As the optimism surrounding the Ukrainian ceasefire remains unsteady and the United States and European Union continue to ramp up sanctions, Russian businesses are eager for some good news. That didn’t come on the 16th when Vladimir Yevtushenko, head of the diverse Sistema conglomerate, was placed on house arrest following charges of embezzlement and laundering shares in the Bashneft oil company. The accusations render Bashneft, Russia’s sixth-largest oil company by output, a sitting duck and draw strong parallels to the 2003 arrest of Mikhail Khodorkovsky and subsequent seizure of his Yukos oil company.
Yevtushenko’s current legal troubles stem from Sistema’s 2009 purchase of oil and gas assets in Russia’s Bashkortostan Republic. More specifically, investigators allege that contractual amendments totaling $500 million were made illegally and with the aim of embezzling those funds. An arrest warrant has also been issued for Ural Rakhimov who oversaw the deal.
Yevtushenko’s arrest lacks an obvious political motive – he’s not the outspoken critic Khodorkovsky was – but the suspended punishment that characterized the Yukos affair is of note. In both instances Russia’s soft legal constraints facilitated the ad hoc justification and eventual condemnation of their alleged legal infractions. Although complicit, the seemingly arbitrary choice of Yevtushenko has spooked local oligarchs and does not bode well for already declining foreign investment figures.
Immediately following Yevtushenko’s arrest, shares of Bashneft and Sistema tumbled 21 and 36 percent respectively. Bashneft’s market capitalization is now almost half of what it was just two months ago. Still, Bashneft has several attractive assets, namely the giant Trebs and Titov greenfield in the Russian Arctic. As the dust settles, several players lay in wait, none larger and more eager than state-owned Rosneft.
Since becoming the largest publicly traded oil company in March of 2013, Rosneft has been plagued by debt and weaker than anticipated production. Energy sanctions have further limited their operations by restricting the company’s access to Western money. Last month, the company requested government assistance in the form of $42 billion from a state fund set aside for pensions. For its own cash infusion, the state is proceeding with plans to sell up to 19.5 percent of its stake in Rosneft.
Falling oil prices together with the collapsing ruble have limited the Kremlin’s options. Fewer resources means tighter competition, and success often implies Kremlin support. The Yevtushenko arrest, like Khodorkovsky’s 11 years ago, signals a rule change, in addition to dealing another significant blow to investor confidence. Russia’s Arctic and deep-sea fields remain among the most promising in the world. However, the recent news surrounding its business climate is quite the opposite.