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. Last Updated: 07/27/2016

Oil Companies Cleaning Up Their Act

Russia's big oil companies are brushing up their corporate act, helping attract much-needed investment and improving the overall outlook for the country's stock market.

But analysts said Thursday the lack of a legal framework with enough bite to prevent firms from stepping out of line meant corporate governance would continue to weigh on prices.

Russia's spotty transparency record has left businesses thirsting for investors, especially after the 1998 financial crisis gutted markets and brought a wave of bank failures.

But bolstered by high global energy prices and the need to expand and modernize, many top oil firms have started to put their houses in order — and with clear results.

"There has been a major improvement in corporate governance among Russian oil companies in the last year," said Charles Saunders, emerging market analyst at Nomura.

"And I certainly think you are going to see more progress going forward over the next 12 to 18 months. That has the potential to have a knock-on effect on companies outside the sector."

Top oil producer LUKoil was the latest to see efforts bear fruit, winning tacit approval of the European Bank for Reconstruction and Development this week for a $150 million loan after releasing 1998-99 financials to U.S. generally accepted accounting principles.

On the same day No. 6 Sibneft announced it had secured a $175 million syndicated loan.

Changes at some firms have been dramatic. Yukos, for example, is now a darling of the oil-dominated equity market after having been blasted in 1998 and 1999 by investors who claimed management was guilty of asset stripping.

"The way in which Yukos has repented has been just as dramatic as the way in which it sinned. They lead the pack here," said Troika Dialog equity strategist James Fenkner.

Estimating that bad corporate governance accounts for a $54 billion discount on what Russian equities would otherwise be worth, he said the improvement among oil firms could sharply improve investor attitudes toward the entire shares market.

"These [oil] companies set the tone and it's impossible for the market to move up unless they are making progress," he said.

Some analysts saw motives for change rooted in a need to tap global capital markets to raise cash for ambitious development plans and a desire to do better business.

Kim Iskyan, an equity analyst at Renaissance Capital who called Russian corporate governance spotty but on an uphill trend, said it was in management's best interests to focus on the business in order to raise shareholder value.

"The management of many companies hold substantial shares in the business. I think a lot of them realize the best way to build their wealth is by building up the business," he said.

Fenkner agreed, and said that was tied to other concerns. "The whole problem with this market is that it runs on vested self-interests. It is predicated on incentives," he said.

"As it is in the companies' best interests — when they need investment money and rising share prices — they are ready to address corporate governance. … But there are no laws that will keep them from changing their behavior later on."

Analysts said while many top companies were following the trend toward better governance, many others were not and there was no guarantee Russian oil companies would not backtrack on the progress that has been made.

"The question concerning oil companies is what will they do when the oil prices slide further," Saunders said. "That will be the real test of their relationships with investors."