The company that the Kremlin stole prepares to come to market

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The Independent Online

As the helicopter soars high above the vast Priobskoye oilfield in Western Siberia, Vladimir Bulba, a senior executive at the Russian oil titan Rosneft and a loyal employee of Kremlin Inc, appears master of all he surveys. Far below him gas is being flared at various extraction sites, its tell-tale flickering blue flame illuminating the snow-covered Siberian plains. Tens of drilling crews are busy burrowing deep into the frozen ground in sub-zero temperatures, operators sit at computers monitoring the flow of the Kremlin's "black gold", and storage tanks pockmark the starkly beautiful landscape.

It seems a world away from London and the world's financial markets but it isn't; British and foreign investors will soon get a chance to buy into this remote oil field and others like it. For Priobskoye belongs to the state-owned oil giant Rosneft, which is planning a partial float on the London Stock Exchange later this year with the aim of raising up to $20bn (£11bn).

It will be Russia's biggest initial public offering and one of the LSE's biggest floats of all time.

The Kremlin has a lot riding on it - its own reputation as a reliable international business partner and a chance to turn some of its fabulous oil wealth into cash so that it can service some of the huge debts it has run up renationalising its oil and gas industry in recent years. It is eager for success - analysts and journalists are being flown to Rosneft's oil fields on luxury charter jets and dazzled with slick presentations and impressive production figures.

Yet on the surface Rosneft looks like an easy sell that should have investors queuing up to sign on the dotted line without the need for a costly charm offensive. The company grew by 9.6 per cent last year, has the second-largest oil reserves of any Russian oil company, is well on its way to becoming the country's number one producer, and has impeccable political connections - its chairman, Igor Sechin, is the deputy head of President Vladimir Putin's administration.

But the company also has a chequered past that may not be to every investor's liking. Its biggest oil unit - Yuganskneftegaz - of which the sprawling Priobskoye field is part, used to belong to the jailed oligarch Mikhail Khodorkovsky and his oil firm Yukos who were persuaded to part with it "in unusual circumstances".

Rosneft "acquired" Yugansk in December 2004 after an unknown shell company bought the firm at a state-organised auction for a fraction of its value. Yukos had no choice but to sell as it had been handed a back tax bill of $28bn (which it argued was punishment for Khodorkovsky's anti-Kremlin views) and was told the only way it could start paying it off was by selling the crown jewel in its empire.

At the time many in the West - not least Khodorkovsky's supporters - condemned the forcible sale as state expropriation, Russia's attractiveness as a foreign investment location plummeted, and Western analysts began to mutter about a return to "the bad old days" of a Soviet-style command economy.

Ordinary Russians had a different view though. They thought Khodorkovsky stole it in the first place during the country's post-Soviet anarchy and applauded when the Kremlin took it back.

If a week is a long time in politics, a year and a half in the oil industry is an age and Khodorkovsky (who has since been controversially sentenced to eight years in jail for fraud and tax evasion) has largely fallen off the Western media's radar, while Russia and Rosneft are booming and Western investors appear hungry to get a slice of the action.

At the Priobskoye oilfield, Mr Khodorkovsky and Yukos have been carefully airbrushed out of history. Vladimir Bulba, the head of Yugansk, is keen to talk about anything else apart from Yukos and nobody at Rosneft is willing to discuss allegations that they bought stolen property, let alone that it is such a significant part of the company today.

But when Rosneft pitches to investors, Yugansk is one of the company's biggest selling points. It accounts for 11 per cent of Russian oil production, holds half the reserves of western Siberia, and is Rosneft's biggest production unit.

At Yugansk's headquarters in the oil town of Nefteyugansk, the name plates have been changed on the doors of senior management's offices and the green and yellow colours of Yukos have been over-painted with the black and gold colours of Rosneft. A chronology of the company's history inexplicably leaps from the unit's creation in 1993 to Rosneft's purchase of it in 2004 and Mr Bulba bristles when asked about Yukos and Khodorkovsky.

"I didn't buy Yugansk," he says with a half-smile. "Rosneft did."

He also denies his employees were ordered to paint Yukos out of history despite the obvious evidence to the contrary. "I am proud to work here. All the other questions [about Yukos] are not for me."

The influential portfolio investor George Soros is among those who believe investors should leave Rosneft well alone when it comes up on the LSE later this year, arguing that buying the company's shares would be legitimising the Kremlin's renationalisation of the oil and gas industry.

Robert Amsterdam, Khodorkovsky's lawyer, is even more outspoken. "Rosneft is a receptacle of stolen goods," he said.

"The Rosneft IPO is not only a very unfortunate step for the London market, it sets a disastrous precedent for oil companies operating in emerging markets. London is giving a signal to the world's dictators - 'If you want to steal assets then go right ahead and bring those stolen assets to London'."

Mr Amsterdam says Yugansk accounts for 80 per cent of Rosneft and argues that the unit's latest valuation in the region of $32bn before the IPO shows that Yukos was robbed blind in 2004 when it was given only about $9bn for 76 per cent of its shares.

"This is syndicating the Gulag," he adds. "They didn't just confiscate it [Yugansk], they put Khodorkovsky in jail for eight years to shut him up and then got someone to try to gouge his eyes out."

Controversial float splits fund managers

Western fund managers are split on whether to back the Rosneft flotation, although there seems likely to be enough appetite to get the giant listing away.

Even some of those investors with profound concerns about the legal and moral dimensions of the float said they would have to consider putting money into Rosneft.

Agne Zitkute, a fund manager at Pictet Asset Management, said: "Personally I have a big issue with this IPO. It is just stolen, repackaged, Yukos assets. I think it's a disgrace."

However, as she manages an investment trust that is listed - on the London stock market - she said she had a duty to "look" at investing in Rosneft.

F&C Asset Management said it had received the Rosneft presentation but it had rejected the listing outright.

Karina Litvack, the head of corporate governance and socially responsible investment at F&C, said: "Rosneft has very, very tempting assets. But we are faced with a situation of a very opaque legal regime and very serious questions over the acquisition of Yuganskneftegaz [the former Yukos unit]," Ms Litvack said.

Some commentators have pointed out that once Rosneft lists in London, it would be open to lawsuits in this country from Yukos. But Robin Geffen, the chief investment officer of Neptune Investment Management and manager of its Neptune Russia and Greater Russia Fund, said he had no reservations.

"I'm not in the least bit discomfited. Yuganskneftegaz was part of Yukos but assets change hands. That's just a fact of capitalism," Mr Geffen said. He added that the Russian's state's assault on Yukos was a "one-off".

The legendary investor George Soros warned this week that the Rosneft IPO would "legitimise" Russia's renationalisation of oil assets.

Saeed Shah

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