Big Oil Deal Helps Putin More Than Russiaby
Sixteen years after undertaking a privatization program that marked its transformation into a sort of market economy, Russia has completed an about-face: With the $61 billion purchase of the oil company TNK-BP from private investors, it has renationalized nearly its entire petrochemical industry.
The TNK-BP deal, announced this week, is the biggest single nationalization in Russian history. It will turn the state-controlled Rosneft, which made the purchase, into the world's largest publicly traded oil company, with 1.7 times the production of Exxon Mobil. It will make Viktor Vekselberg, one of the investors on the selling side, into Russia's richest man. It represents the culmination of President Vladimir Putin's efforts to reverse the privatizations of the 1990s.
The deal accelerates the ascendance of Igor Sechin, a close friend of Putin's who runs Rosneft as its chief executive. Sechin's first major contribution to Rosneft came in the mid-2000s, when he engineered the takeover of Yukos, then Russia's largest oil company, from Mikhail Khodorkovsky, then Russia's richest man. Rosneft acquired Yukos's assets in a highly questionable process replete with creative legal schemes, and Khodorkovsky was put in prison -- where he still remains -- on charges of fraud and tax evasion. Rosneft has since been forced to pay hundreds of millions of dollars to former Yukos shareholders, who managed to prove in non-Russian courts that the government effectively destroyed the company.
This time around, nobody is accusing Rosneft of foul play. The deal puts an end to years of bickering between TNK-BP's two 50/50 investors, British oil giant BP and AAR, a Russian consortium that includes Vekselberg and fellow billionaires Mikhail Fridman and Len Blavatnik. BP will get $17.1 billion in cash and 12.84 percent of Rosneft's stock. It will also pay $4.8 billion for another 5.66 percent of the Russian oil company, which will remain 69 percent state-owned. The latter move is meant as a gift to the Russian government, which will reap about $700 million in taxes on the transaction.
AAR will get $28 billion for its stake. The businessmen in the consortium want no part of Rosneft, realizing that they will have no say in how the company will be run. TNK BP has paid $37 billion in dividends since 2003, about 40 percent of its profit. Rosneft pays out roughly 25 percent of its profits, as required by the government. The merged company will follow Rosneft's policy.
The biggest losers on the deal could end up being Russian taxpayers, who are effectively guaranteeing the $40 billion Rosneft will have to borrow to complete the deal. Rosneft's current finances suggest it can afford to pay the debt, but that could change if oil prices fall. “In that case the government will have to lend a hand in no small way,” Rosbalt news agency quoted financial analyst Nikolai Podlevsky as saying. “Then not only the government's interests will suffer but those of ordinary citizens, because they are the ones who will have to pay for the state's obligations.”
In a series of tweets, Russian banker Grigory Guselnikov expressed his bewilderment at the deal. “Every Russian has worked about five days this year so Rosneft could pay 1.6 percent of GDP to Fridman, Vekselberg and Blavatnik," he calculated. "They will receive an amount almost equal to the deficit of the national pension fund."
The motivation for the deal is easier to explain in terms of politics than business. For Putin and Sechin, the renationalization of the energy sector represents both the fulfillment of personal goals and a bid for popularity among Russians who believe their country is besieged by hostile Western nations. “In 2003, our British and American friends were about to buy up, quite cheaply, Russia's natural resources,” wrote Nikolai Starikov, a best-selling author of political and economic nonfiction, on his blog. “We must understand that if Western corporations gain control of Russian resources, our budget will lose colossal amounts of money, and future generations will lose control of the wealth of our land."
From an economic perspective, the renationalization is a tougher sell. Corrupt and unpopular as they were, the privatizations of the 1990s -- in which a small group of Russian bankers paid a few hundred million dollars for companies now worth billions -- did have some broader benefits. As Vladimir Milov, a former deputy energy minister, wrote in Russian Forbes, private owners boosted production, ending a decline caused by a lack of investment and savage Soviet extraction technology.
"Private oil companies successfully used windfall profits from the growth of international oil prices to intensify extraction," wrote Milov, noting that oil production in Russia grew 8.5 percent a year from 2000 through 2004. “After the government re-entered the oil industry, in 2005-2011, growth slowed to 1.6 percent per year.”
After the TNK-BP deal, only one large private oil company will remain in Russia: Lukoil. The only other technically private large oil company, Surgutneftegaz, has a murky ownership structure and is said to be controlled by a group of Putin's friends. In short, Putin has succeeded in squeezing foreigners and 1990s adventurers out of the sector on which Russia's national wealth is based.
The nature of the TNK-BP deal, though, doesn’t speak well of the president's ability or willingness to increase and develop Russia's energy wealth. Rosneft, which has exclusive rights to drill for oil on Russia's Arctic shelf, will now be burdened with too much debt to invest heavily in new oil fields. At a time when oil prices are phenomenally high and alternative energy development is accelerating, Russia's “national champion” is consolidating rather than building new business.
(Leonid Bershidsky, an editor and novelist, is Moscow and Kiev correspondent for World View. Opinions expressed are his own.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To continue reading this article you must be a Bloomberg Professional Service Subscriber.
If you believe that you may have received this message in error please let us know.
- Jared Kushner's Dreams of Mideast Peace Are Alive
- Elon Musk Is the Henry Ford of His Age. That's Bad.
- Mark Zuckerberg Has No Way Out of Facebook's Quagmire
- Don't Count On Jeff Sessions Protecting Mueller
- Leaking Is Just a Symptom. Trump Himself Is the Cause.
- Is Trump Playing Into Xi's Hands?
- A Pro-Putin Town Explodes in Anger