Wednesday 26 October 2016

Sanctions bite in Moscow as Putin lays out new privatisation plan for Russian oil resources to avoid problems at September polls

Western sanctions over Moscow's role in the Ukraine conflict appear to be working, writes Darya Korsunskaya as the Kremlin this weekend announced plans to sell off the country's silver to plug holes in Russia's budget defecit

Darya Korsunskaya

Published 14/02/2016 | 02:30

A LUKOIL employee looks out over a huge oil refinery in Russia’s frozen north. The massive resources firm is already Russia’s second-largest oil producer and its biggest private oil firm and stands to benefit hugely from the new round of state privatisations
A LUKOIL employee looks out over a huge oil refinery in Russia’s frozen north. The massive resources firm is already Russia’s second-largest oil producer and its biggest private oil firm and stands to benefit hugely from the new round of state privatisations

Oil major LUKOIL has told the Russian government it wants to buy smaller rival Bashneft as the state prepares to sell either a controlling or minority stake in the firm to plug a budget deficit.

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The government of president Vladimir Putin has ordered a privatisation drive to cover a yawning hole in its budget, which has been hit by tumbling crude prices and western sanctions over Moscow's role in the Ukraine conflict.

The state owns 75pc of Bashneft, which it nationalised only two years ago. It is considering whether to sell a stake of more than 50pc or to limit the sale to 25pc through a stock market offering, several government and industry sources said.

"There are many parties showing interest, including LUKOIL," a government source said.

LUKOIL and Bashneft declined to comment, while no spokesperson at the Russian economy ministry was available.

LUKOIL is Russia's second-biggest oil producer and its biggest private oil firm. A Bashneft sale to a private buyer would represent a significant turnaround for the world's biggest energy industry, coming after more than 15 years of consolidation and nationalisation which allowed the Kremlin to regain control after a chaotic privatisation in the 1990s.

It is a measure of the plight facing the budget, which could face an additional shortfall of up to 2.5 trillion roubles (€28bn) this year if crude prices stay at around $30 (€26.6) per barrel.

State-owned Rosneft, led by Putin's closest ally in the energy sector, Igor Sechin, had long been considered a front-runner to snap up Bashneft as his company has swept up a string of energy assets over the past decade-and-a-half.

However, a steep decline in oil prices combined with Rosneft's heavy debt has made the company much less acquisitive in the past two years.

The government is also considering selling stakes in Rosneft itself, which is Russia's top oil major, shipping firm Sovkomflot and diamond miner Alrosa as part of its privatisation drive.

Bashneft is Russia's sixth-biggest oil firm with an output of 400,000 barrels a day. Its market capitalisation stands at $4.5bn (€4bn), meaning a buyer could secure control in the producer and large refiner for less than $2.5bn (€2.2bn).

It used to be valued at as much as $13bn (€11.6bn) before oil prices began to nosedive in mid-2014 and the rouble's value also plunged.

The government has yet to decide whether to sell control in Bashneft as the economy ministry is arguing that a placement in the stock market could generate more money, according to sources.

Bashneft has a history of moving in and out of state control over the past 20 years and has been a target for some of the country's richest and most influential businessmen.

It was first privatised in the 1990s, then nationalised in the last decade before being sold to telecoms billionaire Vladimir Yevtushenkov. The oligarch later fell out with the Kremlin and was put under house arrest, leading to another nationalisation of Bashneft.

Before its second nationalisation in 2014, Bashneft had been preparing for a secondary listing in London and even hired Morgan Stanley to advise on the potential secondary share placement, but the plan had to been abruptly scrapped

LUKOIL, which was created soon after the collapse of the Soviet Union, already produces as much oil as OPEC nations Angola or Nigeria. It has been relatively quiet on the acquisition front in recent years as Rosneft has grown. The publicly-listed company is co-owned by senior management, including billionaire CEO Vagit Alekperov and VP Leonid Fedun. Its business model has been traditionally aimed at acquiring control of firms, rather than holding minority stakes.

As a result of the sanctions over Ukraine, Russian companies have struggled to raise debt from western markets while plans for many stock placements have been ditched. LUKOIL has been one of a small number of companies that have been able to raise money abroad in the past two years.

Rosneft is among the companies being considered in the privatisation drive, though Sechin said this week it would make sense to wait until oil prices recover to $100 (€89) per barrel again before selling a stake in the firm.

But the government can barely afford to postpone all privatisation projects as it presides over an economy that shrank by 3.7pc last year and is expected to contract by an additional 1pc this year.

Its new privatisation plan is expected to fetch between 500 and 800 billion roubles (between €5.7bn and €9bn at current rates), potentially allowing the government to avoid additional painful budget cuts ahead of parliamentary elections set for September.

© Reuters

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