LUKoil Puts Assets in Financial Group

The decision by LUKoil to unload non-oil assets has helped to set up IFD Kapital, a new group with $3 billion in assets that will sell financial services such as insurance as a six-year economic boom boosts incomes for many of the nation's 145 million people.

LUKoil, which pumps a fifth of Russia's crude, has been selling its banking, brokerage and insurance businesses to cut operating costs and focus on oil extraction. IFD Kapital, which plans to become one of the leaders on the domestic market, is chaired by Leonid Fedun, LUKoil's deputy chief executive.

"LUKoil's former assets have been merged into one company," Fedun said in a telephone interview. "I joined the new structure as in the past I participated in establishing" these former LUKoil units.

LUKoil last year temporarily lost its rank as Russia's biggest oil producer to Yukos, intensifying criticism from investors who were concerned at LUKoil's slower production growth and higher operating costs when compared to competitors. In 2002, LUKoil decided to sell units not involved in oil pumping or marketing to increase annual profit by $500 million as soon as this year.

"If cash goes into the company from assets sales at fair prices, that's positive for investors," said Oleg Maximov, an analyst at Troika Dialog, which has a "buy" recommendation on LUKoil. "It's positive that LUKoil gets rid of noncore assets and is able to control costs and increase production."

IFD Kapital will compete with Uralsib and Alfa Group, which provide a wide range of financial services including insurance, along with some other local financial companies.

The group "will be one of the leading integrated financial groups on the Russian market, offering clients the whole range of services," Boris Krasnyansky, IFD Kapital's chief executive, said in an interview.

IFD Kapital emerged early last year after it took over LUKoil's insurance business. In April 2003 it agreed to buy LUKoil-Reserve-Invest, the oil producer's brokerage, an acquisition that was completed in January of this year, according to the financial group's web site. IFD Kapital also is managing LUKoil-Garant, a pension fund.

In June, LUKoil agreed to sell to IFD Kapital for more than $200 million its majority stake in Bank Petrocommerce, which had at that time $1.7 billion in assets and $260 million of its own capital.

The bank purchase gives "a significant impulse for further development," Krasnyansky said in his Moscow office, which is about two kilometers from the walls of the Kremlin. "This will create a full-scale financial group."

IFD Kapital had $1.2 billion in assets and $560 million of capital as of April 1, according to Krasnyansky. The group's companies reported combined 2003 net income of $240 million.

IFD Kapital is fully owned by close-end mutual fund Strategic Investments, which is managed by Management-Center, Krasnyansky said. IFD Kapital is preparing a consolidated financial report for 2004 under international accounting standards, where it may disclose some beneficiaries, according to the accounting rule requirements. Management-Center has not disclosed the owners of Strategic Investments.

"Owners of the mutual fund have no influence on IFD Kapital," Fedun said, refusing to disclose whether he is a shareholder in the fund. "Management-Center is independent and is not linked to LUKoil managers."

"There is possibly some degree of affiliation between IFD Kapital and LUKoil which they don't want to disclose," said Ivan Mazalov, who manages $550 million in Russian assets at Prosperity Capital Management in Moscow.