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. Last Updated: 07/27/2016

Ahead of IPO, Rosneft Hires First Western Exec

For MTRosneft vice president Peter O'Brien
Rosneft has hired U.S. investment banker Peter O'Brien as vice president in charge of strategic investment projects and external financing, the company said Thursday as it steams ahead with plans for an initial public offering this summer.

O'Brien, a former vice president at Morgan Stanley, is the first senior Western executive on Rosneft's full-time payroll, and he will be the Western face steering the state-owned oil major through the biggest -- and most controversial -- IPO in Russian history.

O'Brien, 36, said in an interview that he was up for the task.

"We spent time talking about the company's priorities, and I'm confident that the skills I hope to bring -- whether financing, transaction or communication with the markets -- will be valued," said O'Brien, who at Morgan Stanley played a leading role in most major deals in Russia's energy sector over the last few years, including advising Novatek and Rosneft on their IPOs.

When he starts on Monday, he will replace Sergei Alexeyev, who resigned suddenly from his post as chief financial officer in February, citing "personal reasons" for the move, which provoked fears the IPO could be delayed.

The government has said it wants to raise as much as $17 billion by selling up to 49 percent in Rosneft's shares on exchanges in Moscow and London, potentially strengthening Rosneft's hold on its most controversial acquisition, Yukos' main production unit, and cementing a huge shift toward state domination of the energy sector.

Rosneft has hired a bevy of public relations advisers, and has been taking journalists on trips to its production facilities in an attempt to break out from its image as a hidebound state company with a corporate governance record that many investors have questioned.

But even though Rosneft has a string of Western banks, including Morgan Stanley, advising it on the IPO, until now it did not have any senior executives on its full-time payroll.

Incidentally, with the hire the firm will be following in the footsteps of Yukos, which was the first Russian oil company to hire Western executives to help boost its image on global stock markets.

The state's protracted legal campaign against Yukos has helped transform Rosneft from being the nation's No. 8 oil major to No. 3. It moved up the rankings after it snapped up Yukos' main production unit, Yuganskneftegaz, following a forced sale over $28 billion in back taxes in late 2004. Now that the rest of Yukos is under bankruptcy supervision following a court ruling this week, it could grow even further.

But even though investors and banks appear to be lining up to take part in the Rosneft transformation -- and the shift toward Kremlin domination of the energy sector that has ensued from the breakup of Yukos -- O'Brien still could face a potential minefield of controversy ahead.

Late last year, President Vladimir Putin said the Kremlin had offered former U.S. Commerce Secretary Donald Evans a position as Rosneft chairman in what looked like a bid to repackage the company as Western-friendly. But after a wave of criticism, Evans turned down the offer, saying he had "other commitments."

Rosneft has been named in a lawsuit filed in the United States by a group of Yukos ADR holders who claim that the company played a lead role in expropriating the assets of Yukos. Critics, including Andrei Illarionov, the outspoken former economic adviser to Putin, have said that the IPO will essentially repackage shares that were expropriated via the takeover of Yugansk for sale back to investors.

The IPO is aimed, in part, at paying down a $7.5 billion bridge loan that was extended to Rosneftegaz, a holding vehicle for Rosneft that was set up last year as part of a deal to increase the state's stake in Gazprom from 38 percent to 51 percent.

It is not clear yet whether Yugansk will be consolidated into Rosneft ahead of the offering. Ministers, including Industry and Energy Minister Viktor Khristenko, suggested last year that the unit could remain outside the offering. But in a recent interview with Vedomosti, Khristenko looked to be opening the way for a consolidation, saying "one should not be too dogmatic" about the issue.

O'Brien on Thursday said he preferred not to comment on the details of the IPO because he had not started the job yet.

He expressed confidence, however, in Rosneft's management team. "Some strong additions in the business units over the past couple of years coupled with existing managers means they now have a team that combines the best of what's in Russia," he said.

Even though government officials have said the company hopes to raise as much as $17 billion in the share sale, the exact size of the stake and the possible amount to be earned have yet to be fixed.

Investors said Thursday that they would be looking to O'Brien to make sure the interests of minority shareholders in Rosneft's subsidiaries were not violated in a possible consolidation ahead of the sale. Company documents leaked to the press last year suggested Rosneft planned to swap minority stakes in its subsidiaries, such as Stavropolneftegaz, for shares in the parent company at a large discount to market prices.

After an investor backlash, the head of the Federal Property Management Agency, Valery Nazarov, said the IPO would be conducted before the subsidiaries were consolidated. But it is not clear whether that remains so.

Investors expressed hope that O'Brien would help push the company into greater transparency.

"There is no doubt that O'Brien is going to push Rosneft to treat investors fairly and shape the company in a fashion that is transparent and market friendly," said Eric Kraus, chief strategist at Sovlink Securities. "But the jury is still out on whether [Rosneft president Sergei] Bogdanchikov is going to listen."

Others said they thought minority investors would still be on their own in trying to protect their rights. "O'Brien understands this market far better than anyone else. He'll be able to communicate things that are important for the market and which I don't think Rosneft understands now," said Ivan Mazalov, fund manager at Prosperity Capital Management, Russia's second-biggest foreign portfolio investor, which owns a small stake in Stavropolneftegaz.

"I'm sure he'll explain the risks of corporate governance and how this will affect the market value, but I don't think he'll be the one calling the shots," Mazalov said.