RUSSIA ENERGY: YUKOS REDUX FOR RUSSNEFT?

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 004244

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DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
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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)

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SUMMARY
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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.

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BACKGROUND
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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."

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GUTSERIYEV,S FALL
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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.


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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.)

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COMMENT
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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