Rosneft flotation hit by legal threat

Investor unease grows over controversial sale of shares in state-owned Russian oil giant

The controversial $80bn (£44bn) London flotation of the Russian energy giant Rosneft is facing a new legal threat, as opposition mounts to the listing among Western investors.

It emerged yesterday that the chairman of Rosneft, Igor Sechin, has just been served in Moscow with papers from a US lawsuit over the company's acquisition of Yugansk, its biggest asset. The case also names Rosneft's chief executive, Sergei Bogdanchikov, and the company as defendants.

The lawsuit represents the sort of legal action that has made many Western investors nervous about buying shares in Rosneft. The state-owned company is looking to raise $10bn.

Franklin Templeton's Mark Mobius, one of the best known emerging markets fund managers, said: "I don't know what they're smoking. Frankly, we're not interested at all. We just don't see any reason why we should be owning a company subject to legal disputes."

Yugansk used to belong to Rosneft's rival Yukos, but it was forced by the Kremlin to sell the asset allegedly for a fraction of its real value. The latest lawsuit has come from a dozen US investors in Yukos, who own American Depository Receipts (ADRs) in the company. Tom Johnson, the lead attorney on the case at Covington & Burling, said: "If we prevail, it could lead to an enormous number of additional claims. The loss of value just related to the ADRs is $6bn. If you look at the publicly traded Yukos ordinary shares, that is another $20bn to $30bn."

Separately, the investment vehicle of the former Yukos majority owner, Mikhail Khodorkovsky, has already pledged a "life-time of litigation" against Rosneft.

A spokeswoman for Yukos said it was waiting to see the Rosneft prospectus before deciding on its own legal action. "We want to see how they position the provenance of Yugansk," she said.

The origins of Rosneft assets has put off a number of potential investors. The company used to be a relatively minor Russian oil operator until the Yugansk deal made it the country's leader in the sector.

Agne Zitkute, a London-based fund manager at Pictet Asset Management said: "This IPO smells bad. Frankly, I have a moral problem with buying back something that was stolen from me."

The Kremlin hopes to get the Rosneft flotation away just before the meeting of G8 leaders in St Petersburg next month, making the timing of the issue extremely tight.

Karina Litvack, the head of corporate governance and socially responsible investment at F&C, said: "The questions we will be asking are legal ones. We need a clear understanding of the Russian legal system and the litigation risk surrounding Yugansk. We will also want to see what provisions are made for that risk."

Rosneft sources said that, through legal actions in Russia and the US, Yukos has been able to make no progress in its case.

Alexander Schwarzkopf, of the hedge fund Altima Partners, said he believed falling markets rather than legal or moral issues would be the main obstacle. "It is very difficult to see anything right now being placed successfully. But it all boils down to price. For them [Rosneft], it could be a tough choice: postpone or go ahead with an IPO at any price," he said.

This view is also taken by William Browder, the head of Hermitage Capital Management, the largest portfolio investor in the Russian stock market. "If there is some question about the safety of assets, you have to have a discount built in to make sure the shares are attractive for investors."

Mr Browder, who has been banned from Russia after Hermitage was critical of corporate governance standards in the country, added : "Many [Russian] companies are trading on Western markets that have an unpleasant provenance of assets so you really have to make a moral judgement on all Russian companies or on none of them."