Russian prosecutors file commercial suit on Bashneft privatisation

By bne IntelliNews October 10, 2014

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The ongoing saga over Russia's leading telecommunications and oil holding Sistema, and its ownership of regional oil company Bashneft, took a new twist on October 9, when Russia's prosecutor general filed a commercial law suit against Sistema for the return of Bashneft to the state, claiming that its assets had been illegally privatised by the Republic of Bashkortostan in 2003.

The appearance of the prosecutor general in the case with a commercial suit may mark a turn for the better in the fortunes of Vladimir Evtushenkov, majority shareholder and chairman of Sistema. The move appears to meet a wish of Russia's president Vladimir Putin expressed during a question and answer session at a Russian investment forum on October 2. Putin said that he hoped the conflict over Sistema  - a holding company controlling Russia's largest mobile telecom company MTS as well as Bashneft and other assets - would be resolved in the “sphere of commercial arbitration rather than criminal law”. 

The prosecutor general is a new player in the developments around Sistema and its disputed ownership of Bashneft. The criminal investigation into the privatisation of Bashneft, and its subsequent acquisition by Sistema, had been conducted by Russia's investigative committee, which operates independently of the prosecutor general's office.  The investigative committee placed Evtushenkov under house arrest on September 16, sending shockwaves through Russia's business world.

According to experts, the possibility for the prosecutor general to file commercial lawsuits demanding the return to the state of “illegally held” property was only introduced to the commercial arbitration codex in the summer of 2014. Now the prosecutor general is making full use of the well-timed amendment.  “The property of BashTEK [predececessor structures to Bashneft] was federal property and its privatisation was not approved by the state”, the prosecutor said, as quoted by Interfax. The prosecutor thus demanded that Sistema return Bashneft to state ownership.

The defendants in the suit, Sistema and its subsidiary Sistema Invest, refute the claims, arguing that according to the statute of limitations in Russian civil law, the claim had to be filed within three years. 

The Bashneft predecessor structures were privatised by the Republic of Bashkortostan through 2003, with ownership ending in the hands of Ural Rakhimov, the son of the then president of Russian constituent republic Bashkortostan, Murtaza Rakhimov. In 2003, Russia's audit chamber said that the assets had been stolen from the state, but law enforcement action at the time did not get anywhere in Bashkortostan's courts, with Murtaza Rakhimov serving as president of the republic until 2010. In 2009, Sistema acquired control and launched consolidation of the assets into Bashneft. Only in 2014 did the investigative committee start investigating the privatisation and subsequent sale to Sistema. 

The investigative committee on October 9 was clearly reluctant to be upstaged by the prosecutor's office and demanded to be let in on the commercial lawsuit as a third party with its own claims. Experts were undecided whether this was as part of a good cop - bad cop play with the prosecutor general's office or whether it was in real competition for the limelight. The investigative committee applied to be adjoined to the commercial suit with claims not only for the Bashneft assets to be returned to the state, but for dividends paid by Bashneft to Sistema since 2009 to be paid to the state - totalling a whopping Rub190bn. But the court turned down the investigative committee's request, and the prosecutor general also declined to include the claim for dividends compensation in its suit, saying that the law did not provide for such a claim. 

News of the investigative committee's potential part in the lawsuit initially sent Sistema stock plummeting nearly 10%, but after the court refusal the share price then corrected and by 12.10 Moscow time had grown 0.9% over the previous closing time, according to Vedomosti, continuing the roller coaster share price ride of Sistema stock since September.

Spokesperson for the prosecutor general Yulia Malysheva later told journalists that the prosecutor's suit against Sistema could be increased “at any time”, but that currently it demanded only that Bashneft be returned to state ownership. 

Commenting on the actions of the investigative committee, Malysheva said that “the investigative committee acted exclusively in the interests of the Russian federation, but there is no basis for its participation in these proceedings”.

The hearings on the suit will commence on October 23. 

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