Graham Stack in Berlin -

Latvia's asset recovery vehicle Reverta is gunning for Zhan Khudainatov, the brother of Rosneft deputy CEO Eduard Khudainatov - and possibly for Eduard himself, bne can reveal. According to Reverta, the Khudainatovs have defaulted on loans totaling $78m - and have now resorted to gross fraud to ditch their creditors, lawyers claim.

The case highlights the conflicts of interest, fraud and corruption at the very top of Rosneft, now the world's largest listed oil company, and gives an idea of the kind of issues that awaits BP as it becomes a 20% stakeholder in Russia's new national champion.

Reverta, the "bad bank" successor organisation to the nationalized Parex bank, tells bne that a mysterious Swiss company called Krini Holding Limited, linked to Rosneft deputy CEO Eduard Khudainatov and his brother, took out over $100m of loans from Parex through 2008, acquiring a Siberian gas company and building processing facilities. The assets were sold in early 2012 for just over $400m, but most of the loan was never repaid, forcing Reverta to take court action in Russia against the companies and individuals.

The $400m side-business allegedly sold this year by Rosneft's deputy CEO Khudainatov - a state executive throughout almost his entire career - encapsulates how the Kremlin's tightening grip on energy has twinned with officials making vast private profits. This is the elephant in the room that BP will now confront following the deal agreed in October that will see the UK major take a 20% stake in Rosneft following a merger with its Russian joint venture TNK-BP.

Conflicts of interest

According to documents seen by bne, in 2004 Eduard Khudainatov held a general power of attorney for Krini Holding. In 2004, Krini Holding took a loan of $40m from Parex to purchase an energy company Severneft, which held a license issued for a gasfield on the hydrocarbon-rich Yamal Peninsula. Eduard Khudainatov's brother Zhan than became CEO of Severneft.

Khudainatov at the time was not a private businessman, but CEO of the state-owned Gazprom subsidiary Severneftegazprom, developing the massive Yuzho-Russkoe gasfield also on the Yamal Peninsula. His apparent undisclosed private business interest in the gas branch thus created a glaring conflict of interest.

There seems little doubt Eduard Khudainatov was the main man at Krini Holding. "We have documents showing a general power of attorney of Eduard Khudainatov for Krini Holding, his personal guarantee for the company and proof that he personally performed a number of transactions on behalf of the company," says Viktoria Burkovskaya of Moscow law firm Egorov Puginsky Afanasiev & Partners, which is representing the Parex successor company Reverta in Russian courts. "These documents point to Eduard Khudainatov's close mutual ties with the company."

Rosneft failed to respond to email, fax and telephone enquiries on the matter over the course of a week. Eduard Khudainatov has previously denied any link to Severneft or Severorgsintez, or any linked companies.

In 2006-08, an affiliate of Severneft, Severorgsintez, took a further $87m in loans from Parex to construct processing facilities on the Yamal Peninsula for gas extracted by Severneft. The loans were guaranteed by Severneft, and Eduard Khudainatov in 2006 provided a personal guarantee for Severneft, according to documents seen by bne.

Loan repayment on the Severorgsintez loan was due to start in 2010, but nothing was paid back. Parex/Reverta started legal moves in Russia to reclaim the debt, one of their 10 largest outstanding loans.

The Khudainatovs then took very evasive action: in August 2011, Severneft assigned its assets and license to a new subsidiary, Severneft-Urengoy. Severneft and Severorgsintez then simply liquidated themselves, despite the outstanding loan. Adding insult to injury for Reverta, in January Severneft-Urengoy was sold to Russian chemicals giant Eurochem for a whopping $403m, roughly four-times the investments made in license and facilities by the Severneft owners.

Seeing their clients flush with cash while welshing on debts, Reverta took off the kid gloves and filed a complaint of gross fraud against Zhan Khudainatov and other directors of Severneft and Severorgsintez in April 2012 - offenses that carry a minimum five-year sentence in Russia. "The case is at the pre-investigation stage," says Burkovskaya.

Dance of the PEPs

Khudainatov's rise to riches started when in early 2000 he headed Vladimir Putin's first presidential electoral campaign in the Yamal-Nenets autonomous district, part of the Tyumen region, where most of Russia's vast oil and gas reserves are located. And when Putin was elected president in March 2000, he duly named Khudainatov the federal inspector for Yamal-Nenets, tasked with ensuring the Kremlin's writ ran in the district.

Yamal-Nenets soon became the scene of a fierce war waged by the Kremlin under Vladimir Putin and his new Gazprom management to regain control of the huge Yuzhno-Russkoe gasfield, which the previous 1990s Gazprom management had mysteriously divested to private gas trader Itera. In 2002, the company holding the license, Severneftgazprom, was finally returned to the Gazprom fold - and Khudainatov made CEO in 2003. Yuzhno-Russkoe, which went into operation in 2007, is now the main supplier to the Nord Stream pipeline, via which Russia directly supplies gas to Germany under Baltic Sea. Thus Khudainatov's apparent private acquisition of Severneft in 2004, as alleged by Reverta, seems the flipside to the Kremlin's tightening grip on the energy sector - and could count as a reward for loyalty.

And according to bne enquiries, the counter-party in the Severneft deal was another top state energy official, Semen Vainstok, who was at the time CEO of state oil pipeline monopolist Transneft. Before its sale to Krini Holding, Severneft was owned by oil company Gorizont-Neft and Stroikredit Bank, both closely linked to Vainstok at his old stamping ground of Lukoil-West Siberia, according to company documents seen by bne.

In 2007, Russia's accounting chamber investigated Transneft's finances under Vainstok's watch. According to the report, as leaked to anti-corruption blogger Alexei Navalny, during Transneft's construction of the East-Siberia-Pacific oil pipeline some $4bn had been siphoned off by 2007 by structures believed linked to Vainstok, including by Stroikredit Bank.

The Severneft 2004 deal points to Vainstok's close commercial ties with the Kremlin's inner circle buying him immunity. Vainstok left Russia for Israel in 2008, with no criminal charges ever brought. He could not be reached for comment.

Ironically, the murky background to the Parex-Severneft loans may also now let the Khudainatovs off the hook - at the expense of Latvian taxpayers who bailed out the bank in 2008. Anti-money laundering legislation demands tight scrutiny of banking arrangements for state executives, known in the jargon as politically exposed persons (PEPs). But Parex before nationalisation in 2008 flaunted the regulations, specialising in dodgy banking services for PEPs. "The bank's philosophy was that all commercial loans should fund bribery," former head of international relationships at Parex, John Christmas, tells bne.

The murkiness means that documentation of the Severneft loans is incomplete. "During change of ownership in 2008, documents pertaining to key bank deals with Russian customers including some originals of the Severorgsintez collateral agreements have vanished," says Burkovskaya. "As our internal check is still proceeding, we cannot comment on this situation further before the end of that check."

BP's Sechin question

The $400m question regarding Eduard Khudainatov is: who pushed his rise to the top, and did they take a cut in the side business?

The one man who stands out in promoting Khudainatov's career is Igor Sechin, Putin's energy tsar, now CEO of Rosneft. In 2008, after the Yuzhno-Russkoe field went online successfully, the then deputy PM Sechin promoted Khudainatov to be deputy head of Rosneft, where Sechin was chairman of the supervisory board. Then in 2009, Sechin made Khudainatov CEO of Rosneft. In March this year, re-elected President Vladimir Putin made Sechin CEO of Rosneft, and Khudainatov - who is reported to refer to Sechin simply as "the boss" - humbly stepped back down to deputy CEO without a murmur of complaint.

Sechin for his part in January, when still deputy PM with a remit for energy, obliged state energy executives to disclose their and their families' assets as part of a belated anti-corruption drive after mass protests in Moscow - but exempted Rosneft from the order. Sechin said Rosneft met with obligations voluntarily but it is not known that Khudainatov disclosed large cash holdings. Rosneft discloses only that Khudainatov holds a stake of 0.0605% in Rosneft, worth $43.5m at current market cap.

According to Putin, BP's recent decision to take a 20% stake in Rosneft and two seats on the board should lead to greater transparency in the company. But the example of Khudainatov's business interests on the side - a rule rather than exception in Russia - will be a warning to BP of the compliance risks entailed in Russian state business. "Those seats could help us influence corporate governance," BP's press service tells bne, but would not comment on what conditionality over hiring they will seek from Rosneft.