Kremlin tightens screws on tycoon who refused to play ball

A court in Moscow has rejected a bail application by Vladimir Yevtushenkov, the chairman of Russia's vast Sistema investment group, and ordered the billionaire businessman to remain under house arrest.

Russian law enforcers confined Yevtushenkov to his luxury estate outside Moscow last week on suspicion of orchestrating a money laundering scheme when his Sistema group acquired the Bashneft oil company in 2009.

The case recalls the arrest of Russian tycoon Mikhail Khodorkovsky and the confiscation of his oil company a decade ago. It has spooked the Moscow stock market and sown fears in the local business community that the Kremlin is embarking on another wave of oligarch bashing.

Prosecutors allege that Yevtushenkov broke the law when Sistema acquired control of Bashneft, an oil production and refining company based in Bashkortostan, a Russian region near the Urals with a large Muslim population.

They claim that Murtaza Rakhimov, the son of Murtaza Rakhimov, the then president of Bashkortostan, had expropriated Bashneft from the state in an illegal privatisation.

Sistema had masterminded an illegal money laundering scheme and engaged in bribery when it invested $2.5 billion (€1.96 billion) to acquire control of Bashneft in 2009, it is alleged.

Petitioned Putin

Sistema denies wrongdoing and has pledged to use all legal means available to defend its position.

Russia's Union of Industrialists and Entrepreneurs, a grouping of the country's most powerful businessmen, signed a petition urging Russian president Vladimir Putin to intervene and release Yevtushenkov until the case was heard.

However, a court in Moscow refused to compromise at a hearing yesterday, turning down Yevtushenkov’s 300-million rouble (€6.1 million) bail application – a record in Russian legal history – and ordering the Sistema boss to remain under house arrest until November 16th as earlier planned.

In a gesture of leniency, the court ruled that Yevtushenkov, who was confined last week to his walled estate near Moscow and forbidden to communicate with the outside world, could now travel to work, receive post and speak to colleagues.

But the Sistema boss, “rich and influential enough to put pressure on witnesses” in the case, could not be allowed to go free, the judge said.

The court ruling reinforced nervousness among investors, slicing more than 7.6 per cent off Sistema’s share price during morning trading on the London Stock Exchange.

There are wider negative implications for Russia’s fragile economy, which, battered by western sanctions imposed in the wake of the Ukraine crisis, is hovering between stagnation and recession.

Investor confidence

In an unusually outspoken statement, Russian economy minister Alexei Ulukayev warned last week that the Yevtushenkov case would further knock investor confidence and could spur capital outflows from Russia, which are already expected to exceed €80 billion this year.

Even more emotional was a statement from German Gref, the president of Sberbank, Russia's biggest lender, who said Yevtushenkov's arrest was a "great tragedy" that would negatively affect the business climate.

Yevtushenkov belongs to the first generation of Russian oligarchs who grew fabulously rich on the back of murky privatisations in the early 1990s after the Soviet Union collapsed.

From a grandiose building that once housed the US embassy in downtown Moscow, Sistema controls a diversified portfolio of public and private companies. These include MTS, Russia’s biggest mobile telephone operator, as well as retail, healthcare, electronic and tourism groups.

Sistema appeared to have the Kremlin’s blessing when, in its first foray into natural resources, it acquired Bashneft, one of Russia’s oldest oil producers, in 2009.

Coming at time when the Kremlin was tightening control over Russia’s regions, the deal appeared to smooth the way for the ouster of Rakhimov, who, after serving as president of Bashkortostan for almost two decades, bowed to official pressure to step down in 2010, while retaining a seat on the Bashneft board.

Invested in oil fields

Under Sistema’s watch, Bashneft invested in the revival of Bashkortostan’s aged oil fields and refineries and acquired new production licenses that put the company on a path to future growth.

Even Yevtushenkov admitted that the Russian government had done Bashneft a “favour” when the company, bidding at an oddly uncontested auction, won rights to develop two huge oilfields in northern Russia in 2011.

Unlike Khodorkovsky who challenged Putin, Yevtushenkov has steered clear of politics and is said to be unquestionably loyal to the Kremlin. But loyalty is no longer enough. After annexing Ukraine’s Crimea and advocating a policy to “gather Russian lands,” Putin looks set on drawing the country’s last remaining privately owned oil assets into state control.

Khodorkovsky, who served 10 years in jail before receiving an amnesty from Putin last year, said Yevtushenkov was paying the price for refusing to hand over his assets to the Kremlin at the offered price.

"If Yevtushenkov has an opportunity to reach an agreement, he should go for it. I would not see any shame or discomfort if he agreed to any conditions," Khodorkovsky told the business daily Vedomosti.