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Tatneft edges towards the precipice

The company's finances are under severe strain, as its resources are drained off to prop up an ailing local economy

A systemic banking crisis in the Russian republic of Tatarstan is stretching the finances of Tatneft, the country's fifth-largest oil producer, to the limit.

The government of the semi-autonomous region is forcing Tatneft to bail out non-core assets, such as banks, as Russia struggles to cope with western sanctions and emerge from a two-year recession caused by a decline in energy prices.

Oil and petrochemicals are the bedrock of the economy of Tatarstan, located 800km east of Moscow. Since the establishment of the mainly Muslim republic in 1990, Tatneft has been its economic backbone and effectively its cash cow. The company provides about 40% of the republic's budget revenue and plays a vital role in supporting government initiatives and maintaining social obligations.

While parts of the Russian economy are beginning to turn a corner, Tatarstan seems to be suffering more than it did during the 2008 crisis. Tatneft has already spent over $1bn in the past two years buying up non-core assets in Tatarstan and there is a risk it may be compelled to spend its remaining cashflow to rescue a number of banks in the region.

Analysts say Tatneft could be facing virtually open-ended claims on its resources from the republic's authorities and that this may explain why it is holding on to its cash, rather than raising its dividend payout.

"Tatneft will jeopardise investor good-will, if it continues to participate in deals for non-core assets in Tatarstan—something over which the company's management may have little or no control," said Alex Fak, senior oil analyst at Sberbank CIB in Moscow.

Tatneft already has stakes in several leading lenders and ratings agencies have warned that further loans to these and other banks could lead to downgrades.

Tatneft first got involved in banking in 1994, when it helped to establish Bank Zenit. In 2001, Tatneft acquired a blocking stake in AK Bars Bank to add to its control of Devon Credit Bank and it retains a 25% stake in Zenit, which provides Tatneft's employees with payroll services.

The banking crisis may have stabilised throughout most of Russia, but it seems to be getting worse in Tatarstan. Lenders Bulgar Bank, Anchor Bank and Kama Horizon have all had their licenses revoked in the past three months while the central bank has placed Tatfondbank, a top 50 Russian lender, into temporary administration.

The situation at Tatfondbank is critical, with more than 10% of its deposits having been withdrawn over the past three weeks. Negotiations over saving the lender are continuing between the regional government and the central bank. Tatneft revealed in late December that it had R5.4bn ($92m) on account at the bank, but insisted there wouldn't be a material impact on the group if the funds could not be recovered.

More than 40% of Tatfondbank's shares are currently owned by companies affiliated to the regional government and it's not inconceivable that Tatneft would be involved in a rescue.

Tatneft already has a track record of backstopping Zenit, including a capital injection of R6.7bn in June and a further R25bn in the third quarter.

Investors had been encouraged last year by Tatneft's plans to boost output and diversify into petrochemicals, which management cited as the reason for its purchase in March of a 25% stake in Nizhnekamskneftekhim (NKNC) from a government holding. However, the diversification strategy proved to be short-lived. By the end of December, Tatneft announced it was selling its NKNC stake to another local government-controlled holding TAIF.

Other non-core deals in recent months saw the company increase its stake in Nizhnekamsk Tire by 15% to 73% and the acquisition of land plots from AK BARS Bank. Investors are unimpressed—Tatneft's shares plunged 18% lower in February. Further bailouts would diminish the company's cash pile and disappoint any hopes for a dividend rise.

The Tatarstan government owns 36% of Tatneft's stock plus a "golden share", which enables it to have board representation and to veto certain major decisions. Ultimately, the government dictates what the company buys, what it holds and when it sells to other local interests.

Fitch acknowledged this in a note to investors late last year, saying: "Tatarstan's ability to direct financial support from the republic's banking sector to Tatneft is limited, while the republic's dependence on Tatneft is high."

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