So, after all the nail-biting and anxiety, the Rosneft IPO was a success. The banks managed to raise $10.4 billion, with the deal 1.5 times oversubscribed. President Putin told German TV he was “satisfied”.

The lead-managers, meanwhile, were jubilant. They’d set an aggressive initial price range of $5.75 to $7.75 per share, then priced at the higher end of that range, at $7.5. The message was clear –‘the international market likes Rosneft, and forgives Russia for the Yukos affair’. What better PR could the Kremlin want, just as the world’s leaders fly into St Petersburg for the G8 Summit?

This was in fact a carefully stage-managed event, a state-controlled IPO, to the extent that an IPO can be state-controlled. Only around 35% of the deal was apparently sold to western portfolio investors. We don’t know which ones – whether, for example, Roman Abramovich’s Milhouse Capital counts as a western investor. Strategic investors were also lined up to give the stock support, including BP and Gazprombank. Sources say BP weren’t doing it for the actual oil company, but to show their loyalty to the Kremlin.

And another 35% went to Russian institutional investors, which is likely to include several state-connected funds, such as Gazprom’s Gazfond, controlled by the son of a close friend of Putin’s; or Vnesheconombank, the Silovik bank which provided the emergency cash for Rosneft’s acquisition of Yugankneftegaz.

In other words, the Kremlin has enough influence and capital at its disposal to make sure the Rosneft deal was a big, shiny success. It was rather like the hot air ballon which the government rented for the winter olympics, which floated the word ‘Russia!’ over Turin – Russia on the rise, Russia ascendant!

But controlling an IPO is one thing. Maintaining constant control over the Rosneft stock price is another. Having made sure the deal was priced at the high end of the pricing range, the Kremlin now faces the risk of the share price falling steeply once free trading begins, next Wednesday, once the world leaders have gone home and the hangover has kicked in.

It will rapidly become apparent if the Kremlin has artificially inflated the share price. If so, it will run out of air during trading, and sink gracelessly to the ground, like a punctured balloon. This could easily occur – perhaps not immediately, but steadily, over the course of the next few months. And if such a flagship deal does badly in the medium-term, the whole Russian stock market could suffer. This was a benchmark deal for the country, and if foreign investors lose money on it, they will not be quick to come back.

This means that Rosneft CEO Sergei Bogdanchikov’s job just got a lot harder. He’s going to have to work very hard to justify such a high-end pricing for the company. And the Kremlin will have every incentive to help him, because this is a flag-ship deal for the Kremlin’s policies too.

As analysts point out, that means Rosneft is likely to go after the rest of Yukos’ assets quickly, and will probably bully its way into new reserves, and use every trick it has at its disposal to beat the competition in Russia. So, ironically, the success of the IPO means a tougher and perhaps less fair market for foreign companies like TNK-BP, and private companies like LUKoil and Yukos.

The Kremlin will make sure that Rosneft, its favoured son, gets all the breaks, to try and stop its share price sinking. Every time Yukos stages a new legal appeal in international courts, the stock price will fall. And each time that happens, the Kremlin will probably approve a new takeover or oil license for Rosneft, and the share price will go up.

It’s not exactly free market capitalism. More like a game of volleyball between Yukos and the Kremlin, with the share price of Rosneft as the ball. 

Julian Evans, a British freelance journalist based in Moscow.

July 14, 2006