The Big Picture For The Week Of April 16, 2006

In a big picture sense, oil from Russia is important because there is a lot of it in the ground and in the next few years it looks as though there will be more of that oil being processed and put onto the market for consumption.

That is the simple part. The rest is where it gets progressively more complicated.

Regardless of your opinion about the entire Yukos/Khodorkovsky affair I have never heard any dispute that Khodorkovsky was told, as were all the oligarchs, to stay out of politics and he did not. I am in no way opining as to whether he should or should not have made comments or anything else and it is possible that what I say is not in dispute is in fact in dispute. I am just trying to relay the facts as I understand them and I may have facts about Khodorkovsky incorrect but I have seen and read enough coverage that I think I this right.

The fallout of the Khodorkovsky affair was that Yukos was shut down and the assets were later put up for auction. Again, there was politics and controversy surrounding the manner in which this occurred and I don't want to turn this post into a debate of the politics of it.

The emerging company from all of this with the old Yukos assets is Rosneft. Rosneft is going to have an IPO and July is a possible date for the listing which is likely to be on the London Stock Exchange. I would like to learn more than what little I know now but I am interested in the company.

Some of the numbers, if true, are compelling. Earnings in 2005 were $3.9 billion vs $0.8 billion 2004. Revenue was $23.9 billion vs $5.3 billion in 2004. In 2005 the company reduced its debt by $1.7 billion down to $10.9 billion.

I would not get too excited about the growth built into those numbers because the old Yukos' operations were severely hampered in 2004 and so the company did not do a lot that year.

Some other fun facts about Rosneft include, among Russian companies, it is 2nd in gas production, 8th in oil production, 7th in reserves, and first for oil refining capacity. With the IPO, the company plans to sell 1/3 of the company for about $20 billion. As the company is now state owned, I presume the 2/3rds not sold will be held by the government and possibly sold later.

A lot of people assign a risk to Russian shares because of the Yukos affair. While I certainly cannot say it won't happen again I think it makes sense to believe that the Russian government does not want it to happen again. A second company being dismantled would probably cause a huge flight of foreign capital, much worse than Yukos. The country, I believe, wants to be a capitalist country with foreign investment. Fair to say they are still learning about capitalism but anything they do that jeopardizes foreign investment into the country is counter to their own interests. And it is worth pointing out that there are plenty of Russian companies traded on foreign exchanges in the US and in Europe.

Russia wants to be more important in the world economy not less. Between now and the listing date there will be a lot more to read about Rosneft before making any kind of decision.