Yukos revisited - again, and again, and...

By bne IntelliNews February 2, 2009

Ben Aris in Berlin -

"The oligarchs are behaving well now, but what will they do when things get tough again?"

This was James Fenkner, founder of the Red Star hedge fund, questioning the commitment of Russia's leading businessmen to improving corporate governance - except he made this comment almost exactly 10 years ago, in the wake of the spectacular rise in the share price of oil company Yukos.

During the 1990s, Yukos owner Mikhail Khodorkovsky was the worst abuser of minority shareholder rights, diluting investors like Kenneth Dart's stakes in Yukos production companies down to nothing. Then, in 1999, he launched a legendary corporate governance makeover that sent his share price soaring. The "Khodorkovsky effect" spread to almost all Russia's leading companies as oligarchs realised they could make more money from boosting their share price than from stealing from the state.

Improving corporate governance was easy during an economic boom that lasted almost a decade. But now the stock market is tanking and the economy is almost at a standstill, many leading companies' commitment to corporate governance principles has been found wanting. Things have got so bad that Jim O'Neil, chief economist at Goldman Sachs, who famously coined the term "BRIC" to describe the four major emerging markets, wrote in a Financial Times oped in January that maybe the "R" in BRIC should be removed after corporate governance began to deteriorate last year as the crisis storm clouds gathered.

Here are some of the recent abuses:

• TGKs: February's bne cover story is on the row that has broken out after well-connected oligarch Mikhail Prokhorov refused to honour a mandatory buyout agreement with a group of leading funds.

• RBC: Russia's leading online information provider and the first company to ever IPO in Russia, Rosbusinessconsulting, admitted in September that it had, unbeknownst to shareholders, invested part of its capital in the equity market and lost a bundle. The company is now desperately seeking a white knight and in January warned that it's facing bankruptcy.

• Norilsk Nickel: Russia's metal giant bought back $2bn worth of shares last summer using company funds to compensate shareholders, at a 26.5% premium to market prices that rose to a 300% premium as the crisis unfolded in the autumn. "We believe that the real motive of the buyback was to deny Norilsk shareholders a cash dividend and that this was specifically aimed at [minority shareholder] RusAl," say analysts at Uralsib. The majority shareholders were also accused of buying votes ahead of an EGM held in the autumn.

• Ingosstrakh: the Kremlin's favourite oligarch Oleg Deripaska has been locked in a corporate governance dispute with Netherlands-based PPF Group for about a year, after the Russian insurance company Ingosstrakh (60% of which is controlled by Deripaska) voted to dilute PPF's stake from 38.46% to about 10%.

• Sibir Energy: the listed Sibir Energy agreed to buy two oil companies and real estate assets from its core shareholder Chalva Tchigirinski in October at peak market prices, despite the fact the market was in freefall. The company's share price tanked. "We believe the transaction is purely about the core shareholders cashing out of illiquid assets during a time of crisis," says analysts at UralSib.

• Rise in auto-bankruptcy: further down the scale, Renaissance Capital is reporting that smaller companies are rushing to bankrupt themselves, even when they have the means to pay off creditors: "It is often borrowers themselves (ie. their shareholders) that hurry to initiate bankruptcy procedures. Since bankruptcy is an effective way of shielding the borrower from any creditors' claims, including payments on the issued bonds, it offers a good alternative to any efforts to satisfying creditors' claims, even if this is possible... - effectively abusing bankruptcy procedures to gain favourable restructuring terms."

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