By Max Hess
At the time of this piece’s publication, the share price of oil company Tatneft is up more than one third year on year. In comparison, Rosneft’s is essentially flat, while Lukoil, Russia’s largest non-state oil company, is up 9.76%. The gap between Lukoil and Rosneft shares has long been at least in part a function of the political risk premium investors take when backing Rosneft. After all, Lukoil does not finance the Venezuelan government, provide Iraqi Kurdistan with lines of credit, face numerous EU and US sanctions, or find itself at the center of an alleged plot to bring down Russia’s former economy minister. A closer examination of Tatneft, however, reveals it faces its own, rather significant political risks. Tatarstan’s web of regional elites, the uncertainty over its future status as an autonomous republic, and local protest dynamics all threaten to destabilize already unwieldy environment. Tatneft has found itself at the nexus of these trends, and with them a new line of business, one that should provide little comfort to its investors and creditors: a sideline in bailouts.
Tatneft is the state oil company of Tatarstan, with the regional government holding a golden share in the company. The region’s unique political economy has allowed it to retain both a locally dominant regional oil business as well as a major private conglomerate, TAIF Group, controlled by the family of former Tatarstan president Mintimer Shaimiev. It is also Russia’s last autonomous region to retain a president and prime minister, and remains a net contributor to the federal budget – it pays in more than it receives in federal transfers. Talks are ongoing over the extension of its autonomous status, although consensus is that it will likely be allowed to lapse. The current state of Tatarstan’s autonomy, and how this applies to Tatneft, however, remains visible in several cases: a murky asset sale to TAIF, the collapse of VIM-Avia, and three bank bailout efforts, two of which succeeded.
Tatarstan’s unique political economy has allowed it to retain both a locally dominant regional oil business as well as a major private conglomerate, TAIF Group, controlled by the family of former Tatarstan president Mintimer Shaimiev. It is also Russia’s last autonomous region to retain a president and prime minister, and Tatarstan remains a net contributor to the federal budget – it pays in more than it receives in federal transfers. Talks are ongoing over the extension of its autonomous status, although consensus is that it will likely be allowed to lapse. The current state of Tatarstan’s autonomy, and how this applies to Tatneft, , however, is visible in several cases, namely a murky asset sale to TAIF, the collapse of VIM-Avia, and the bailouts of two local banks, as well as the failure to rescue Tatfondbank.
The banking crisis comes to Tatarstan
Trends in Russia’s banking sector since the country’s economic downturn in 2014 make for bleak reading. Hundreds of small banks, primarily controlled by individual interests engaged in related-party lending, have been shuttered while the debt holdings of major banks have led the Central Bank to intervene on an unprecedented scale. However, Tatarstan has largely been left to its own devices in handling the crisis, as seen in the collapse of state-owned Tatfondbank, placed into administration at the end of 2016.
Tatarstan’s president Rustam Minnikhanov hinted in February 2016 that TAIF could bail out the bank, which had already received capital injections from Tatarstan earlier in the year. However, the rumored TAIF was never launched and Tatfondbank’s licenses were withdrawn in March as significant fraud in its operations was uncovered, including allegations Tatfondbank was financing the businesses of regional MP Robert Musin, Tatfondbank’s chairman. He was ultimately arrested.
Accusations of fraud at Tatfondbank ultimately saw regional prime minister Ildar Khalikov, who had been head of the bank’s board of directors, resign. As if to highlight that local authorities are more concerned with self-preservation than cleaning up the economy, Khalikov was subsequently named head of local energy business Tatenergo, wholly owned by Svyazinvestneftekhim (SINEK), the Tatarstan government’s investment arm that also controls Tatneft, and which had pumped 1bln rubles into Tatfondbank in July 2016. The series of events around Tatfondbank’s collapse serves to demonstrate that the lines between public and private, government and business, are effectively non-existent.
TAIF, Tatneft, Bank Zenit
TAIF has long had a symbiotic relationship with Tatneft and Minnikhanov’s hints at a potential rescue for the fund warrant some further elucidation. TAIF purchased a 25% stake in petrochemicals producer Nizhnekamskneftekhim (NKNK) from Tatneft for 32bln rubles (US$524.5m at December 2016 exchange rates) just after Tatfondbank was placed into administration by the Central Bank. Tatneft had only bought the stake in NKNK nine months prior, for 19.85bln rubles (US$292m at March 2016 exchange rates), roughly half of its market price. This highly profitable sale, worth some US$232m, may well have been TAIF contributing to what was effectively another bank bailout affecting a Tatarstan-linked bank at the time.
The purchase-and-sale of NKNK is not the only line item of note of Tatneft’s 2016 financials. It was simultaneously burning through funds by propping up a regional financial institution, Bank Zenit, through capital injections and converting previous loans and deposits. From the end of 2015 until the end of October 2016, Tatneft’s stake in Zenit rose from 24.56% to 50.43% . The latest, and most costly recaptialisation of the bank, came in June 2017, bringing Tatneft’s stake to 71.9%. These have cost Tatneft at least 20bln rubles (US$347m), while concerns over the bank’s viability remain. The cost of Tatneft’s 2016 injections into Bank Zenit reached roughly 13.1bln rubles (US$226m), suspiciously proximate to the profits from selling the NKNK stake to TAIF.
The other bailouts
Bank Zenit is not the only financial institution to benefit from Tatneft’s largesse. Tatarstan’s largest bank, AK Bars Bank, also received a major cash injection: 10bln rubles (US$174m) in May 2017, half of which came from Tatneft. The other half came from SINEK, which is wholly owned by the Republic of Tatarstan, and is the largest shareholder of Tatneft. Tatneft now directly owns 17.2% of AK Bars Bank. There is good reason for further concern regarding AK Bars Bank: Robert Musin of the Tatfondbank scandal was also its president.
The collapse of Tatfondbank and Tatneft’s financing of Bank Zenit and AK Bars Bank most certainly demonstrate that the region is has been left to its own devices when it comes to bailouts. This appears to have been further highlighted by local reports that Tatneft and Bank Zenit were underwriting the operations of airliner VIM-Avia, which is registered in Tatarstan but has been based at Moscow Domodedovo, after its collapse in September.
Despite public denials of additional loans to the airliner, Russian state media subsequently reported Tatneft was financing the continued operation of at least some VIM-Avia flights. Zenit was also the airliner’s largest creditor, owed roughly 3bln rubles (US$52m). Although the airline’s operating license was ultimately revoked, there clearly remain unanswered questions over Tatneft and Zenit’s role despite the latter’s statement that it does not expect the airliner’s collapse to affect its finances.
While the 2016 cost of pumping funds into Bank Zenit was effectively financed by the aforementioned transaction with TAIF, there are no potential hints that TAIF has provided Tatneft with a similar financial cushion this year. Tatneft’s fortunes have been buoyed by the rise in oil prices so far this year, particularly in Q3, but there is reason to expect the oil company will have to further support its new dependents. While questions linger over the final bill Tatneft faces with regards to VIM-Avia, the real concerns are over Zenit and AK Bars Bank.
Following SINEK and Tatneft’s May cash infusion, Fitch downgraded AK Bars Bank’s long-term issuer default rating two steps to B, five notches into junk and well below the BBB- rating of Tatneft. Moody’s adjusted baseline credit assessment for AK Bars Bank is two levels lower, at Caa1 (CCC+). The bank’s continued viability remains a serious question. To contrast, Zenit has a long-term issuer default rating of BB from Fitch, although “Fitch has not factored in support from Tatneft directly into BZ’s ratings” and an adjusted baseline credit assessment of Ba3 (BB-) from Moody’s on the back of Tatneft support. AK Bars Bank will likely require additional cash injections, failing a central bank takeover, or it too could collapse. A collapse would risk a repeat of the protests that erupted after Tatfondbank’s collapse, which could have significant impacts on the ongoing debate over the extension of Tatarstan’s autonomy.
Tatneft has been employed to bail out two of Tatarstan’s largest banks, and its losses from the Tatfondbank collapse could exceed 5.4bln rubles. The questions over the financing of VIM-Avia are likely less threatening to Tatneft’s health but demonstrative of the extent to which the Kremlin has seen fit to hand what it deems Tatar issues over to Tatarstan. The protests that followed Tatfondbank’s collapse could return in the event of additional bank collapses, and AK Bars Bank in need of additional support. The drawn-out negotiations over Tatarstan’s autonomous status also raise questions about the future administration of regional companies; an end to this status would likely see other interests displace the TAIF-Tatneft symbiosis and likely invite other powerful actors to compete for Tatarstan’s spoils. Tatneft’s political risks are clearly significant.