Rosneft’s bid for Itera is a key step in Russia’s internal rebalancing of power

May 29, 2013
Obsession
Energy Shocks
May 29, 2013

The $3 billion bid by Russian state oil giant Rosneft for the 49% it doesn’t already own of gas producer Itera seems, on the face of it, to be overpriced. A 49% stake in Itera’s natural gas assets is worth only $2.7 billion, says Sberbank. The discrepancy indicates that Rosneft is after bigger game: not merely some more gas assets, but the lucrative right to export natural gas from the country. And perhaps bigger game still: political power.

As it stands, state-controlled Gazprom holds the sole legal rights to export natural gas from Russia, earning $37.9 billion last year. The monopoly makes Gazprom Russia’s single-biggest taxpayer, and undergirds its might as an economic and political force at home and abroad.

But the talk in Moscow has been that, in order to assuage European criticism of Gazprom’s market dominance—the company controls 25% of the European gas market–President Vladimir Putin is contemplating allowing for a second exporter. The betting has been that the lucky company will be Novatek, a natural gas juggernaut controlled by Gennady Timchenko, a Putin friend. But Rosneft chairman Igor Sechin would prefer that prize for himself, bankers in Moscow tell us. Over the last year, Putin has been conducting a routine shuffling of the ownership of key resources, and, perhaps at Sechin’s instigation, Itera appears to be in the latest in this process.

Since the 1990s, the opaque company has possessed the right to import natural gas from Turkmenistan to Russia, and export it through Ukraine and on to Europe.The assumption has been that Moscow has permitted this arrangement because some of the profit flow goes to powerful interests in Russia. According to an audit in the early 2000s by Hermitage, a hedge fund run by investor-turned-Kremlin-critic Bill Browder, the apparent skimming ran into billions of dollars.

Thus one way to explain the excessive price Rosneft is paying for Itera is that the skimming continues. Typically, when natural-resource assets are sold in Russia, the departing owners are bought out at an agreed-upon price. But in order to leave the room with their winnings, they have to give back some of the money to the buyers. Since everyone knows these rules from the outset, and all want to leave the game whole, the prices for Russian assets end up inflated.

But another—or perhaps additional—interpretation is that Itera is worth much more to Rosneft, and Sechin, than the value of its gas. In the year since Putin reassumed the presidency, Sechin’s standing has swelled in Moscow on the back of deals that have made Rosneft one of the world’s largest publicly traded oil companies. In doing so, Sechin has knocked Gazprom off its perch as Russia’s most powerful company, and has appeared hungry for more. He and the head of Gazprom, Arkady Dvorkovich, a former deputy prime minister, represent rival factions within Russia’s power elites, which have had a long-running and increasingly public turf war.

Dvorkovich’s faction lost a key player when Vladislav Surkov, an architect of Putin’s political strategy, was forced to resign earlier this month. Buying Itera, then, would not only help Rosneft break Gazprom’s gas export monopoly, but be another key step for Sechin and his allies in consolidating their power.

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