RUSSIA ENERGY: YUKOS REDUX FOR RUSSNEFT?

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 004244 SIPDIS SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT DOE FOR HARBERT, HEGBORG, EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER NSC FOR MCKIBBEN E.O. 12958: DECL: 08/29/2017 TAGS: EPET ENRG ECON PREL RS SUBJECT: RUSSIA ENERGY: YUKOS REDUX FOR RUSSNEFT? Classified By: Econ MC Eric Schultz for Reasons 1.4 (b/d) -------------- SUMMARY -------------- ¶1. (C) Russneft owner Mikhail Gutseriyev has apparently fled Russia as authorities seek his arrest on charges of illegal business activities and tax-evasion. Gutseriyev may be guilty, he has a dubious track record, but this may also be yet another case of selective prosecution against an oligarch whose rapidly-built company has come to the attention of the Kremlin. End summary. -------------- BACKGROUND -------------- ¶2. (C) In a case reminiscent of the dismantling of Yukos, a Moscow court on August 28 issued an arrest warrant on tax-evasion and other charges for Mikhail Gutseriyev, owner of Russneft, Russia's seventh largest oil producer. Although comparisons between the cases are inevitable, there are significant differences, in particular the two companies, principals. Khodorkovsky went from low-level salesman to banker to Yukos head with no formal GOR position. Gutseriyev on the other hand was a member of the governing elite. He was head of Slavneft, a state-owned oil company, in the late 1990s. ¶3. (C) Gutseriyev temporarily fell out of favor with the Kremlin for resisting Slavneft's privatization and was removed from office. Slavneft was subsequently privatized, going half to Sibneft (now Gazpromneft) and half to TNK (now TNK-BP). Gutseriyev later emerged as deputy head of the Association of Independent Oil Producers (ASSONEFT),but was again dismissed, this time for misusing his position to gather sensitive information on small producing companies. ¶4. (C) With financial backing from oil trader Glencore and his own bank, BinBank, Gutseriyev made a comeback in 2002, creating Russneft. He expanded rapidly, purchasing small producer after small producer to build a 300,000 b/d oil company. (Note: One of the victims was U.S.-owned Goloil, which Teton Petroleum was forced to sell under some duress. End note.) Not known for his transparent corporate governance, Gutseriyev is rumored to have made plenty of enemies while amassing a fortune estimated at $2.9 billion. Jerry Rohan (protect) a semi-retired long-time Russia energy sector expert for PWC, told us Gutseriyev deserves little sympathy given his shady past -- "let's put it this way, if he shows up on your doorstep seeking asylum, I hope the door is slammed in his face." -------------- GUTSERIYEV,S FALL -------------- ¶5. (C) Gutseriyev,s mistake appears to have been growing Russneft too big, too quickly at a time when the Kremlin is bringing the oil sector under its control. He is thought to have incurred the Kremlin's particular ire by bidding on Yukos assets (in one case successfully) in competition with state-owned Rosneft. In January of this year a tax-evasion case was opened against Gutseriyev. This led to court-ordered actions in July and August, freezing Russneft shares, amid further charges of "illegal entrepreneurship" and transactions "contrary to the bases of lawfulness and morals." ¶6. (SBU) As legal pressure mounted on Gutseriyev, Kremlin-friendly billionaire Oleg Deripaska offered to buy Russneft. The offer from Deripaska's holding company, Basic Element, was reportedly worth $6.5 billion, including assumption of Russneft debt as well as some $675 million in tax claims. The Federal Anti-Monopoly Service, which would need to approve the deal, stated that it has not yet received an application from Basic Element. A Basic Element spokesperson, however, confirmed to the press on August 28 that the company's plans with regard to Russneft have not changed. MOSCOW 00004244 002 OF 002 ¶7. (C) Gutseriyev compounded his problems when he resigned from Russneft on July 30th and posted a letter on the company website claiming he was being pushed into selling the company to Deripaska. Realizing that accusing the powers-that-be of coercion was not a great idea, he almost immediately retracted the letter and publicly stated that the pending sale was voluntary. ¶8. (C) An arrest warrant was issued August 28 for Gutseriyev following indications he had fled the country in violation of an agreement to remain in Moscow pending resolution of the case. Gutseriyev's present whereabouts are unknown, but he is rumored to be in London. He was reported to have been in Baku for the funeral of his son, Chingiskhan, who had died in a car accident on August 22. (N.B. There has been no speculation to date that his son's death is linked to Gutseriyev's legal problems.) -------------- COMMENT -------------- ¶9. (C) It would seem that Gutseriyev's long track record of alienating supervisors and authorities has caught up with him. If Gutseriyev is indeed in Britain, an extradition request can be expected, which could further complicate Russia-UK relations. Russneft will likely end up with Deripaska or Rosneft or some other state-controlled or state-affiliated entity. This latest development has added to speculation (long-rumored and most recently suggested last week by the U.S.-based Energy Intelligence Group) that a new oil super-giant will be formed prior to the end of Putin's term that would include Rosneft, Russneft, Surgutneftegaz (the number 4 producer),and Bashneft (another top-ten producer). Burns