by Simon Pirani
The biggest somersault in Russian corporate history will be complete next year when cfo Bruce Misamore takes Yukos, Russia’s no.2 oil company, on to the US capital markets.
The proof of Yukos’ gymnastic ability is already there in the rerating: market capitalisation is up to $20 billion, from $300 million in 1999. Yukos has ceased to be a synonym for rotten corporate governance, and Misamore, an affable 52-year-old American, says he is focused on “making this a truly competitive international corporation in terms of financial management”.
When he arrived in February 2001, Misamore – with 23 years’ experience behind him at Marathon Oil and PennzEnergy one of corporate Russia’s senior ex-pats – made a commitment to Yukos for “five years … and maybe more. We’re all having fun!”
Misamore is both front-man and manager. It was his assured mid-western drawl – now one of Yukos’s public voices, alongside that of ceo Mikhail Khodorkovsky – that recently relayed Yukos’ expectations of raising output next year to at least 1.6 million barrels per day, edging Lukoil out of Russia’s no.1 producer spot.
That Findlay, Ohio, twang presented the world with details of the $150 million deal to buy into the Lithuanian refiner Mazheiku Nafta, signed in June after two years of hard bargaining.
Together with regular roadshows, quarterly US GAAP-standard reporting and work with ratings agencies, it’s all laying the foundation of next year’s ADR listing, which may be combined with a secondary offering by core shareholders.
And behind the scenes, Misamore is both overseeing construction of a 21st-century finance department and helping overhaul management culture as a whole.
But before all this came that somersault. It started before Misamore arrived; indeed his recruitment by Yukos boss Mikhail Khodorkovsky, one of Russia’s richest men, was a key part of it.
In 1999, Yukos’ reputation among western institutions had sunk from bad to awful. Khodorkovsky’s bank, Menatep, which financed his controversial 1995 privatisation purchase of Yukos, had gone to the wall in Russia’s 1998 financial crash. Menatep defaulted on a $236 million loan from Standard Bank of South Africa, Daiwa Europe and West LB, who then received 32% of Yukos as collateral.
Then stakes in Yukos’ three main production subsidiaries were transferred offshore, rendering the company a hollow shell; dilutions of the subsidiaries’ shares were authorised but then cancelled. Daiwa and West LB, fearing they would end up with nothing, sold up to Standard Bank in mid-1999, which in turn exited Yukos at the end of 2000.
Khodorkovsky says he never intended to cheat the banks, and played the offshore game to drive away maverick US investor Kenneth Dart, who had bought into Yukos.
And in 2000, Yukos calmly converted itself into an investor-friendly company: it consolidated its assets, adopted Russia’s most stringent corporate governance charter, required new share issues to be approved by 75% of shareholders … and recruited Misamore, former British foreign secretary Lord Owen (who chairs Yukos International) and other ex-pats.
To observers of the Moscow market the makeover was completely logical. As Russia integrates into the world economy, the upside is in respectability and market access, not in the opaque wheeler-dealing and asset-stripping with which post-Soviet capitalism began. Khodorkovsky acknowledges what’s changed, calling himself three generations of Rockefellers rolled into one.
This summer, the 39-year-old tycoon set a new standard of openness, revealing exactly who owned how much of Yukos and becoming the first Russian oil baron to publicise the scope of his personal wealth. (Group Menatep of Gibraltar controls 61% of Yukos, of which 36% is Khodorkovsky’s, or about $8 billion worth, and five other key shareholders have about 4.25% each.)
If it hadn’t been for Misamore’s restraining hand, Khodorkovsky might have gone public a year earlier. “Mikhail came to me in the summer of 2001 and said he wanted to announce the identity of the principal shareholders, and that he had the agreement of all except three,” says Misamore.
“I told him, ‘don’t announce it’. Had we done so, we would simply have provoked suspicions about who those three people are.” Misamore suggested that Khodorovsky hold back until he had convinced everyone. “So he went back and talked to those three, and the announcement was made when everyone was ready.”
The hesitation arose from concerns about privacy and personal security, says Misamore. “But the business has evolved, corporate governance has evolved, and people accepted that as we are going to the US market, the information will become known anyway.”
Doesn’t the market still ask about the Standard-Daiwa-West LB episode? “The ratings agencies wanted to talk about it, because it wasn’t that long ago,” says Misamore. “But investors – if they understand, and have confidence in, what the company is doing – are very forward-looking. Most have accepted that the company has changed.”
As for transparency and good corporate governance, “yes, Mikhail has said, it’s the way to make money”. Ways of thinking have to change, and will not do so overnight, Misamore believes.
Yukos’s financial strategy is to make a great leap forward on to the international capital markets, leap-frogging over the path being trodden by most Russian oil companies of trade finance, relationships with commercial banks and eurobond issues.
At 30 June 2002 Yukos had a $3.4 billion cash pile and just $96 million of debt. Next month it is likely to bid in Russia’s biggest privatisation auction yet, of a controlling stake in the state oil company Slavneft, with a $1.3 billion starting price. If Yukos won, it could pay cash, whereas other likely bidders such as Sibneft and TNK are borrowing heavily.
Misamore sees no reason to borrow, and doesn’t accept some bankers’ argument that Russian corporates should do it to get their names into the market. “We might consider financing development at Mazheiku by borrowing via that entity, rather than at corporate level. But Yukos is financially strong and at present debt financing doesn’t make sense.”
Which means that – while Schroeder Salomon Smith Barney advised on the early stages of the Mazheiku negotiations, other investment banks have helped with M&A work, and Citibank is used for cash management – Yukos is more focused on equity investors.
Project finance will be needed for big pipeline projects, including one to link its eastern Siberian fields to China and another to take oil to Murmansk to access sea routes to the US. But even here the company is driving a hard bargain with potential partners, eschewing production sharing agreements that western oil companies prefer and arguing for joint ventures under the Russian tax regime that, Misamore says, now compares favourably with many in the world.
When Misamore arrived at Yukos, the company’s somersault was already well underway, in terms not only of its external image but its internal structures. His predecessor Michel Soublin, a secondee from the multinational oil services provider Schlumberger, had started building financial expertise.
“Some functions were in place, but needed strengthening: financial control, treasury, and, particularly, corporate finance, which had previously focused on domestic M&A and subsidiary consolidation. We needed to enhance the quality of that team, and we went out and hired.
“Other functions had to be built from scratch. I brought in an insurance manager and established an international tax function. We are particularly mindful of preparing for international expansion.”
All this is common to new, fast-growing corporations across the world. As for Russia-specific problems, Misamore picks out two: the mindset of employees for whom market driving-forces are still relatively new, and another, external, post-Soviet legacy, the state bureaucracy.
Misamore believes the former problem – “the ability of the Russian workforce to take responsibility” – will be solved by time, by the post-Soviet generation, and by a personnel development programme Yukos has initiated with IMD of Lausanne, a leading business school.
The second problem, Russia’s notoriously cumbersome state bureaucracy, will be trickier to tackle. The current cause of teeth-gnashing at Yukos is the wording of legislation on interim dividend payments: Yukos argued for payments to be made at companies’ discretion, but the law awaiting president Putin’s signature will require a shareholders’ meeting to be convened to approve each payment – a typically pointless Russian administrative requirement, some argue.
Then there is Russia’s image as a still-dangerous place to do business. In September, Sergei Kukura, first vice-president of Lukoil, was dramatically kidnapped in broad daylight and held for several days before being returned unharmed.
Misamore acknowledges: “I took a lot of calls… from bankers, from folks back home wanting to know if I was out of my mind. But I didn’t change my personal security regime.
“I don’t feel less secure here than elsewhere. It’s important to understand that these [high-profile kidnapping or assassination] incidents are related to particular sets of circumstances.”
Thus speaks a man too phlegmatic, too clear about the big picture, to be unduly ruffled by the latest surprising, even alarming, development. Which is the required approach at the top of one of Russia’s premium corporations.
Listed: Russian Trading System, Moscow
Market capitalisation: $20 billion
Financial advisers: Various, including SSSB (Citigroup)
Solicitors: White & Case and others
Largest shareholders: Group Menatep (Gibraltar) 61%, Veteran pension trust 10%, free float 22%. Shareholders of Group Menatep: 9.5% Mikhail Khodorkovsky, 50% trust controlled by Khodorkovsky, 8% Leonid Nevzilin, 7% Platon Lebedev, 7% Vladimir Dubov, 7% Mikhail Brudno, 7% Vasilii Shakhnovskii, others 4.5%.
BRUCE MISAMORE: THE CV
1950: born, Findlay, Ohio
1972: graduated with BA in Finance from Bowling Green State University, Ohio
1973: awarded Masters degree in Finance from Bowling Green
1976-1993: worked at Marathon Oil in a series of roles with responsibility for finance and international finance
1993-1999: senior vice-president (finance) and treasurer, PennzEnergy
2001: joined Yukos as chief financial officer