Lukoil Punches Out of N.Y.S.E. for Fear of Public Opposition to Its Rogue State Relationships; Heads For London

(Washington, D.C.):(Washington, D.C.): On 29 June, the Financial Times reported that the Russian oil company Lukoil switched its upcoming share issue from the New York Stock Exchange to London. The underlying cause for this decision was articulated by Lukoil vice president Leonid Fedun, as the desire to steer clear of the “political risk that exists [in the U.S.],” brought on by the company’s business dealings in such U.S.-sanctioned countries as Iraq, Iran and Sudan.

Lukoil’s decision marks the second time in recent months — the first being a Chinese sovereign bond offering pulled this Spring from an expected offering in New York — that a major foreign entity has opted out of the U.S. debt and equity markets in favor of less- stringent disclosure requirements found in European markets. Both occurred after the Securities and Exchange Commission decided on 8 May to compel the disclosure of “material risks” associated with foreign registrants’ business dealings with U.S.-sanctioned countries.

Lukoil’s international fundraising shift also followed the near-unanimous passage of the Sudan Peace Act in the House of Representatives two weeks ago — a bill that includes a provision that would bar access to the U.S. capital markets for it and other foreign oil firms involved in Sudan, as well as the trading of the securities of those firms already listed on U.S. exchanges. Mr. Fedun acknowledged that “It is completely possible that [US officials] could ban companies carrying out an issue [with business] in these regions, so we have decided to work in a better political environment with a full listing on the London Stock Exchange,”

It seems likely that critics of the SEC’s new disclosure measures will cite Lukoil’s decision to support their case. They will claim that such transparency requirements may well damage the competitiveness of the U.S. markets as foreign firms operating in countries under U.S. sanctions regimes exit to other international exchanges. As Center for Security Policy President Frank Gaffney points out in his Washington Times column of today, “this is utter nonsense.”

The fact is that the SEC has done nothing more than its job by determining that American investors have a need to know where their money is going and how it is being used — particularly when the prospect of expanded U.S. sanctions, divestment campaigns and/or negative publicity could well depress the value of the securities in question. Lukoil’s “punch-out” of the NYSE merely serves to underscore the long-held Casey Institute belief that international financial regulators would be well-advised to harmonize their disclosure requirements to ensure that overseas investors are accorded comparable protection to our own.

It isn’t often that a corporate decision not to bring a stock offering to market generates news. So it was no great surprise that the Financial Times of London gave only a few paragraphs to the announcement by the Russian oil conglomerate, Lukoil, that it would forgo its expected offer on the New York Stock Exchange of a share issue valued at roughly $680 million.

Yet this development is of momentous significance. It marks the second time in recent months that a major fund-raiser engaged in dubious international activities has declined to try to secure large sums from the U.S. capital markets.

Earlier this year, Communist China decided to offer a sovereign bond it had long planned to issue in New York in Europe’s financial markets only.

Now, Lukoil has chosen to follow suit, pursuing instead what it calls a “full listing on the London Stock Exchange.”

Lukoil Vice President Leonid Fedun explained the reasoning behind his company’s action – a logic that likely applied to the Chinese transaction as well: According to the FT, Mr. Fedun said the “move on to the London market was made ‘in order to avoid the political risk that exists in the U.S. .’ He cited sanctions against Iraq, where Lukoil has been involved in oil-for-food contracts, and other countries such as Sudan and Iran where it has business.” Mr. Fedun added, “It is completely possible that U.S. officials could ban companies carrying out an issue from working in those regions, so we have decided to work in a better political environment” – namely, in the London exchange.

Translation: Bad actors in Moscow and Beijing and other capitals around the world are waking up to a stunning new fact of life. It is no longer possible for them to exploit the lack of transparency that has heretofore enabled their ilk to solicit funds from unsuspecting American investors in U.S. capital markets without disclosing where their companies, their parent firms and subsidiaries are doing business – and with whom.

This sea-change in the American stock and bond markets has come about as a result of changes adopted on May 8 by the Securities and Exchange Commission affecting the filing requirements and other procedures that apply to foreign would-be registrants. These changes were catalyzed by one of the leading congressional champions of human rights and national security, Rep. Frank Wolf, Virginia Republican, and the William J. Casey Institute’s Roger W. Robinson.

Lukoil had even more reason to fear a financial debacle had it brought its share offering to Wall Street in the aftermath of the House of Representatives’ adoption two weeks ago of the Sudan Peace Act. That legislation, passed by a 422 to 2 margin, includes a provision introduced by Rep. Spencer Bachus, Alabama Republican, that would bar access to the U.S. capital markets to foreign oil firms involved in Sudan, as well as trading of the securities of those firms already listed on U.S. exchanges.

It seems reasonable to believe that opponents of the Bachus amendment to the Sudan Peace Act – and, indeed, of the SEC’s efforts to ensure that American investors understand fully the risks associated with prospective investments – will seize upon the placement in foreign markets of the Lukoil share and Chinese bond offerings to oppose such legislative and/or regulatory initiatives. Wall Street firms and those responsive to their well-heeled lobbying in the Bush administration and in the Senate will raise the specter of capital controls, engendering capital flight and lost business opportunities, unless such measures are spurned.

This is, of course, utter nonsense. The only foreign governments, firms and other entities who have anything to fear from the kind of transparency long required of American market entrants – and that is now being sought from foreign ones, as well – are those doing business in countries subjected to U.S. sanctions. Even if the Sudan Peace Act were to be adopted unchanged by the Senate, however, they could still do business in every rogue state on the planet except for Sudan, although informed investors may not respond to such offerings once it is clear that the ultimate beneficiaries of the dollars thus generated could include countries like Iran, Iraq and Libya.

Rather than seek to undo the laudable American market transparency initiatives that are currently frustrating the likes of Lukoil’s executives, Chinese sovereign borrowers and the U.S. investment houses hoping to garner lucrative fees from hawking their stock and bond offerings, the Bush administration and legislators would be well advised to encourage foreign exchanges to ensure that their investors are afforded comparable “material risk” information. Just as the right answer to inequitable application of national security-minded export controls is not to dumb down ours to the lowest common denominator applied by others, our approach on capital markets transparency ought to be to bring others’ exchanges up to our new, higher standard.

If the only result of these developments in the U.S. capital markets is to make it more difficult for global bad actors to get the funds with which to finance their odious operations around the world, the effort would be worthwhile. If it has the added effect of bringing greater transparency and discipline to financial markets worldwide though, the upshot could be far greater: It might just create powerful incentives for nations and companies to eschew deals with those engaged in genocide, slave-trading, terrorism, proliferation and other unsavory activities – a choice they haven’t had to make to date and that would be very much in the interests of all freedom-loving people to ensure they must make from now on.

Frank J. Gaffney Jr. is the president of the Center for Security Policy, the organizational sponsors of the William J. Casey Institute, and is a columnist for The Washington Times.