Putin's Patronage
Rosneft’s Rocky Road to Recovery

Bloomberg has a fascinating piece on the rocky road navigated over the past two years by the Kremlin and Russia’s largest oil company, Rosneft:

Two years ago, the Kremlin’s oil flagship was foundering, hit by falling prices and international sanctions just as it faced $20 billion in debt payments.

Short of cash, Rosneft got about $15 billion of emergency aid with help from the central bank. But the deal spooked investors, requiring a massive rate increase to stem market turmoil. Chief Executive Officer Igor Sechin, the man Vladimir Putin had for a decade relied on to build Rosneft into a giant, faced rare disfavor from his patron, senior officials said at the time.

Now, Putin is turning to Rosneft for help. Sechin’s energy colossus is helping fill a yawning budget gap at home and support the Kremlin abroad. The company’s turnaround is a triumph for the Russian president, who vowed to protect the pillars of his state-dominated system from U.S. and European Union pressure when they were slapped with sanctions two years ago.

In short, Rosneft appears to have made a major turnaround in two years: from a cash-strapped liability, beset by falling oil prices and restrictive sanctions, to a healthy enterprise that is helping the Russian state plug its budget holes. Yet the story of how Rosneft got there is indicative of real problems in Putin’s system—and the haphazard, short-term economic fixes he prefers to structural economic reforms.

The story as told by Bloomberg involves luck as much as smart economic policy. At crucial moments, Rosneft was saved by forces beyond its control. For instance, customers (not identified by the company, as Bloomberg notes, but thought to be Chinese) made massive prepayments for future crude supplies, giving the company a much-needed cash transfusion. At the same time, the falling ruble was an unexpected boon for Rosneft, reducing its costs in dollars and softening the blow from low oil prices.

More than anything, the Rosneft chronicles illustrate a simple truth: when it comes to business-state relations in Putin’s Russia, one hand washes the other. Putin appointed Igor Sechin, a loyal intelligence veteran from his Leningrad days, as chairman of Rosneft in 2004, allowing him to share in the state spoils. He stood by Sechin in 2014 even as a botched bailout scheme caused the ruble to plunge. In turn, Sechin righted Rosneft’s fiscal ship, bought rubles to help steady the currency, and reversed a decline in crude oil output. Now, both Putin and Sechin stand to gain in Rosneft’s purchase of Bashneft: a fake “privatization” that will help the state fill budget gaps while enriching both men.

Rosneft’s purchase of Bashneft and its recently announced energy deals in India allow Putin to claim that Rosneft’s troubles are over, and that Russia is on the road to recovery. But a closer look at the story shows a system that is still dominated by considerations of loyalty and patronage politics, not market efficiency. In the long term, that will pose serious problems for Rosneft, and for Russia.

Read the whole thing here.

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