The Russneft Affair Continues

Well, it’s been another wonderful week in Russian disinformation. Today the big news is that the Moscow City Court has granted the Interior Ministry’s request to seize 100% of shares of the oil company Russneft and continue with the criminal proceedings against owner Mikhail Gutseriyev (who owns 80%), proving once again that even when you cooperate with the Kremlin and do what they say, you’re still going to go down.

Remember how, at least for a few hours, Russneft owner Mikhail Gutseriyev strongly denounced the campaign of persecution against him by the Kremlin? In an emotional letter posted on the Russneft website (which was later removed the same day, though not before enough reporters saw it), Gutseriyev decried the “unprecedented hounding” by the Russian authorities, which included regulatory harassment of the company, a tax probe, criminal charges, and a series of other actions – all aimed at punishing him for having purchased Yukos assets without the Kremlin’s blessing. [I have issued earlier statements arguing that the fact that the Russian government believes that no one can buy Yukos assets without its permission confirms the illegitimacy of the proceedings.] But then suddenly, on August 2, Gutseriyev surprisingly recanted his story, and denied that he had ever been pushed to resign from Russneft (I’d hate to imagine what kind of terrifying midnight visit from the FSB could have prompted such a change of heart). The government media reported him as saying “Many journalists are interpreting the situation involving Russneft and my comments on it. Therefore, I would want to state officially that the shareholders decided to sell the company without any outside pressure … There is no political aspect to the deal, as journalists have been writing.” However, in order to truly add the legalistic windowdressing to the state theft of Russneft, the Kremlin had to take a page from the Yukos Affair playbook and bring in a third party to serve as a fence. In an effort to launder the stolen assets from Yukos, the Russian government applied significant pressure on international firms such as BP, ENI, and Enel to participate, or express interest in participating in the unlawful auctions of stolen Yukos assets to provide the appearance of good title. For the Russneft Affair, the main fence is the billionaire Kremlin loyalist Oleg Deripaska, who has become a favorite of the Kremlin especially after openly admitting that he is inseparable from the state and would never resist a nationalization. Derek DeCloet of the Globe and Mail describes the situation most accurately:

Oleg Deripaska, Russian tycoon and buddy of President Vladimir Putin, is one lucky man. Why, just the other morning, he opened some Froot Loops, shook the box a bit, and out came the keys to Russneft, one of the largest oil producers in the country – just like that.

However Basic Element’s application to acquire Russneft was never clear either – on July 29, the media reports that this Rusal holding company had filed with anti-monopoly authorities to buy the group, but then on August 8, Bloomberg reports that in fact they had not applied. Typical of Russia’s infamous information asymmetry, no one seems to know what is going on, except that we are witnessing the heavy hand of the Kremlin seeking to retroactively change news reports that weren’t convenient to its motives. It is largely assumed that Deripaska’s Basic Element will just be a temporary owner of Russneft until the company is passed along to state ownership under Rosneft. A similar transaction was arranged when ENI and Enel were allowed to win a stake in Gazprom Neft at a rigged Yukos auction, but forced to include a two year call option to Gazprom, so the state can reassert control. In regards to the ENI/Enel asset laundering of Yukos, James Fenkner of Red Star Asset Management in Moscow told Bloomberg “The Kremlin has been successful at co-opting global energy majors. These international companies have to play this game because they need access to Russia’s reserves.” What is certain is that Rusal will get a knockdown price for Russneft, which is the seventh largest oil company in Russia, producing 300,000 barrels of oil a day, and estimated to be worth $8-9 billion dollars. However, as one analyst interviewed by Kommersant points out, Deripaska will likely get the company at a 50% discount for just $3-4.5 billion. If the prosecutors were seriously seeking to recoup these convenient tax arrears from Russneft, wouldn’t they want to sell the assets for their full value? These past few weeks of heavy disinformation and uncertainty in Russia’s oil and gas sector contrast sharply with recent comments made on August 6 by Vladimir Putin, promising foreign investors greater transparency:

We have consistently been guided by a desire to offer a transparent environment for foreign investors. I have to point out that Russia has one of the most liberal regimes for allowing foreign investment in the oil and gas sector. We must work not simply at openness but for maximum understanding and transparency, so as to avoid any ambiguity whatsoever.

To say these words, only to seize control of Russneft two days later, is deeply disingenuous, and poses significant concerns not only to those seeking to invest in Russia, but also to private Russian firms so eager to raise funds in share issues on international stock markets. Mikhail Gutseriyev is no Khodorkovsky, and has never shown the latter’s leadership in promoting civil society. However the state’s unlawful campaign against him bears many of the hallmarks of the Yukos affair, and serves as a reminder of Russia’s lawlessness and the total lack of credibility of the Russian procuracy. What this says about the Kremlin’s belief in its own impunity and in particular, the ongoing use of Mr. Deripaska as a facilitator, should be a matter of great concern to anyone who professes to understand the Russian market.