In Russia, a Bow to the Powerful Energy Sector

Over the weekend, Russian media reported that the Kremlin changed its position and will agree to sell a private stake in state-owned oil firm Bashneft to state oil giant Rosneft. According to Russian First Deputy Prime Minister Igor Shuvalov, quoted by Kommersant, Moscow is planning to lift its suspension on the sale following a fierce political battle waged since August, when the sale was halted. If Rosneft is allowed to complete the purchase, it would end one of the most important battles being fought within the Kremlin among the Finance Ministry, the executive branch under President Vladimir Putin and Rosneft chief Igor Sechin.

But the oil dispute is not the only one of its kind souring relations between the government and the energy sector. The Russian government announced a series of privatization schemes last year, including selling a 50 percent stake in Bashneft (Russia's sixth-largest oil firm) for $4.6 billion and a 19.5 percent stake in Rosneft (Russia's largest oil firm) for $11.4 billion. Rosneft, however, contested its sale, and Sechin has since fought for greater control over the company. The Russian government has resisted his efforts, feeling it has little choice given its dire economic situation: The 2016 budget shows an expected $36 billion shortfall if the current account deficit is kept under 3.6 percent, and the Kremlin is counting on the funds raised by Rosneft's privatization to offset the damage. Otherwise, it will be forced to borrow heavily on international markets at the high interest rates caused by international sanctions or tap its reserve funds, which would leave little cushion for the 2017 and 2018 budgets. With budget drafts for 2017 expected to begin circulating this week, resolution on the privatization dispute was expected. Now it seems a final deal will be struck soon.

(DENIS SINYAKOV/AFP/Getty Images)

Analysis

Last month, Sechin threw a wrench into the talks over privatization, outlining heavy terms in exchange for his acceptance of the deal. He already had demanded the authority to set the price and choose the buyer for the piece of Rosneft that was to be sold. Sechin then added the condition that the Kremlin must agree to let Rosneft bid on the portion of Bashneft up for sale. Putin opposed allowing Rosneft to bid on Bashneft because it would undermine Rosneft's own privatization and render void the attempt to transfer more energy holdings (and financial risk) out of state hands. Furthermore, Putin worried that allowing such a deal would empower Rosneft so much that it would threaten his power and that of other rival factions over Russia. At a time when Putin is becoming increasingly politically isolated, the struggle between two of Russia's most powerful men seems particularly pertinent.

If the rumors are true and Putin has in fact sanctioned the sale of Bashneft to Rosneft, it would seem as if the leader has bowed to Sechin under mounting political and financial pressure. According to the Kommersant report, Rosneft will pay $5 billion for the Bashneft shares, slightly more than a previous bid that many had deemed too high. The hefty price may be Sechin's compromise to Putin.

The conflict between the Kremlin and the energy sector is far from over. Bidders could still come forward for a slice of Rosneft, despite the high price tag. So far, Moscow has courted the interests of China, Japan and India, of which only New Delhi has shown interest, even if it probably cannot afford the entire stake.

The Kremlin is also considering raising energy taxes to cover next year's budget — a proposal that has already sparked debate. Currently, oil is taxed through a mineral extraction tax, an income tax and an export tax. The plan is to increase the extraction tax, while possibly decreasing the other taxes, transferring much of the financial burden from the export phase to the extraction phase. In addition, the Energy Ministry is proposing a 70 percent tax on profits from oil projects (up from 20 percent). The proposal, of course, has been rejected by oil companies and is receiving considerable pushback from the Energy Ministry. It will be worth noting whether the Kremlin can push through such a major tax reform on energy assets before the 2017 budget is finalized and whether it will make the much desired partial privatization of Rosneft completely unpalatable for foreign investors. Its financial solvency might just rest on the answer to those questions.

Natural Gas World is pleased to provide this article in cooperation with Stratfor, a Natural Gas World Knowledge Partner.  For more visit www.stratfor.com Follow Stratfor: @stratfor on Twitter | Stratfor on Facebook