BP-Rosneft deal: Who are Rosneft?

Back in 2003 few people had ever heard of Rosneft. A state-owned, relatively minor player in Russia’s oil industry, the10 year old company was dwarfed by its privately owned rival Yukos, which was controlled by the country’s then richest man Mikhail Khodorkovsky.

That all changed in December of that year. A $27bn tax claim against Yukos set off a chain of events that would eventually lead to the bankruptcy of the company and the jailing of Mr Khodorkovsky, who was last month sentenced to a further eight years in prison for tax evasion.

But, it was 12 months later with the auction of Yuganskneftegaz, the main production facility of Yukos’s empire, that Rosneft was propelled into the big time as the business was sold off to help settle the Yukos tax debt.

Despite Yuganskneftegaz being one of the most attractive oil assets put up for sale in Russia, bidders proved elusive and in the end only two offers were made for the business; one from Gazpromneft, the oil business of state gas company Gazprom, the other from Baikalfinansgrup.

If the second name is not familiar this is no surprise - the company was only set up two weeks before the date of the auction. Even more bizarrely, the company was registered in the Russian city of Tver in a building that otherwise housed a vodka bar, a mobile phone retailer, a travel agent and a handful of other small local companies.

Yet this improbable bidder won the day, offering $9.3bn after securing a multi-billion dollar letter of credit from Sberbank, a state-owned bank. Four days later Baikalfinansgrup was bought by Rosneft.

The Baikalfinansgrup deal might seem somewhat murky, but it had one substantial result: Rosneft could not be directly legally challenged by the owners of Yukos for the purchase of the company’s prize asset.
The acquisition immediately promoted Rosneft to the oil industry’s big league and took its annual production from about 20m tons to more than 70m. Today it produces more than 100m tons a year.
The second major event in Rosneft’s rise to prominence came in 2006 when it listed on the London stock market.
The deal was highly controversial and even many City financiers had misgivings about allowing a company with Rosneft’s recent history to sell its shares in the UK market.
Billionaire hedge fund manager George Soros railed against the deal, describing Rosneft as an “instrument of state”. The company’s listing prospectus did little to dampen these fears, containing an admission that it might not always act in the interests of minority shareholders.
In the event the deal got done, partly with the support of BP and other major oil companies, who acted as strategic investors. The Russian state retained, as it does today, the majority of the shares, with a 75.16pc holding.
The Russian government’s hold over Rosneft is unsurprisingly strong and the company is chaired by Russia’s deputy prime minister, Igor Sechin. Other board members include senior government adviser Andrei Reus; Andrey Kostin, the chairman of a state development bank; and the company’s former president Sergey Bogdanchikov.
The only non-Russian member of the board is Swiss banker Hans-Joerg Rudloff, chairman of Barclays Capital, who is well connected in Russia having been one of the first Western financiers to do business there after the collapse of the Soviet Union.
In today’s Russia, Rosneft is among the handful of state champions created by the government that have become international players in the world markets. Run out of a rocket ship-shaped skyscraper in Moscow the company employs more than 100,000 people and generates tens of billions of dollars in profits each year.