Category Archives: Russneft

Continued tribulations for Russneft

Putin and Deripaska in 2006 - From Kremlin.ru Despite news of the sale of Russneft to Oleg Deripaska’s Basic Element, Mikhail Gutseriyev’s embattled oil company is facing increasing difficulties from state regulators.

On Wednesday last week, a Russian court froze Russneft’s assets and claimed 100% of the company’s shares in light of the pending criminal investigation into Gutseriyev’s economic history. Then on Friday, a Moscow arbitration court ruled to uphold a $670 million tax evasion lawsuit against the company. As a result, Russneft’s aggregate debt has risen to over 20 billion rubles ($785 million). Russneft also still owes its creditors–including the Swiss trading firm Glencore–about $3 billion in loans.

The market value of Russneft is estimated to be between $6 and $9 billion, and money to repay the tax suit and associated fines could likely be found. However, the effect of this continued economic beating on the company will likely sour Deripaska’s enthusiasm over taking control of the oil company. There has been no word suggesting Deripaska will pull out of the deal to buy Russneft, however, approval of which is pending before the Federal Anti-Monopoly Agency.

Gutseriyev announced his resignation following news of Russneft’s sale, and, in a letter briefly posted on his company website, went on to condemn the manner in which he left. Gutseriyev claimed essentially to have been forced out following a series of coordinated attacks through the use of state regulators and officials. He later withdrew his comments, saying that the decision to sell and for him to leave was a normal procedure approved by the company’s board after careful deliberation.

It was expected that the attacks on Russneft would quiet once Gutseriyev left the scene. However, the incendiary letter (despite the hasty retraction) may very well have prolonged the company’s travails, while seriously denting the price he may get for the company.

The events also suggest that more than one faction is involved in the process, each with slightly different aims. One faction likely had a personal issue with Gutseriyev and wanted him out, another may be coveting his oil assets, and still another (represented by Deripaska himself) is seeking to further cement its place within the Kremlin, Inc hierarchy (that is, the network formed between the Russian government, political leadership, key business figures, and strategic economic sectors).

From “Russia Profile:”

All Russian media, including Kremlin-loyal outlets covering the affair confirm that a group of siloviki (high-placed officials affiliated with security services and police with a hand in business) had a role to play in Gutseriyev’s removal. It should be noted that the news of the stock-freezing came at the moment when Gutseriyev was finalizing the sale of Russneft to Oleg Deripaska, owner of the Basic Element conglomerate, and one of Russia’s richest men.

Russian business and information daily Vremya Novostei, citing sources inside Russneft, claims that the arrest of Russneft’s stock could be an action of a “third party,“ which, unlike Deripaska and Gutseriyev, “strives to transfer the property of Russneft to the state.” This third party, in the Russian newspaper’s opinion, is acting in the interests of Russia’s biggest state-owned oil major Rosneft, as well as in the interests of those behind the destruction of YUKOS.

Analyzing the situation, Moscow-based Vremya Novostei points to the fact that Russneft can be bought by Deripaska only when the court lifts the freeze on the company’s shares. The court can only do so when Russneft’s new owner pays for the unlicensed extraction of oil in Ulyanovsk. If the state does receive due compensation for the over-extraction, it can renationalize Russneft’s shares. This seems to be the scenario most preferable to the siloviki.

This obviously would not be the preferable route for Deripaska, nor what he was expecting when he agreed to pursue Russneft, a decision which likely required the Kremlin’s approval (or was perhaps done at the Kremlin’s request).

In an article in the Novaya Gazeta (site currently down, article accessed from the JRL) from August 13th, Yulia Latynina labels Deripaska as a “white knight” from the annals of Russian folklore:

A white knight, Russia-style, is the person who helps you fight off your enemies, then takes away whatever the enemies were trying to take away from you. Deripaska has also acted as an intermediary: his interview with the Financial Times, where he said he is prepared to give all his assets to the state, came out just as the Russneft negotiations were at their height — and this comment appeared to be about Russneft.

She also adds a further rationale behind the attack on Gutseriyev (beyond the oft-quoted unapproved pursuit of Yukos assets):

Gutseriev is an ethnic Ingush; and president Murat Zyazikov of Ingushetia, whose region is being swept by a wave of bombings, needs to come up with some sort of explanation to present to the Kremlin. There are only two possible explanations: either Zyazikov has completely lost control over Ingushetia – or Ingushetia is peaceful and prosperous, but Gutseriev is funding terrorists. The latter explanation is more convenient.

While it’s currently unclear exactly who is driving what, the resolution of this conflict with Russneft and Gutseriyev should give outside observers a better idea about the power struggles and relative weights of potentially competing Kremlin factions. This understanding, of course, comes at a rather high price–especially for Gutseriyev, whose future remains unclear.

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Russneft’s sale

From russneft.ruAs rumored, Oleg Deripaska’s investment firm “Basic Element” will purchase a controlling stake in Russneft, pushing Mikhail Gutseriev out of the successful oil company he cobbled together from various smaller production units since 2002. Gutseriev, however, had recently run afoul of Russian tax regulators, likely stemming from a contentious relationship with a Kremlin higher-up. From Kommersant:

Oleg Deripaska’s Basic Element holding and Mikhail Gutseriev’s Russneft will officially announce the sale-purchase of Russneft today. Gutseriev will receive $3-3.3 billion for leaving one of Russia’s largest oil companies and, it seems, criminal charges against him and the general directors of Russneft subsidiaries will be dropped.

The sale is confirmed by a press release on Russneft’s website (.doc), pursuant to (expected) approval by Russia’s anti-monopoly regulators.

The press release states Gutseriev “temporarily suspends his business activity, resigns from all the business projects and is going to devote himself to scientific activity,” removing himself from the operations of Russneft while leaving his vice president Oleg Gordeyev as acting head of the company, Russia’s seventh largest oil firm.

According to the Kommersant article, Gutseriev made enemies with FSB general Murat Zyazikov while running for a State Duma spot from Ingushetia, the semi-autonomous region where Zyazikov is president. Gutseriev also apparently clashed with Chechyan president Ramzan Kadyrov over Gutseriev’s plan to create a free economic zone within the the conflict-ridden republic . Russneft had also bought assets from Yukos while Khodorkovsky’s company was being shackled by tax evasion accusations, drawing ire from the Kremlin by becoming involved with the black-listed oil firm. Russneft denies directly purchasing (.doc) any of Yukos’ assets, however.

Gutseriev was an ambitious businessman, and his insistence on entering the political sphere and propensity to make powerful enemies, combined with his unwillingness to kowtow to the Kremlin’s unwritten rules governing the behavior of companies within “strategic” sectors, led to his removal from the oil company he almost single-handily constructed.

Deripaska has a more Kremlin-friendly reputation, which will likely lead to a closer adherence to expected behavior within the oil sector. However, it seems that the major concern with the company was not with its overall performance, but rather with the single figure at its top. With Gutseriev gone, operations are expected to continue largely as they had before. However, while under investigation for tax fraud, Russneft’s investment and development operations apparently suffered, likely leading to a necessary influx from Basic Element before production levels can regain–and maintain–their past levels.

Glencore, Gutseriev’s key financing partner while he was acquiring the various facets that would become Russneft, is still owed about $2.5 billion, a debt that will be assumed by Basic Element, along with the nearly $1 billion in possible tax penalties (though the tax charges will likely be dropped, or at least significantly reduced).

Glencore holds the rights to export the oil from Russneft through 2014, and maintains holdings in some of the companies subsidiaries. Glencore has a previous relationship with Deripaska through last year’s giant aluminum merger, which included Deripaska’s Rusal and aluminum assets of Glencore. The Swiss commodities trader allegedly had input on the sale of Russneft to Basic Element, suggesting that the new ownership structure will not unduly affect their relationship with the “new” Russneft. Much of the past cooperation between the two firms, however, was apparently centered on Gutseriev personally, rather than the company as a whole, so some restructuring of the relationship could be expected.

This story is getting far less Western media attention than the Yukos affair, likely because it lacks some of the more flashy elements. Gutseriev is only the 40th richest man in Russia, after all, rather than at the top of the list as Khodorkovsky was. But many of the basic elements between the two stories are similar. Essentially, the business leader was becoming too “political,” and refused to fall into line with the Kremlin. Economic crimes from the past were dredged up and used as a lever to exact some revenge. While there may very well have been some sort of “wrong-doing” on the part of Gutseriev around the creation of Russneft–he was, after all, the former head of Slavneft where many of the new company’s assets derived from–lately, the firm had been strictly following all tax and governmental regulations. Regardless, (and unsurprisingly) those who opposed Gutseriev and his operations were able to find ways to force him out in the end.

Russneft’s future in the air

After a Russian arbitration court today upheld the government’s claims of $145 million in back taxes owed by the 300,000 bpd oil firm Russneft, the company’s head, Mikhail Gutseriyev, is said to be in talks to sell to a Kremlin-friendly entity. Gutseriyev denies that he is planning to sell, however, suggesting his company is worth $8-9 billion, more than the $6.5 rumored to be offered by Oleg Deripaska’s investment firm Basic Element. Rosneft has also been suggested as a potential buyer, based on oil major’s recent acquisitions.

Gutseriyev, the former head of Slavneft, went on to create Russneft from a collection of small acquisitions around 5 years ago, made with the help of financing from the Swiss commodities firm Glencore. This winter, Russneft came under pressure from the Kremlin over back taxes owed by the company, culminating in a raid of its Moscow office in May followed by the tax charges.

Some say the accusations stem from Russneft’s association with the foreign firm Glencore. Others suggest that it has more to do with the manner in which Gutseriyev was able to so cheaply acquire the assets, particularly from Slavneft and the embattled Yukos. Indeed, it would seem that the Kremlin’s displeasure would derive more from the spirit of the deals, rather than their actual content, as Russneft remains a relatively small player in the Russian oil scene, accounting for about 3% of the country’s total production. However, Rosneft and Kremlin-controlled firms are inching their way towards 50% control of Russia’s oil sector, so any additions would add to that cause.

A press release by Russneft says that it “did not enter in any negotiations as to the sale of the holding’s shares and does not have any intention to. OAO NK “RussNeft” is not sold.”   It goes on to call the rumors of the impending sale as “a provocative act.”