A £6bn London flotation, a Russian oil company - and a question of morals

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This week the London Stock Exchange will play host to one of the biggest share sales on record. But the £6bn flotation of Rosneft, a state-owned Russian oil producer, will not only be huge, it will also be massively controversial.

Apart from the sheer size of Rosneft - it will have a stock market value of about £38bn - one other thing marks it out from other public listings. Critics of Rosneft, and they include the billionaire investor and philanthropist George Soros, claim the company has been built on assets stolen by the Kremlin from another set of shareholders.

Allowing Rosneft to list its shares here will therefore legitimise that act and undermine London's reputation as one of the world's leading financial centres.

The trickle of Russian companies seeking the respectability, kudos and access to capital that a London share listing brings may have turned into a flood. But the City has never seen anything quite like Rosneft. The allegation against the company is simply put: that its main subsidiary, an oil and gas business called Yuganskneftegaz, was illegally expropriated from another oil company called Yukos by the Russian government.

The Kremlin says Yuganskneftegaz was seized in lieu of unpaid taxes. Indeed, Mikhail Khodorkovsky, the former chief executive of Yukos, now languishes in a Siberian concentration camp having been found guilty of tax fraud. But to many observers, inside and outside Moscow, Mr Khodorkovsky's crime was not to embezzle the Russian taxman but to challenge the political authority of President Vladimir Putin.

Imprisonment and the confiscation of his company is, say Mr Khodorkovsky's supporters, the price he is now paying. Rosneft's history has not stopped a bevy of the world's biggest investment banks agreeing to float the company and, in the process, share out $140m worth of advisory fees between them.

Nor has it prevented Rosneft's advisers aggressively marketing the company in the hope that they can persuade at least one big Western oil company to become a strategic investor. For days, the banks behind the float have been trying to persuade BP, Britain's biggest company, to take part. Indeed, stories are rife that it has agreed to place an order for shares; stories denied by the company. If it does decide to back the float, it would be a huge fillip for the Kremlin, providing Rosneft and its backers with the veneer of respectability they crave. Robert Amsterdam, Mr Khodorkovsky's lawyer, said it would also leave BP with "blood on its hands", because of the treatment meted out to his client.

So far, BP has kept its counsel, waiting to see whether other big oil companies choose to invest and whether the shares will be priced at a more realistic level.

Price does not concern Mr Soros. He has condemned the Rosneft flotation for raising "serious ethical and energy security issues". In a speech last week to the London School of Economics he said the float ought not to be allowed because Russia was becoming a monopoly supplier to excessively dependent Western economies.

His criticisms have been echoed in Russia by a former Putin adviser, Andrei Illarionov, who resigned last year over what he called the "swindle of the year". Last week, Mr Illarionov described the sale as "a crime against the Russian state and the Russian people. We are talking about the transfer of property from the state without any compensation. We will be witness to massive embezzlement."

He said the flotation would dwarf even the loans-for-shares scandals of the mid-1990s when many of Russia's present-day oligarchs benefited from prize assets being sold off to preferred bidders at bargain-basement prices. And other investors in New York and London, including Foreign and Colonial, have questioned the ethics.

This has not deterred four prominent banks and two of the UK's best-known legal and accountancy firms from lending their names to the offer. The joint global co-ordinators are ABN Amro Rothschild, Dresdner Kleinwort Wasserstein, JP Morgan and Morgan Stanley. Linklaters are Rosneft's lawyers and accountancy advice is being provided by Ernst & Young.

Nor has it budged the view of the Financial Services Authority and the London Stock Exchange that Rosneft is entitled to float in London, provided investors are made aware of potential dangers. With this in mind, the Rosneft prospectus contains one of the longest chapters ever devoted to "risk factors". Over 25 pages, it details $48bn of lawsuits Rosneft is facing from Yukos and its former shareholders.

The FSA and the LSE will not comment publicly on Rosneft. But it is no coincidence that the offer is London. Sources at the New York Stock Exchange say the flotation would never have got beyond first base because of the disclosure requirements of US stock market regulators.

Here, the motto is caveat emptor. Potential investors have until Wednesday, when the book closes, either to take the plunge or to give Rosneft a wide berth because of the legal risks and ethical concerns.

Mr Illarionov believes that when President Putin goes the Rosneft flotation will be reversed by a more enlightened Russian government and the assets restored to state ownership. If so, investors in London preparing to take a punt on this Russian arrival could hardly complain.

The movers and shakers

By Andrew Osborn

Mikhail Khodorkovsky was once Russia's richest man and worth an estimated £8bn; now he is its most famous inmate. The 43-year-old oligarch acquired the oil firm Yukos in 1995 but made an enemy of the Kremlin by funding opposition parties. He is serving an eight-year jail term, 3,100 miles east of Moscow

Vladimir Putin is President of the Russian Federation. The 53-year-old former KGB officer has brought order and prosperity to Russia after the chaos of the 1990s but his critics say it has been at too high a price. He has been accused of stifling free speech, of overseeing a "managed" democracy and of backing Khodorkovsky's prosecution

Sergey Bogdanchikov is president of the state-owned oil firm Rosneft. The 49-year-old has been the Kremlin's cheerleader-in-chief when it comes to the Rosneft IPO. Worth about $700m (£380m), he has tried to talk up the sale by vowing to plough a third of his own wealth into Rosneft shares

George Soros is a Hungarian-born investor and one of the few market players to take a stand against the IPO, saying it should not go ahead. The 75-year-old says he has serious problems with the way Rosneft acquired Yugansk from Yukos.

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