Streetwise Professor

August 21, 2016

The Price of Politics in Putin’s Natural State

Filed under: Energy,Politics,Russia — The Professor @ 10:20 am

After months of watching Rosneft, Lukoil, Gazpromneft, and others shout “Bashneft is mine!” “NO! It’s mine!”, Putin has apparently lost patience and said “None of you will get it!” Last week Medvedev announced that the sale of the company (seized from oligarch Vladimir Evtushenkov’s Sistema in 2014) would be delayed indefinitely.* Rustem Khamitov, president of Russian Republic of Bashkortostan (where Bashneft is located), suggested that the sale be delayed five years. Meaning never.

Yes, Medvedev made the announcement, but a decision like this is obviously Putin’s. Medvedev’s job is to announce controversial decisions or release bad news that Putin doesn’t want to be questioned about. Coming as it does in the midst of the surprise defenestration of Putin’s chief-of-staff Sergei Ivanov and other high-level reshuffling, this has set off considerable speculation about the real reason for the decision.

The main subject of speculation is what this means for Igor Sechin, head of Rosneft. Sechin wanted Bashneft badly, but the technocrats in the government, led by another Igor–Deputy PM Shuvalov–were fighting this tooth and nail. Perhaps Putin just got tired of the fighting, and pace my introduction, decided to end it by putting the company on the shelf.

Or maybe there is something more to it. The official reason given for the delay of the Bashneft is that the company is that the government wants to prioritize the sale of a piece of Rosneft:

Deputy Prime Minister Igor Shuvalov on Wednesday said Russia would consider selling Bashneft stake after it has completed the privatization of Rosneft,

“A sale of a stake in Rosneft is on the forefront now. We should focus on that. After selling the Rosneft stake, [the government] will return to selling Bashneft as we have a Presidential order to privatize this company,” Interfax news agency quoted Mr. Shuvalov as saying.

One interpretation of this is that is a big defeat for Sechin. Sechin has fought “privatization” for years. When the oil price has been high, Sechin has said that it would be stupid to sell because the company was undervalued; when the oil price has been low, Sechin has said that it would be stupid to sell when the stock price is commensurately low. In Sechin’s view, the market undervalues Rosneft 100 percent of the time, and the price is never right. The real reason is that nosey outside investors would cramp Igor’s style.

If this signals Putin’s resolve to push the sale of Rosneft, it would be a stinging defeat for Sechin. This would fit with the firing of Ivanov, as it would represent a further winnowing of the old guard.

A more charitable interpretation is that this is Putin’s way of cutting the baby. Shuvalov and others had objected to Rosneft’s participation in the Bashneft auction because purchase of the company by a state company would not be a proper privatization, and would violate Russian law. Perhaps Putin promised Bashneft to Sechin, but only after a sale of the stake in the company (which would still remain majority state owned).

What is clear is that the decision is not purely an economic one, but is driven by regime politics. Politics will drive the ultimate disposition of the company (and Rosneft), and will provide some information about who’s up and who’s down within the elite.

The episode provides a demonstration of the importance of rent seeking within a natural state like Russia. The delay is driven by a battle over rents, and the delay is quite costly. The Russian government needs quite badly the money (a material $5 billion or so) that a sale would generate. Oil in the $40-$50 range and sanctions have put a serious dent in Russia’s fiscal situation, and it has blown through a good fraction of its rainy day funds. Further, the stock price of Bashneft fell 8 percent on the day of Medvedev’s announcement. This is a measure of the value destroyed by state ownership.

This is real money, particularly for Russia right now. That Putin is willing to leave it on the table is a measure of the price of politics in Putin’s natural state.

* Evtushenkov’s fate is a perfect illustration of the parlous nature of an oligarch’s existence. Those attempting to draw inferences from past connections (such as they were) between Trump and Russians really need to keep that in mind, but never do. Hell, if figures like Yakunin, Victor and Sergei Ivanov, and perhaps now Igor Sechin can fall from favor, past connections with far lesser figures are less than meaningless.

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