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Russia's 'Darth Vader' Hellbent On Destroying Sistema

This article is more than 6 years old.

Vladimir Yevtushenkov used to be a billionaire. That's a forecast. He's still a billionaire. But if political oil man Igor Sechin keeps hammering away at Yevtushenkov's private equity firm Sistema, he will drop a few billion rubles in a heartbeat.

Sistema's pristine offices are downright Czar-like, directly across the street from Red Square. A boardroom has a view of the State Historical Museum, with its red brick and a white roof that looks like it has a permanent dusting of snow on top. If Rosneft's recent lawsuit is successful, it might be curtains for that view of historic Moscow. Or worse yet, a death knell that may force Sistema to sell stakes in prized possessions like the $8 billion Mobile TeleSystems (MBT).  On Tuesday, the private equity firm sold a 5% stake in retailer Detsky Mir, Russia's version of Toys R Us, for $56 million, Reuters reported.  The stock fell over 8% on the stake sale, erasing half of its gains since its IPO this year.

Sistema needs a lot more Detsky Mir's to protect them from Sechin's billion-dollar lawsuits.

Sechin is considered to be the second most powerful man in Russia. He is such a force, that the local press calls him Darth Vader. Some say he is even more powerful than Vladimir Putin because he commands Russia's biggest oil company, Rosneft. Sistema found itself in the unfortunate position of being in an oil war with them, a war that Yevtushenkov paid for by being placed under house arrest from September to December 2014 on money laundering charges, and upon release handed Bashneft, an oil company he paid $2.5 billion for between 2005 and 2009, to the government...for free. His surrender was not enough.

Russia's former Economic Development Minister, Aleksei Ulyukayev, knows Sechin's fury. He has been in jail since November 2016 because of Sechin. Ulyukayev says the bribery charges brought against him by Rosneft's lawyers are a "monstrous set-up." Ulyukayev, once a fixture at Russian investor conferences, has little shot at redemption. His life, he would say if you could interview him, is in shambles because of Lord Vader.

Last month, Reuters reporters in Moscow made the "mistake" of doing a spot news item based on a Sberbank client report titled “Rosneft: We Need to Talk About Igor”. The Sberbank report said Sechin “almost single-handedly sets the company’s strategy” and they calculated that since purchasing oil and gas producer TNK-BP for around $55 billion in 2013, Rosneft has rifled through another $22 billion on acquisitions, “with no clear focus”. Sberbank withdrew the original report in Russia and re-issued it, though with the same sell recommendation for both Russian and English-speaking clients.

It seems only logical to think that Forbes-listed billionaire Yevtushenkov is next to be added to Sechin's body count.

Ask Sistema why and nobody really knows how to answer. Revenge? Maybe. For what? Yevtushenkov has no political ambitions. He is not funding opposition parties, nor has there been any allegations of such things in Russia's state-controlled media.  Former Bashneft shareholders who did not want to be quoted on the record said that they believe Rosneft is going after Sistema in the courts in order to make money to help it pay for Bashneft, and plug up other financial holes in a company not known for its financial prudence.  Net income for the first 9 months of the year is down 3.9% from a year ago. Free cash flow is down 46.2% in rubles and 39.2% in dollars, according to the company's financials. Bashneft shares are down 36%. Rosneft shares are down 24.7%. Private competitors Lukoil oil are up barely at 0.7%.  And state-controlled oil firm Gazprom Neft is up 18%, all in ruble terms.

This is not about Russia being Russia, really. This is Vader being Vader. He also helped abscond with Yukos Oil, the private energy company once owned by exiled ex-billionaire turned full-time Putin basher Mikhail Khodorkovsky. Khodorkovsky's entire life after Yukos has been based on seeking revenge against Sechin and the Russian government. Such is the type of anger that Sechin generates.

On paper, Yevtushenkov looks like the kind of apolitical Russian family-owned businessman who made good from the collapse of the Soviet Union. He invested in companies that helped modernize Russia. He made a lot of money. One source was Bashneft. It is now the source of all his problems.

Depending on how awful this fight between Sechin's Death Star, aka Rosneft, and Sistema becomes next year, Yevtushenkov may even end up on the long and infamous list of billionaires forced out of Russia due to run-ins with the government. People who know him say he does not allude that this is a possibility. But a second lawsuit, as big as the first, may force his hand. Doing business in Russia is costing him his fortune. Forbes estimates his net worth to be around $1.8 billion, and falling.

See: Sistema Says Rosneft Claims For Asset Freeze 'Groundless' -- Reuters

On Dec. 8, Russian oil giant Rosneft and Bashneft said that that they were suing Sistema yet again for 131 billion rubles, or $2.2 billion.  Rosneft owns Bashneft, so it is essentially a Rosneft vs. Sistema suit. This after successfully suing Sistema for $2.3 billion in August. Sistema appealed the ruling. Another appeal hearing is scheduled for next Monday with no end in sight.

The total amount sought this time around is exactly the amount Sistema received from Bashneft dividends when it was a shareholder of the company. Rosneft's lawsuit assumes that if the court has already ruled this summer that Sistema was a "bad faith" owner, then those dividends were received erroneously and should be returned to Bashneft.

Much of this legal bantering goes back to the early days of Russian state asset sales post-USSR. A Russia court noted in November 2014 that Bashneft, once a municipally owned oil company, was privatized against the wishes of the federal government. Although Bashneft's government owners saw things different, this is usually used by Rosneft as evidence that Sistema bought the company against the federal government's will.

One might think that returning the asset to the federal government would be enough.

Rosneft said it "undertook every effort to achieve an out-of-court settlement" with Sistema for the first case. Rosneft first warned of a second lawsuit three months ago. The company said it was not trying to impact Sistema's holding companies, and offered Sistema "assistance in organizing loans in the event they proved to be necessary" to pay off the claim, the company said. Sistema countersued to cover the costs of the lawsuits, according to Reuters.

Sistema could not be reached for comment.

As it stands, Sistema is now in the business of protecting itself from Rosneft. Sources who could not be quoted on the record because of their ties to the lawsuit said Rosneft is suing to force Sistema to pay for the first case in exchange for killing the second one. But if Sistema was forced to pay for both, it would put them out of business. Paying for one will be tough enough as the company has around $300 million in cash. Everything else is tied up in company shares.

On Tuesday, Rosneft's soft power gave way to hard power with the company's lawyers demanding a total freeze on Sistema's assets. At least a third of Sistema's position in NYSE listed Mobile TeleSystems was frozen by the courts this summer. Sistema owns around 50% of the company.

This latest case goes to court in January. It might be the beginning of the end for Sistema if Sechin wins again.

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