Russia's Ministry of Economic Development has attempted to bring some order to the upcoming privatisation of Bashneft as the situation becomes increasingly confused. It has proposed eight rules that, if adopted, would leave only two companies that have so far expressed an interest in the race – Rosneft and Lukoil. And the Russian president has already ruled that Rosneft should not be allowed to participate. 

The problem is that while the economy ministry wants to make as money as it can from the sale of the state’s 60.18% stake in Bashneft, which makes up 50.08% of the share capital, other state-owned companies just want to increase the size of their empires. Specifically, state-owned oil giant Rosneft has been vying for a place at the auction due in October. Despite Vladimir Putin's explicit decision to exclude Rosneft from the tender on August 9, Rosneft said the following day it would bid anyway.

Nine companies are reported to have expressed an interest in the sale, with Rosneft and Russia’s leading privately owned oil company Lukoil seen as the most serious bidders.

The economy ministry sent a report with its recommendations on how best to raise the most money from the sale on August 10. Ernst & Young independently assessed the value of the government's stake at RUB306bn ($4.7bn) in July.

The ministry has advised against selling the stake via the stock exchange and suggested a direct placement with a strategic investor via an auction, Vedomosti reported, citing people who participated in the drawing up of the report. This format would allow the government to maximize the sale proceeds, provide a transparent and competitive bidding process, and complete the transaction before the end of 2016, one of the Vedomosti sources said.

The ministry also wants to impose eight conditions on the sale. The applicant must be registered in Russia. It should have no debt to the Russian budget at any level. It should have more than RUB10bn of revenue a year. The deal should not be financed by Russian banks. The buyer must obtain the approval of the Federal Anti-Monopoly Service. It should prepare a strategy for the development of Bashneft. And any bidder needs to make a prepayment of 10% of the starting price.

The sale is being organised by VTB Capital, which has already sent out invitations to several dozen potential bidders, including foreign companies. 

Among the Russian companies that have thrown their hats into the ring are Rosneft, Lukoil, Independent Oil & Gas Company (NOC), Antipinsky refinery, Tatneftegaz, Tatneft Fund Energy, Russneft and state sovereign wealth fund the Russian Direct Investment Fund (RDIF).

If the ministry’s eight rules are adopted, then several of these potential bidders would be immediately excluded. Tatneftegaz revenues are too small to  qualify. NOC does have the cash to pay, although NOC's president Eduard Khudainatov said in July that the company has a preliminary agreement with foreign banks. Antipinsky refinery is unprofitable and has debts, which should disqualify it. Russneft also has a large amount of debt, which it hopes to clear with an IPO soon. Really the only two companies that can afford the deal are Rosneft and Lukoil.

However, observers also worry the Russian registration requirement excludes all foreign bidders from the race as well – not that any foreign entities have expressed any interest in participating yet.

The rule precluding Russian banks from financing the deal also introduces a knotty problem. Any buyer will probably have to finance the deal somehow and with international sanctions in place it will be next to impossible for any major Russian company to borrow abroad the $4bn or so needed. Moreover, with the credit cap of 25% of total debt exposure to a single loan, no one bank can fund this deal either. The RUB306bn needed is larger than any of Russia’s private banks could afford to lend in a single deal.