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Russian farce

Russia’s planned privatisation of Bashneft is off, for now, after Rosneft made a mockery of the process

When is a privatisation not a privatisation? When the state tries to buy the asset being sold by the state.

That’s what Rosneft, which controls about 38% of Russia’s crude oil output and is itself 70% owned by the state, tried to do when it officially applied on 26 July to participate in the sale of Bashneft, the crown jewel in the state’s asset sell-off. An acquisition of Bashneft would have taken Rosneft’s market share to about 41% and strengthened the state’s role in the industry. To most observers that’s the opposite purpose of privatisation.

Now the whole thing has been postponed, after the government ruled that its oil champion, Rosneft, couldn’t take part. The proposed sale, in turn, of parts of Rosneft, could also now be delayed.

Investors, always worried that the asset sales could be a new method for the Kremlin to shuffle assets between friendly oligarchs, might now ask questions about the whole process.

The whole point of reviving the privatisation programme was to plug Russia’s widening budget deficit, rein in excessive state ownership and boost the efficiency of public companies. So Rosneft, already saddled with massive debt from its $55bn acquisition of TNK-BP in 2013, was a baffling buyer. Thanks to sanctions, it would probably have relied on funding from state banks.

Gaining ground

So the whole Bashneft-sale plan started to smell a bit whiffy, even for the Kremlin. It has also sparked another turf war between the government’s economic liberals and the siloviki, or men of power.

The latter camp is led by Igor Sechin, Rosneft’s boss and President Vladimir Putin’s former energy czar, while the former includes deputy prime minister Arkady Dvorkovich. Speaking to Vedomosti newspaper on 28 July, Dvorkovich insisted a decision had been taken not to allow state-controlled entities to participate in the privatisation.

Yet Rosneft wasn’t the only state player trying to get in on the act. The Russian Direct Investment Fund, a sovereign fund originally set up to stimulate investment in Russian private equity, was also eyeing the sale, alongside funds from Asia and the Middle East.

Tatneft, which is controlled by the government in Tatarstan, submitted a bid for the government’s entire 50.08% stake in Bashneft.

However chaotic the whole privatisation now appears, keeping Rosneft’s hands off Bashneft was the sensible decision. And at least the Kremlin has dropped its semantic efforts to explain away the state-controlled firm’s involvement. At one point, Dmitry Peskov, Putin’s spokesman, got into a tangle by claiming Rosneft was “formally speaking, not a state company” (because it is owned through holding a holding company).

Lukoil will still face some competition, when Bashneft is put back on the block, and government loyalists will be among them.

Lesser-known Russian players NNK and Antipinsky Oil Refinery have also expressed interest in the sale. NNK is controlled by former Rosneft head Edward Hudatainov while Nikolai Yegorov, an ex-classmate of Putin’s, reportedly controls 20% of Antipinsky. If either NNK and Antipinsky is successful, believe some observers, they might decide to invest their assets in “privatised” Bashneft in a year or two.

“Whatever the outcome of the first act of the drama, it might not be the end of the story,” Vladimir Milov, a former deputy energy minister and now a frequent critic of the government as head of the Institute of Energy Policy, wrote in Kommersant newspaper.

“The Russian oil industry, after all, knows too well who the real national champion in the oil business is.”

The Rosneft debacle is undermining the broader privatisation campaign, which is designed to raise $15bn to alleviate the government’s budget deficit. Also expected to go on the block are stakes in Russian Railways, VTB Bank, airline Aeroflot, and Rosneft itself.

The drive got off to a decent start with the sale in July of a 10.9% stake in diamond miner Alrosa for $0.813bn. It was Russia’s first asset sale since 2013. But opaqueness surrounding the Bashneft sale raises concerns that the privatisation process can be compromised by the Kremlin’s loyalty to a coterie of loyal business leaders.

What started as a good idea to help raise cash now has the hallmarks of a good farce.

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