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Another Yukos?

Rosneft acquired prized oil producer Bashneft, but now it's taking the previous owner to court. The case will have ramifications for capital markets

A $3bn lawsuit initiated by state-controlled Rosneft against the conglomerate Sistema over alleged asset-stripping has dismayed investors and risks undermining Russia's drive for investment.

The claim covers alleged damage to oil producer Bashneft, which privately held Sistema owned until 2014, before the state reclaimed it and sold it to Rosneft. If Sistema loses, its owner Vladimir Yevtushenkov could be forced to raise debt or offload his best assets.

The dispute has parallels with the dismemberment of Yukos, the oil giant owned by oligarch Mikhail Khodorkovsky. When Khodorkovsky was jailed for defying the Kremlin, Yukos was broken up. Its main assets ended up with Rosneft.

Moscow-based investors and analysts say the case is less about alleged asset-stripping and more a vendetta orchestrated by Rosneft boss Igor Sechin against Yevtushenkov as a result of the latter's acquisition of Bashneft in 2009.

Yevtushenkov was stripped of the company in 2014 after he was placed under house arrest for six months on criminal charges depicting the transaction as illegal. He was later freed and must have thought he was out of the woods after Sechin, a key ally of President Vladimir Putin, finally secured Bashneft last year.

"Sechin missed out the first time and then Bashneft was awarded the valuable Trebs and Titov oilfields," says Tom Adshead, chief operating officer at Macro Advisory, a Moscow consultancy. "It's a grudge that has festered and now Sechin wants Sistema to pay for it—his own tab for Bashneft, that is."

Shares in Sistema plunged by 40% on 3 May, when news of Rosneft's initial R107bn ($1.9bn) lawsuit broke. A week later, the stock sank another 10% after the Bashkortostan republic, which owns 25% of Bashneft, joined the lawsuit and the claim was upped to R170bn.

Rosneft says its concerns are based on law rather than retribution. It accuses Sistema of de-merging non-core assets, liquidating loans, buying out minority shareholders and cancelling treasury stock. Sistema insists that such claims of mismanagement are unfounded and everything was done lawfully.

Meanwhile, former economy minister Alexei Ulyukayev, has been under house arrest since November 2016, awaiting trial on a charge of attempted bribery linked to the sale of the Bashneft stake to Rosneft. Some see the hand of Sechin behind the move, as Rosneft had been involved in collecting information and tipping off the authorities ahead of the arrest, while Ulyukayev had publicly opposed Rosneft's "privatisation" of Bashneft. However, the authorities maintain this is just a straightforward corruption case.

"Yevtushenkov has been humiliated, but there is blood in the water," says a veteran Russian portfolio manager. "Sechin doesn't care about the damage he does to investor sentiment, nor to Rosneft's share price."

Investor appetite

Under Sistema's five-year ownership, Bashneft became a darling of portfolio investors. Production jumped 45%, dividend payouts soared, while the value of the company increased eightfold.

VTB Capital said the lawsuit poses a "significant risk" to mobile network operator MTS, a unit of Sistema, which may have to assume part of the debt burden.

Ratings agency Fitch says Rosneft's claims equate to five times the amount of dividends received by Sistema from its subsidiaries in 2016. "If satisfied in full, the impact on the company's leverage and its ratings is likely to be negative."

With Putin seemingly staying out of the fray, Sechin appears to have the weight of the legal system behind him. In early June, a court in Ufa, Bashkortostan approved Rosneft's request to increase its claim and permitted the republic's government to join the case as a co-plaintiff.

Investors are already voting with their feet. Russian-dedicated funds pulled out $100m in the week when Rosneft increased their claim.

$3bn - Size of the lawsuit facing Sistema

To compound investor woes, a decree obliging state-owned companies to pay dividends worth 50% of their earnings has been relaxed for both Rosneft and gas monopoly Gazprom. Meanwhile, Bashneft's board has recommended that the company not pay anything to ordinary shareholders.

"Negative news such as the disappointing state-owned companies' dividends and the lawsuit initiated by Rosneft against Sistema have done little to support sentiment towards Russian equities as an asset class," says Natalia Orlova, chief economist at Alfa Bank.

Corporate governance in Russia has been back-sliding since the Kremlin turned in on itself in the wake of Western sanctions imposed for its interference in the Ukraine conflict.

Heads of the country's leading energy companies, including Lukoil, Transneft and Surgutneftegas, wrote to Putin in late May asking him to limit the information legally available to smaller shareholders.

The companies are seeking to restrict minority shareholders' access to any internal documents, such as contracts on large deals, minutes of board meetings and reports on asset valuations. According to Vedomosti newspaper, the letter sent to Putin suggested that shareholders with less than 25% of voting shares should justify requests to see such documents, and only larger shareholders would be allowed to access these freely.

The amendments would empower management and majority owners by keeping minority interests completely in the dark.

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