State may sell Rosneft equity
№ 4 (April 2010)
Russian Deputy PM Sechin: New Oil Tax Proposals Coming
Igor Sechin, Deputy Prime Minister and Chairman of Rosneft, said the government will submit new oil tax proposals to the Prime Minister by the year-end. The oil industry, in particular, Rosneft, has been battling with the Finance Ministry for a significant reduction in its tax bill to help fund capex. So far, the Finance Ministry has prevailed with its argument that the government needs the revenue to fund investment into infrastructure, new industries, SMEs, etc. If investors believe that the oil companies may get the PM’s support for a tax cut in 2011 then valuations will rise. Too early to say how likely that is but any new optimism may spark some speculative price gains. This is at least one of the reasons for the 3.8 percent price gain in Rosneft (ROSN LI) recently.
By C Weafer
Another factor in how Rosneft’s share, and those of the other state companies, may perform comes with Sechin’s comment that the sale of shares in Rosneft (and in INTER RAO, over which he is also Chairman) will “depend on market conditions”. The clear implication being that the debate in government over whether to sell more shares is now resolved and that the sale may go ahead when markets improve. That ties in with a statement made earlier in the day by the head of the Union of Industrialists in Russia. He said that the government should press ahead with selling surplus state equity holdings to fund the budget deficit. Cutting the state’s direct involvement in the economy is also a major priority for President Medvedev. Up to now, however, there was no indication that the government has agreed the strategy for for selling additional equity in the major listed state enterprises. We may now see this as a big part of the state’s privatization programme in 2011.
State could earn $33 billion
If the state were to cut its equity in Rosneft back to a 50 percent+1 stake (as it has in Gazprom) then it would generate $19.6 billion from selling the surplus equity. If the state were to do the same with Sberbank, VTB and Federal Grid, then the total generated (at the current market value of each company) would be $33.4 billion.
Hong Kong is an option
If this were to go ahead then the equity issuance could, at least in part, form part of a secondary placing in Hong Kong. Rosneft has the Asia credentials with the deal to supply China with oil as part of the “oil for debt” deal. It is thought that the government is very keen to boost its Asia credentials ahead of the ASEAN Forum to be held in Vladivostok in 2012. A listing of Rosneft shares in Asia would make sense in that regard. Given the scarcity of major oil shares listed in Asian bourses, the demand from regional directors would likely be high.
But, specter of YUKOS refuses to go away.
Mikhail Khodorkovsky also held started a hunger strike and that generated unfavorable headlines about Russia around the world. The action does serve to remind that the YUKOS factor is still a part of the perception of investment risk in Russia. Existing investors discount the issue but as the government pushes ahead with the “modernization” program it will need to attract in an increasing number of investors into industries outside of natural resources. Investors in, e.g. oil and mining industries, are very risk tolerant (you don’t find oil in Switzerland) while investors in other industries are more sensitive to investment risks. The Strasburg Human Rights court is currently considering the $98 billion claim that ex YUKOS shareholders have been pursuing against Russia since 2004 and may make a ruling this summer. That will generate a big headline for sure.