Bashneft: Re-Nationalization Is On The Cards. It's The Right Decision

This week Moscow courts seized Sistema's shares in Bashneft as part of an on-going investigation into the oil-producers privatization.

The privatisation, in my opinion, was unquestionably dirty as at least two people involved in the deal have already been convicted, and the deal has 10 years of investigations behind it. 

The outcome of this is still un-known but I offer some likely scenarios.

1. The deal is invalidated and the shares are returned to the Bashkortostan regional government. Sistema may then be forced to pay back years of dividends which it may need to sell down its stake in its other prize asset to fund; MTS. 

2. The court decides to auction off the shares and give the proceeds to the Bashkortostan government as compensation. The likely buyer could well end up as being Rosneft, although, it could also be a whole host of other companies including Lukoil. 

3. Sistema are fined for their part in the deal and must pay the Bashkir government the amount that they benefitted from the deal, but may still hold onto the shares if they can finance the fine without selling out.

Many have speculated that this is some trumped up charge in order for Rosneft to buy out the company, they point to Yukos and TNK-BP as examples of Rosneft's greed. Firstly, the winner from this is the regional Bashkortostani government in most likely recouping lost assets, not Rosneft, and secondly the precedents used in the argument are misleading or incorrect.

Yukos participated in a whole range of illegal activities and were deservedly bankrupted; much like how American energy giant Enron broke numerous financial laws and were bankrupted at a similar time.

Rosneft and the Russian government certainly "gained" from this experience, but they ultimately were the ones who were originally hurt through illegal privatizations and tax avoidance. A great travesty from the 1990s was undone.

The TNK-BP affair is far less controversial. The two main shareholders BP and AAR group disagreed greatly on a number of issues. The resolution was for Rosneft to buy them both out for around 60 billion dollars - a price tag which many said was over-valued. Rosneft was not the winner of the feud, BP and AAR were for the excellent valuatio they recieved on their shares. 

In both circumstances and perhaps once again minority shareholders got "punished". In Yukos's case they owned shares in a bankrupted company. In TNK-BP's case, they received a lower offer from Rosneft for their shares than BP or AAR did. But this is not an issue related to Russia. This is an issue about minority shareholders in general and the risks of being one.

As we speak, British billionaire Mike Ashley placed an enormous financial bet on Tesco - he sold a put option, something which usually hedge funds only do - through his JD Sports retail company. He acted legally and he is perfectly entitled to do so. Yet, minority shareholders were not happy that he did so and the shares have been punished.

This is precisely the reason why voting shares trade at a premium (sometimes an extremely large one) to non-voting shares in every country in the world; including all of the safest jurisdictions - being a minority shareholder carries its own risks. In business one can act fully legally but ungentlemanly. This happens in every country in the world, every day. Business is a dog eat dog world.

I, personally, do not feel sorry for minority shareholders. The investigation had years of history, and they should have correctly done their homework. Russia has finally corrected a deal which was described in 2003 by an audit committee as an "unprecedented theft of assets from federal ownership". 

Ultimately, re-nationalization of oil assets that were illegally stolen from the state and the Russian people in the 1990s is the right thing to do. Perhaps, some in the financial world will lose out for buying the Bashneft shares. But in both international and russian law you are responsible to check the legality of an asset and seller when you buy it; due-diligence is an integral part of every business decision take.

The Russian people have the lost the most of anyone over the years in Russia - they deserve the repatriation of assets which were originally theirs (through the government. 

The Western press fantasized over this being another example of Putin's abuse of power, in reality, it is the Russian courts coming to the correct decision. I earlier reported on how they had got this whole affair wrong and their biased fantasy. 

The timing of the court case is not ideal however, as it will probably add to capital flight, a weakening of the Ruble and a hit to business confidence.

In the long-run, however, the deal should have no impact on trend-growth of the Russian economy.