Russia's Minister of Economic Development Alexey Ulyukaev arrives at Moscow's Basmanny Court. (c) Maksim Blinov / RIA Novosti. All rights reserved.Last week, for the first time in Russia’s recent history, a federal minister was arrested. According to the Investigative Committee, Alexey Ulyukaev — at that moment, Russia’s Minister of Economic Development — was detained accepting a bribe of two million dollars at the office of state oil company Rosneft. 

From the explanations given by the Investigative Committee, Ulyukaev had tried to extort money from Rosneft in exchange for issuing a positive ministerial evaluation of the state oil company’s acquisition of state-owned shares in Bashneft. In turn, Rosneft contacted law enforcement agencies, which organised the operation to detain the minister — Ulyukaev was arrested with “specific marks” on his hands after supposedly handling the money. 

How realistic are these accusations? Aleksandr Shokhin, chairman of the Russian Union of Industrialists and Entrepreneurs, said it best: “You’d have to be crazy to… threaten Rosneft and demand two million dollars from Igor Ivanovich Sechin [CEO of Rosneft], who is basically one of the most influential people in our country. It wasn’t the Investigative Committee’s job to detain Alexey Ulyukaev, but representatives of the Kashchenko Psychiatric Hospital.” 

The case of lawyer Sergei Magnitsky comes to mind. Back in 2007, Magnitsky accused Russian tax officials of stealing 5.4 billion roubles (£140m) — he was later accused of stealing those funds himself. We can assume that Rosneft was putting pressure on Ulyukaev, demanding that he approve the Bashneft deal, and then accused the minister himself of threats and extortion.

That said, the objections of Ulyukaev and other members of the Russian government against Rosneft’s acquisition of Bashneft, which were made clear in July this year, are easy to explain. Russia’s law on privatisation of state and municipal property forbids the participation of companies that the state has a share of 25% or more.

Rosneft doesn’t fall under this law only formally. The state company’s main shareholder (69.5%) is Rosneftegaz, which, in turn, belongs 100% to the state. Moreover, in July, vice premier Arkady Dvorkovich referred to a direct order from Putin not to allow state companies to participate in privatisation.

The arrest of Ulyukaev on fantastic charges of “threatening” Rosneft and bribe extortion is, it appears, only an episode in a saga that goes back to 2010

Nevertheless, on 2 September, Putin gave an interview to Bloomberg in which he stated that, although “it’s probably not the best option when one company under state control acquires another purely state company”, in the end “the important thing for the budget is who gives the most money”, and this is why Rosneft cannot be denied participation in the Bashneft deal. 

On 12 October, Rosneft bought a 50.08% stake in Bashneft for 329.7 billion roubles ($5.24 billion) — thus becoming the majority shareholder. Ulyukaev stated at the time that in the process of preparing the deal, two proposals were received, and that the “very best, which was higher than the valuer’s price, was made by Rosneft.” Ulyukaev didn’t name the other potential buyer.

Shortly after, Putin stated that he “was slightly surprised” at the decision to sell Bashneft to Rosneft, although he referred to the fact that this was the “position of the government of the Russian Federation, first and foremost its financial-economic bloc” (although the government had objected to the deal in July, referring to an order by Putin himself.) 

A month later, Ulyukaev was suddenly arrested. Who needed this, and why?

High stakes 

The arrest of Ulyukaev on fantastic charges of “threatening” Rosneft and bribe extortion is, it appears, only an episode in a saga that goes back to 2010.

Back then, Dmitry Medvedev, who was president at the time, announced a new wave of privatisation of state property. Privatisation, Medvedev stressed, was an “ideological issue” for the government. By August 2011, the government (on Medvedev’s request) had distributed a list of companies due to be sold. Among others, the government planned to sell its stakes in Rosneft, RosGidro and Inter RAO EAS by 2017, retaining only a “golden share” in these companies. 

But Medvedev’s privatisation plan had a powerful opponent: Igor Sechin, who is CEO of Rosneft and a close ally of Putin. Having written several letters to Putin, Sechin effectively stopped the plan. In the government’s new plan for privatisation, passed in 2013 when the presidency had switched to Putin, the full sale of state-owned shares in Rosneft and other Russian energy companies was not even mentioned — only a partial privatisation was proposed. Moreover, Sechin insisted that the state’s shares shouldn’t be sold for less than the flotation price. Putin supported him in this, explaining that the state energy companies were undervalued and that it wasn’t worth selling them “for pennies”. 

The arrest of Ulyukaev is a clear hint to the government and its head Dmitry Medvedev about what will happen if they interfere with Sechin’s privatisation plan 

Sechin’s motives are quite clear. The sale of Rosneft shares to the “wrong people” could mean the loss of control over the company, which he considers his own. This doesn’t mean that Sechin is against privatisation in principle — it’s more likely that he’s against privatisation that bears risks for him personally. However, Sechin is ultimately interested in moving from being the manager of Rosneft to its owner. And this means that he could support privatisation, but only on his terms. 

The risks for Sechin under Medvedev’s presidency, though, and under Medvedev’s premiership remain. Sechin has continued to drag the process out, meanwhile adding further assets to Rosneft (TNK-BP, and now Bashneft). But by 2015, the economic situation in Russia meant that the ideological motivation for privatisation had been replaced by a fiscal one. Now it wasn’t a question of an “institutional task”, as Putin called it, but simply how to close a hole in the state budget. This is why it became harder for Sechin to resist the planned sale of 19.5% of Rosneft’s shares. 

August 2016: Igor Sechin, head of Rosneft, on an official visit to Azerbaijan together with Alexey Ulyukaev. (c) Alexander Zemlianichenko AP/Press Association Images. All rights reserved.Russia’s economic crisis forced the situation, and Sechin began to lobby a scheme for privatizing Rosneft under which the company would first buy its shares back from Rosneftegaz, and then sell them again. To realise this scheme, though, he needed the government’s approval. 

This is where Ulyukaev’s arrest comes in. According to Novaya Gazeta, the surveillance operation on Ulyukaev began “on the initiative and direct participation” of Oleg Feoktistov (link in Russian), Rosneft’s head of security and, in the past, deputy head of the FSB’s internal security department. As Vedomosti claims, Sechin himself apparently asked Feoktistov to do this when the latter was still working for the FSB. 

Putin’s style of governance has always assumed, on the one hand, the estrangement of independent players, and, on the other, the encouragement of competition between dependent players

The arrest of Ulyukaev is a clear hint to the government and its head Dmitry Medvedev about what will happen if they interfere with Sechin’s privatisation plan — in particular, Rosneft’s scheme to buy back its own shares.

As soon as Rosneft buys its shares from Rosneftegaz, the government will lose its veto function — the shares’ future will now be decided by the company’s management. It is likely that the shares will be sold to firms already affiliated with Rosneft, such as the Independent Oil Company (NNK), which is owned by Eduard Khudainatov, Sechin’s former deputy at Rosneft. (NNK’s connection to Rosneft was confirmed by the Moscow city arbitration court in 2015, and then a federal court annulled the decision.) 

NNK and other firms associated with Rosneft should be able to find the funds to buy the shares in state banks. Of course, Putin has already stated that privatisation using state bank funds is not permissible, but he’s also said that state companies shouldn’t “privatise” other state companies — nevertheless, this is exactly what happened with Bashneft. 

Surgutneftegaz might also stump up the funds — this company already helped Rosneft gain control of Yuganskneftegaz (link in Russian), which used to belong to Mikhail Khodorkovsky’s Yukos. 

Arresting politics

Putin’s style of governance has always assumed, on the one hand, the elimination of independent players, and, on the other, the encouragement of competition between dependent players. Here, Putin acts as a referee between them, making his role irreplaceable.

At the same time, Putin has to make sure that no player becomes too powerful in relation to the others. Thus, while Putin gives Sechin practically a free rein, he has left Medvedev as head of government, his eternal antagonist. 

However, since 2014, a new external factor has emerged. Putin now doesn’t only guarantee balance within Russia’s elite, but he tries to isolate it from external influence. Perhaps this is what Sechin used to his advantage, having convinced Putin that Ulyukaev, a liberal with offshore assets in the west (read Alexey Navalny’s report here), is a “weak link” for the Kremlin. 

The chain of events in recent months — Rosneft’s purchase of Bashneft shares, the arrest of Ulyukaev — shows that this balance has been violated. Sechin is becoming too powerful, the government  - too weak. 

If in the past Putin preferred the carrot to the stick when dealing with the elite, now he is using the stick more and more. This is a new situation, and how the elite will react to this is, as yet, unknown. Ulyukaev’s arrest has sharply increased the level of uncertainty for everyone — including Putin.

Translated by Tom Rowley.