The Observer: A bear market: “This autumn, Putin spent $7.5bn to raise the Russian state's stake in Gazprom, the natural gas giant, from 39 per cent to 51 per cent.”: “…no Russian company has the experience or expertise to seize the opportunity that LNG presents. That is why Gazprom, the state-owned energy company, has entered a consortium with energy giant Royal Dutch Shell on its Sakhalin-2 project.”: "With the world's biggest gas reserves, the energy future would seem to belong to Russia.": Sunday November 27, 2005

The Russian oligarchs are still coming to London to float, but they're only one step ahead of Putin, writes Nick Mathiason

Another Russian stands poised to join the exclusive billionaire club. Within three months, Vladimir Lisin will float a small proportion of his shares in Novolipetsk Steel on the London stock market. The move will inject hundreds of millions of dollars straight into Lisin's bank account. Given that Lisin appears to own nearly all of the company, he will be worth £5 billion - making him Russia's second-richest man after Roman Abramovich.

The bare facts of his business career are known, but they still tell little about how he came from nowhere to gain control of Russia's third-largest steel producer. However, like most oligarchs, Lisin had powerful enemies to defeat and placate.

These include the billionaire Reuben brothers. Now based in London, they were active metals traders in the Soviet Union. With the powerful Chernoi brothers, they had exclusive contracts to export huge quantities of steel. This set them on a collision course with Lisin, and legal action still rumbles on over alleged breaches of agreements.

Lisin was close to Oleg Soskovets, who worked in Kazakhstan and went on to become Minister of Metallurgy in the USSR in 1991, although Lisin has downplayed the relationship in interviews. It was Soskovets, some say, who introduced Lisin to Lev Chernoi. It was suggested that Lisin run a metals export company that Chernoi controlled with the Reuben brothers.

The company was called Intermetal, a subsidiary of Trans-World - the Chernoi and Reuben brothers' metals trading firm that dominated the sector as communism ended. For four years from 1993, Intermetal sold steel produced by Novolipetsk. But in 1997, Lisin moved to seize control of Novolipetsk and sell its steel using his own company, Worslade.

According to Irish High Court papers, he did it by transferring Novolipetsk shares from the group's nominee company to a different company, which he controlled. This move led to Lisin controlling the entire steel firm.

Also, the Reubens alleged that money used by Lisin to fund his share purchase came from a revolving credit facility guaranteed by Intermetal. The Reubens claimed that Lisin failed to pay them back. Both cases prompted legal action. The Reubens were compensated for the loss of the export steel contract and an out-of-court settlement was reached over the repayment of the loans.

However, one action remains outstanding. It relates to an alleged breach of a joint venture agreement in 1999. This weekend, the Reubens confirmed that they will shortly issue proceedings. A spokesman for Lisin says: 'Nothing has happened for five years. This speaks volumes about what they feel is the strength of the claim.'

Novolipetsk, which turns over £2.6bn, is joining a growing band of Russian companies poised to raise money in the Square Mile. Senior London Stock Exchange marketing executives have schmoozed the oligarchs, suggesting they should choose London as their listing venue, although not much persuasion was necessary. After all, the obvious alternative, New York, has in recent years tightened regulations. The Enron and WorldCom scandals saw the introduction of new directors' responsibilities and more stringent SEC listing rules.

London's light-touch regulation, combined with the kudos of a City listing, has proved irresistible to a growing number of Russian firms. The largest fundraising bid before Novolipetsk was Sistema, the telecoms group, which made £1.3bn. Steel group Evraz, Pyaterochka, a Russian discount retailer, and Novatek, a Siberian gas producer, have all listed since August 2004, raising a total of £3.5bn.

But bankers believe a new £15bn wave of flotations of up to 50 companies will land in London. Rosneft, the giant Russian energy firm, is expected to raise £7.5bn next year. Others waiting in the wings include Vneshtorg Bank, Gazprom Bank and Rusal, the giant aluminium company.

As advisers rub their hands in anticipation of huge fees and hefty bonuses, there are some who warn that the London-based banks and PRs taking fees from companies run by controversial characters with allegedly murky pasts raise serious ethical issues. They are, however, lonely voices, as Russian tycoons become ever more desperate to turn their paper fortunes into hard cash, having fought sometimes violent battles for the control of strategic assets.

But as the prospect of huge cash windfalls becomes tangible, so does that of new legal battles. Analysts say that with the Russian legal system unreliable and prone to bribery, there will be a growing number of legal claims over major Russian businesses that will land in London's courts and rake over some of the murkier events in 1990s Russia.

The oligarchs, meanwhile, are driven by the need to find a cash exit from Russia. Novolipetsk, for instance, does not need cash to fund new ventures or acquisitions. It already has a £990m cash pile in the bank.

Adding urgency to the exodus is the fear of President Putin's ambition to control strategic assets through renationalisation and stake-building in vital industries. Those hoping that Putin's move to imprison powerful oligarch Mikhail Khodorkovsky and seize his Yukos empire would turn out to be an isolated incident have been disappointed. Only last week, Putin raised alarm in the Russian business community after he appointed several officials to the board of Avtovaz, the country's largest carmaker. The move has been interpreted as the start of a quiet nationalisation.

This autumn, Putin spent $7.5bn to raise the Russian state's stake in Gazprom, the natural gas giant, from 39 per cent to 51 per cent. He has also blocked a plan by Germany's Siemens to take a stake in Power Machines, a supplier of nuclear turbines for Russian submarines, from oligarch Vladimir Potanin. The stake has instead been sold to the state-owned electricity generating firm. And last month, Kamaz, Russia's biggest heavy truck manufacturer, was designated a 'strategic asset' by the government.

Many say renationalisation is a just crusade. After all, while most of Russia's 150 million people face poverty, its oil, gas and steel assets were ruthlessly seized at knockdown prices by opportunists in what was dubbed the 'sale of the century'.

Recouping huge losses only partly explains Putin's tactic of stamping his authority over potential opposition from the business elite. He is also keen to build national-champion businesses. The former KGB chief admires the way that a post-war Germany recovered to become a mighty global exporter using this technique.

But there is an even bigger prize. Putin, who is due to step down in 2008, wants to make Russia the world's most important energy provider. Today Russia holds the world's largest natural gas reserves, its second-largest coal reserves, and eighth-largest oil reserves. It is also the world's largest exporter of natural gas.

But it is the harnessing of liquefied natural gas (LNG) technology that Putin believes will transform Russia's fortunes. LNG is frozen and distributed overseas in huge tankers. With no need for pipelines, LNG brings Russia's gas wealth within reach of new markets and bigger and better deals.

The impact will have a transformational effect on Russia's geopolitical position. But currently no Russian company has the experience or expertise to seize the opportunity that LNG presents. That is why Gazprom, the state-owned energy company, has entered a consortium with energy giant Royal Dutch Shell on its Sakhalin-2 project.

There was a time when the oligarchs thought the future belonged to them. But they are realising short-term, albeit lucrative, gains. With the world's biggest gas reserves, the energy future would seem to belong to Russia. Is this why Tony Blair wants to go nuclear? 

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