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. Last Updated: 07/27/2016

State Draws Up Way To Float LUKoil Stake

In a race to beat the State Duma’s restrictions on the sale of state-owned enterprises, the government presented its plan Friday to indirectly float a stake in No. 1 oil major LUKoil on the New York Stock Exchange.

The float, which is expected to raise about $800 million, is the government’s largest privatization project of 2001.

"The number of potential investors is much higher on the NYSE than on the local market," Dmitry Mazepin, deputy chairman of the Federal Property Fund, told reporters. "And higher demand leads to higher prices — that’s simple economics."

Since Russian security regulations prohibit the state from selling its shares on foreign exchanges, the government will create a holding company, which it plans to register before the end of the year. The state will then transfer about 50 million shares, or roughly 6 percent of LUKoil, to the newly created entity and list its shares on the NYSE in the second half of 2001.

"The State Duma bars us from listing directly, so we must use the last week of the year to get around its regulations," Mazepin said.

The Duma has expressed concerns about the sale of key state-owned companies to foreign investors, hesitating to pass the privatization program that would allow the state to offer companies such as LUKoil on foreign bourses. However, the government, which holds about 16 percent of the company, desperately needs the extra cash.

Among other expenses, it needs the money to make payments on its $48 billion debt to the Paris Club of creditor nations. While Russia is lobbying to restructure its payments of the loan, Paris Club creditors resist, saying Russia is banking on dilating oil prices.

Indeed, the government counted on oil prices of $21 a barrel when it molded its budget for next year. If oil prices drop, Russia may not have the cash to pay its debtors.

"It is hard to predict exactly what will happen to [oil] prices," said Dmitry Andreyev, an oil analyst at United Financial Group. "But our estimates are inline with the government’s."

Not everyone shares Andreyev’ s optimism. Ivan Mazalov, oil analyst at Troika Dialog, said he does not see an oil barrel selling higher than $17 in 2001. He said that lower-than-expected oil prices may create a deficit that will force the government to raise oil taxes .

Oil prices are not the only factor in assuring LUKoil’s share offering will receive a warm welcome on the NYSE, however. The market conditions play a big role: "Today, LUKoil is at about $8 a share," he added, " but it makes no sense to offer the shares at less than $16."

Mazalov said according to his estimates the sale would not make sense unless the government can get "closer to $20 a share."

Analysts polled agree that waiting for a favorable market climate may mean LUKoil will postpone its debut on NYSE till the second half of 2001.

This time frame seems to suit the government: "We are not in a hurry, and we have no time restrictions," said Vladimir Malin, chairman of the Property Fund, although he declined to specify when the sale would take place.

The Project Privatization Co., the Property Fund’s newly created entity, will deposit its LUKoil shares through the Bank of New York, while Credit Suisse First Boston and Morgan Stanley Dean Witter will act as the lead underwriters for the deal.

On Friday, President Vladimir Putin signed a decree that allows the government to create the holding company, Interfax reported.

"A global company like LUKoil must have global investors," said the Federal Property Fund’s Mazepin.