Rosneft Deal Puts Spotlight on Putin’s Special Cache of Cash

(Bloomberg) -- Russia is planning its biggest privatization in years this month, but the $11 billion expected from the sale of shares in state oil giant Rosneft PJSC won’t go straight to the cash-strapped budget.

Instead, the money will go to a murky holding company that’s nominally owned by the government but actually accountable mainly to two people -- President Vladimir Putin and Igor Sechin, his longtime ally who is Rosneft’s chief executive officer -- according to five people with direct knowledge of the company.

Set up in 2004 to hold government stakes in Rosneft and Gazprom PJSC temporarily, Rosneftegaz JSC now accumulates billions every year from dividends on those shares, as well as other assets, keeping most of the cash in local banks. When it spends money, the funds go to projects -- from shipyards to scientific research -- backed by Putin and Sechin. Some are personally approved by the president.

Its special status has allowed Rosneftegaz to accumulate as much as 500 billion rubles ($7.8 billion) -- enough to cover almost a fifth of this year’s budget deficit -- but not transfer it to the Finance Ministry. That total is about twice what it’s paid to the government. It includes about $5 billion from the last time the Kremlin sold shares in Rosneft, back in 2013, according to two people familiar with Rosneftegaz’s finances.

‘Off-Budget’ Funds

The government “has for three years been unable to retrieve the proceeds from its previous foray” selling Rosneft shares, Alexey Bulgakov, analyst at Sberbank CIB, wrote in a report last month. “Given this, it is unclear to us why the government thinks it will be able to get the proceeds from this one.”

Kremlin spokesman Dmitry Peskov said Monday he’s confident that cash will wind up in the budget by a Dec. 15 deadline. Though billed as a privatization, the shares are likely to be sold to Rosneft itself, which plans to sell them on to unspecified investors at a later date.

Though Rosneftegaz’s money comes from government-owned assets, Putin in 2012 described it as having “off-budget -- I want to underline that -- but significant financial resources.” Last month, he said it has been financing scientific research at government institutes, including 12 billion rubles this year. Rosneft-backed projects have also gotten funding.

Rosneft Deal Puts Spotlight on Putin’s Special Cache of Cash

“Sechin behaves like former General Motors CEO Charles Wilson: ‘What’s good for Russia is good for Rosneft -- and vice versa,’” said Alexander Losev, chief executive of Sputnik Asset Management, a Moscow investment fund that has owned Rosneft shares.

Massive Deposits

Internal government documents seen by Bloomberg in October showed Rosneftegaz got government approval to place as much as 1.8 trillion rubles on deposit with Gazprombank. They didn’t reveal how much cash the company has, however. The documents also showed that the company had refused to provide dividend information to Prime Minister Dmitry Medvedev’s government, saying the data went directly to the president.

Rosneftegaz isn’t the only battleground between technocratic members of the cabinet and the powerful oil magnate. Former Economy Minister Alexei Ulyukayev, now under house arrest on charges of trying to extort a $2 million bribe from Rosneft to approve another privatization deal, had opposed that sale to the state oil giant, along with others in the free-market camp in Putin’s administration.

Little is publicly known about Rosneftegaz beyond its annual financial reports, which it will no longer have to release following a change in its legal status earlier this year. Sechin is the chairman of the board. It has a staff of about a dozen and its operations are limited to collecting dividends and earning interest, according to regulatory filings.

Kremlin spokesman Peskov said in October that Putin “has the basic information” about Rosneftegaz’s finances. He denied Putin has direct control over its finances or operations. Neither Peskov nor Rosneftegaz responded to requests for comment for this article.

‘Reliable Source’

Under heavy pressure to narrow the deficit, the government has slashed investment projects and the Finance Ministry has stepped up efforts to extract money from Rosneftegaz and other state companies. But many of the largest corporations, whose top executives enjoy direct access to Putin, were able to win exemptions earlier this year from a government order that they pay half their profits in dividends. Next year’s budget draft calls for Rosneftegaz to hand over all the dividends it earns -- an estimated 156 billion rubles -- to the budget.

Of the 149 billion rubles in profit Rosneftegaz reported for 2015, some 107 billion rubles were retained for investment projects, according to the documents seen by Bloomberg. The holding company agreed to pay 36 billion rubles in dividends to the government and put the remaining 6 billion rubles in its “reserve fund.” Its investment projects include power plants in the Kaliningrad region on the Baltic Sea and a Rosneft-owned shipyard on the Pacific coast. One senior official said some funding decisions were made by the president.

A year ago, Putin said he had ordered Rosneftegaz to spend 60 billion rubles to modernize the Zvezda shipyard on the Pacific. “The funds are there, it’s a reliable source,” he said. “Rosneftegaz’s funds are an effective tool.”