With the privatization of several state-owned assets looming, Russian President Vladimir Putin forbade the sale of the Bashneft Oil Company (which was de facto recently expropriated from Russian tycoon Vladimir Evtushenkov), to Rosneft. The Russian President’s explicit order was confirmed by official representative of the first deputy Prime Minister Arkady Dvorkovich, RBC reports.
Earlier today, Russian media reported that Dvorkovich was infuriated by the fact that VTB Capital, which is in charge of Bashneft’s privatization, sent offers to several state-run companies, including Rosneft, Gazpromneft, Gazprom and the Russian Direct Investment Fund. Russian law forbids that companies in which the government has more than a 25 percent stake to participate in privatization. Among these four, the last two are run by the state directly—38.4 percent and 100 percent ownership, respectively—while both Rosneft and Gazpromneft belong to the government indirectly, through the state-owned Rosneftegaz and Gazprom, respectively. (Of course, formally, neither Rosneft’s nor Gazpromneft’s acquisition of Bashneft would have violated the letter law. The spirit, however, is another question.)
RBC’s highly-placed source in the Kremlin also confirmed that Putin explicitly instructed that Rosneft specifically be disallowed from participating in Bashneft’s privatization.
Several months ago, the state-run news agency RIA Novosti, citing a high-ranking source, reported that Rosneft and its CEO Igor Sechin had never been interested in buying Bashneft. Today, however, Rosneft’s official spokesman, Michael Leontiev, expressed indignation at the announcement. Leontiev said he had never heard about Putin’s instructions, and insisted on the company’s right to participate in Bashneft’s privatization, thereby confirming Rosneft’s strong interest in the asset on sale.
Given Rosneft’s desperate financial situation, this should not come as a surprise. As we previously wrote:
Rosneft’s finances went bad shortly after buying TNK-BP for $55 billion in 2013. The Russian company did not have cash on hand for the deal, so it borrowed over $30 billion from Western banks. Three years later, nobody can explain the rationale behind the acquisition. The deal appears to have been driven by the personal ambitions of Rosneft’s CEO Igor Sechin, who happens to be a close friend of Vladimir Putin. Tumbling oil prices coupled with questionable management decisions from Sechin resulted in Rosneft’s total market capitalization dropping below the sum paid for TNK-BP by the end of 2014.
Beyond the oil markets rout, U.S. sanctions in the wake of Russia’s annexation of Crimea and invasion of Ukraine targeted Rosneft directly. Sechin asked for a 1.5 trillion ruble bailout but never got it. He then scaled back his demands, asking for help in funding projects to develop new fields; all these proposals were also rejected. In May of this year, Sechin turned to the Russian Central Bank for financing, but failed again.
To understand Rosneft’s ravenous appetite for Bashneft, one need only to look at Russian oil production data. In 2015, Russia extracted 534 million tons of crude, up 1.4 percent from 2014. The leading oil producer was Bashneft (+11.9 percent, 19.9 million tons), followed by Tatneft, Gazpromneft and Surgutneftegaz. Meanwhile, Rosneft’s production fell 0.9 percent in the past year. And beyond the healthy oil production figures, Bashneft owns a number of highly profitable oil refineries.
Despite all its financial difficulties and poor operational results, Rosneft refused to lower its top managers’ salaries. On the contrary, the salaries of eleven of the company’s board members, including the CEO, Igor Sechin, increased by 1 billion rubles ($150 million) in 2015, reaching a total of 3.7 billion rubles.
Putin’s personal intervention, preventing the sale of Bashneft to Rosneft, might indicate that Igor Sechin has recently started to fall out of favor with the Russian President, and thus that his (Sechin’s) personal influence and power are waning. It also suggests that recent Russian media reports, suggesting that Sechin was pulling the strings of the most powerful and secretive department at the FSB—the 6th Service of the Department of Internal Security (USB) of the FSB—is simply wrong. As we have been saying for the past few weeks, Putin’s long-time head of security, General Viktor Zolotov, who was recently appointed to lead the newly-formed National Guard, stands behind the recent FSB infighting—including the latest attack on the Investigative Committee of Russia.
Igor Sechin’s trajectory as a state-owned company’s CEO most resembles that of the former Russian Railways CEO Vladimir Yakunin. Yakunin ran his company into a sorry state—the most public scandal was when several suburban commuter rail service lines in a number of Russian regions were cancelled in 2015—but kept asking for money from the federal budget, even as Russia was experiencing difficulties. As this was going on, Yakunin built a palace for himself in a Moscow suburb—a three-story marble mansion, located on 70 hectares of land, with a 50 meter pool, a 15-car garage, and a separate storage building for fur coats. This kind of behavior earned him the reputation as one of the most rapacious heads of a state-run firm—a man who doesn’t know when to stop. In 2015 Yakunin was fired; in practice, it was a dismissal in disgrace: he was offered an unprestigious position in the Russian Senate, with a humble Ford Focus as an official car, and without an office in the deliberative body’s main building.
Rosneft could perhaps still be able to dodge the law, and Putin’s directive, if it uses a private friendly company—like the Independent Oil Company of Rosneft’s board member (and Sechin’s long-time friend) Eduard Hudainatov—as a proxy for the acquisition of Bashneft. The same was done with Yuganskneftegaz, the main asset of Mikhail Khodorkovsky’s Yukos Oil Company. It was bought at auction by a company with ownership capital worth only $500, and three days later was re-sold to Rosneft.
This time, however, Sechin may not get his way. It seems that Vladimir Putin is intent to follow the spirit, rather than the letter, of the law, when he prohibits state-owned companies to participate in privatization.
The offer for Bashneft was also sent to the biggest global oil companies and investment funds.