MOSCOW, October 30. /TASS/. The Moscow Arbitration Court on Thursday granted a lawsuit filed by the Prosecutor General’s Office on the return of oil producer Bashneft’s shares to state ownership.

The court acknowledged that a series of privatization deals, under which the fuel and energy enterprises in the Republic of Bashkortostan were assigned to the ownership of Ural Rakhimov, a son of Bashkortostan ex-head Murtaza Rakhimov, were conducted with violations.

The Bashneft assets have to be returned by Bashneft’s core shareholder — Sistema holding company owned by billionaire Vladimir Yevtushenkov, which purchased the oil producer’s shares from Ural Rakhimov.

Sistema shares are growing on the Moscow Stock Exchange as investors expected a gloomier outcome.

The defendants in the case were Bashneft’s private owners - Sistema holding company owned by Yevtushenkov who is currently under house arrest and Sistema’s subsidiary, Sistema-Invest, as well as Bashneft itself.

“The court granted the lawsuit by the Prosecutor General’s Office on returning 71% of Bashneft shares to state ownership,” the judge read out following Wednesday’s court hearings on the case.

The court’s ruling will come into force in a month. The court proceedings will continue, if the ruling is appealed against in the Ninth Arbitration Appeals Court. This is why, the court has ruled against lifting the arrest of the Bashneft shares as a protective measure.

A Sistema representative who was present during the court hearings and the company’s press office declined to comment on Sistema’s plans to appeal against the judgment.

How Bashneft was privatized

Privatization deals, which the Prosecutor General’s Office demanded to recognize as illegal, were held in the 1990s. During that period, companies close to Bashkir Capital were buying up oil, energy and oil refining enterprises in the Republic of Bashkortostan. Investigators believe that Ural Rakhimov, a son of ex-Bashkortostan head Murtaza Rakhimov, was the main beneficiary of the business built on assets sold out from the republican property.

The privatization deals finally drew the attention of Russia’s law-enforcement agencies. The Audit Chamber of Russia said after its check that the privatization of the Bashkortostan fuel and energy sector “was the most unprecedented case of the theft of state-owned assets.”

The investigation held after the audit ended without any results in May 2010 but was resumed in 2014. Ural Rakhimov who has been placed in Russia’s federal wanted list is the main suspect in the case of “grey” privatization schemes in Bashkortostan.

The Prosecutor General’s Office said in its lawsuit that the disputed Bashneft shares had originally been in federal ownership while the Bashkortostan authorities had made a decision on privatization without the federal center’s permission.

Yevtushenkov’s role

Sistema started to buy up Bashkortostan’s energy companies in 2005, gradually building up its shareholdings in Bashneft, four refineries, the oil trader Bashkirnefteprodukt and the power utility Bashkirenergo to finally acquire their controlling stakes for $2 billion.

Yevtushenkov’s Sistema, which was a defendant in the court, did not participate in the privatization of the Bashkortostan energy companies currently integrated into Bashneft. These companies’ assets were sold by structures close to Ural Rakhimov.

However, investigators say that Sistema knew about the legal vulnerability of the Bashkortostan fuel and energy companies and purchased this business at a considerable discount.

In view of this, Russia’s Investigative Committee insisted that claims to Sistema should be expanded to oblige the holding company to return both the Bashneft shares and dividends received on this stock for all the years of its possession. These dividends amounted to 142.5 billion rubles ($3.4 billion at the current exchange rate) for Sistema and 47.5 billion rubles ($1.1 billion) for Sistema subsidiary, Sistema-Invest. The Prosecutor General’s Office on Thursday decided against this claim causing Sistema’s stock growth by 16.5% on the Moscow Exchange.

Sistema lawyers were trying to convince the court that the deal to buy the shares of the fuel and energy companies in Bashkortostan, which are now part of Bashneft, was a legally clean transaction and Sistema was a bona-fide buyer while a report on the transaction was sent to Russia’s State Property Agency (Rosimushchestvo).

“It turns out that the Prosecutor General’s Office knew nothing about the illegitimacy of the shares privatization while Sistema should have known about this,” Sistema’s lawyer said in the court.

In the defendants’ estimates, the purchase price of $2 billion exceeded the average market price over the past six months prior to the transaction by 80%

“If the Prosecutor General’s Office believes that the sale of the Bashneft shares by decision of the Bashkortostan government caused damage, then the government of Bashkortostan must repair this damage,” the Sistema lawyer said.

In the lawyer’s opinion, the Prosecutor General’s Office had the right to claim only 38% of Bashneft shares instead of 71% because most of the shares had been transferred to the company’s personnel for free or sold to Bashkortostan residents at preferential prices.

“That is why, the Prosecutor General’s Office may claim 30-38% of the shares; otherwise, this may be regarded as the shares de-privatization,” the Sistema lawyer argued.

Investors wrote off Bashneft

Sistema’s shares started to grow (by 13% in London) after the court announced its verdict for the holding company to return the Bashneft stock to the state. Investors have already priced in Bashneft’s withdrawal from Sistema’s portfolio in their estimate of Yevtushenkov’s business, Raiffeisenbank analyst Andrei Polishchuk said.

Sistema core shareholder Yevtushenkov was arrested on September 16. At this moment, Sistema’s market value was $8.12 billion while Bashneft was worth $6.6 billion.

From September 16 to October 30, Sistema shed 55.4% while Bashneft lost 38.7%, which suggests that Sistema’s market value fell by $4.5 billion and Bashneft’s capitalization by $2.55 billion.

The Bashneft stock is also rising now (by 6.5% on the Moscow Exchange) but its market value is currently at about $4 billion, which is the sum by which Sistema’s capitalization has gone down.

“The market initially priced in a more pessimistic outlook during a fall in the share prices. In particular, this scenario envisaged the return of dividends paid on Bashneft shares and penalties. That is why, the return of the shares to the state is a more optimistic scenario, although possibly the decision is not yet final,” the Raiffeisenbank analyst said.

If Sistema had been forced to return all dividends received from the oil business, it would have had to sell some of its key assets, apart from losing Bashneft, Aton brokerage analyst Dinnur Galikhanov told TASS.