Round two of Russian power face off

By bne IntelliNews October 8, 2012

bne -

Ringing the bell on a second round of the face off between liberals and hardliners, the Russian government has ordered Rosneftegaz to pay RUB50bn ($1.6bn) in dividends for the first nine months of 2012 to the federal budget. The cabinet then plans to use the cash to boost the capitalization of utilities that the state state-owned oil and gas holding - controlled by Kremlin-insider Igor Sechin - is eyeing.

The order was signed by Russian Deputy Prime Minister Arkady Dvorkovich, a leading liberal who has taken on what many see as Russia's most powerful man after President Vladimir Putin. The first round of the fight began soon after Putin returned to the Kremlin in April. In September, the government, headed by his predecessor - current Prime Minister Dmitry Medvedev - suggested Rosneftegaz pay up to 95% of its cash-pile to the government as dividends.

The company holds the government's stakes in state giants Gazprom and Rosneft, from whom it has been busy collecting dividend payments over the years. Sechin has suggested using that accumulated cash to buy stakes in a number of energy companies, especially in the utiltiites sector, and building the holding up into an energy national champion. Under the plan, Sechin would of course head that expanded holding, which would boost his power and influence.

The liberal-minded Medvedev and his cabinet has objected to the scheme, and the plan to suck out most of Rosneftegaz's cash would in effect de-fang Sechin, leaving him simply as the chairman of a large state-owned oil company: Rosneft.

The show down has far wider implications however. It's the first clash between the liberal wing and the Siloviki clan of state capitalists, who are mostly based in the presidential administration. Technically the government has the power to order Rosneftegaz to make the pay out, but crucially, Putin's stance on the issue remains unclear. If he were to back his old friend Sechin, then the creditability of the government and Medvedev would be gutted.

However, the cabinet is busy building its defensive lines. Behind Dvorkovich's order, Economic Development Minister Andrei Belousov has now proposed injecting the planned revenue into the charter capital of power companies Inter RAO UES and RusHydro. RusHydro in particular is a top target in Sechin's scheme to grow Rosneftegaz's portfolio.

Sechin has criticised the potential a planned asset swap between RusHydro and EuroSibEnergo, claiming it is value destructive for the hydropower giant and that Rosneftegaz should get involved. Dvorkovich, who followed Medvedev from the Kremlin to the White House earlier this year, has set himself up to lead the campaign to keep Rosneftegaz out of the upcoming restructuring of the utilities sector.

The end result will say a lot about how Russia will be run in the next decade and in which direction it is headed. However, one element in that remains uncontested.

Sechin has suggested that the proposed transfer of liquidity from Rosneftegaz to the federal budget be agreed personally with his old friend Putin. However, that puts the president in an awkward position. While he is clearly the ultimate power in Russia, formally the decision remains Medvedev's. While those outside Russia believe Putin will support Sechin, many observers in Moscow believe that this is a fight that the former energy tsar is set to lose.

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