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Kremlin Directs Rosneft To Buy Bashneft, Retaining State Control

Rosneft chief executive Igor Sechin (right) is a close ally of Russian President Vladimir Putin (left).
Rosneft chief executive Igor Sechin (right) is a close ally of Russian President Vladimir Putin (left).

The Russian government has directed the Rosneft state oil company to acquire a majority stake in the Bashneft regional oil firm, calling into question whether the sale amounts to a "privatization" as advertised by the Kremlin.

A decree signed by First Deputy Prime Minister Igor Shuvalov this week directs government representatives on Rosneft's board of directors to approve the purchase of 50.1 percent of Bashneft's stock by October 15 for no more than 330 billion rubles or about $5.3 billion.

While the Kremlin continues to call the deal a "privatization," it would further consolidate state-controlled Rosneft's growing control over the country's vast oil resources under chief executive Igor Sechin, a close ally of Russian President Vladimir Putin.

Rosneft, when combined with Bashneft, would control 42 per cent of Russia's oil production, 37 per cent of its refining capacity, and a quarter of its gas stations, according Otkritie Capital.

Moreover, the deal will be consummated without opening the sale up to other bidders, including Lukoil, Russia's second largest oil company and one of the only private firms left in the oil sector, which had expressed an interest in buying Bashneft.

"This is not privatization, it's a continuation of creeping de-privatization," Mikhail Krutikhin, a partner at the RusEnergy consulting firm, told the Wall Street Journal.

Moreover, with one state company acquiring another, the transaction amounts to a sleight of hand which will not actually raise much cash to reduce Russia's budget deficit over the long term, as originally intended, Krutikhin added.

"If Rosneft spends money on acquisitions, they will report less income, and that means less revenue for the Russian budget," he told the Journal.

Earlier this year, Kremlin officials had said they would bar Rosneft from participating in the sale of Bashneft, a regional producer with most of its assets in the republic of Bashkortostan, because of Rosneft's government-owned status.

However, the Kremlin last month relented under pressure from Sechin.

On October 7, Rosneft announced that is has enough cash on hand from daily operations to complete the acquisition without taking on debt.

Rosneft itself is the next major state asset to be partially sold, with the Economy Ministry committed to divesting a 19.5 percent interest by the end of the year. The value of the stake has been set at 700 billion rubles.

Rosneft is considering buying part of the state’s offering of those shares as well, spokesman Mikhail Leontyev said on October 6. He said the company is confident that the share price will rise after the sale.

With reporting by Wall Street Journal, Bloomberg, Reuters, Financial Times, and TASS
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