Igor Sechin and Rosneft finally won the battle over the privatization of the Bashneft oil company—the sale was finalized earlier today. Russia’s Prime Minister Dmitry Medvedev signed a decree authorizing the sale of Bashneft to Rosneft last week, despite the fact that earlier in July, the Deputy PM Arkady Dvorkovich publicly said the Government had decided to not allow state-owned companies (which Rosneft partly is) to participate in the bidding process.
Earlier this summer, remarking on the possibility of Rosneft participating in Bashneft’s privatization, the assistant to Russia’s President and the former Economic Development Minister, Andrey Belousov, called the idea that a state-owned company might acquire another state-owned company “a stupidity”. Furthermore, in August, Russian media reported that Vladimir Putin had personally declined Sechin’s application for the Bashneft acquisition.
And yet there was Vladimir Putin, speaking at the Russia Calling economic forum today, explaining away the final decision as something that flowed from “the Government”, and especially its “financial and economic bloc”—not from him. Putin said he was even “a bit surprised by the Government’s position”, but at the same time he justified the deal saying that, “strictly speaking”, Rosneft (69.5 percent of which belongs to the Government) is not a state-owned company because British Petroleum (BP) is among its shareholders (at 19.75 percent).
Putin added that Rosneft offered the highest price, exceeding the Ernst & Young independent valuation: Rosneft is offering 330 billion rubles ($5.06 billion) versus the 297-315 billion ruble estimate, for a grand total of 50.0755% of Bashneft’s shares.
“Rosneft offered up the market price,” Putin concluded.
According to the terms of the deal, the money for the Bashneft sale needed to be handed over by Friday, October 14th. (The money was paid, but the shares have not yet been transferred.) Coincidently, one of Russia’s major banks, Sberbank, temporarily increased its deposit rates four days ago—from 6.85 percent to 8 percent—for its October deposits. Sanctioned by the United States, Sberbank doesn’t have access to Western capital markets, so it’s likely that this is an indication that the bank is scrounging between the couch cushions looking for cash to finance the deal—just one more example of how the “market economy” works in Russia when money is being transferred from one state-owned pocket into another.
As to how Igor Sechin finally got his paws on Bashneft, we would surmise that the Government, and especially its “financial and economic bloc”, was strongly against the deal—largely because neither Medvedev nor the Finance Minister has any financial stake in Rosneft, and largely because neither is known to be particularly close to Sechin. On the contrary, the “financial and economic bloc” is struggling to find money to cover the Government’s budgetary expenses, and it stands to reason that it wanted as “real” a privatization as possible in order to bring in cash from the private sector.
Meanwhile, Vladimir Putin is rumored to be the real owner, alongside Sechin, of the Independent Petroleum Company—a firm that is officially registered to former Rosneft CEO and a current Rosneft board member Eduard Khudainatov. If this were ever proven, it would go a long way towards explaining Putin’s interest in helping Sechin, no matter the budgetary implications amid the financial crisis. (Needless to say, the country’s wellbeing has never been atop of Putin’s list of priorities.)
As to Putin’s statement about being surprised by the Government’s decision? Well, that’s another one of Putin’s everyday lies. Ever since Medvedev tried and failed to fire the former Russian Railways CEO Vladimir Yakunin (who was ultimately fired by Putin two years later), the current PM has not been known for making his own decisions, especially when it comes to Putin’s allies (which both Sechin and Yakunin are). Thus, there is no way Medvedev could have decided who would buy Bashneft without Putin’s explicit sanction. Russia’s President is probably trying to shift the burden of a financially bad decision onto Medvedev, given that the Prime Minister is officially responsible for Government decisions. And maybe Putin is fooling with Medvedev a little, as he sometimes does in public.
Bashneft became a state-owned company after a 72 percent ownership stake was seized by the Russian Government in 2014. The company’s previous owner, Vladimir Evtushenkov, the owner of the Sistema conglomerate (which Bashneft was part of), was placed under house arrest. Number 15 on the Forbes’ list of Russia’s richest men, Evtushenkov was accused of money-laundering in connection with the acquisition of Bashneft from Ural Rakhimov, the son of the former leader of the Republic of Bashkortorstan. That deal, which was finalized in 2009, cost Evtushenkov $2 billion, a figure the Investigative Committee said undervalued the company by $500 million (hence the money-laundering charges). Before it came under the control of the Rakhimov family in 2002-2003, Bashneft was owned by the regional government.
After Evtushenkov had successfully transferred his share in Bashneft to the Federal Agency for State Property Management, the businessman was freed.
As the Russian Federal Antimonopoly Service reported in September, the Russian Government has been increasing its share of the economy over the past decade at an eye-watering clip. For the past ten years the Government’s share of Russia’s GDP increased from 35 percent to 70 percent.
And every attempt, in good faith and in bad, by the Russian Government to divest itself of some of its holdings fail because, again and again, it encounters its main enemy: itself.
A brief coda: it appears that Rosneft itself might have found a way to earn money on its own privatization at the expense of the Russian taxpayer. At the above-mentioned forum Putin said that Rosneft has enough cash on hand to both pay for Bashneft and to buy out the Russian Government’s stake—19.5 percent—in Rosneft itself—a fact later also confirmed by Rosneft’s press secretary, who said the company is ready to act. The next logical step will be for Rosneft to buy out its own shares before the Bashneft deal is finalized and the shares are officially transferred—and before Rosneft’s market capitalization increases. If it plays out this way, it will be according to a long-running script for short-changing the federal budget: the country will get less, while Putin and his friends stay financially secure.