Reproduction d'un article publié par M. Robert Amsterdam sur son site

Institutional Approval of Lawlessness

In the same week that Rosneft symbolically concludes the feeding frenzy on Yukos by acquiring the company’s 22-story Moscow headquarters from the shadowy front company, Prana, we are treated to the utterly surreal news that ratings agencies Fitch and S&P have both upgraded their outlook on this company's business profile to positive.

Such decisions are not only disappointing and reprehensible on a moral level, but actually pose significant dilemmas to the future credibility of global economic institutions.

Fitch and S&P have willingly ignored Rosneft’s long and firmly established record of playing outside the rules, and relying on the Kremlin to use arguably illegal tactics and regulatory/political pressure to advance its interests and outflank competitors. The ratings agencies have identified Rosneft’s recent acquisitions of major upstream and downstream assets as the central motive for upgrading their marks. However, if the acquisition of these assets is not accomplished by competition and managerial competence, than exactly what value are the rating agencies rewarding? Is there any credible analyst that actually believes that the state auctions of Yukos assets were free and fair? Even fewer analysts who are well versed in Russia’s business environment would deny that the seizure and subsequent potemkin auctions to pass the stolen properties to Rosneft were unconstitutional – the state was required under Russian law to sell non-core assets of Yukos first, but its refusal to do so highlighted the government’s role as a direct beneficiary of these measures.

The dilemma posed by these increased ratings is the message that it sends to corporations in emerging economies. Companies live and die on the market by the outlooks produced by these entities, and when certain tactics and decisions are viewed positively, it is an open encouragement to continue down the same path. In the case of Rosneft and Russia, Fitch and S&P have just welcomed the further dismantlement of transparency and rule of law, and the institutional approval of lawlessness and state intervention.

If the principle objective of ratings agencies is to provide shareholders with information and intelligence on how companies are being managed, it would seem to be extremely important that they support transparency measures. The following excerpt from a roundtable neatly summarizes the dilemma as it relates to Russia and state-owned companies like Rosneft:

“In stark contrast with these principles, the study revealed consistent differences in disclosure standards between the state-controlled and similarly sized public Russian companies. This is in line with the notion that transparency of state-controlled enterprises is hampered by the tendency of the Russian government and individual officials to use their influence on such companies to promote political or individual goals that often diverge from commercial motives and investor interests. High standards of transparency and disclosure, on the other hand, are a cornerstone in the foundation of good governance. They provide legitimate stakeholders--whether creditors, minority shareholders, taxpayers, or the general public--with the information they need to be able to begin to hold government decision-makers accountable for their actions.”

So from what source does is this information coming from? From economist Andrei Illarionov or another expert looking to rain on the Russia investing bull’s parade? No, actually this is a quote from a Roundtable hosted in Moscow by the OECD in 2005, prepared by Standard & Poor’s itself titled “Transparency and Disclosure by Russia’s State Owned Companies.” The report found Rosneft to be at the very bottom of the transparency rankings: “Rosneft discloses virtually no information on its basic principles of corporate governance, including its Articles of Association and dividend policy. The company does not file any statutory reports to Russian or foreign regulators that are public.” You may also recall how Rosneft’s prospectus for the IPO famously declared that there would be times in which the company would NOT pursue profitable activities – no wonder BP had to be blackmailed into buying the stock – but a lot of good that did them.

It appears that the ratings agencies are succumbing to Russia’s “new financial architecture” in a similar way to the oil and gas, mining, and accounting companies are: it is apparent that everybody has to change the rules when they do business with Moscow. Is everyone in the business community really so willing to stick their heads in the sand and sacrifice long-term consequences for a few short years of high growth? Giving Rosneft a positive rating is the same as Shell thanking the Kremlin for taking away Sakhalin, the same as Tony Hayward claiming BP’s is better off with a minority position in Kovykta, and the same as PricewaterhouseCoopers withdrawing ten year’s worth of Yukos audits “not because of government pressure” but because of “new information” that they refuse to disclose.

The common thread here is that everyone is denying an inconvenient reality. And by all appearances this same mass delusion has spread across the pond to Kennebunkport, Maine, where President Bush continues to slather Vladimir Putin with obsequious praise while at the same time the Russian president says that the human rights and freedom of press issues in Russia are identical to those of the United States. At the very least, as a courtesy Putin didn’t compare the Americans to Nazis again during the visit. But the entire series of preposterous circumstances demands the question: at what point do we snap out of this mass delusion? When will this exaggerated stereotype of kowtowing politicians and investors topple over on top of itself?

Posted by Robert Amsterdam on July 3, 2007 6:52 PM