There is a noisy lawsuit making headlines in Russia. This spring Bashkir oil company Bashneft filed a lawsuit against Sistema company, which was its owner until 2014 and, according to the plaintiff, stripped the assets, returning the empty shell to the state.
The current majority shareholder of Bashneft, the largest Russian oil company Rosneft, has joined the suit. Claims to the temporary owner were supported also by the largest minority shareholder of Bashneft, the Republic of Bashkiria. The amount of the claim is $3 bln — that’s what the amount of material losses caused by Sistema’s managers to Bashneft were estimated at.
The owner of Sistema, the oligarch Vladimir Yevtushenkov, insists that his team managed the Bashkir company effectively and increased its capitalization. He says that the process of reorganization is a normal corporate practice, and actively promotes the thesis that the litigation negatively affects the Russian investment climate.
However, conversations about this have nothing to do with reality. Foreign investors have long realized that this scandal will affect them. The paper of MTS, the key asset of Sistema, which indirectly appears in the case, is depreciating, but everyone understands that this is normal: quotes should react to the news in a similar way that happens all over the world.
As the columnist of the Russian Forbes writes, “in fact, foreign investors in Russia use conditions that are not available in many other countries. There are no such barriers to the input and withdrawal of funds for foreign investors, as, for example, in China.
“Non-residents can freely withdraw all the earned money at any time after tax payment. The infrastructure of the market is constantly improving. In Russia, you can trade almost all instruments from the S&P 500 index, while the trade commission is seven (!) times lower on an average than if you conduct transactions through a foreign broker. The opinion that it is a bad investment climate, is losing supporters every day.”
The thesis that a bloodthirsty oil state corporation is trying to strangle a progressive European-oriented company, the leader of the IT market in Russia, also does not hold water. No matter what we think about the pro-Kremlin state oligarchs, the oligarchs of the 1990s are clearly not better. Or has Europe forgotten the swindlers and thieves from the bandit Yeltsin’s Russia, obsessed with greed? Can someone really think that they had something in common with civilized Western business? It is known that they made their capital in the epoch of so-called “privatisation”, when racketeers in crimson jackets, in close connection with corrupt officials, stripped state assests, pumping out the maximum profit, with almost no investment.
The owner of Sistema, Vladimir Evtushenkov is a classic example of the 90’s oligarch. After the fall of the USSR, he headed one of the structures of the Moscow government – the Moscow Science and Technology Committee (MSTC) which smoothly transformed into a commercial organisation with a similar name. Privatisation of a whole government department was something quite unusual, even for those days.
It is unlikely that a modest official would have been able to become a billionaire without the participation of the all-powerful mayor of the capital, Yuri Luzhkov, with whom he was closely related. As some media reported, Evtushenkov is married to the wife’s sister of the former mayor, Elena Baturina, and this kind of kinship largely explains the success of the oligarch. In 1993, Yevtushenkov officially managed the city administration and began to participate actively in the purchase of assets. Intourist, Detsky Mir, Moscow oil refinery and gas stations became his property, which was called “Luzhkov’s purse” very often.
Legally, the foundation of Evtushenkov’s empire is based on fraud. While he held the post of chairman of the board of directors of the Moscow Science and Technology Committee and the corporation Sistema founded by him, in fact, he was shifting ownership to himself. The corporate style of the Sistema corporation is the manipulation of assets and the complex reorganisations resulted in banal racketeering, business enterprises turned into privately owned assests from which all gains were then squeezed to obtain short-term fabulous profits.
A textbook example is the establishment of control over the telecommunications business of the Russian capital. In 1995, an investment tender for a blocking stake in the Moscow City Telephone Network was won by a trust partnership, the largest investor being the closed joint stock company Moscow Science and Technology Committee (MSTC), which owns 80 percent of the city.
At that time Evtushenkov was still Chairman of the Board of Directors of this company. Within a year, all investors except MSTC, were being replaced by organisations which were part of Sistema. A short year later, the charter capital of the partnership increased from 30 to 180 mln rubles, while the city’s share decreased from 22 to 3.6 percent, and the non-voting shares of investors who did not have the right to manage the partnership, suddenly became fully fledged management voices.
The final move was that the limited partnership was transformed into an open joint-stock company, 94 percent of which is owned by Sistema. However, it is obvious that such a transformation appears to be a fraud, because according to law, a limited partnership can be transformed either into a full partnership or should be liquidated. As a result of this particular reorganisation, the city lost control over the Moscow’s telecommunication system.
Along with MGTS, Sistema obtained shares in rapidly growing mobile and Internet companies, with MTS being the key one. At first, there was another major shareholder for MTS – a service provider called ASVT. However, as early as 1996, the ASVT company exchanged 19 percent of MTS shares from Sistema for a share in Noel, and later it was found that the assets had been preliminarily withdrawn from the latter. After 10 years, ASVT filed a lawsuit against Sistema demanding a compensation for $1.7 bln in losses after they lost MTS. In the end, ASVT received a compensation in the amount of $160 mln.
Actually, similar privatisation procedures were also used by Sistema to take over the innovation and technology centre in the city of Zelenograd, which led to production of microchips and a new generation urban automatic telephone exchanges for Sistema by JSC Angstrem and JSK Mikron.
In his recent interview with Russian media, the former owner of mobile phones chain stores Evroset, Evgeny Chichvarkin, who is also one of the committed critics of Putin’s regime, explained in detail how Evtushenkov tried to “snatch” his business. Chichvarkin had been also forced to move to London. And you definitely cannot suspect him of playing along with the Kremlin hoping to tar Sistema’s “progressive” owner’s reputation.
By 2010, Evtushenkov was already ranked 13th in the list of the country’s richest businessmen (his fortune amounted to $7.5 mln) and he absolutely felt he could get away with anything. For example, to the indignation of Muscovites, his structures unceremoniously erected new elite cottages in the reserved area of Serebryany Bor near the Moscow River.
In early 2014, sentenced to life imprisonment, ex-senator from Bashkortostan Igor Izmestyev testified that Ural Rakhimov, the son of the former president of the republic, stole the republic’s property for a total of $7 bln. Soon the investigation put forward a version that it was Vladimir Yevtushenkov who had helped legalize the stolen money.
Now Sistema assures us that they legitimately owned Bashneft and thus had the right to perform any operations with its assets. In reality, however, Evtushenkov seems to have never perceived the company as his property (even two years before Bashneft’s de-privatization, Sistema itself openly warned its shareholders that there are risks of losing the company) and therefore all of his actions were aimed at extracting the maximum short-term benefits out of it.
It is curious, however, that following a court order, Bashneft became a state-owned company again, Sistema and its Western investors also talked about political pressure on big business and frightened everybody with the deterioration of the investment climate.
Even if “acquisition” and pricing happens this way in theory (Sistema bought Bashneft for 2 bln of credit taken in VTB) it is worth noting that as a result of asset swapping, AFK managers shifted this burden on Bashneft itself, paid off from operating profits, by divesting assets to Sistema, with their value paid by Bashneft shares as a result of further mortgaging. They siphoned off the dividends of 133 bln roubles without investing a dime in Bashneft’s development. In this way Sistema earned about 8 bln dollars and covered the initial cost of aquisition after lawfully returning the company, a very shrewd move.
In fact, Sistema was seizing almost all net profits, depriving the company of the main source of investment funding. In various examples the profits of previous years was being seized as dividends: in 2014 51 bln roubles were paid in favour of Sistema which amounts of about 150 per cent from net profit in 2013 accounting for AFK.
Sistema materially altered the holding structure of Bashneft and seized important assets from it, in particular from its offshore and subsidiary structures. As a result of reorganisation, Bashneft was deprived of energy (Bashkirenergo), logistic, financial (Financial Alliance) and oilfield service (Targin) assets for an overall amount of $3 bln. According to a Bashkir parliament deputy Ildar Isangulov, “less than a half of all equity which Yevtushenkov had bought from Ural Rahimov was returned to the government”. At the same time Sistema made Bashneft pay for service of its already ex-units of energy supplying, oilfield services and other supporting processes.
Net profit of Bashneft per Boe reduced by 36 per cent during Sistema management. Administrative expenses grew by 40 per cent. Due to retrenchments in maintenance, oil refineries of Bashneft are in a critical condition.
Net assets of Bashneft reduced by 54 bln roubles – from 233 bln to 179 bln roubles as a result of reorganisation. Liabilities magically grew by almost 41 bln roubles – from 283 bln to 324 bln roubles. Long-term credits and loans suddenly grew more than twice – from 68 bln to 141 bln roubles, and the leverage ratio of the company increased by 16 percent. That led to a fantastic result: the turnover of investments was 2.5 times for almost five years of raiding Bashneft. As they say at Bashneft, such results are achievable, in the gambling business, rather than in the energy sector.
Meanwhile, at the trial, Sistema can’t present any legal arguments except for whipping up emotions in the public sphere. In fact there is the appeal of foreign independent directors to President Putin with a demand to intervene and solve the issue “peacefully”, a proposal to call an arbitrator, delaying the process. The only goal is to evade the legal arbitration procedure at any cost, to substitute the legal procedure for the transaction “according to concepts”.
And Europeans are trying to help AFK managers with it, raising a wave of publications in authoritative media outlets where identical quotes about the “flagrancy” of the standard arbitration proceedings between two business companies are doing the rounds. If, for example, Apple and Microsoft were litigating, almost nobody in the Western world would appeal to withdraw the arbitration in favour of a “friendly” settlement accepted under the pressure of the authorities.
