#Russian corporate giants court battle

Russian oil giant Rosneft and the telecoms-to-travel conglomerate AFK Sistema were to return to court today (Thursday, 17 Aug.) as the two do battle over a smaller company one once owned and the other owns now. At stake is £2 billion in asset value which Rosneft claims was spirited out of regional oil producer Bashneft while under Sistema management.

Sistema, often cited in recent years as a rare model of good corporate governance, claims the case raises new questions about property rights and the rule of law in Russia.

But critics claim Sistema’s public gloss is pure PR, much of it picked up from UK and US bankers, advisors and PR consultants in the run-up to its precedent-setting 2000 flotation on the New York Stock Exchange of mobile telecoms subsidiary MTS.  Up to that point, Sistema, with its eclectic mix of holdings - insurance, a bank, a children’s department store group, Intourist - was just another post-Soviet pick-and-mix conglomerate run out of a marbled mansion in central Moscow.

Over the next decade and a half the company brought in high-priced independent directors, the UK’s Lord Mandelson among them, polished up its PR and IR activities, and generally did everything possible to make itself look modern, progressive and transparent.

But behind the gloss there lay post-Soviet dross.  The legal dispute with Rosneft revolves around one aspect of that legacy.

The story dates back to the Boris Yeltsin years when “spontaneous privatisations” were de rigeur and insider deals routine.  The Yeltsin government transferred a collection of oil fields and refineries to the regional Republic of Bashkortostan whose governor, Murtaza Rakhimov, was a Yeltsin ally.  Years later, in 2002, Rakhimov ordered the company’s privatisation.  Most of the shares wound up in the hands of one company, a beneficial owner of which was Rakhimov’s son, Ural, who later became Bashneft’s CEO.

A few years later, the new owners sold a minority stake in Bashneft to Yevtushenkov’s company for $600 million.  Then, in 2009, Sistema purchased full control, paying $2 billion.

There were sporadic claims of corruption throughout.  In response, an investigation was begun in 2014, leading to Yevtushenkov’s arrest, a shocking development at the time, and ultimately to his surrender of the disputed company back to the state.

In 2016, Rosneft purchased Bashneft at auction.  Rosneft set about integrating Bashneft, only to discover that parts of it, whole subsidiaries allegedly, were missing.

Rosneft launched a lawsuit against Sistema claiming the company had stripped assets out of Bashneft during its 2009 -14 tenure.  It also claimed a buyout of minority shareholders by Sistema had led to more lost value.  Altogether the lawsuit claimed losses of RUB 170.6 billion (£2 billion at current rates).

In many ways, the case is a stark reminder of Russia’s wild 1990s. Indeed, Yevtushenkov got his start early in that decade.  He began his rise to business prominence as a mid-level Moscow city bureaucrat, chairman of the Moscow Science and Technology Committee.  In the early 1990s, he created a similarly named private company and shifted most of its assets to his company. Critics point out all this occurred under the nose of the powerful Moscow mayor at the time, Yuri Luzhkov. Yevtushenkov is married to the sister of Luzhkov’s wife.

In 1995, a private trust partnership bought a major stake in the Moscow City Telephone Network.  The largest partner in the partnership was the Yevtushenkov-owned Moscow Science and Technology Committee, the private sector clone.  Within a year, all other private investors had been sidelined or replaced by organisations which were part of what became Sistema.  The Moscow municipality's own share in the enterprise was diluted down to 3.6 per cent from 22 per cent. And at this point, the limited partnership was converted  into an open joint stock company, 94% owned by Sistema.

In the ensuing years the group continued to expand aggressively. Evgeny Chichvarkin, the self-exiled former owner of a Russia-wide chain of mobile phone shops, recently told an interviewer of Yevtushenkov’s personal involvement in trying to “snatch” his business from him for free. Chichvarkin chose to sell to different buyers instead.

Rosneft managers feel their case follows a similarly murky pattern. The case is still before the courts, but based on procedural findings, it is not going well for Sistema thus far.

Sistema’s current tactic is to shop for a friendlier jurisdiction. At the last hearing in the Bashkir Arbitration Court, Sistema lawyers demanded the case be transferred elsewhere, claiming that the presiding judge was biased.

Sistema also appears to be trying to sidestep the legal process altogether, appealing instead to the media and beyond. They said as much in last week’s proceedings when a Sistema lawyer told the court, “My speech is for the media but not for the court.”

Speaking to reporters after the hearing, a Rosneft spokesman observed, “When one of the parties does not have legal arguments anymore, it uses criticism and insult.  Sistema has demonstrated the groundlessness of its legal position.”

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