Investors Wary Due to Yukos Probe

After the cutthroat but lucrative capitalism of the first post-Soviet decade, investors in Russia have been getting used to President Vladimir Putin's brand of economic stability and predictability.

But with the legal onslaught against the nation's biggest oil producer helping to shunt capital flight beyond the US$12 billion (euro9.7 billion) mark this year, foreign investors - some burnt, some disoriented - are looking to the Kremlin for reassurance.

Jailed former Yukos owner Mikhail Khodorkovsky transformed the company into a corporate governance poster-child and the bluest of Russian blue chips. But as bailiffs scurry to enforce a crushing 99.4 billion ruble (US$3.4 billion, euro2.7 billion) back tax bill that is expected to grow to US$10 billion (euro8 billion), the company looks set to tumble into bankruptcy - or the hands of Kremlin-friendly executives.

The former toast of the local stock market and the darling of the more conservative institutional investors is today worth some 75 percent less than its US$45-billion (euro36.4 billion) peak capitalization while the affair - widely believed to be politically motivated - has helped to contract local bourses by a third since April.

Yevgeny Gavrilenkov, chief economist of the Troika Dialog investment bank, said Yukos was among a combination of reasons for the capital exodus.

"There are more intrigues in economic policy today. The government is sending contradictory signals and the investors don't understand what the government is doing," he said.

In the long run, the sour sentiment over Yukos could hinder Russian companies' access to cheap money as foreign banks up their interest rates on loans to local firms, said Alexander Kim, equities strategist at the Renaissance Capital investment bank.

Ironically, this would hit struggling firms in the non-raw materials sector the hardest, and scupper the government's stated aim of reducing the economy's reliance on the oil industry, Kim said.

"The institutional investors were innocent bystanders," he said. "They are frustrated that the fight between Khodorkovsky and the Kremlin was so hard to predict."

The state's auction of its 7.59 percent stake in the Lukoil oil company as well as a joint venture between Siemens and local turbine-maker Power Machines will be important bellwethers for Russia's future investment case, said Aivaras Abromavicius of East Asset capital Management Ltd., which manages some US$340 million (euro275 million) in Russia-focussed funds.

Similarly, any progress on lifting restrictions on foreigners' access to shares in natural gas giant Gazprom would help investors brave the losses incurred in the Yukos fallout.

Putin has suggested that Gazprom reforms could come soon, but investors' hopes were dampened Wednesday after a parliamentary deputy called for an investigation into how foreigners get around the ban on owning local Gazprom stock.

Many foreign business executives in Russia have found it hard to empathize with Khodorkovsky, who had challenged the Kremlin by funding opposition parties - violating an unwritten agreement that big business stay out of politics, dating to Putin's arrival at the Kremlin in 2000.

Khodorkovsky "sailed too close to the wind and got what he deserved," said William Browder, CEO of Hermitage Capital Management, which has US$1.5 billion (euro1.2 billion) under management from US and European investors. "But we have huge sympathy for all the minority shareholders who have been caught in the crossfire."

Western observers are puzzling over what investors can expect in the long-term from the Yukos affair.

The "horror-story" scenario, according to Christopher Granville of the United Financial Group, would see other conglomerates steamrolled in the wake of a state-sponsored carve-up of Yukos. A more probable outcome - with a 50 percent likelihood according to the brokerage - would leave Yukos shareholders with virtually nothing but cause limited damage to the wider market.

As the Kremlin's weight bore down on Yukos, Browder says he trimmed the so-called "oligarch stocks" in his portfolio. Shares in Yukos and the Sibneft oil company - controlled by Chelsea soccer team owner Roman Abramovich - were replaced by holdings in state gas monopoly Gazprom and the opaque but Kremlin-connected Surgutneftegaz, which trade at huge discounts to their oligarch peers.

Despite dark headlines and the cries of protest from Yukos stockholders, there has been no shortage of big-ticket cross-border dealmaking in Russia, even as bailiffs prepare a core Yukos subsidiary for sale. A booming economy awash with petrodollars and a population of 144 million people continues to draw foreign direct investment.

In testament to the potential, brewing giant Heineken announced two purchases worth about US$86 million (euro69.5 million) this summer, while European cigarette-maker Altadis recently snapped up local player Balkan Star for a cool euro147 million ($181.8 million ).

"Foreign direct investments are attracted by Russia's healthy macroeconomic statistics and high private consumption growth," said Kim. He pointed at recent entries on the consumer finance market by General Electric's financial wing and BNP Paribas.

But where foreign firms once rushed in to ink deals, Dominic Sanders, head of the Linklaters international law firm's Moscow office, said the Yukos affair had taught his clients the value of doing their political homework.

"There is considerable economic momentum across a range of sectors, but people are watching Yukos and are more concerned about getting a political signoff where they can."

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