Michael Harrison's Outlook: The Rosneft flotation should be stopped, but if it is not then we should ensure it is a flop

'Lifetime of litigation'; And after Putin? Soros view
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The Independent Online

Listing rule 2.1.3 of the Financial Services Authority's handbook gives it the power to prevent a company from floating on the London Stock Exchange if "admission of the securities would be detrimental to investors' interests". It is hard to think of anything more potentially detrimental to the health of the investment community than allowing one set of shareholders to buy stock in a company whose main assets were stolen from another set of shareholders.

And yet that is precisely what the FSA and the LSE intend to permit next month when the state-owned Russian oil company Rosneft lists in London. Rosneft's main asset is an oil business called Yugansk which was expropriated by the Russian government from another oil company called Yukos, in lieu of back tax it allegedly owed. The chief executive of Yukos, Mikhail Khordokovsky, now languishes in a Siberian concentration camp having been found guilty of tax fraud after a political show trial of which Stalin would have been proud.

The tax which he is alleged to have withheld amounts to 8 roubles for every one rouble of Yukos revenues. Even in Russia, the tax regime is not that punitive. But its penal system is. Mr Khordokovsky's "crime", of course, was not to embezzle the Russian taxman but to challenge the political authority of President Vladimir Putin. He is now paying a fearful price. So are the shareholders in his former business. Estimates of the scale of the theft range from $40bn to $70bn.

'Lifetime of litigation'

The FSA and the LSE say they are not there to make value judgements about the kind of companies which list in London or the provenance of their assets but simply to ensure that the listing requirements are fully met. This means ensuring that there is full disclosure of all the information that shareholders require in order to make an informed investment decision. Caveat emptor, in other words. In that respect, you can be sure the chapter headed "Risk Factors" in the Rosneft prospectus will be a long and detailed one. The company is facing a multitude of legal actions from Yukos and its former shareholders, aimed not only at Rosneft itself but any investors who choose to buy shares in the forthcoming flotation. They have been promised a "lifetime of litigation" if they choose to buy Rosneft shares and in so doing end up with blood on their hands.

The LSE and FSA say it is not their place to prevent this happening, but rather to make sure that investors are aware of the danger. If it was the job of the regulatory authorities to pass moral judgement on who may list and who may not, then the list of banned companies would be very long.

Why, for instance, allow the internet poker website PartyGaming to have a London share quote when its activities are illegal in the US, the market where it makes most of its money? And what about all those companies with histories dating back to the days of Empire when assets in former British colonies were seized at will? Taken to its logical extreme, those state-owned companies which were privatised under the Conservatives would have been prevented from listing on the grounds that their assets were sold from under the taxpayer for ludicrously low prices.

This, however, is to miss the point. To anyone outside the Kremlin, the Yukos affair was as clear an example of robbery, plain and simple, as it is possible to get which makes the forthcoming flotation little more than legalised money-laundering.

Allowing Rosneft to list its shares on the London market will legitimise the whole shabby affair. It is as if Robert Mugabe were coming to London to sell shares in the farms stolen from white landowners by his ruling Zanu PF government.

It is as if ethics and morality no longer have anything to do with the trading of shares. Rosneft, goes the argument, is just one more Russian company racing to monetise its assets and London had better join in this latter-day Klondike or it will miss out. Stock markets are going global, and if we don't permit Rosneft to list here, then our loss will be another exchange's gain.

A lot of very prominent banks and advisers have bought this argument and are lending their names to the Rosneft float in return for a fat fee. The joint global co-ordinators of the offer are ABN Amro Rothschild, Dresdner Kleinwort Wasserstein, JP Morgan and Morgan Stanley. The lawyers are Linklaters, the accountants are Ernst & Young and the City public relations advisers are Brunswick. Why these firms have seen fit to take the Rosneft shilling, only they can answer.

And after Putin?

Sadly, they are not alone in thinking the UK should be at the very centre of this free-for-all. Tony Blair, no less, has said there is nothing wrong with Gazprom, another Kremlin-controlled company, buying Centrica, Britain's biggest gas supplier. He says politics has no place in such matters. Try telling that to the Ukranians, who suddenly found their gas supplies frozen by Moscow earlier this year in what to the outside world appeared an act of political retribution for voting in an anti-Russian government.

One of the other risk factors that any would-be investors in Rosneft must weigh is whether they feel comfortable with owning a small minority stake in a company majority owned by the Russian government. President Putin will only be there for another year. What if a new government takes a different view about Rosneft's ownership?

Soros view

But this is to bring the argument back down to a practical level when the issue is one of principle. It is wrong to buy stolen goods and that applies as much to companies as any other commodity. The price range for the Rosneft float will be set in nine days and you can be sure it will be priced to go. The two-week roadshow of investors begins after that. Sergei Bogdanchikov, the president of Rosneft, has pledged to invest more than a quarter of his $700m fortune in the stock in an attempt to drum up investor interest. Rosneft's backers claim that there have already been strong expressions of interest from a range of institutions. But so far, the only investors to put their heads above the parapet have tended to be those critical of the float, such as George Soros.

Unless they have lost their collective moral compass, the regulatory authorities should act now to stop the Rosneft listing going ahead in London. If they will not then it is the job of investors in their own self-interest to shun the shares and make sure the issue is a flop. Otherwise, natural justice and human rights will have come second.