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Deja Vu Slow but Steady Lacklustre Interest Striking Issue 952 11•October•2017 Week 40 Deja vu The dispute between Rosneft and Sistema has revived memories of the Yukos affair a decade and a half ago. Slow but steady Upstream developments in the Black Sea are moving forward, albeit at a slow pace. Lacklustre interest A recent auction held by Rosnedra for subsoil rights in the Khanty-Mansiysk region failed to attract interest. Striking oil Gazprom Neft has reported an oil discovery off the coast of Sakhalin Island. East Siberia is set to become the biggest centre for oil output growth in Russia. Do you know why? Our latest Special Report focuses on the risks and rewards in the East Siberian oil & gas basin, an area that today represents the driving force behind growth in the Russian petroleum industry. Find out more. FSUOGM CONTENTS FSUOGM www.NEWSBASE.com FSUOGM FSU Oil & Gas Monitor COMMENTARY Investors unsurprised by Rosneft-Sistema verdict 4 REGIONAL PROFILE Steady progress in the Black Sea 6 PIPELINES & TRANSPORT TANAP may be finished ahead of schedule, says Turkey 8 PERFORMANCE Naftogaz sees profits jump on upstream earnings 9 INVESTMENT Gazprom set to launch Serbian UGS, refining projects 10 POLICY Siberian tender fails to draw investors 10 PROJECTS & COMPANIES Gazprom seeks to expand ties with KMG 11 Gazprom Neft hits oil off Sakhalin 11 NEWS IN BRIEF 12 OUR CUSTOMERS 17 Have a question or comment? Contact the editor – Joseph Murphy ([email protected]) Copyright © 2017 NewsBase Ltd. All rights reserved. No part of this publication may be reproduced, redistributed, or otherwise copied without the written permission of the authors. This includes internal distribution. All reasonable endeavours have been used to ensure the accuracy of the information contained in this publication. However, no warranty is given to the accuracy of its contents Week 40 11•October•2017 www.NEWSBASE.com P3 FSUOGM COMMENTARY FSUOGM Investors unsurprised by Rosneft-Sistema verdict The court ruling has confirmed what foreign investors already knew about the risks of operating in Russia, writes Simon Watkins RUSSIA ROSNEFT’S recent victory in a legal battle with governance issue as a Russia risk premium ever industrial conglomerate Sistema has confirmed since the Yukos affair,” Sergey Libin, a Mos- WHAT: the scepticism among international investors cow-based equity analyst at Raiffeisenbank, told Sistema was recently over corporate governance and shareholder NewsBase Intelligence (NBI) on the phone. ordered to pay US$2.35bn rights in Russia. The case embroiling Sistema is somewhat dif- to Rosneft for alleged In August, an arbitration court in Bashkor- ficult to comprehend. asset stripping at tostan ordered Sistema to pay 136 billion rubles The company, controlled by Russian billion- Bashneft. (US$2.35 billion) in damages to Rosneft over aire Vladimir Yevtushenkov, began acquiring alleged misdoings at Bashneft, a local oil com- shares in Bashneft in 2006 and had amassed a WHY: pany. Bashneft was held by Sistema until 2014, 77% stake in the company three years later. It The case resembles when it was expropriated by the government. restructured the producer and took it public in the Yukos affair, when Two years later, Rosneft, which is majority December 2013, with only 3% of Bashneft share- Russia’s former largest state-controlled, took over the oil company in holders reportedly opposing the move. oil company was another so-called privatisation sale. Sistema’s problems began in 2014, when a presented with US$28bn Sistema has appealed against the recent rul- Moscow court ruled that the federal govern- in tax claims and forcibly ing and is hoping for an out-of-court settlement. ment had made procedural and valuation errors broken up. In the meantime, over US$3 billion of its assets, in transferring Bashneft to the Bashkortostan including shares in telecom operator MTS, government in the early 1990s. The court said WHAT NEXT: remain frozen. this voided all subsequent transactions and that The conquest of Bashneft business vehicles belonging to Yevtushenkov had has satiated Rosneft’s Deja-vu bought stock in Bashneft at an illegal discount appetite at home, with Accusations have mounted that the case was amounting to US$500 million. Yevtushenkov the producer now focused orchestrated so that Rosneft could seize control was subsequently placed under house arrest for on raising efficiencies of Sistema’s property, raising concerns over the a few months and Bashneft was renationalised. and seeking overseas impartial rule of law in Russia. The oil company was bought in late 2016 by Ros- opportunities. It has revived memories of the Yukos affair, neft, headed by a close ally of President Vladimir when Russia’s former biggest oil company was Putin, Igor Sechin. As such, Rosneft did not have presented with US$28 billion in tax claims in any direct dealings with Sistema. 2003 and forced into bankruptcy within three Nevertheless, the oil company filed a law- years. Some of Yukos’ largest assets in Siberia suit against Sistema in May, originally seeking were taken over by Rosneft. as much as 170.6 billion rubles (US$2.9 billion) In a less extreme example, the Russian gov- from the company for allegedly stripping assets ernment is widely seen as having forced BP into at Bashneft before 2014. The court’s final ruling selling its shares in Eastern Siberian-focused oil in August reduced the claim to US$2.35 billion. producer TNK-BP in 2012, with the assets even- It dismissed Sistema’s argument that the changes tually falling into the hands of Rosneft. In the it had made to Bashneft were legal, in line with years preceding the sale, TNK-BP was presented standard business practices and approved by with onerous back-tax demands and threatened shareholders. with legal action. Its offices were bugged and raided and staff reported encountering visa Redressing the past problems. It can be argued that Moscow’s earlier efforts to These instances may help explain why the consolidate Russia’s strategic energy industry court ruling came as little surprise to seasoned were aimed at reversing mistakes made in the investors in Russia. 1990s, when much of the sector was sold off “The fact that the verdict had virtually no cheaply under opaque conditions. effect on the overall valuation of the Moscow “On the one hand, it could perfectly legiti- Exchange highlights that foreign investors have mately be argued that because of the nature of been pricing in this sort of opaque corporate early privatisations under [former President] P4 www.NEWSBASE.com Week 40 11•October•2017 FSUOGM COMMENTARY FSUOGM Boris Yeltsin – the voucher scheme and the Yeltsin,” the source said. later loans-for-shares scheme – there is a gov- The first stage of this strategy, which ran ernment duty to redress the wide-scale under- between 2000 and 2004, saw the Kremlin valuation, corruption and cronyism that were cement its power over Russian politics by neu- involved in state asset privatisation of those tralising opposition parties, the media and rival eras,” Anthony Rapa, a Washington-based oligarchs such as Khodorkovsky. Furthermore, lawyer with international litigation and arbi- reforms were made to the tax system to halt the tration specialist legal firm Steptoe & Johnson, siphoning of funds out of the country, which had told NBI last week. been a predominant theme of the 1990s. Under The voucher scheme, which started in 1992, the second stage, the government built up the involved Russian citizens receiving vouchers country’s strategic industries, including oil and from the government that were exchangeable for gas, the nuclear industry, arms production, fish- shares in state enterprises. In practice, though, eries, aerospace and the media. It also sought to these paper slips were often sold for cash (or expand Russia’s financial reserves and pay off its vodka) to mafia-related profiteers. Most of the sovereign debts. shares were eventually amassed by the country’s “These efforts laid the groundwork for stage nascent oligarchy. three, which was to reassert Russia as a major Then, under the loans-for-shares scheme power on the global political stage, involving in 1995 and 1996, many of Russia’s remaining both leveraging oil and gas supply might, as has valuable assets were held as collateral for bank happened with Europe over the past few years, loans to the government. When Moscow could and by pushing back on NATO expansion, as we not meet its repayment schedule, these assets have seen with Crimea and others,” the source were sold by the banks in auctions widely seen told NBI. as rigged and also fell into the hands of the oli- These three stages feed into the fourth, the garchs. This is how Mikhail Khodorkovsky source said, aimed at shoring up the Kremlin’s secured control of Yukos, worth about US$5 bil- direct control of the strategic industries. “Putin lion in asset valuation terms at the time, for only believes it is absolutely essential to have the lead- around US$300 million. Yukos’ downfall years ers of the core industries being members both of later became a cause celebre for the mistreat- his inner circle and former intelligence officers, ment of private shareholders in Russia, despite although he has frequently said that this is ‘no the dubious means by which Khodorkovsky such thing as a former intelligence officer’, and acquired the company in the first place. Sechin is one of those,” the source explained. “On the other hand, though, these obvious “In the end, the whole Rosneft-Sistema case business miscarriages have now been rectified comes down to personalities,” Sam Barden, CEO and the new spate of government interference of energy trading firm and consultancy SBI looks like it results from a very different motive,” Markets in Dubai, told NBI last week.
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