One swallow may not make a summer, as the saying goes, but then few swallows are as valuable as the $6.75bn merger recently announced between Russia's Tyumen Oil Company (TNK) and BP, Europe's second largest oil company.
Analysts have long bemoaned the lack of foreign direct investment (FDI) into Russia as a constraining influence on Russia's development. FDI has lagged at levels of around $4bn a year over the past few years, actually falling slightly from $4.4bn in 2000. The government is targeting figures of $5.5bn-$6.5bn in 2003, rising to $7.5bn-$8.5bn by 2005.
Even this increase still compares poorly to neighbouring China, which received around $50bn of FDI in 2002.
This helps to explain why a ringing $6.75bn endorsement of Russia as an attractive investment venue is so welcome, especially when that endorsement comes from BP, a company that knows better than most about the dangers of investing in Russia.
BP was badly burnt in its first dealings with Russia in 1997, suffering when it bought a 10% stake in Siberian oil firm Sidanco and then saw Sidanco's majority shareholder TNK try to strip some of the company's choicest assets. Four years, and a series of legal and political disputes later, BP and TNK resolved their differences, paving the way for February's merger agreement.
"The creation of a new company combining the interests of BP and TNK voices a huge vote of confidence for oil investment in Russia and affirms a worldwide approval on the country's progress since the financial crisis of 1998," says TNK president Simon Kukes.
Others agree. "Obviously this transaction has also provided a huge PR benefit to TNK-Sidanco, the oil sector and Russia as a whole," says Kirill Stein, director and deputy head of corporate finance at Alfa Bank in Moscow. "While this does not mean that Russia has received an investment grade rating, as defined by western ratings agencies, the more subtle effect is a significant increase in the perception of the attractiveness of Russia as a place to invest."
Bond prices were the first to register the news, with equity prices expected to follow suit.
"For the oil and gas sector, this transaction will very likely act as a new and re-valued benchmark for analogous Russian assets," says Stein. "The re-valuation of such a benchmark for the sector should also drag the rest of the equities market up with it."
According to Kukes, the company has no immediate plans to return to the international debt markets. "In 2003, TNK plans to refinance its existing debt and maintain it at $2bn-$2.5bn, as well as increase our average debt maturity profile and the share of long-term debt in our portfolio," he says.
The company had previously been targeting an IPO in 2005, but there will not now be any change to the shareholder structure until 2007 at the earliest, he adds. Lots of work needs to be done internally, on simplifying the corporate structure, buying out minority shareholders, and putting into practice group-wide accounting practices before an IPO is a realistic prospect.
TNK executives face a busy few months as they try to work through the details of the merger agreement. The companies have agreed that Alfa Group and Access-Renova (AAR), which jointly own TNK, together with BP, will each own 50% of the new holding company. NewCo, as the merged company is known at the moment, will have a 10-member board, with each company nominating five members. AAR will name the chairman and BP the chief executive of the new company.
TNK must also decide what the news means for the acquisition of Slavneft, the oil major that it bought jointly with Sibneft last December in a privatisation auction. TNK's Slavneft holding is not included in its agreement with BP, and analysts believe that it may sell its stake to Sibneft as a result of the merger. "TNK and Sibneft have not yet reached a final decision on the future of Slavneft," says Kukes. "The two contingent prospects are that Slavneft be divided equally between both companies or integrated into either one of them."
Changes in the ranks
NewCo will become Russia's third largest oil company after Lukoil and Yukos, pushing Surgutneftegas into fourth place. Should Sibneft wholly acquire Slavneft, as predicted, then it will move up to fourth place, pushing Surgutneftegas still further down.
Analysts also expect the association with BP to help raise TNK's corporate governance standards. "In 2002 TNK created an advisory council to advise management on corporate governance policies and help transform itself into a truly international oil company with the best international practices," says Kukes.
"We are determined to increase the value of the company and its attractiveness to international investors by bringing its operations to the highest international standards."
It is likely that any further sizeable foreign direct investment into Russia's natural resources sector will have to involve the government's say so. A report by UFG brokerage in Moscow highlights the government's likely concern. "The issue for future potential purchasers is whether the Russian government will be happy to see large swathes of the Russian oil industry being sold to foreign oil companies," the report explains.
"The first deal with BP is entirely understandable. A second is possible given the lobbying power of the domestic oil industry. But a third within the next couple of years may simply be a deal too far."
But will the news have any major bearing on FDI levels across other industry sectors? French carmaker Renault provided further evidence at the end of February that the BP-TNK deal may be more than just a flash in the pan, when it announced that it will invest a further $250m into Avtoframos, the Renault-Moscow government joint venture.
The deal is the largest foreign direct investment into Russia's car industry, following a $150m investment by Ford into building a new plant near St Petersburg.
Yet the sectors capable of attracting serious levels of FDI are still very limited. "FDI cannot increase tremendously solely on the back of huge multinationals entering into transactions with the leading Russian companies," says Alfa's Stein. "A very large portion of FDI should be devoted to investment in small and medium sized businesses, which in Russia are almost non-existent." *