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Sechin's role in Magomedov arrest under scrutiny

The arrest of another oligarch with links to the energy industry has raised questions over the motive

The hand of Russia's oil czar Igor Sechin may have been instrumental in the arrest of billionaire Ziyavudin Magomedov on embezzlement charges.

Magomedov, the owner of the Summa Group conglomerate, was detained on March 31 on charges of embezzlement related to the construction of a football stadium in Kaliningrad to be used in the World Cup this summer.

Analysts believe his arrest pertains to a long-running row over control of Novorossiysk Commercial Sea Port (NCSP). Summa and state-owned oil pipeline monopoly Transneft hold 50.1% in NCPS through a joint venture, while Transneft owns an additional 10.5% directly.

NCSP controls the Black Sea port of Novorossiysk, as well as the Baltic port of Primorsk—the largest Russian terminals for the export of oil and oil products to world markets. Summa also has stakes in several other infrastructure and energy projects including freight container operator Transcontainer and ship operator FESCO.

At the beginning of the year, Magomedov agreed to sell his stake in NCSP to Transneft in a transaction signed off by the Federal Anti-Monopoly Service (FAS). Some analysts have suggested the deal could have been worth as much as $1.8bn—a figure Transneft refutes.

It's a deal that would have resulted in Transneft owning 60.6% of the port. However, the pipeline operator suspended negotiations on April 23 following Magomedov's arrest on charges of embezzling 2.5bn roubles ($40m) in budget funds.

Magomedov denied all charges at a pre-trial hearing, where a judge rejected an offer to pay a $35m bail bond and ordered him detained until May 30. If found guilty, the billionaire could face up to twenty years in prison. His older brother, ex-senator Magomed Magomedov, and Summa's general director Arthur Maksidov were also arrested.

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Fingers have been pointed at Rosneft boss Igor Sechin. It was Sechin's aggressive pursuit of strategic energy assets that led to the arrests of Bashneft owner Vladimir Yevtushenkov and former economy minister Alexei Ulyukayev, who is now residing in a penal colony until 2025.

For the past five years, Sechin has been trying to acquire NCSP, but both Magomedov and Transneft have resisted. The Rosneft boss has even written to President Vladimir Putin saying his company needs onshore infrastructure to develop the Black Sea's offshore deposits.

Transneft, which, together with Summa, acquired the stake in NCSP in 2010, has also been seeking tighter control over oil flows, the lifeblood of the country's $1.4 trillion economy.

Complicating the whole scandal over Magomedov's arrest is a claim made by Transneft spokesman Igor Demin that Rosneft recently made an offer to buy Summa's stake in NCSP.

Sechin has been trying to acquire NCSP for five years

"A representative of Summa called us and offered to close the deal, including offering discounts to the deal, and as an additional argument, the fact that another candidate was appearing on the scene-Rosneft," said Demin.

On April 23, Rosneft issued a statement saying the company was "a strategic partner" of Transneft and that it hadn't held any negotiations with Summa. Furthermore, Rosneft dismissed the rumour as "a provocation by the Transneft press service" and a misinformation campaign.

But Sechin is no stranger to provocation. A close ally of Putin's for 25 years, he was heavily involved in an opaque sting operation against Ulyukayev, involving a gift basket of wild-game sausages and a brown bag containing $2m.

Meanwhile, London shares of NCSP tumbled by almost 20% in April and may have been one objective of Magomedov's arrest.

Rosneft has in the past benefitted from the chaos of rivals. It snapped up Yuganskneftegaz oil unit from the bankrupt Yukos at a third of its market value in 2005 and received a refund worth 100bn roubles in December last year from privately-held conglomerate Sistema following a dispute over the so-called privatisation of Bashneft.

Ultimately, the case is destructive for Russia's investment sentiment and will deter many foreign investors from investing at all in energy and strategic sectors—let alone taking outright stakes.

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