Offshore is a sure thing

June 14, 2016

“De-offshorisation” is one of President Putin’s favourite words. But it is one he uses selectively.

Ilya Zaslavsky

With the publication of the Panama Papers, President Putin’s long-professed commitment to weaning the Russian economy from its offshore addiction (“de-offshorisation” as he likes to call it) looks more and more like hypocrisy. Yet the president is still stringing the public along on this subject – helpfully, Vesti, Russia Today and the Kremlin website have saved the video clips of almost all his posturing.

But most pundits have completely overlooked the largest offshore deal in Russia’s history. A lot has been said about the cosy arrangement with the cellist Roldugin, and the dodgy deals that made Kirill Shamalov (Putin’s son-in-law) and various friends and relations extremely wealthy, but somehow the $28 billion offshore transaction for the sale of the Russian share of TNK-BP to Rosneft in the spring of 2013 has never been properly looked into. You could do a lot with that amount of money in Russia; to put this figure in perspective, Russia’s annual health and education budget, combined, are around $6 billion.


Since 2003, the oil major BP had owned 50% of the shares in TNK-BP Management, a company set up to exploit Russia’s oil and gas resources; the other 50% belonged to the consortium AAR which was made up of Alfa Group (Mikhail Fridman, German Khan and Pyotr Aven), Access Industries (Leonid Blavatnik) and Renova (Viktor Vekselberg’s group of companies).

Having come up against the unpredictable nature of the Kremlin’s preferred way of doing business BP had decided to exit what was nevertheless a very profitable joint venture. It is also clear that Putin and Igor Sechin, head of Rosneft, had decided that it was necessary to buy out both BP’s and AAR’s 50% shares.

In July 2012, came the first announcement that Rosneft was prepared to buy out BP’s 50% share in TNK-BP; furthermore Mikhail Fridman, one of the consortium of shareholders in AAR, made an opening offer of $10 billion for half of BP’s share (thus valuing the company at $40 billion).

The British were eventually bought out for $27.5 billion, but only $17 billion of that was paid in cash, and $4 billion of that amount went straight back into buying shares in Rosneft, with the remaining balance transacted as an exchange of shares in Rosneft and BP.

One might reasonably question why, if the whole company was never valued by analysts at more than $40-45 billion, and the value of half the company should therefore have been no more than $20-22.5 billion, did Rosneft overpay? Here, there is at least some kind of rational commercial explanation: part of the payment was made in Rosneft shares, which were of uncertain long-term value, while BP was a global brand, with the English promising new technologies and an exchange of knowledge and personnel. Rosneft thus gained BP as a strategic partner, even if the Russian government (as the main shareholder in Rosneft) did have to overpay.

The Russian shareholders of AAR received $28 million in cash, a figure that, according to Kommersant, represented an over-payment of around 40-60%

The Russian shareholders of AAR received $28 million in cash, a figure that, according to Kommersant, represented an over-payment of around 40-60% – i.e. around $8-10 billion. The question is why?

Despite the widespread criticism, Putin personally (according to Reuters), without any public discussion, oversaw and approved the deal during an all-night session with lawyers and bankers in Novo-Ogarevo.

In October 2012, Russia Today reported that the deal was done, with their invited analyst from Gazprombank stating that the true value of the company was slightly higher than the market capitalisation of $40 billion; and he listed a number of assets – the share in Slavneft, and NPZ in Ukraine, as well as international licence agreements – that should be taken into account in the overall price.

According to my calculations, however, even if you do take these assets into account, the maximum true valuation should have been £45 billion, and at most $48 billion – nothing like the $55-61 billion that Rosneft ended up paying. The increased final sum was the result of a further payment made in 2016 to cover accrued interest on the original deal price that was not paid in full in 2013.

Well, what’s new, you think: so Sechin squandered several extra billion, we’re used to that …

Apparently, nobody in the Kremlin was bothered either by the inflated price or by the fact that it was transacted offshore. Even TNK-BP’s former top manager, Marat Atnashev, said on TV Rain that, “the merger of TNK-BP and Rosneft is to everyone’s advantage except Russia’s economy.” Well, what’s new, you think: so Sechin squandered several extra billion, we’re used to that …

The conclusion one takes from all this would seem self-evident: the Russian taxpayer has become depressingly used to billions of dollars being swiped in the full light of day without proper justification or any sense of shame.

It is ironic, therefore, that, only a few weeks later, in December 2012, in his address to the Federal Assembly, Putin called yet again for the de-offshorisation of the economy. As if it had been someone else and not he who had just approved the pumping of billions of dollars through offshore accounts to his oligarch acquaintances.

Putin was proud of his dealmaking skills. At the completion of the deal in March 2013, he proudly explained to the British how lucky they were to have Rosneft as their new partners. A spokesman enthusiastically confirmed that the state company’s profits would grow appreciably; and Sechin said that the deal was carried out according to the highest international standards, all the while Putin nodding in agreement.

At a meeting in the Kremlin, 1st February 2016, President Putin says that “we have been talking about de-offshorisation for a long time now …” video courtesy of

Time and again, Putin has continued to preach about the need for de-offshorisation. Only his targets change; in his presidential address at the end of 2013, for example, he now cited the offshore purchase of TNK-BP as an example of something very negative – not because of the inflated price, however, but the fact that it was transacted offshore. A deal he approved.

And when the president speaks, state media is sure to follow. If Putin says that the country’s problems are all the fault of the oligarchs and those irresponsible Russian citizens who, unlike him, love their offshore deals, then Channel One is there to add to the chorus of disapproval. In the middle of her report for Vesti (at 3.30 min.), the reporter briskly announces, in steely North-Korean tones, that, “this enormous deal, it transpires, was carried out offshore, in Cyprus, the Caribbean and Europe.”

Aping the president, Igor Sechin admitted that a number of deals were indeed done offshore “at the insistence of our partners,” but that “Rosneft had no intention of operating offshore.” Actually pumping the oil out of ground, then, happens at home; only the money is sent abroad.

The headline figures show how good a deal it was:


In spite of this, Sechin is unrepentant. Last year, he said that he did not regret buying TNK-BP at the height of the oil price, and that he had every right to feel proud of the deal since “the synergy continues to grow and with it, the effect of this acquisition.” He is right about the effect.

Nonetheless, many responsible commentators and politicians realised only too well what had happened. In 2014, Alexei Navalny wrote that because of this “extraordinary deal” Russia would now have to draw on its financial reserves.

In an interview I had with the late Boris Nemtsov , in answer to my question as to whether the deal for Rosneft to purchase TNK-BP was justified, or useful, he replied: “It is an absurd and extremely detrimental deal, which has led to a monopoly in Russia’s oil market, which has put Rosneft in a very serious situation, and which has left the sector suffering even more from underdevelopment and corruption. TNK-BP as a private company is a very different thing to Rosneft as a bureaucratic state company. So it is a complete and utter absurdity, and just shows the total lack of professional know-how of Sechin – and Putin, who approved the deal. Added to which, this deal very quickly led to some very major problems – a decrease in the budget’s overall tax revenues because Rosneft began to demand tax breaks, and so forth. And furthermore, this whole deal led to a rise in the [domestic] market price of oil since it created an artificial monopoly of the market. It is an absolute absurdity!”

Absurd indeed.

Ilya Zaslavskiy is a former adviser to TNK-BP