Sistema’s Plight: Sechin Returns to Bankrupt Yevtushenkov

On 6 June the Bashkortostan Arbitration Court held a preliminary hearing on Rosneft’s lawsuit against Sistema. The court accepted Rosneft’s new estimate of the damages it wishes to recover, which went up from $1.9bn in May to $3bn this month. The court’s willingness to accommodate Rosneft’s requests – for instance, to accept Sistema’s internal correspondence from 2013 and 2014 as evidence – is the first indication of its favorable treatment of Rosneft’s claims.

 

The legal and logical merits of these claims appear dubious: a former owner of an asset is accused of deliberately reducing its value and is demanded to compensate the new owner. Rosneft alleges that Vladimir Yevtushenkov’s holding company destroyed value at Bashneft well before the government came in to repossess it. Moreover, the damages seem to be calculated in an entirely arbitrary fashion: their latest re-assessment is based on Rosneft’s belief that they should reflect the rouble’s devaluation since 2014. Rosneft wants to be compensated in dollars based on the 2014 exchange rate.

 

The political implications of this lawsuit are substantial, in our view, as they further erode the “rules of the game” in the energy sector and the broader economic arena. After he was placed under house arrest in 2014, Yevtushenkov stopped resisting Rosneft’s efforts to acquire Bashneft. The criminal case against him was dropped in 2016, with President Vladimir Putin inviting him back to the Kremlin and publicly stating that the charges were removed.

 

Yevtushenkov’s interviews at the time demonstrated his acceptance of the new state of affairs: he suggested that he “learned the Bashneft lessons” and agreed with “all rules of the game.” He even said, prophetically as it now appears, that he “absolutely does not care if he were to lose all [his assets].” It is difficult to imagine a more humble and unconditional statement of political loyalty. Why then, less than two years later, is Sechin retuning with a claim that will bankrupt Yevtushenkov?

 

The answer is twofold, in our view. The first is that after he received a reprimand from Putin earlier this year, Sechin finds it more difficult, for now, to challenge top-level figures and companies. Yevtushenkov, however, is fair game. In challenging him, Sechin feels right in his element: Sistema’s future quite literally depends on his word. The company’s stock shot up 10% last week when Sechin uttered “Everything’s possible” to a question about a potential out-of-court settlement of Rosneft’s claims.

 

The second, more profound reason is the shift that has emerged in the last year, where loyalty and even ties to Putin have failed to protect several senior government figures, especially in regional administrations. In this sense, Yevtushenkov’s fate is similar to the five regional governors who have been arrested since 2015. They suffered not because they broke the rules of the system but rather because the rules themselves have eroded.

 

It may be too soon to assume Sechin’s victory. Notably, the Moscow Arbitration Court had refused to take up the case, and the trial and appeals may take some time. If Rosneft wins the case in Bashkortostan, however, which seems likely, it will be the beginning of the end of Sistema. In any case, even if Sistema survives, these developments demonstrate the risks of engagement with second-tier companies and figures in the Russian economy, which in our view will remain high at least until President Putin is re-elected next year.