Arrest of one of Russia's business elite worries investors

By Isabel Gorst

Sept. 20, 2014 5 AM PT

Reporting from Moscow — “Thank God We’re VIPs,” proclaims a billboard in Zhukovka, a riverside village near Moscow lined with grandiose mansions that shelter Russia’s rich and powerful.

But membership in the elite community of oligarchs did little to protect billionaire Vladimir Yevtushenkov from state investigators who have accused him of money laundering when his AFK Sistema group acquired one of Russia’s last privately owned oil companies five years ago.

The arrest of Yevtushenkov sent Russian markets tumbling and compounded investor fears fueled by the tightening of Western sanctions last week on Russia’s energy sector over Moscow’s support of separatists in neighboring Ukraine.

Russia’s Micex Index dropped nearly 2% this week and the sense of security in the moneyed circles of Zhukovka fell with it.

What is particularly unsettling for Russian business leaders is that Yevtushenkov adhered to the ground rules set for the oligarchy by Putin that they steer clear of politics. If the Kremlin will target a captain of industry as compliant as Yevtushenkov, the implication is that no one is safe.

Yevtushenkov was detained Tuesday on suspicion of financial improprieties in his 2009 acquisition of Bashneft, a midsize oil producer and refiner based in Bashkortostan, a Russian republic in the foothills of the southern Ural Mountains. Some Russian news reports said Friday that the 65-year-old oligarch had been released from house arrest, but Yevtushenkov and the head of the Russian Investigative Committee denied that he was free.

“Don’t believe these reports, I was not released,” Yevtushenkov told the RIA Novosti news agency. Investigative committee spokesman Vladimir Markin also denied that Yevtushenkov’s detention had been lifted, telling the news agency that the investigation was still underway.

Investigators have ordered Yevtushenkov to remain under house arrest until mid-November while they look into Sistema’s phased 2006-09 purchase of Bashneft, the conglomerate’s first venture into the oil market. Sistema has denied wrongdoing and pledged to defend its position in court.

Confined to his high-walled Zhukovka estate, Yevtushenkov is barred from speaking with anyone except his family and lawyers and from using the Internet. Russian security agents have fitted him with an electronic tracking ankle bracelet.

Sistema’s portfolio includes oil, telecommunications, retail, tourism and healthcare assets that were valued at more than $45 billion, at least until Yevtushenkov’s arrest roiled Russian stock prices this week.

Russian law enforcement has been focused on Bashneft for some time. Prosecutors have been pursuing Ural Rakhimov — the son of Murtaza Rakhimov, the former president of Bashkortostan — on charges of privatizing Bashneft unlawfully since last year. He escaped by fleeing the country.

In a separate but related case, Yevtushenkov is under investigation on allegations of wrongfully acquiring state property when Sistema bought Bashneft and for bribery as well as money laundering. If convicted, he could face a prison sentence of at least 10 years.

Many political observers here suspect the case against Yevtushenkov masks a new high point in a politically charged tug-of-war over Bashneft with Igor Sechin, the head of Rosneft, Russia’s state oil company. Sechin, a close associate of Putin, has encouraged the Russian president’s campaign to reassert government control over the jewels of the economy, including the lucrative oil industry.

Sistema has invested heavily to reverse a decline at Bashneft’s aging fields in Bashkortostan, transforming the company in the process into Russia’s fastest-growing oil producer with an output of 320,000 barrels a day. Securing reserves for future growth, Bashneft won rights to develop two huge fields in the Russian Arctic in 2010 that added more than 1.4 billion barrels of oil to its portfolio.

As one of Russia’s last remaining privately owned oil companies, Bashneft is an obvious target for hostile takeover by the Kremlin, according to Mikhail Khodorkovsky, the fallen Russian oligarch who lost control of his vast Yukos oil corporation after a bitter legal battle that landed him in a prison camp in 2003.

Khodorkovsky has always accused Sechin of orchestrating the onslaught by federal tax collectors that brought Yukos to its knees. Rosneft, now Russia’s biggest oil producer, was the main beneficiary of bankruptcy auctions where Yukos’ assets were sold off at cut-rate prices.

Speaking from somewhere in Europe where he has lived since Putin agreed to his release from prison last year, Khodorkovsky said Sechin was on the rampage again and would grab Bashneft from Sistema.

“This is the very same Igor Ivanovich [Sechin] who has gotten no smarter in 11 years and may have gotten even greedier,” Khodorkovsky told Vedomosti, the Russian business daily.

Dmitry Peskov, Putin’s spokesman, dismissed Khodorkovsky’s statement, saying attempts to compare Yevtushenkov’s arrest with the Yukos case were “unfounded and inappropriate.”

Rosneft insisted that it was not interested in taking over Bashneft.

At a time when Russia is facing intense pressure from the West over the Ukraine crisis, Yevtushenkov might have been chosen by the Kremlin as an example to others that “total obedience and loyalty are the only guarantee of survival,” Pavel Felgenhauer, a veteran political and defense analyst, wrote this week. “In the present battle of life or death with the West triggered by the Ukraine crisis, all Russia’s strategic assets must be under one command. ... Yevtushenkov apparently failed to understand this.”

Russian officials and business leaders rallied to support Yevtushenkov after his arrest, although their response fell far short of open rebellion. Alexander Shokhin, president of the Russian Union of Industrialists and Entrepreneurs, persuaded the majority of his influential business lobby group to sign a petition calling for Yevtushenkov’s release, but acknowledged to the Dozhd television network that there had been “tense discussions” over the wording of the document.

Russian Economy Minister Alexei Ulukayev, who is battling to stave off a recession, warned that the case against the Sistema boss was undermining investor confidence and could spur further capital flight.

“It’s clear that the suspicion that there is some economic motive behind this complicates investors’ decision-making,” Ulukayev told reporters in Moscow.

Clouds have been gathering over Sistema since June, when Yevtushenkov was called in for questioning by Russian investigators. Some commentators believe that the oligarch, who could have opted to flee Russia, is open to discussing the sale of Bashneft.

But with an oversupply on global markets driving oil prices below $100 a barrel, this is not a favorable time to dispose of oil assets.

Sergei Aleksashenko, a former Russian deputy finance minister, warned that the Kremlin had no intention of paying for Bashneft.

“This is not even a racket,” he said of the Russian hierarchy’s coveting of Bashneft. “This is simple, undisguised theft.”

Gorst is a special correspondent based in Moscow.