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. Last Updated: 07/27/2016

Rosneft Opens Bidding to Investors

State-owned Rosneft began accepting bids from investors Monday for its controversial $11 billion initial public offering, giving them a chance to buy assets the state earlier seized from them and sign off on the Kremlin's dominance over the oil industry.

Shares are valued at between $5.85 and $7.85, Rosneft announced, putting the value of Russia's No. 2 oil company at $60 billion to $80 billion -- significantly more than the country's No. 1 oil major, privately held LUKoil. The IPO's terms and legal risks facing investors were mapped out in a 505-page prospectus obtained by The Moscow Times.

Given the IPO's terms, analysts said the oil major would sell between 10.5 and 14.1 percent of the company in the IPO, which is tentatively scheduled for July 14, one day before the G8 summit begins in St. Petersburg.

The major question facing potential investors was how the Kremlin's control of the oil sector would affect their long-term investment.

Potential investors and stock analysts said Rosneft was seeking such a high price for its shares despite legal risks because as the Kremlin's flagship oil major it was on track to win favored status for major new fields and for partnership deals with foreign oil companies.

"Whoever buys Rosneft is buying into the Kremlin," said one participant in the sale, speaking on condition of anonymity because he was not authorized to speak.

"Rosneft is expected to benefit from the unparalleled advantage of Kremlin support," agreed Eric Kraus, who manages the Nikitsky Fund. "The next time a new, juicy oil company comes up for auction, they will get strong consideration."

A successful IPO would indicate that investors had bought into Russia's newly configured oil industry, which in less than three years has been transformed from an industry dominated by private owners to one largely controlled by state-run companies. The transformation has also affected the rules for foreign investors, who for now are limited to minority ownership of energy projects and are seeking partnerships with the new state giants.

The transformation was sparked by the legal campaign against Mikhail Khodorkovsky's Yukos oil company.

Rosneft tripled in size overnight when it acquired Yukos' main production unit, Yuganskneftegansk, following a forced state auction as payment of more than $28 billion in back taxes. That $9.4 billion buy, in late 2004, gave Rosneft 70 percent of its production base.

Rosneft's controversial winnings underscore the precarious position of Russian investors, who must gauge a company's political fortunes as much as its financial footing.

They also have made some major U.S. funds, fearful of a lawsuit filed last year by Yugansk's former owners, leery of investing.

"I can tell you straight that we as a fund are not going to invest," said Ian Hague, co-manager of New York-based Firebird Capital Management, which has $2.1 billion in Russian stocks under management. "There is no interest or incentive in paying a premium for assets that we bought before at much lower prices," he said, referring to the fund's previous holdings in Yukos. U.S. investors are estimated to have lost up to $6 billion as a result of the state's campaign against the oil major. "Why would we jump at the chance to own it again when it's at the all-time highest price?" Hague said.

That Rosneft is Kremlin-backed made Hague that much warier. "This company will be endeavoring to develop oil fields over the next 10 to 12 years," he said. "It is difficult for me to believe the same people will still be in the Kremlin in 10 to 12 years' time. There could be a whole new regime."

Hague concluded: "So what are you buying except risk?"

Rosneft acknowledged the political risks of doing business in Russia when it distributed its prospectus on the IPO to investors Monday. In a 27-page section titled "Risk factors," the company noted: "Possible changes following the next Duma or presidential election could affect the policies and practices of the government with respect to Rosneft."

The prospectus also highlighted lawsuits filed by Yugansk's former owners over its acquisition of Yugansk, as well as the oil firm's fragile finances, with debts of over $11.6 billion putting it at risk of breaching loan covenants and defaulting.

One potential legal threat, it said, came from a $33 billion suit filed by Yukos owner GML, formerly known as Group Menatep, in an international arbitration court in the Hague under the terms of the Energy Charter. The suit, which alleges expropriation, was filed against the Russian government. "If certain shareholders of Yukos are successful in obtaining an arbitral award against the Russian Federation, those shareholders may seek to enforce that award against Rosneft, which may expose Rosneft to substantial liability," the prospectus said.

Rosneft also pointed out in its prospectus that it was being sued for $3 million by U.S.-based shareholders of Yukos for exproprating Yugansk.

GML director Tim Osborne said Monday that his group was indeed focusing its efforts on the Energy Charter suit, which, he conceded, was likely to take years. The first hearing in the case is expected in July 2007, he said.

The Rosneft IPO "clearly demonstrates the continuing conspiracy to take Yukos' assets by the Russian Federation," he said. "We will deal with this in the Energy Charter case."

But many investors played down the chances of Yukos shareholders winning any cases against Rosneft. Kraus, of the Nikitsky Fund, said any rulings -- in the Hague or the United States -- would be meaningless unless upheld by a Russian court, adding that that would not happen.

Also facing Rosneft are possible lawsuits from minority shareholders in the company's subsidiaries, such as the Komsomolsk oil refinery in the Far East. These shareholders accuse Rosneft of undervaluing the shareholders' stakes in the subsidiaries ahead of the IPO.