped last week by a Siberian court in favor of an unknown candidate who will undoubtedly serve as someone's lackey. Without control over Chernogorneft, Sidanko's shareholders and creditors cannot expect to crawl out of this mess.


There are probably few decisions Sir John Browne, chief executive officer of BP Amoco (knighted for his success in recreating British Petroleum), regrets more than paying $571 million for 10 percent of Sidanko in 1997. Still, his promises to turn the company around deserve more respect than they have been shown thus far. Russia's oil industry is in a miserable condition, and unless something is done to facilitate immediate investment, the country could end up importing crude within five or 10 years. This fear has been expressed by many experts in the industry, and if bureaucrats and oilmen sit on their hands and watch BP Amoco get molested, then another chapter in Russia's economic collapse will be written, and we will have another reason why no one wants to put money in this country.