Speculation swirls after arrest and sacking of Russian economy minister

Speculation swirls after arrest and sacking of Russian economy minister
Russian President Vladimir Putin sacked Economy Minister Alexey Ulyukaev for "breach of trust" after his detention on November 15.
By bne IntelliNews November 16, 2016

Russian President Vladimir Putin has fired Minister of Economic Development Alexey Ulyukaev for “breach of trust” following his arrest for alleged solicition of a $2mn bribe in the country's highest-reaching corruption case in post-Soviet times.

The events signal an apparent growing rift between Kremlin interests and the work of the government, with Ulyukaev regarded as a long-standing member of the relatively liberal camp trying to steer Russia back to economic health. Others are also said to be under scrutiny for possible action by security services.

“The detention of minister Ulyukaev is beyond my understanding and is a hard event for the authorities and the government,” Prime Minister Dmitry Medvedev said about  the surprise swoop by Federal Security Service (FSB) agents early on November 15.

Ulyukaev, 60, was charged with extorting the bribe while facilitating October’s acquisition of the Bashneft state oil company by leading state-controlled oil major Rosneft. His approval was needed to authorise the estimated $5bn evaluation of the controlling stake in Bashneft before its sale to Rosneft, which is controlled by Igor Sechin, who is a close ally of Putin and regarded as one of the most powerful people in Russia.

The sacked minister was reportedly detained in a pre-prepared operation as he took the money. Speaking in court later the same day, he denounced the case against him as a “provocation”, but pledged to cooperate with the investigation as the only means of restoring his reputation.

Ulyukaev is now under house arrest, and faces potentially up to 15 years in prison and a $200mn fine. As bne IntelliNews columnist Mark Galeotti writes, "Quite possibly he will never actually be prosecuted; he is broken, now, and the etiquette of such political assassinations is often that a soft landing follows the fall".

While a chorus of Russian officials has noted during the latest events that “nobody is above the law” in the fight against corruption, the charges against Ulyukayev have perplexed commentators, given the seeming earlier consensus on green-lighting the Rosneft deal.

The upheaval is all the greater given Rosneft’s great influence within the Kremlin, Ulyukaev’s wide experience and solid track record, as well as the relatively small amount of the alleged bribe, which barely exceeds the declared annual income of the ex-minister’s household.

Neither experts nor officials doubted the sale price of Bashneft being the market price, so for Ulyukaev to take money simply to confirm the valuation is regarded by many people as an incongruous scenario.

“The explanation for his arrest is questionable, as Bashneft was sold at the market price and the decision on privatization was taken by the government," Alfa Bank commented on November 16.

“Another concern is that the intelligence services apparently started investigating the Minister’s activities a year ago and his phone calls had been under surveillance since the summer,” the bank adds, noting that his case is “quite similar” to the arrest of  Deputy Finance Minister Sergei Storchak arrested in 2007. Storchak was held in pre-trial detention for 11 months before fraud and embezzlement charges against him were dropped. He returned to his former position in 2011.

This year, the government steadily resisted the participation of state-controlled Rosneft in the privatisation of Bashneft as "passing the same [state] money around", as one unnamed official described the proposed deal. But the company quickly become the only bidder for the lucrative asset and had the rules bent to allow the deal, not without Ulyukaev’s assistance, according to some accounts.

However, sources surveyed by Vedomosti daily doubt the extent at which Ulyukaev and his ministry could influence the deal, as it was reportedly approved at the level of the president and prime minister.

It is not clear what other covert “services” Ulyukaev might have provided to Rosneft, as his ministry does not directly participate in the regulation of the oil and gas sector. “Often we are not even invited to the working meetings,” an unnamed ministry official told the newspaper.

The daily notes that the case against Ulyukaev was pursued by high-ranking security apparatus officials involved in a recent reshuffle of the security forces ordered by Putin.

The case against the minister was reportedly initiated and supervised by the head of Rosneft’s security department, Oleg Feoktistov, who moved to the energy company in August from the FSB domestic intelligence agency.

Feoktistov’s team was reportedly driving on the case at Sechin’s demand, while developing cases against a handful of other notable officials involved in the economy, such as Deputy Prime Minister Arkady Dvorkovich and presidential advisor Andrei Belousov. Both had both vocally opposed Rosneft’s takeover of Bashneft.

Previous unconfirmed reports claimed that Putin was aware of the preparation of the case against Ulyukaev from its inception.

“The current situation is a litmus test for the Prime Minister, Dmitry Medvedev, and as to whether he is able to defend the innocence of one his cabinet members,” Alfa bank wrote.

The bank’s analysts see Ulyukaev’s arrest and dismissal as a “very negative development for the government’s credibility”, adding that the “fact that the intelligence services are surveilling cabinet members is another very negative sign”.

Meanwhile, other commentators have suggested that the arrest could even be a way for Rosneft and the affiliated “siloviki” (the security agencies and military) to slam the emergency brakes on this year’s planned privatisation of 19.5% of Rosneft for $11bn, which is being overseen by the economy ministry.

By year’s end, the Sechin-headed holding Rosneftegaz is set to receive the 19.5% stake on top of the controlling stake it already holds in Rosneft. The anticipated $11bn proceeds from the purported sale will go to the government in the interim to help reduce the year's budget deficit.

Rosneftegaz is then expected to re-sell the stake in Rosneft early in 2017 to a number of hand-picked Kremlin investors, effectively finalising the privatisation process. But the arrest of Ulyukaev could neatly derail the privatisation. This would de facto reduce Sechin’s control of Rosneft, while enabling Rosneftegaz to accumulate even greater control in country’s largest crude oil producer.