Assets of Russia's AFK Sistema arrested under €2.5bn Rosneft lawsuit

Assets of Russia's AFK Sistema arrested under €2.5bn Rosneft lawsuit
Rosneft closes in on Sistema in €2.5bn lawsuit over Bashneft. / Photo by Rosneft
By bne IntelliNews June 27, 2017

Key assets of Russia’s multi-industry investment conglomerate AFK Sistema have been arrested under the €2.5bn lawsuit pursued by state-controlled oil giant Rosneft, causing its shares to tumble on Moscow Exchange as the case came to court on June 27.

On the same day, Rosneft’s servers came under what the company called a “powerful hacker attack” that it hoped was not linked to “current judicial procedures”.

This is the second time the independent Sistema has been dealt a major blow by federal and republican authorities, after its anchor asset Bashneft was effectively renationalised in 2014 by a court order, with the majority stake in the oil company being subsequently acquired by Rosneft in October 2016.

Now Sistema’s 31.76% stake in mobile operator MTS, 100% in the Medsi private healthcare chain and 90.47% in Bashkirian Power Grid Company are arrested by the court of the Russian republic of Bashkortostan under claims of Rosneft that Sistema stripped RUB170.6bn (€2.57bn) from Bashneft.

Sistema spokesman Sergei Kopytov called the measures “another attempt to put unprecedented pressure on the company”, TASS reported amid negative market reactions to the latest encroachments on Sistema. On June 27, shares of Sistema on Moscow Exchange dropped 9.6% on the news, with MTS shares losing 3.5%.

Sistema is also limited in receiving dividends from arrested assets, which if prolonged, could hurt the conglomerate as MTS mobile major is its main cash cow, bringing over 50% of consolidated revenues.

“The current value of the attached assets is nearly the same as the total claims filed by Rosneft and Bashneft against Sistema,” Gazprombank analysts wrote.

Sistema argues that the provisional measures are excessive since they aim to secure payment of the claim even if the claimant loses the lawsuit in the hearing that was scheduled to start on June 27. 

“In order to assess Sistema’s losses it will be necessary to await the court ruling," Gazprombank added, noting that locking down the assets will complicate Sistema’s ability to borrow funds to satisfy the claim if the company loses the suit.

Lawyers surveyed by Vedomosti daily found the Bashkortostan court’s ruling surprising, noting that asset and dividend arrests are rarely used in cases which seek cash damages.

Kremlin press secretary Dmitry Peskov did not comment on the case, despite previous reports that independent directors of Sistema had personally urged President Vladimir Putin to rein in influential Rosneft head Igor Sechin and end the attacks on Sistema.

In May, Rosneft and Bashneft filed a lawsuit against the conglomerate, claiming damages from the privatisation of the oil company in the early 2000s. Sistema rejects claims that it owes any damages.

Vedomosti estimated that as of the end of 2016 Sistema had RUB60.2bn (€914.7mn) of cash on accounts, another RUB18.5bn in MTS, and a total of about RUB84.97bn, or only 49.8% of Rosneft’s claims.

Founded by Vladimir Yevtushenkov in 1993, Sistema is the controlling shareholder in most of the companies in its investment portfolio, which includes assets in telecommunications, utilities, retail, high tech, pulp and paper, pharmaceuticals, healthcare, railway transportation, agriculture, finance, mass media, and tourism.

Yevtushenkov, who was placed under house arrest during the previous legal turmoil around Bashneft, owns 64.2% in Sistema. About 14% of its shares are free-floated, with minority shareholders including about a dozen of international funds such as Norges Bank Investment Management (1.68%), Skagen AS (1.19%), Brandes Investment Partners (0.73%), East Capital (0.58%).

Meanwhile, Rosneft was hit by a powerful cyber attack, the company said in a June 27 statement that appeared to refer to its ongoing legal battle with Sistema.

“A powerful hacker attack has been carried out on the company servers. We hope that this has nothing to do with the current judicial procedures,” Rosneft said on the company’s Twitter page.

The company emphasised that its oil production operations were not affected. “A hacker attack could have serious consequences, but thanks to the fact that the company switched to a standby system for managing production processes, neither the production nor the preparation of oil was stopped,” Rosneft said in a statement.

The company had passed on information about the cyber attack to law enforcement authorities, it added.

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