Kremlin forced to postpone controversial Rosneft flotation

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The Independent Online

The timing of what is expected to be London's biggest public offering of the year was thrown into doubt yesterday when the Kremlin disclosed the state-owned oil titan Rosneft may not come to market until the fourth quarter of 2006, instead of July.

The announcement is the second sign in as many weeks that the Kremlin is in two minds about how to proceed. Last month it was reported to have halved the amount it hopes to raise from a partial float from $20bn (£11bn) to $10bn, apparently thanks to buoyant oil prices.

Though the Russian government has always said it wants to leave its options open, it had been widely expected to opt for a July flotation on the London Stock Exchange to coincide with a G8 summit of world leaders in St Petersburg. Mixed investor reaction to Rosneft's controversial prospectus and a growing sense that the summit may not be as harmonious as had been hoped appear to have injected uncertainty into that equation.

Yesterday Kirill Androsov, Russia's Deputy Economy Minister and a Rosneft board member, said a final decision on timing was yet to be made. "It is true that the dates are being shifted," he told reporters. "But we still believe that the IPO can take place before the end of the year. Roughly it could take place in the third or fourth quarter." In an aside, the minister disclosed that the government might decide to cancel the IPO, though his aides were quick to describe that remark as a joke.

Originally the Kremlin wanted to sell up to 49 per cent of Rosneft while keeping a controlling stake, but the pitch to investors has so far been dominated by discussion of the company's controversial past.

Though in rude health, its assets include the sprawling Siberian oil unit Yuganskneftegaz, which is responsible for 11 per cent of Russia's total oil output. Yugansk, as it is known, once belonged to the jailed oligarch Mikhail Khodorkovsky and his oil firm Yukos, a fact that is making some potential foreign investors nervous.

It was forcibly "acquired" by the Kremlin in December 2004 in a sham auction for a fraction of its real value and later bought by Rosneft. Mr Khodorkovsky, a swindler in the Kremlin's eyes but a political martyr in the West's, was sentenced to eight years in jail for various white-collar crimes. Many Western analysts viewed the sale as government-sanctioned theft. Mr Khodorkovsky's supporters are arguing now that buying into Rosneft would be tantamount to legalising that expropriation.

The G8 summit in St Petersburg in July was seen as an ideal time to float a large chunk of Rosneft in London. But the US Vice-President, Dick Cheney, recently criticised the Russian President Vladimir Putin's democratic credentials and Russia's alleged use of its energy resources as a political tool, suggesting that the summit may not be the best moment for a Rosneft sale.

Russia cannot afford to delay for too long as it has $11bn of debt, and the Kremlin sorely needs a successful IPO to extinguish it. Part of that is a $7.5bn loan taken out by Rosneft's parent company to buy the Kremlin a 10.74 per cent and controlling stake in Gazprom. If it delays until the fourth quarter, it may well have to refinance that loan, though Mr Androsov said the company may choose to pay off some of its debts by spending dividends.

Rosneft grew by 9.6 per cent last year and with 15 billion barrels it has the second-largest proven reserves in Russia.

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