Russian conglomerate AFK Sistema could be forced to sell or collateralise its stake in one of country’s “big three” mobile operators in order to pay the €1.95bn compensation slapped on Sistema by a Bashkortostan court this week, analysts surveyed by Vedomosti daily on August 24 believe.

Sistema has to pay RUB130bn in damages out of RUB170.6bn sought by Russia’s oil behemoth Rosneft for alleged abuse of Sistema’s shareholding rights in the Bashneft oil company, which used to be controlled by Sistema until it was seized by the state. Rosneft paid RUB330bn ($5.3bn) in October last year in a dodgy privatisation deal that transferred control of Bashneft to Rosneft in what was widely seen as another example of poor property rights in Russia.

Gazprombank on August 24 estimated the total value of Sistema’s assets at RUB475bn, out of which RUB250bn was a stake in Mobile TeleSystems (MTS). The bank does not rule out that Sistema could agree with Rosneft to transfer a part of its assets, including a large minority stake in MTS, in lieu of payment for the claim. 

Sistema shares fell 3% after the announcement of the court ruling and its market capitalization has declined by RUB108bn since the lawsuit was filed, but Gazprombank sees a potential for further loss of RUB28bn. The company’s shares have lost some two-thirds of their value since the row with Rosneft began. 

The investment conglomerate has one month to appeal the court decision. The highly likely defeat of the appeal makes the Sistema case a dangerous precedent, damaging Russia’s already embattled investment climate, analysts say. “The judge has questioned the legality of such standard corporate procedures as preparations for an IPO and buying out its own shares,” a representative of Sistema, Sergei Kopitov, commented. 

Previously, Sistema’s appeals to remove the lockdown of RUB170bn worth of its assets, including the stake in MTS, have been denied.

The head and founder of Sistema, Vladimir Yevtushenkov, was put under house arrest in 2014 for alleged irregularities in Bashneft’s privatisation before being released after transferring ownership of the oil company to the state. The lucrative oil asset, now state owned, was then sold to Rosneft, despite the fact the “privatisation” was technically between two state companies. 

Rosneft again stands to benefit from the latest compensation to be paid by Sistema. VTB Capital estimated on August 24 that RUB136bn awarded to it by the court represents around 12% of Rosneft’s 2017 Ebitda. Potentially, assuming a 50% payout ratio, Rosneft’s dividend yield could rise from currently estimated 3.8% to healthier 5.5%, VTB calculates. 

The case against Sistema and its owner Yevtushenkov has echoes of the corporate attack that the head of Rosneft, Igor Sechin, conducted against the billionaire Mikhail Khodorkovsky and the now defunct Yukos Oil, then Russia’s largest oil company. That ended with Yukos being broken up and its prized assets acquired for a song by Rosneft, while Khodorkovsky was jailed for 10 years. It also ended any illusion by foreign investors that Vladimir Putin’s regime would respect property rights.

Fitch Ratings on June 28 placed Sistema and its main asset MTS on rating watch negative “following a Russian court injunction to freeze significant Sistema assets including its 31.76% stake in MTS, in relation to claims filed by Rosneft against Sistema”.

“The court injunction and the subsequent bailiff’s decision [on the asset freeze] significantly limit Sistema’s ability to control a sizable portion of its assets, and may reduce the flow of dividends to the holding company,” Fitch warned.

As well as Sistema’s 31.76% stake in MTS, 100% in the Medsi private healthcare chain and 90.47% in Bashkirian Power Grid Company were arrested earlier this month by court order in Bashkortostan.

Sistema 4Q16 IFRS results, RUB mln "
	4Q16	4Q15	1Q17	1Q16	y/y
Revenues	187	184	163.4	164	-0.60%
OIBDA	41	35	44.3	43	3.00%
OIBDA margin	21.80%	19.30%	27.10%	26.20%	0.9 ppt
Net income	-6,184	-10,035	7.3	9
* net of results of oilfield service company Targin, sold by Sistema in late 2016
Source: company data, Gazprombank estimates			Source: Company data, BCS