Sistema and the “Raiders of the Lost Bashneft” Reviewed by Momizat on . [caption id="attachment_5445" align="alignnone" width="615"] Sistema bought a controlling stake in Bashneft Oil in March 2009 for USD 2.0 bln.[/caption] By Chri [caption id="attachment_5445" align="alignnone" width="615"] Sistema bought a controlling stake in Bashneft Oil in March 2009 for USD 2.0 bln.[/caption] By Chri Rating: 0

Sistema and the “Raiders of the Lost Bashneft”

Sistema bought a controlling stake in Bashneft Oil in March 2009 for USD 2.0 bln.

Sistema bought a controlling stake in Bashneft Oil in March 2009 for USD 2.0 bln.

By Chris Weston, CEE Consulting Group

A decade on from the assault on, and subsequent dismemberment of, Yukos, there arises yet another example of the perilous and provisional nature of property ownership in Russia; this time a sizeable Russian diversified group, Sistema, whose shares are quoted as Global Depositary Results in London.

The curiosity in this case is that, unlike Mikhail Khordokovsky of Yukos, the latest oligarch to come under Kremlin pressure, Vladimir Yevtushenkov, had no discernible track record in opposing the incumbent President and the Kremlin, or has been evident in seeking to enhance civil society or, as in Khordokovsky`s case, seek to proffer an “alternative politics.” Sistema, in which  Yevtushenkov owns a controlling stake, is a conglomerate which owns, inter alia, one of Russia`s largest children’s stores, Detsky Mir, and a leading telecommunications services provider, Mobile TeleSystems, as well as banking, insurance and construction interests. In addition, until recently it owned a 72 percent stake in a domestic oil company, Bashneft Oil, one of the largest producers of oil products in the country.

Bashneft Oil was a Russian oil company established by the transfer of the oil related assets of the Soviet oil ministry in Bashkortostan to the regional government of the Republic of Bashkortostan by the then President Boris Yeltsin.  It was later privatised during 2002-3.

Sistema bought a controlling stake in Bashneft Oil in March 2009 for USD 2.0 bln. It is worth bearing in mind that Sistema had bought a minority stake before the acquisition and presumably had obtained all relevant permissions, both formal and informal, from the authorities to proceed with its majority stake acquisition.

Fast forward to September 2014 and reports emerge of Yevtushenko falling under house arrest and that “all was not quite right” with the original Bashneft acquisition. Some publications even went so far as to hint at certain Kremlin insiders` renewed interest in Bashneft given the impact of sanctions following the Crimean annexation and the Russia-Ukraine conflict. Sistema, the company, had, it seems, fallen prey to its namesake, Sistema – the set of informal rules and pressures that constitute Russia`s form of “governance” that extends to corporate raiding by influential insiders and seizure of private property by state officials.

Yevtushenko appears to have escaped Khordokovsky’s fate albeit he seems to have shared the same pressures faced by a previous oligarch, Vladimir Gusinsky, whose release on bail was conditioned on him signing over ownership of assets. Yevtushenko was released in December 2014 with “charges not proven.”

We can observe the effect of the Bashneft “expropriation” in Sistema`s 2014 financial statements. Part way down the profit and loss account appears the innocuous sounding “Loss on deconsolidation” with the eye catching amount of USD 4.969 bln paying testimony to the latest reordering of property rights.

From a net profit in 2013 of USD 2.3 bln, Sistema incurred a loss in 2014 through the above of just over USD 4 bln.

In turn, Bashneft was notified by its registrar on December 10, 2014 that the majority shareholder had changed from Sistema to the Russian government`s Federal Agency for State Property Management. This followed the ruling of the Moscow Commercial Court, which came into effect on December 8, 2014. On October 30, 2014, the court upheld the claim of the Prosecutor General’s Office of the Russian Federation for the recovery of Bashneft’s shares owned by Sistema in favour of the Russian Federation.

Of interest regarding the above, which generally follows the typical interconnectedness of corporate raiding, justice Russian style (“telefonoye pravo”), employment of state agencies etc. is the use of the Federal Agency for State Property Management as the “warehouse” of the Bashneft shares. This suggests a move away from the “rough and ready” measures taken to appropriate Yukos which involved a hitherto unknown Baikal Finance to acquire Yukos` assets worth billions of dollars before it was, in turn, acquired by Rosneft – famously termed by a former economic advisor to Putin as the “scam of the year.” The use of the Federal Agency in this case suggests the authorities may be seeking a “decent interval” before an auction process is arranged to offload the stake in Bashneft to favoured insiders.

What of Sistema? In December 2014, the Group filed a claim with the Moscow Court of Arbitration for the recovery of RUB 70.7 bln losses from Ural -Invest, a legal successor of the seller of the Bashneft shares to the Group. In February 2015, the court upheld Sistema’s claim. In March 2015, Sistema and Ural-Invest signed a settlement agreement. In accordance with its terms, all assets owned by Ural-Invest of RUB 46.5 bln (USD 750 mln), will be transferred to the Group, which will invest RUB 4.6 bln of this amount into the projects of Ural charitable fund. The disparity between compensation and original price paid hardly constitutes a “happy ending.”

But the Bashneft affair appears to have played probably as much of a part in creating problems for Russia as much as the falling oil price and sanctions, probably a more far reaching impact than is commonly assumed.

A significant element in any country`s GDP growth, in addition to consumption (now in Russia affected by the recession), government spending (financed by taxes or resort to borrowing or possibly inflation), exports (now crimped in Russia by falling oil prices and reduced gas supplies), is investment. Some observers have estimated that for Russia to enjoy GDP growth of over 4.5 percent, it needs an investment rate as a percentage of GDP of around 30 percent, and, by some measures, even higher investment rates. South Korea and Japan enjoyed substantial GDP growth to enjoy their period of prosperity with an investment rate of thirty percent or more. Contrary to perceptions of stability under the present incumbent, such investment rates have dropped since 1999 to around 10 percent – a fall from the 20 percent rates enjoyed under Yeltsin.

Indeed, recent events show a disinvestment as all parties – whether Russian oligarchs or western multinationals, have exercised their right to repatriate their capital offshore given question marks over property rights and ownership. The latest call by the Russian government to seize assets of western companies whose home countries permit the enforcement of the order by an international arbitration court for Russia to compensate Yukos minority shareholders to the tune of USD 50 bln, will only compound the poor growth prospects of the country.

Photo courtesy of Anton Zelenov (Wikimedia Commons).

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