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Rosneft vs Sistema brings echoes of Yukos affair

For long-term investors in Russia, the nightmare unfolding for the privately held conglomerate Sistema gives them a distinct sense of déjà-vu

Anyone who remembers the dismemberment of Yukos and the capture of its assets more than a decade ago will be feeling the same. Rosneft, again, is at the centre.

Assets belonging to Sistema and its ultimate controlling shareholder Vladimir Yevtushenkov are being stripped from the group one by one, while the company has shed R150bn ($2.5bn) in market value since litigation against it began. Russian courts have seized a 32% stake in the mobile operator MTS as well as 90% stake in Bashkir Power Grid Company and 100% of Medsi Group, a national healthcare chain, in a $3bn lawsuit filed by Kremlin-controlled oil producer Rosneft.

Today, stocks also dropped 3% on news the court has kept its assets frozen by Rosneft, while shares are now down by about 88% since legal action started.

Bashneft, once Sistema's main oil production asset, already belongs to Rosneft, which claimed the prize in a so-called privatisation last year. The current claim covers alleged damage to Bashneft, which Sistema was forced to surrender to the state in 2014.

Courts have dismissed appeals by Sistema and there is a real chance that Yevtushenkov, who has previously been placed under house arrest, could face the same fate as former Yukos boss Mikhail Khodorkovsky. When Khodorkovsky was jailed for defying the Kremlin, Yukos was broken up and its assets ended up with Rosneft.

"This Sistema court case reminds me of a Stalinist show trial," a veteran Russian investor, who has owned Yukos and Bashneft stock, tells Petroleum Economist. "There will only be winner and it's certainly not the Russian investment market."

Due to the litigation, Sistema is already in technical fault of R4bn. Things seem certain to get worse.

Former economy minister Alexei Ulyukayev has been caught in the cross-fire. He 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. Since his arrest, Ulyukayev has lost 15kg and it was announced on 8 August Rosneft boss and Vladimir Putin confidant Igor Sechin will give evidence that he personally caught the quietly spoken technocrat red-handed with a bribe worth just $2m.

As in the Yukos case, which turned into an international cause célèbre, the defendant has allies who are coming out to bat for him.

Lord Peter Mandelson, a former senior minister in the UK government, signed a letter addressed to President Putin asking for him to ensure a fair trial. Mandelson, who was a non-executive director at Sistema until June, was reportedly paid $200,000 a year by the conglomerate.

Former Luxembourg Minister Jeannot Krecké signed the same petition while Alexander Branis, the chief investment officer of Prosperity Capital, wrote his own letter to the presidential administration on behalf of minority shareholders calling for Sistema to be protected by the law.

Branis, whose firm is one of the largest Russia-focussed portfolio investors with about $4bn under management, is the face of corporate governance in Moscow. Prosperity has battled many lost causes against oligarchs and state-controlled entities over the years, while Branis was appointed by the presidential administration to head an Expert Council to make recommendations on corporate-governance reform.

In 2008, after the Yukos furore had died down, president-elect Dmitry Medvedev declared war on "legal nihilism", saying he was a "lawyer to my bones". The Expert Council was a key pillar in a bid to transform Moscow from a capital-markets backwater into an international financial centre to rival Frankfurt and London. Wall Street titans, including Goldman Sachs's boss Lloyd Blankfein and JP Morgan's chief Jamie Dimon, were also roped in.

Medvedev's plan to reform the courts, stamp out rampant corruption and attract long-term foreign investment to Moscow went up in flames when Russia invaded Georgia and the global credit crunch sent local markets plummeting. The council's work petered out but was rebooted by Ulyukayev, of all people, in August last year.

Normal service resumed when it turned out that Medvedev was just keeping the seat warm for Putin to return as President. Since then, the Kremlin's liberal wing has been railroaded by the siloviki—the so-called hard men from Russia's security services. Notions of upholding property rights or ensuring fair trial have been replaced by the need to quash domestic dissent and beef up the military to project Russia's interests overseas.

Putin instigated the case against Yukos after Khodorkovsky funded an opposition movement. His rationale was that he was merely seizing back for the Russian people what had been stolen from them by a robber baron.

The Russian president has so far stayed out of the Sistema dispute—allowing Sechin and the courts to run their course. For outsiders looking in, the outcome seems all too predictable and the Yukos echoes ring all too loud.

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