Sechin: Public Setbacks Amid Political Preeminence

By November 2017Russia

On 22 November, Rosneft CEO Igor Sechin unveiled ambitious plans for production growth at the company. Sechin suggested that by 2022, Rosneft’s liquids output should reach 250mn tons (5mn bpd). Rosneft’s average output in the first nine months of this year amounted to 4.59mn bpd, an 11.4% increase from the same period in 2016, which was largely a result of its acquisition of Bashneft.

The announcement follows a string of developments at Rosneft that serve to demonstrate Sechin’s continued preeminence. On 21 November, Sechin presided over the launch of the Erginsky group of fields in Western Siberia, with Prime Minister Dmitriy Medvedev in attendance. Several days earlier, Sechin unveiled plans to load the massive Zvezda shipyard project with vessel orders. On 16 November, Rosneft announced an order for 56 ships; Gazprom and Novatek have suggested that they would also commission vessels from yet-to-be-constructed Zvezda. Additionally, last week, the Duma approved a budget that envisages mineral extraction tax breaks for Rosneft’s Samotlor field. These breaks, decried by other major oil companies as arbitrary and unjustified, will save Rosneft an annual 35bn roubles (about $590mn at the current exchange rate) for the next 10 years.

By all measures, Sechin shows himself as the supreme ruler of the Russian energy arena. Yet the simmering irritation at him, which is prevalent across the government, industry and media, has intensified in recent weeks to such an extent that it is difficult to ignore.

Rosneft’s coverage in the press and among industry observers, which was hardly complimentary in the past, has become even more unfavorable. Most recently, the company’s lavish spending abroad, with $1.3bn paid to the Kurdistan Regional Government (KRG) before it effectively lost control of the oil promised to Sechin, prompted widespread criticism. Rosneftegaz’s accounting loss of over $3bn, posted on the privatization of Rosneft stock, was met with similar coverage.

A recent research note from Sberbank CIB, a respected brokerage, presented a grim view of Rosneft’s operations and debts. With a heading “We Need to Talk About Igor,” the note blamed Sechin for waste and inefficiency at Rosneft, triggering a furious response from Sechin’s press secretary Mikhail Leontyev. Within a day, Sberbank CIB recalled the note and issued an apology, but by that time it had been widely circulated by gleeful journalists.

However, the ongoing trial of former Economy Minister Aleksei Ulyukayev has emerged as the most embarrassing and politically damaging development for Sechin. On 22 November, Sechin disregarded the third court summons requiring him to testify as a witness. Sechin has explained his inability to attend the trial by his workload as CEO with his representative stating that he will not be able to visit the court until the new year, since he “expects to get busier.” Earlier, reports appeared that Rosneft had shut down its mailing service to prevent a court summons for Sechin from being delivered to the company.

Sechin would evidently prefer to avoid an embarrassing cross-examination on a witness stand, which might reveal that he had provoked Ulyukayev. (One of the questions that the defense team would like to ask is how $2mn could fit into a small bag that Sechin handed to Ulyukayev along with the now infamous sausage basket.) Sechin expects that by refusing to attend the trial, he will force the judge to read out his testimony given to investigators and move on with the case. However, it may be difficult for the judge to oblige Sechin, as failure to question a key witness would constitute a major procedural violation. It would present a strong opportunity for Ulyukayev to appeal the verdict, especially in the European Court for Human Rights.

As before, we believe that Sechin’s position at Rosneft is strong and he retains President Vladimir Putin’s support for the major projects he carries out at the company, regardless of their profitability. But the widespread disdain for Sechin’s personality and the self-inflicted embarrassment of Ulyukayev’s trial are visibly eroding his public standing. The trial’s progression will be a key near-term signpost of his ability to limit the damage from recent public setbacks.