Streetwise Professor

May 8, 2017

Whatever Igor Wants, Igor Gets: Primitive Capital Accumulation, a la Sechin

Filed under: Economics,Energy,Politics,Russia — The Professor @ 7:34 pm

Apparently winning the “auction” for Bashneft (after it was widely claimed by Putin, and others, that a sale of the company to Rosneft would be a sham privatization) wasn’t enough for Igor Sechin. Igor is now after MOAR, and is using the “legal” process to get it. Rosneft has filed suit against the former owner of Bashneft, Vladimir Evtushenkov’s holding company Sistema, and is asking for a cool $1.9 billion. News of the suit knocked almost 40 percent off of Sistema’s stock price.

The grounds of the lawsuit are unclear.

In the past Sechin has complained about a sale of a Bashneft asset, oil services company Targin, to Sistema at an allegedly knock-down price. He has also criticized contracts between Targin and Bashneft entered into after the sale as unduly favorable to Sistema.

Both of these allegations are plausible. This is Russia, after all, and related-party transactions and Credit Mobilier-like contracting scams are classic ways of tunneling assets.

Recently Rosneft has had to spend $100 million to address safety problems at Bashneft refineries. Rosneft claims that it has found “irregularities.”

If commercial and legal logic mattered (a big if, I know), the alleged shenanigans involving Targin would not be grounds for a suit, and it would be hard to imagine how Rosneft would have standing. Recall that Bashneft was seized by the state in 2014, and Rosneft bought it from the government. So any uneconomic transactions in 2014 or earlier would not harm Rosneft: it would have known that Targin was not included, and what the contracts were. So Rosneft was not harmed by what happened before the company was nationalized.

Failure to detect “irregularities” at the refineries would suggest a lack of due diligence if these were not discovered prior to buying from the state, or if they were known, they would have been reflected in the price. Again, it is hard to see how Rosneft could have been defrauded. Further, there’s a big difference between a $100 million repair bill and a $1.9 billion legal claim.

But does it matter, really? Any legal claim is almost surely a pretext to expropriate a politically vulnerable oligarch who is, shall we say, Без крыши. And this strategy is in Rosneft’s DNA. After all, the company was built primarily on the assets seized from Yukos, and another big asset–TNK-BP–was obtained only after a campaign of pressure against BP (although the Russian AAR consortium held their own and were paid in cash). Put differently, Rosneft was built by  what Marxists called primitive capital accumulation–force and fraud, sometimes operating under the color of legal authority.

But there is a price to be paid for this. It shows that Russia remains a fraught place for investors with assets that come under the covetous eyes of Sechin, or others like him. This depresses valuations for Russian companies, and is a serious drag on investment. No wonder year in and year out Russia is notable for the small share of investment, which runs about 18 percent of GDP, very low for a country in its stage of development. (The world rate is about 24 percent.)

But whatever Igor wants, Igor gets, evidently. Even though what’s good for Igor isn’t good for Russia.

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  1. You’ve gotta wonder why he’s so keen to have it. I’m reminded of the situation in computer processors, where Intel could probably bury AMD if they really wanted to, but why put yourself in such a dominant position which can leave you open to scrutiny? To be specific, if Putin starts to see Sechin as a political rival, what’s to stop him claiming that Rosneft is becoming a monopoly and needs to be broken up. Size has its vulnerabilities as well as its protections – but I guess Sechin didn’t get where he is by not understanding politics…

    Comment by Hiberno Frog — May 10, 2017 @ 10:32 am

  2. You have to pity the poor team doing pre transaction HSE due diligence on a Soviet era refinery in Bashkiria in this political situation.

    Comment by pahoben — May 11, 2017 @ 5:14 am

  3. You’ve gotta wonder why he’s so keen to have it.

    The rumour was that Putin expected Rosneft to show production increases. You can either do that by developing new fields or bringing infill wells online, or you can snaffle another oil company. To Putin, who is only interested in revenues, it’s all the same.

    To be specific, if Putin starts to see Sechin as a political rival

    Will never happen. Sechin saves Putin from having to use Andrex, he’s a complete toady. The day Putin leaves office, Sechin is finished.

    Comment by Tim Newman — May 11, 2017 @ 7:55 am

  4. […] Whatever Igor Wants, Igor Gets: Primitive Capital Accumulation, a la Sechin […]

    Pingback by Links, 11 May 2017 | illiquid ideas — May 11, 2017 @ 2:47 pm

  5. @Hiberno Frog & Tim–He’s already got beautiful Bashneft. What he wants now is to suck some additional money out of Sistema. One has to admire in a way the chutzpah. State seizes company from Sistema. Sechin buys company from the state in a dodgy deal. Sechin then cooks up some reason vaguely related to Bashneft to bleed Sistema of money.

    My guess is that Sechin is under pressure to pay more to the state, because the state is under budgetary pressure. Also, the Essar deal (which is hung up now, due to problems with Indian creditors) and other expenditures may be putting pressure on Rosneft, especially given that it is cut off from longer term capital other than that available from Russian banks and bond markets. One also wonders if that there is something attributable to the QIA-Glencore deal–details of which are still murky–requires Rosneft to come up with some money.

    Somewhat surprisingly, a Moscow judge rejected the suit, but on narrow procedural grounds. Sounds like he didn’t want to get in the middle of that. I doubt Igor will be put off so easily. And if I were the judge, I’d have my wife start the car 😉

    The ProfessorComment by The Professor — May 12, 2017 @ 2:53 pm

  6. @pahoben–So true. If I were them, I would have been very worried about my health, safety, and environment.

    The ProfessorComment by The Professor — May 12, 2017 @ 2:54 pm

  7. @Professor
    lol and likely a few people crossing themselves right now immediately before they start their car.

    Comment by pahoben — May 15, 2017 @ 8:26 am

  8. @Prof&Tim: Good summaries, thanks.

    Comment by Hiberno Frog — May 19, 2017 @ 7:54 am

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