Russian oil privatization saga points to limits of Putin’s power

*The Bashneft-Novoil refinery in Ufa.

*The Bashneft-Novoil refinery in Ufa.

31 August 2016, Moscow/UFA, Russia — Russia’s decision to postpone the privatization of a mid-sized oil company has sent a message to investors: for all his power, President Vladimir Putin has failed to stop political infighting getting in the way of business.

Foreigners have long been wary of buying assets in Russia because of concerns that the state has little respect for ownership rights, but the tussle between competing clans over control of Bashneft has been particularly fierce.

Economy Minister Alexei Ulyukayev said the delay in the sale of the government’s majority stake in the provincial oil firm, announced on Aug. 16, reflected market conditions and investor readiness for the deal.

But the battle over Bashneft is a reminder for foreign investors that winning one camp’s backing is no guarantee of protection for an investment because interests and influence can shift rapidly in the Kremlin.

“Foreign investors … all understand what is happening, which is an internal battle they are not involved in,” Chris Weafer, a senior partner at Macro-Advisory Ltd, a consultancy that advises investors on Russia, told Reuters.

On one side, sources close to the government and Bashneft say, is Igor Sechin, head of state oil firm Rosneft and a Putin lieutenant. Opposing him are economic liberals in the government who believe Bashneft should be in private hands.Putin has avoided taking sides, the sources said.

“With Bashneft it’s clear it’s a political story,” said one source close to talks on the company’s privatization. “Bashneft is a good company, which is worth something, and which one of the Russian players would buy. But it’s clear there is no political decision on who can buy it.”

Foreign investors are concerned the same fate might await other assets the Kremlin is planning to privatize, including a 25 percent stake in shipping firm Sovcomflot, which the government has said was worth 24 billion rubles (281.32 million pounds).

Family Feud
There is a sense of deja vu in the Bashneft saga for long-term investors in Russia.

Reflecting on how Bashneft has changed hands repeatedly in the last three decades, a source at a western bank said: “The only one way to sell Bashneft is to sell it to Russian oligarchs. Foreigners see lots of risks.”

Named after the region of Bashkortostan where its oil is extracted and where it operates three oil refineries, Bashneft produces around 400,000 barrels of crude oil a day — about the same as Vietnam produces and about 4 percent of Russia’s output.

After the collapse of communist rule in 1991, Bashneft was in the hands of the Bashkortostan regional government based in the city of Ufa and there was little oversight from Moscow, leaving regional leader Murtaza Rakhimov to hold sway.

When Putin replaced Boris Yeltsin, who resigned as president on the last day of 1999, he set about restoring central control.Rakhimov saw this as a threat and his son, Ural, persuaded him revenue from Bashneft would be diverted to Moscow and control of jobs would be lost, according to a source who worked with the regional leader at the time.

“Just imagine: Ufa, minus 50 degrees outside, old ladies are standing at the bus stop in felt boots. Where do they work? Only at these three refineries, there is no other place.” Murtazawas waking up with this fear every morning,” said another source, a former high-ranking energy official. Rakhimov signed a decree in 2002 allowing controlling stake sin companies in the energy sector to be transferred to private entities.

The assets passed to firms close to Ural Rakhimov but relations between the two men worsened when Ural opposed his father politically, according to two sources with knowledge of the company at the time.

As father and son feuded, Bashneft increasingly drew the attention of Vladimir Yevtushenkov, the billionaire boss of telecoms conglomerate Sistema. Sistema gradually acquired shares in Bashneft and by mid-2009 had secured a controlling stake, at a cost of about $2.5 billion.

According to a source close to Murtaza Rakhimov, it was more than a simple commercial transaction: it had political backing from influential parties in Moscow.

“Murtaza was pushed from above to sell Bashneft to Yevtushenkov. He was resisting for a long time,” the source said.

Yevtushenkov had ties to members of economic liberals who at the time were in the ascendancy. Under him, Bashneft ramped up its crude output and drew up plans for a secondary share offering in London in 2014. But Yevtushenkov’s star waned as the political tide turned in the Kremlin, with economic liberals losing favor.

Sechin’s Interest
Bashneft’s growth caught the eye of Sechin as he sought acquisitions to increase Rosneft’s production and refining capacity. Yevtushenkov also irked him by beating Rosneft to the purchase of a small oil company, Burneftegaz, in 2014, industry sources said.

Yevtushenkov may also have worried the Kremlin by holding what two industry sources said were preliminary talks with a Western oil trader. Sistema declined comment, but the acquisition of a stake by a major Western oil trader could have made it harder for the state to nationalize Bashneft. Yevtushenkov was accused in 2014 of misappropriating Bashneft shares and held for three months under house arrest.

The charges, which Sistema denied, were eventually dropped but a court ruled Sistema should return its shares to the state.Sechin has denied being behind Yevtushenkov’s arrest. A Rosneft spokesman declined to comment.

The government hopes to net around half of Bashneft’s $10 billion market value as part of a privatization drive which is intended to help plug budget holes now that oil prices have fallen and Russia is subject to Western sanctions over Ukraine.

The state also intends to sell part of its holding in Rosneft as part of this drive, and this sale is now expected to take place before Bashneft’s privatization.

*Vladimir Soldatkin, Oksana Kobzeva & Katya Golubkova, Olesya Astakhova, Polina Devitt & Darya Korsunskaya, Editing – Timothy Heritage – Reuters

About the Author