Russian Rivalries: A Tale of Two Energy Firms

8 MINS READSep 7, 2017 | 12:26 GMT
Russian President Vladimir Putin meets with Igor Sechin, the CEO of oil giant Rosneft, on May 17, 2017.

Russian President Vladimir Putin meets with Igor Sechin, the CEO of oil giant Rosneft, on May 17, 2017.

  • As overall energy revenue in Russia has decreased in recent years, oil giant Rosneft has aggressively attempted to expand its influence.
  • Rosneft hopes to translate its power into major changes in the energy landscape, such as ending rival Gazprom's monopoly over piped natural gas exports.
  • Rosneft's increasing influence has allowed its leader, Igor Sechin, to expand beyond energy politics into conflicts with his personal rivals, which may draw a response from Russian President Vladimir Putin.
  • Should Putin decide to take down Sechin, the consequences would ripple beyond the energy sector and into the larger political environs of Russia.

When Russian President Vladimir Putin began consolidating power in the early to mid-2000s, he also consolidated his country's energy sector. Putin oversaw the creation of two mega-energy firms — Rosneft for oil and Gazprom for natural gas — as well as a handful of regional firms. And since their inception, Rosneft and Gazprom have been the Kremlin's crown jewels, making up about half of the Russian government's budget and 25 percent of the country's gross domestic product (GDP) during years of high energy prices.

Rosneft and Gazprom remain Russia's most strategic assets, even as revenues have declined following the fall of oil prices in mid-2014. But the shrinking revenue pie has left various Kremlin elites scrambling to secure the biggest slice they can get. And the most aggressive competitor is Rosneft, driven by its ambitious leader, Igor Sechin. Rosneft has been maneuvering to outshine and outperform its rival Gazprom to grow its power within the energy sector and Russia at large.

The Rise of Rosneft

Gazprom has long been the Kremlin's favored energy partner, holding a monopoly over Russia's piped natural gas exports. Gazprom's stranglehold on natural gas exports are a useful tool for the Kremlin as it manages its relationships with former Soviet states, as well as Europe and Turkey. But lower global natural gas prices, as well as a string of diversification projects in Europe, Eurasia and the Middle East, have curbed Gazprom's ability to influence affairs in those regions, which in turn has weakened its position with the Kremlin.

In Gazprom's struggles, Rosneft has spied an opportunity. Now that its rival is weaker, the firm has started to aggressively grab new assets. In October 2016, Rosneft closed a deal to take over the country's sixth largest oil firm, Bashneft, even after Putin explicitly warned against the takeover with a rare public threat. Rosneft won out in the end, agreeing to let the Kremlin privatize a large swath of its company in exchange for permission to take over Bashneft.

Putin reportedly planned to divvy up the privatized Rosneft shares among companies that are not politically allied with — and are often hostile to — Rosneft, such as independent producer Lukoil and Kazakhstan's KazMunaiGaz. But Sechin allegedly pulled a fast one behind the scenes, striking a murky deal with foreign company Glencore and the Qatari Investment Authority, which have no political biases against his firm.

Rosneft swiftly ramped up its rivalry with Gazprom. In June, it replaced two Gazprom-loyalist board members with members elected from the new shareholders. And the oil firm, no longer interested in staying in its own energy lane, has set its sights on the natural gas sector that Gazprom has ruled for so long. Rosneft has gone from producing 2 billion cubic meters (bcm) of natural gas in 2012 to 67 bcm in 2016, with plans to hit 100 bcm by 2020. That's still less than a quarter of Gazprom's production, but it represents much more of a stake in the natural gas sector than Gazprom is willing to share. And Rosneft is offering more flexible natural gas pricing mechanisms to win its rival's clients in Russia and abroad, which has ruffled Gazprom's feathers and forced it to follow suit.

2016 performance indicators for major Russian energy companies

The Power of Pipelines and Political Leverage

Rosneft's larger strategy is to translate its rising profile into political leverage. The company has become increasingly involved with foreign countries — such as Egypt, Libya, India, Venezuela, Germany, Syria and China — and these relationships all support the Kremlin's interests. Right now, it is unclear if Rosneft is acting at the Kremlin's behest or if they are just conveniently aligned, but regardless, there is substantial overlap between Rosneft's moves and Moscow's foreign policy objectives, which gives Rosneft political leverage.

One of Rosneft's main goals is to persuade the Kremlin to end Gazprom's longstanding monopoly over piped natural gas exports. And, led by Sechin, the firm is making some progress. In early August, independent Russian news outlet Vedomosti reported that Rosneft had been holding backroom meetings with the Russian Security Council's commission for economic security. The commission recommended the liberalization of export routes, and Russia's Federal Antimonopoly Service (FAS) suggested that such liberalization could happen as early as 2018, though the Energy Ministry hinted at 2020.

Incremental liberalization of the natural gas export industry would be a boon to Rosneft, allowing it to focus first on exporting via pipelines that run to Asia. Right now, Gazprom is standing firm in its demand to be the only gas producer supplying the future Power of Siberia pipeline, which will go to China. But Beijing had been hoping to benefit from competition between energy firms. Rosneft has struck a string of natural gas deals with Chinese firms in recent months, and is hoping for a final push into liberalization in the region, which would open the door for full liberalization in every region. The increased competition would benefit the Chinese, Europeans and Turks, and could be seen as a Russian olive branch after years of growing tensions.

Sechin Gets Personal

Rosneft's string of financial and political successes has bolstered its chief's confidence. Now Sechin, who already has decadeslong relationships with Russian political heavyweights and a powerful alliance with the FSB, is using his growing influence to target his enemies. In November 2016, Russian Economic Minister Alexei Ulyukayev was detained on charges of bribery and extortion — arguably the most high-profile arrest in post-Soviet Russia. Ulyukayev belonged to a large faction of Putin loyalists who had been battling Sechin and Rosneft for years. In his trial, Ulyukayev argued that he was being framed by Sechin and the FSB. (Putin's position on his one-time loyalist's arrest — and Sechin's likely orchestration — is unclear.)

More recently, Sechin has gone to political battle with another Putin loyalist, Chechen President Ramzan Kadyrov, who accused Rosneft of going back on commitments to build a plant in Chechnya. Rosneft denies the accusation, claiming to be conducting a feasibility study. But the conflict reveals a deeper antagonism between Rosneft and Chechnya, which has long demanded that Rosneft hand over its assets in Chechnya to the republic's government because of a lack of investments. Meanwhile, Sechin's FSB allies have been fighting to gain a larger security foothold in the republic. Accusations have flown back and forth, escalating to the sabotaging of refinery upgrades and Chechen involvement in the April 3 St. Petersburg bombing.

And Sechin has mixed business with personal revenge in yet another arena, suing Bashneft's former owner, Sistema, for alleged abuse of its shareholding rights in Bashneft. On Aug. 23, a court ordered Sistema to pay Rosneft some $2.3 billion for stripping assets from Bashneft during the takeover, a ruling Sistema is fighting.

Is the Oil Czar Going Too Far?

Rosneft's rapid expansion and Sechin's string of political victories raise questions about whether Sechin is overreaching. Given Rosneft's major stake in Russia's energy sector and Sechin's many alliances with the FSB and elite businessmen, the oil czar is arguably the second most powerful man in Russia behind Putin. And for reasons ranging from economic stagnation to political infighting to changing social issues, Putin is feeling increasingly challenged by the divisions within Russia. With his cutthroat ambition, Sechin is a major driver behind some of those divisions.

Putin has shown that he's willing to take down many large elites within the Kremlin, even those who have been by his side for decades, as Sechin has. However, with his powerful allies and wide reach, Sechin is the one silovarch who may be too big to fall. His downfall would ripple beyond just Rosneft and his own personal networks, threatening the stability of Russia at large.

But according to a string of reports among Russian media and watchers, Putin has been building up a set of powerful loyalists to support him, including Kadyrov, Rostec chief Sergei Chemezov, presidential aide Vladislav Surkov, Prime Minister Dmitri Medvedev, parliamentary speaker Vyacheslav Volodin, financier Yury Kovalchuk and others. Though most of these loyalists lack the powerful asset bases that Sechin has, they still give Putin options. For example, the Russian president could bolster the declining Gazprom by putting the politically powerful Medvedev in charge. And he is already expanding the newly formed National Guard, a force directly loyal to Putin alone, which could eventually rival the FSB's position.

Overall, Sechin and Rosneft are one part of a larger power struggle inside the Kremlin. Russia is increasingly unstable, and Putin is thus increasingly at risk of finding himself with a viable political opponent who could threaten his rule. For Russia's president, the creeping influence of Sechin and the clashes between Gazprom and Rosneft may well be harbingers of bureaucratic threats to come.

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