TCS Daily

Russia's Bad Gaz

By Pejman Yousefzadeh - December 28, 2004 12:00 AM

Recently, I wrote on the danger of Russia's potential political backsliding into a new era of authoritarianism or totalitarianism. Political backsliding remains a concern for those of us who are interested in the spread of freedom and liberalization in Russia, but we have a new worry as well; the danger that Russia will also fail to wrest itself from its history of economic and commercial statism.

Recently, Yukos -- Russia's biggest oil company -- had a forced sale of over three-quarters of the stake in its main production unit, Yugasnskneftegaz. The forced sale was the consequence of Yukos's declaration of bankruptcy in American courts. The winning bidder for Yugasnskneftegaz was a company named the Baikal Finance Group. As the Economist points out, the company had only registered to bid two days before the auction of Yugasnskneftegaz. Other than that, information about the company was difficult to come by, to say the least.

Only a few days after Baikal successfully won control of Yugasnskneftegaz, Baikal was entirely bought out by Rosneft -- the Russian state-owned oil company. This article tells us that the sum for Baikal's purchase was not disclosed, that Baikal was a shell company registered to a small grocery store in the town of Tver, and that no one in the Russian government -- including President Vladimir Putin -- has given any information on who owned Baikal.

In short, what we have is a government buyout of Yugasnskneftegaz through a front company that was itself conveniently bought out by Russia's state-owned oil company only a few days after it successfully bid for Yugasnskneftegaz. Not only is this a blatantly statist action, it is statism accompanied by clumsy misdirection that will fool no one, but will give everyone reason to be worried about the state of Russia's economic and business reforms.

The bid for Yugasnskneftegaz is a case of information asymmetry, where one party knows more about the nature of the transaction than does the other party. Most of the time, information asymmetry runs to the advantage of the seller, and that appears to be the case here, given that the government forced the sale of Yugasnskneftegaz and then bought it through a shell company that immediately was bought out by the state's own oil company. The government knew the true identity of Baikal while others didn't, and no one outside of the government appeared to know that Rosneft would acquire Baikal after Baikal successfully bid for Yugasnskneftegaz. If information asymmetry is allowed to run unchecked, parties will be less willing to engage in commercial transactions for fear of being defrauded or swindled by more knowledgeable parties that receive the favors of the asymmetry.

In this case, information asymmetry was not only used to defraud potential suitors for Yugasnskneftegaz, it was used to basically shut them out of the bidding process. The registration by Baikal to bid only two days before the auction took place and the almost complete lack of information regarding the company served to ensure that other companies bidding for the purchase of Yugasnskneftegaz would not have the requisite information with which to carefully calibrate their bids, measure their potential for success against the potential for a successful bid by Baikal, or fully preserve their rights in any dispute (after all, it is hard to fight for your rights when you are deprived of information). Additionally, companies competing with Baikal for the purchase of Yugasnskneftegaz were deprived of valuable information concerning the actions of the Russian government and the government's relationship with the companies, as it ultimately was the government vying for control of Yugasnskneftegaz through a shell company.

If economic and commercial reforms are going to be successful in Russia, the country needs to have a healthy dose of transparency and information sharing as an inherent part of its business structure. The West in general and the United States in particular ought to assist Russia in implementing policies designed to bring about greater transparency and information sharing.

This can be done by using Russia's association in the G-8 as a leveraging tool. Much of the G-8's work is devoted to the issue of economic and commercial reforms in Russia, and the issue of promoting transparency and information sharing should occupy a larger share of attention and discussion when considering Russian economic reforms. Additionally, the G-8 can work to make further economic loans to Russia more explicitly tied to the need for Russian government officials to liberalize and encourage modes of information sharing. If necessary, consultants from other countries can work with the Russian government to reform Russia's business practices.

These reforms need not exactly mirror the kind of laws and arrangements we have here in the United States or other countries have. But the need for reforms is indisputable and thus far they are not being put in place. Until they are, the shenanigans associated with the sale of Yugasnskneftegaz will only be repeated and a country with vast potential to maximize its wealth and the wealth of its citizens will continue to regress economically.

The author is a lawyer and frequent TCS contributor.


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