In Russia, privatisation can mean selling one state-owned company to another

WHEN Russia’s government floated the idea that its supposedly ambitious privatisation plans should include selling Bashneft, a state-controlled oil firm, to Rosneft, another state-controlled oil firm, many officials were opposed. One presidential adviser called it “idiocy”. Even President Vladimir Putin said it was “not the best option”. But Igor Sechin, the head of Rosneft, is a persuasive man. On October 9th the government announced that Rosneft’s 330 billion rouble ($5.3 billion) bid had been accepted.

The main imperative was the government’s urgent need for money. The quasi-privatisation “helps them to resolve the budget problem, but doesn’t reduce the role of the state in the economy,” says Oleg Kouzmin of Renaissance Capital, an investment bank. Rosneft’s offer was above the value an independent analyst had put on the company. Leonid Fedun, vice-president of Lukoil, Russia’s largest remaining privately held oil firm, said his company could not have matched such a high bid, but for a state-owned company like Rosneft that is too big to fail, “it doesn’t matter how much they pay.”

Rosneft falls under Western sanctions on Russia, which restrict its access to financing. But it has $22 billion on hand and says it will not have to borrow for the deal. (Much of the cash comes from Chinese pre-payments on a 25-year oil deal signed in 2013.) Rosneft was already Russia’s largest oil company, having absorbed assets from two former competitors, Yukos in 2004 and TNK-BP in 2013.

Critics contend that the move simply shifts money from one state pocket to another. While the proceeds from the sale will allow the government to claim a smaller budget deficit, they ultimately come out of the assets of Rosneft, a mostly state-owned company. Some analysts think the merger involves synergies that will increase Rosneft’s value, though by how much is unclear. In any case, such accounting tricks will not improve the long-term health of Russia’s economy, still sputtering under the pressure of Western sanctions and depressed oil prices. Nor will the decision help attract investment into a country where, by the measure of Russia’s own Federal Anti-Monopoly Service, the share of GDP controlled by the government and state-owned firms has risen from 35% in 2005 to 70% in 2015.

Bashneft’s fate had as much to do with politics as with budget maths. “It’s a story of the relations between clans around Putin,” says Konstantin Simonov, director of the National Energy Security Fund, a think-tank. From 2009-2014, Bashneft belonged to Vladimir Yevtushenkov, a Kremlin-friendly oligarch. After Mr Yevtushenkov rejected Mr Sechin’s overtures to buy Bashneft, he found himself under house arrest and his company seized by the state. Many in Moscow believe this was orchestrated by Mr Sechin, a security-services veteran and close ally of Mr Putin. He has denied any involvement.

Mr Yevtushenkov was later released, but the jockeying for Bashneft continued after it appeared on a list of assets up for privatisation earlier this year. Allowing Rosneft to buy Bashneft, Mr Simonov says, is an “open slap in the face” to the government’s more liberal economic advisers, who sought to prevent the sale.

Next on the “privatisation” chopping block is a 19.5% stake in Rosneft worth some $11 billion. The state owns nearly 70% of Rosneft’s shares; the rest are held privately, including a 20% stake belonging to British Petroleum. While Western investors have stayed away because of sanctions, the company has attracted interest from Asian and Arab investors. Wang Yilin, CEO of the China National Petroleum Corporation, said in an interview with a Russian television network that his company would be interested—but only if it meant influence over Rosneft’s management, something Russia is loth to allow. In lieu of other suitors, the government may turn again to a familiar customer: Rosneft itself. Mr Putin says that the government has already approved the unorthodox plan, calling it an intermediate step before real privatisation. “We’re not planning to build state capitalism,” he insists. One might be forgiven for thinking otherwise.