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. Last Updated: 07/27/2016

THE ANALYST: Kremlin's Deal on Slavneft Smacks of Same Old Tricks

Two months ago a corporate governance event occurred that was inadequately analyzed in the media. A leading figure of the Liberal Democratic Party of Russia, the often controversial nationalist political party that has seen its popular support sink from one parliamentary election to the next, was appointed president of Slavneft, the country's eighth-largest oil company.

There are hundreds of skilled, experienced oil managers in the country, so many that the government shouldn't have to resort to politicians to pump crude out of the ground. To his credit, Mikhail Gutseriyev, the new Slavneft president, admits he is not an oil man, though he did graduate from an oil and gas university (the same one Moscow Mayor Yury Luzhkov once attended). He is, in his own words, a financier, and that is precisely what Slavneft - again, in his opinion - needs.

Gutseriyev has not hidden the fact that a deal with the government took place, though he is taciturn on the details. However, he did admit in an interview that his appointment was the government's idea, and that they insisted he resign his post from LDPR before the appointment proceed.

A bizarre formality, it would seem. Bizarre because an industrial director, just as any citizen, has the right to belong to a political party, so demanding someone quit his or her party in exchange for a job is ludicrous. But this, in all likelihood, is the formality: the Kremlin wanted to mask this deal from what it really was: a shameless cash-flow giveaway.

Slavneft is a mediocre oil company that has been living in limbo, waiting to be either acquired or molded into a larger state-owned concern. The company produces 12 million metric tons of crude per year, and has a glut of unused refining capacity, especially at the Mozyrsky refinery in Belarus. Like all of the oil companies, Slavneft needs hundreds of millions of dollars in investment; but unlike its competitors, it has little hope of attracting much since it is still state-owned. The government has repeatedly tried to sell a 19.68 percent stake in the company, and has repeatedly failed.

Still, with benchmark Brent crude selling at $30 per barrel, there is no finer place to be than in oil. Mediocre Slavneft is worlds better than some committee chairmanship. For LDPR this deal is a godsend. The party, as its political influence in the State Duma wanes, and with it the number of its boosters, has been gradually branching out in a hunt for new financial backing. Vladimir Zhirinovsky, LDPR's leader, participated in the gubernatorial elections in Belgorod not for personal prestige, but to forge himself a quaint feeding trough in the south. At one point he was even eyeing the governor's seat in Leningrad Oblast, though for some obscure reason he backed off.

Gutseriyev says he intends to reverse Slavneft's fortunes. He has promised to clean house, first by demanding 100 percent cash payments for goods and services, and then by installing a transparent, international system of accounting in the company's books. Yet more ambitious is his plan to increase output over the next 10 years by 8 million metric tons (or 66 percent) by modernizing production technology, tapping reserves in Western Siberia and the Krasnoyarsk region, and creating joint ventures to produce crude in Iraq, Algeria and Libya. Part of the financing, he explained, will come from a $200 million credit from a Western bank he already has an agreement with.

Right. And Russia intends to sell the Kuril Islands to Japan sometime this year.

Gutseriyev sounds like a typical LDPR politician: promise anything and everything, no matter how absurd it sounds. Knowing he has the support of the Kremlin and Belarus (he has already met with President Alexander Lukashenko), he appears to have become slightly giddy at his sudden "promotion" from a Duma deputy representing the Republic of Ingushetia to boss of a multibillion dollar integrated oil company. He has no more chance of procuring 10-year, hundred-million dollar credit lines than he does of buying out LUKoil. His function will primarily be to keep quiet and do what the Fuel and Energy Ministry tells him.

In the end, regardless of Gutseriyev's wishful thinking, this Slavneft deal is the first episode of corporate neglect in Russia after the Yeltsin era that had been characterized by the slogan "politics first, economy second."

Though political wheeling-and-dealing is inherent in any system of government, in civilized countries it is usually a matter of, "Hey, you vote for this program of mine, and I'll remember you next time one of your projects comes to the floor." Here it seems to be: "Hey, you give us all your votes unconditionally, and we'll let you run an oil company."