Graham Stack in Berlin -

The results of audits are supposed to be sacrosanct, but at the end of June PricewaterhouseCoopers told Russian daily Kommersant that it was withdrawing 10 years' worth of Yukos audits because, "information provided to the auditors by the Yukos management did not correspond to information received from the Prosecutor General's Office." In the same week, Alfa Bank circulated a note warning of "no guarantee that either the bank or its clients will not become the next victim" of state claims for unpaid taxes.

Russian companies have been queuing up to obtain the trappings of transparency: credit ratings from one of the big agencies, GAAP accounts, IFRS audited accounts. But following Alfa's note – a milestone in that it made explicit a political risk that all Russian companies acknowledge but none want to admit to – the question is whether this corporate governance drive is nothing more than the Emperor's new clothes.

Standard & Poor's Lorenzo Sliusarev believes that you can apply the "Rumsfeld maxim" to the Russian offices of rating agencies and auditors: "There are things we know we know, and things we know we don't know. But there are also things we don't know we don't know." The business of rating agencies and auditors is turning "known unknowns" into "known knowns." The "unknown unknowns," in contrast, are simply none of their business.

Only as good as the data

But even dealing with the known unknowns is not straightforward. Fitch Rating's Nikolai Lukashevich admits that rating agencies are dependent on the information that companies provide about themselves and this is not always to be trusted.

"We do not engage in forensic accounting, but we do cross-check the financial information we receive from the company with auditors' reports, other publicly available information and plausibility in terms of business sense," he says.

Fitch's analysis of the mobile phone operator Megafon, published in February 2007, illustrates the limits of credit rating agencies' curiosity. Lukashevich's team analysed the ownership structure, as far as it can be traced with certainty. They correctly point to the fact that no one knows the identity of the Mr X who controls 41% of Megafon. Fitch takes this into account as one of the company's known unknowns, says Lukashevich.

However, Fitch abstained from commenting on the widespread speculation that the mysterious Mr X is in fact a certain Mr R – the long-serving Minister of Telecommunications Leonid Reiman. It is understandable why Fitch didn't go down this road: here be dragons.

Lorentso Sliusarev, S&P's telecommunications analyst, agrees with Fitch: "After six months in this country, I realised that all rumours and speculation have no effect on a company's performance. Megafon is a good company, which posts good results and acts transparently. Its decisions make business sense. That's what counts. None of the shareholders are going to act in a way that decreases the company's value."

Sliusarev and Lukashevich see risks in Russia coming from the volatile regulatory environment and lack of independence of regulatory authorities, not necessarily from the murky business structures. They argue that large corporations - and increasingly even smaller ones - are achieving Western-style levels of transparency.

Even where the state encroaches on business, they see it doing so in a predictable way, dictated by "broader concerns" and "strategic interests."

Sliusarev see the Yukos case as the exception that proves the rule. "These were people who had made billions in the nineties by influencing state policy, and wanted to keep on doing this, even when new people had come to power. Everyone else understood that things had changed. Yukos were the only ones to still playing by the old rules," he says.

Still, Russian business is dogged by fears that things may not be what they seem. For instance, Alfa's sensational note to investors was triggered by tax claims pursued against Russneft, a midsize but fast-growing oil company.

A rerun of the Yukos case? Are the siloviki - a Kremlin clique with ties to the security services – pushing the consolidation of the oil sector? The analysts are at a loss to say exactly what is going on, because, prior to the tax claims being filed late 2006, the excellent political connections that Russneft supposedly enjoyed were the key to its success.

"I have the sense of benediction from above," Eric Kraus, head of equities at Nikitsky Russia and CIS Opportunities Fund, commented in 2006 on Russneft's meteoric rise. "The Russian government and the powers that be may be seeking to bring about a consolidation of small and inefficient companies."

It would seem when it comes to the unknown unknowns, even the brightest stars of Russia's financial firmament are very much in the dark.

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