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. Last Updated: 07/27/2016

Fund Fires CSFB, Says Its BP Deal Was Illegal

Credit Suisse First Boston has been excommunicated from the planned 6 percent flotation of oil giant LUKoil's stock on the international markets — the biggest privatization of the year.

Not only is the contract — which would have reaped $10 million in fees for CSFB — to be dissolved, but the State Property Fund has declared that the bank has broken the law.

In a letter to CSFB outlining why the contract is finished, Dmitry Mazepin, deputy head of the fund, wrote that it broke Russian law by consulting oil giant BP Amoco in the sale of its LUKoil stake and not informing the fund about it.

A month ago it emerged that CSFB had provided services to property fund competitor BP, which sold a 7 percent stake in LUKoil in January. BP inherited the stake through the acquisition of U.S. oil company Atlantic Richfield last April.

CSFB and Brunswick UBS Warburg sold the shares for BP for $657 million.

The placement price was less than that planned by the fund, and as a result the potential investor demand for the stock fell, consequently casting doubt on the fund's privatization plans.

"The normative acts of the Federal Securities Commission and the Central Bank provide for the fact that the employees of credit organizations and professional participants on the securities market are obliged to put the interests of their clients higher than their own and avoid the conclusion of agreements that might negatively affect the interest of their clients," Mazepin wrote.

"In the event that a conflict of interests arises, they must immediately inform the client of such and undertake all necessary measures for the resolution of the said conflict in the favor of the client."

However, the fund has no plans to take the Western consultant to court.

Two banks, CSFB and Morgan Stanley, which had made a joint application, were selected as underwriters for the sale of a state share in LUKoil last year.

Mazepin said that now only Morgan Stanley will be allowed to act as underwriter in the LUKoil transaction.

CSFB and Morgan Stanley representatives declined to comment.

A source close to negotiations said that CSFB and Morgan Stanley were to have received at least 4 percent ($24 million to $32 million) of the total amount received upon the sale of the LUKoil shares, which is planned to bring in $600 million to $800 million.

"I think that CSFB understood what it could end in if it acted as consultant both for BP and the government," said Steven Dashevsky, oil analyst with Aton brokerage.

"In the given case they should simply choose which client is strategically more important for them — the Russian government or a major international firm. The value of both transactions was about right, but BP was required to sell the shares quickly, while it was unclear as to whether the property fund would place its LUKoil stake," Dashevsky said.

"At the same time, as far as I know CSFB has a very fraught relationship with the Russian government after they lost a great deal of money in this country after the default."