Russia's privatisation drive takes two steps back

By bne IntelliNews May 23, 2012

Graham Stack in Moscow -

Prime Minister Dmitry Medvedev appointed Igor Sechin as CEO of Rosneft on May 22, whilst President Vladimir Putin added the company to a growing list of "strategic" companies. Following the announcement of a strong liberal presence in the new cabinet, it looks like one step forward, two steps back for Russia's privatisation programme.

The appointment of Sechin, long-serving energy tsar and close associate of Putin, came just a day after he officially lost his position as deputy prime minister for the energy sector in Medvedev's announced cabinet. At the same time, the addition of Rosneft to the list of strategic companies, means it can only be privatized with presidential consent. The news dampens earlier optimism, when Medvedev ordered the new government to accelerate the $30bn privatisation drive he has been trying to launch from the Kremlin for the last couple of years.

Sechin is regarded as the driving force behind the creation of Rosneft as a national champion oil producer out of the ruins of Mikhail Khodorkovsky's Yukos, and as having exercised fairly direct control over the company over the last decade. Lastly this was seen when he oversaw the signing in April 2011 of a strategic partnership with Exxon Mobil to launch exploration and extraction operations in Russia's Arctic.

Now as CEO he will directly implement the agreement, and Rosneft's shift to what is currently terra incognita for the company - but is set to become its new frontier base camp - Arctic shelf operations. Sechin's move to the CEO position will likely send positive signals to Exxon Mobil that his departure from government will not undermine the deal.

Alongside Rosneft, Putin added power sector companies Rushydro, Federal Grid, and MRSK Holding to the list of strategic companies that can only be privatized with presidential approval. In tandem with the appointment of the privatisation drive's most vocal opponent, the move augers ill for Medvedev's attempt to reduce the state's role in the economy. Selling down the state's stake of over 70% in the oil giant to a controlling share of 50%+1 is a key plank in the plan.

Whilst adding Rosneft to the strategic list is not an obstacle to selling the stake per se - the company was already removed from the list once, to clear the way for the 2007 IPO - it is an indication that Putin will take any final decision on timing. This will clearly give Sechin more influence through the Kremlin backdoor. "We look forward to any comments from First Deputy PM Igor Shuvalov and/or Deputy PM Arkady Dvorkovich, the leading policymakers on privatisation matters, to understand the government's reaction to this development," write VTB Capital analysts.

In the run-up to the cabinet reshuffle, Sechin was made chairman of the board of Rosneftegaz, the company holding the state's stake in Rosneft. According to media reports, Sechin has in the past forged plans to use Rosneftegaz as a basis to consolidate control over a number of major state oil sector assets, including most notably pipeline giant monopolist Transneft, as well as potentially also acquiring smaller privately owned companies. " We note the increasing uncertainty over the company's growth path and risks to minority shareholders if Rosneft embarks on major acquisitions in Russia," fret UralSib analysts.

However, according to Vedomosti, rather than part of some grand plan, Sechin's move to head Rosneft was something of a last minute decision, based simply on a search for a fitting post outside the government for such a key member of the Putin team. The options, the newspaper claims, ran from law-enforcement to Gazprom. It also notes that Sechin's new job will his first in 12 years that is not based in the same building as Vladimir Putin.

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