On Closer Examination

OK, this time the crime is theft through nationalizing privately held assets, and the state is Russia. But for those of you who think it couldn't happen here, just harken back to the Supreme Court's recent expansion of the right of eminent domain.

So, in the April 18 WSJ, Gregory L. White, reports on a pending initial public offering (IPO) of OAO Rosneft, the state-owned company that owns one of Russia's biggest oil reserves. White reports that this will not just be a financial triumph, it would also "be a resounding endorsement of the Kremlin's drive to retake control of the strategic energy sector in a country that is the world's top producer of natural gas and No. 2 in oil."

Exactly what form did that drive take? Rosneft was formed in 1993 as Russia converted the Soviet Ministry of Oil into private companies. During the privatization drive of the 1990s, most of Rosneft's prize assets were auctioned off to business tycoons. One of those tycoons, Mikhail Khodorkovsky, owned a company named Yukos which purchased Rosneft's asset Yuganskneftegaz (Yugansk for short). Yugansk is an immense crude oil deposit.

In 2003, Vladimir Putin started his "drive to retake control" of Russia's oil and gas industry, most especially Yugansk. How did he do it? First, the Kremlin imposed $6 billion in back taxes on Yukos, in a move "widely viewed as a politically motivated attempt to scotch Khodorkovsky's political ambitions." Then, President Putin jailed Mr. Khodorkovsky on charges of fraud and tax evasion. Yukos was hit with additional back taxes, totalling nearly $30 billion, in what many viewed as "a politicized example of selective prosecution."

Authorities broke up Yukos and put its assets up for sale to satisfy the back taxes claim. Foreign investors lost about $6 billion.

After President Putin's attempt to have state gas monopoly Gazprom acquire Yugansk was scuttled by a US bankruptcy filing on the part of Yukos, Rosneft moved to reacquire the asset it had lost a decade before. The acquisition left Rosneft deeply in debt and squabbling with its creditors.

And so, the idea of an IPO of Rosneft was born. What else do you do when you have a valuable asset, considerable debts and a need for operating capital? Everybody wins.

Everybody, of course, except Mikhail Khodorkovsky. He sits in prison in Siberia, where he has been in and out of solitary confinement. As of ApriL 19, he was back in solitary confinement after being slashed in the face by a fellow inmate.

So here is the strategy which is being "endorsed" by public reception of the Rosneft IPO. Have the government steal a strategic asset by taxing it and imprisoning its owner. Then sell the asset.

And it's not like anybody is kidding themselves about what's going on. Quoting from White's WSJ article, "Effectively, they have just repackaged Yuganskneftegaz," says Agne Zitkute, a fund manager at Pictet Asset Management in London. "I do have a moral problem with that, but does that mean we're not going to look at the investment? No."

In recognition that this deal needs a "Western" stamp of approval, President Putin offered a position on Rosneft's board to Donald Evans, -- yes, US commerce secretary and chairman of President Bush's 2000 Campaign Donald Evans.

Come on, you knew there would be a Bush connection somewhere in this gas and oil story. And, of course, it comes in the form of legitimizing illegal activity on the part of the state to make money off of oil and gas and imprisoning political figures in far away places on trumped up charges.

Funny thing is, Khodorkovsky may end up with the last laugh. Yukos has been valued at 3 times the $9.4 billion Rosneft paid for it. This presents 2 problems. First, it gives the impression that the sale of Yukos was not an arms length transaction. Second, "because of an apparent oversight before the 2004 auction," Yukos still owns 23% of Yugansk. Which, after the IPO, would make Yukos one of Rosneft's largest shareholders.

According to White, "That, according to people close to the deal, was unacceptable to the Kremlin."

Everyone expects the deal to move forward, and for certain problems to be "glossed over."

One can only hope that those investors lining up for this IPO will once again lose their investment when those "glossed over" problems come to light.