Dmitry Magonya comments on the intention of Tatneftegaz to obtain the governmental shareholding in Bashneft for temporary possession

The Vedomosti received a copy of letter addressed to Russian President Vladimir Putin and signed by Sergey Bakhir, Executive Director of ZAO Tatneftegaz. He suggests transferring of the whole governmental shareholding in Bashneft - 75.08% plus 1 share - to Tatneftegaz for 10-year temporary possession. The date of letter is 2 February.

Bakhir promises that if they accept the deal, the Federal Agency for State Property Management (holding 50.08% in Bashneft) and Bashkiria (25% plus 1 share) will receive $4 bln and $2 bln respectively. Bashneft distributes 25% of net annual profit as dividends - the federal and regional budgets will receive $165 mln for 2015 and $1.65 bln in 10 years (supposing that the profit will not change). "Even if the oil price doubles, the payments [of dividends in 10 years] will not exceed $3.3 bln," Bakhir describes the advantages of his proposal. 75% of Bashneft are now valued at $4.8 bln at Moscow Stock Exchange. The letter states that in addition to a significant market price premium the deal provides for "a guarantee of annual extra payment under an agreed formula if oil prices grow within the next two years."

Bakhir explains that an investor will be unable to realize a profit in a shorter asset holding period: the average duration of investment projects in production and refining is at least 10 years. Upon expiry of that period, the shares will return to the Government. If the net asset value of Bashneft is lower than at the date of sale, Tatneftegaz shall repay the difference to the state budget and if it is higher, the company will keep up to 50% of such difference. If the Government accepts the proposal, Tatneftegaz promises to agree upon the deal with minority shareholders (the company is even ready to redeem their shares) and undertake social programs of Bashneft.

A federal official and the manager of a fund wishing to participate in the privatization of governmental assets are aware of the proposal.

The letter bears a hand-written instruction for Andrey Belousov, Aide to the President, and Alexey Ulyukaev, Minister of Economic Development, to review and "bear in mind the proposal when dealing with privatization issues." The matter is now under an in-depth study as confirmed by a representative of the Ministry of Economic Development. "No comments," said the employee of Tatneftegaz who answered our phone call at the number specified in the letter. Dmitry Peskov, Press Secretary for the President, spokespersons of the Federal Agency for State Property Management and the Government of Bashkiria never answered the queries of the Vedomosti.

Alexander Kornilov, Senior Analyst of Aton, doubts that the investment will repay even in 10 years: given the current oil price, Bashneft will hardly be able to pay high dividends as it has to invest in the development of the Trebs and Titov Fields, refinery upgrading and production maintenance.

Tatneftegaz was established late in 2012 with an authorized capital of RUB4.5 mln and specialization in geological exploration, oil and gas production, etc. According to SPARK-Interfax, the company owner is RGF Investments & Energy Ltd., a Cypriot company owned by Pivitol Holdings Ltd. and Ristgu Ltd. (British Virgin Islands). However, Bakhir's letter states that 60% of the company are controlled by Russian entrepreneurs and 40% by European financiers. "We have nothing to do with Tatneft," writes Bakhir.

Tatneftegaz clearly was not actively operating in 2014 with a net profit of RUB2.6 mln and revenues of RUB20.5 mln (data for 2015 are not available). In April 2014, the Federal Antimonopoly Service approved the bid of Tatneftegaz for the acquisition of Burneftegaz, which was finally acquired by Bashneft for $1 bln. In November 2015, the Kommersant referred to Tatneftegaz as a contender for Rosneft's interest in Polar Lights JV with ConocoPhillips (the asset was actually acquired by Yuri and Alexey Khotin).

Bakhir used to be a Vice President of Mikhail Gutseriev's Russneft. Like Gutseriev, he was accused of illegal enterprise in 2007. Both of them fled to the UK and returned to Russia in 2010, after the accusations were withdrawn. Later, when Gutseriev regained the ownership of Russneft, Bakhir became its Vice President again. Andrey Shegimago, General Director of the only subsidiary of Tatneftegaz - Tatneftegaz-Sever - also used to be a Vice President of Russneft. The businessman's representative told the Vedomosti that Tatneftegaz was not associated with the business of Gutseriev.

2013 witnessed negotiations on the possible merger of Russneft and Bashneft. Vladimir Yevtushenkov's AFK Sistema controlled Bashneft at the time (holding 71.6 % of its ordinary shares). According to Bakhir's letter, Tatneftegaz made an offer to AFK Sistema to sell its share in Bashneft for $11.2 bln as early as in October 2013. The same offer was later made to Yevtushenkov. Bakhir notifies the President that neither AFK nor Yevtushenkov accepted the offer.

In April 2014, the Investigative Committee of Russia (ICR) initiated a criminal investigation for the embezzlement and laundering of shares in Bashneft forcing Yevtushenkov to stay under house arrest for several months. The ICR accused him of laundering of Basheft shares embezzled from the Government. Finally, Sistema agreed to return the shares in Bashneft to the Government and Yevtushenkov was set free; the investigation was closed.

"Understanding the strategic importance of the asset, Tatneftegaz was prepared to sell Bashneft to any state-owned company in the event of deal with Sistema upon first request, securing legitimacy and satisfactory reimbursement for foreign members of Tatneftegaz," Bakhir states in his letter. Bakhir says that "participation in financing was negotiated" with Glencore, Trafigura, Vitol and BP traders; UBS agreed to act as the Arranger and JPMorgan demonstrated its interest in syndication. The traders and banks refused to comment on those statements, and so did AFK Sistema.

Dmitry Magonya, Managing Partner of the ART DE LEX law firm, is skeptical about the leasehold scheme referred to by Tatneftegaz, as it belongs to the Anglo-Saxon legal system, but is strange to the Russian tradition. He advises the Government against agreeing to such deal: "Courts may declare it null and void at any time."

"Bashneft is an efficient company and I cannot understand why the temporary management is needed," wonders an official of the Ministry of Energy. He argues that since the company became state-owned it has had a positive cash flow and now it appears that third parties will benefit from managing it.

"It is better to avoid such exotic schemes," agrees the manager of a fund intending to participate in privatization. "When the owner and managers know that the company is in temporary use they are focused on reaping profit rather than on long-term development."