When Igor Sechin was working as President Vladimir Putin’s deputy chief of staff a decade ago, visitors to his Kremlin office noticed an unusual collection on the bookshelves: row after row of bound volumes containing minutes of Communist Party congresses.
The record stretched across the history of the party and its socialist predecessor — from the first meeting in March 1898 to the last one in July 1990, a year and a half before the Soviet Union collapsed.
Sechin perused the documents and took notes, says Dmitry Skarga, who at the time was chief executive of Russia’s largest shipping company, OAO Sovcomflot.
“He was drinking from this fountain of sacred knowledge so that Russia could restore its superpower status and take its rightful place in the world,” Skarga says.
Sechin’s back-to-the-future fascination with his country’s communist past is something he shares with Putin, who, soon after coming to power in 1999, restored the music (though not the lyrics) of the Soviet-era national anthem and later described the collapse of the U.S.S.R. as the greatest geopolitical catastrophe of the 20th century.
Sechin is an open admirer of socialist icons such as Cuba’s ailing Fidel Castro, the late anti-U.S. Venezuelan leader Hugo Chávez and the executed Argentine Marxist Che Guevara, says Victor Mashendzhinov, who studied with Sechin at college. As a young man, Sechin served alongside Cuban fighters in the Cold War hot spots of Angola and Mozambique.
Sechin, 53, has put his careful study of Communist-era documents into practice at state-run OAO Rosneft, the world’s largest publicly traded oil company by output and reserves. During a decade at Rosneft, Sechin has turned it into something resembling in size the gargantuan Soviet Union ministry that was once in charge of oil production, mainly by swallowing up rivals.
Beginning in 2004, when Putin appointed him Rosneft’s chairman, Sechin arranged Rosneft’s takeover of the main assets of Mikhail Khodorkovsky’s Yukos Oil, according to Khodorkovsky and former Yukos managers. Yukos was Russia’s largest crude producer at the time. Last year, having become Rosneft’s chief executive in May 2012, he orchestrated the company’s $55 billion purchase of TNK-BP, a BP joint oil venture in Russia.
Sechin is the leading exponent of Putin’s stated determination to restore the state’s role in the Russian economy. Putin used Rosneft, through its acquisitions, to return Russian oil to state control. The company, 69.5 percent government owned, controls about 40 percent of Russia’s crude output.
In a similar vein, Putin reestablished majority state control of natural-gas-exporting behemoth OAO Gazprom. The company had been privatized in the mid-1990s under his predecessor, Boris Yeltsin, cutting the government’s stake to 41 percent.
To develop high-tech industries such as armaments and pharmaceuticals, Putin created Rostec, a state corporation that encompasses 663 companies employing 900,000 people, or 1.2 percent of the entire Russian workforce. He expanded state-run banks OAO Sberbank and VTB Group, whose dominance in retail banking has edged out foreign rivals such as HSBC and Barclays.
Sechin declined requests to be interviewed. Putin spokesman Dmitry Peskov said, “Sechin is a believer in the role of the state in his economic philosophy while at the same time not excluding a free-market approach.”
Of Putin’s relationship with Rosneft, Peskov said, “The president can’t get involved in the affairs of a company.”
Even as Putin, 61, stages the world’s most expensive Olympics, the $48 billion Winter Games in Sochi, to showcase the glories of present-day Russia, he has spent his time in office reshaping the economy to resemble the country’s Soviet past.
After Rosneft’s March acquisition of TNK-BP, state-owned enterprises accounted for more than 50 percent of Russia’s gross domestic product, up from 30 percent in 1999, according to data published by BNP Paribas SA’s Moscow unit and the European Bank for Reconstruction and Development (EBRD).
Russia’s economy grew 1.4 percent last year — the slowest expansion since the 2009 recession. The government projects growth will average 2.5 percent a year through 2030, compared with 7 percent annually from 2000 to 2008.
“Under Putin’s rule in Russia, the state is monopolizing key branches of the economy,” says Anders Aslund, a senior fellow at the Peterson Institute for International Economics. Aslund was an economic adviser to Yeltsin in the 1990s, when the government carried out a wave of sell-offs of state assets that put 70 percent of the economy in private hands.
“Incredibly, Putin seems oblivious both to the collapse of the Soviet Union’s economic system and why it happened,” Aslund says. “Half of the economy is controlled by state companies, and that is why the Russian economy isn’t growing.”
Such criticism ignores competitive realities, Peskov says.
“For example, in shipbuilding it’s absolutely pointless to carry out privatization,” he says. “You can privatize enterprises, but they won’t be competitive; they will be doomed to failure. So consolidating the assets under the state’s wing is the only way to preserve key sectors of the economy.”
Putin has said Russia stacks up favorably with many European countries on some key economic indicators. For example, Russia’s jobless rate for November was 5.4 percent, compared with 11.1 percent in the euro zone.
“The economy is in much better shape than in a number of European countries,” Peskov says.
In furthering Putin’s mission, Sechin is more than just a loyal underling to the president, says Khodorkovsky, who accuses Sechin of orchestrating the destruction of Yukos. In December, Putin showed he’s confident enough in the economic change he’s wrought to free Khodorkovsky, once Russia’s richest man and Putin’s most powerful rival.
Khodorkovsky, who was imprisoned in 2003 on tax-evasion and fraud charges, spent 10 years in prison camps. He says Sechin has helped to shape as well as execute Putin’s economic policies.
“Sechin is a real oligarch, in the classic meaning of this word,” Khodorkovsky said in Berlin on his fourth day of freedom. “He convinced Putin that state capitalism is right and is realizing this idea in practice.”
Putin, a onetime KGB colonel, maintains his tight grip on the economy by drawing on Sechin and other members of his inner circle to ensure that loyal allies direct the country’s industrial strongholds and revenue flows. Sechin, like Putin, is a St. Petersburg native and worked for Putin in the 1990s.
Like Sechin, Putin’s favored few are men who were associated with him before he became president. They include the chief executives of Gazprom, Sberbank, Rostec and monopoly rail operator OAO Russian Railways. Gazprom, Rosneft and Sberbank are now the country’s three largest companies by market capitalization.
Despite his relatively low profile internationally, Sechin looms large at home.
“Sechin is easily the most influential person in the country after Putin,” says Sergei Markov, a political analyst at Plekhanov Russian University of Economics in Moscow. “Putin trusts him more than anyone else.”
Having Sechin in control at Rosneft reflects Putin’s commitment to large government-run corporations.
“The experience of successful economic modernization of countries such as South Korea and China shows that the state has a necessary role to play,” Putin said in a 2012 campaign manifesto. “Large private capital willingly doesn’t want to go into new areas, because it doesn’t want to carry major risks.”
Lately, that private capital has been flowing away from Russia. Concerns about Putin’s treatment of Khodorkovsky and what it said about doing business in Russia encouraged investors to pull $420.6 billion out of the country from 2008 to the end of last year, according to the central bank — a trend the government has said it wants to reverse.
Khodorkovsky’s release from prison won’t be enough to allay the concerns of foreign investors, said Alexander Kliment and Yael Levine of Eurasia Group, a political-risk research firm. His release, they say, was a public-relations stunt ahead of the Sochi Olympics.
The key drag on the economy is corruption, much of it concentrated in the state sector, says Elena Panfilova, head of Berlin-based Transparency International’s Russia branch. Russia was ranked the most corrupt nation among the Group of 20 advanced economies in the organization’s 2013 Corruption Perceptions Index.
Another hindrance is the fact that state-run companies face no incentive to cut costs and eliminate waste, because non-state shareholders are in a minority, says Mattias Westman, chief executive of Prosperity Capital Management, the largest Russia-focused equity investor, which manages about $4 billion in Russia and other former Soviet countries.
Largely thanks to Rosneft and Gazprom, Russia — with a population of 143 million — is the world’s largest energy exporter by barrels of oil equivalent a day and the biggest crude producer after Saudi Arabia. The government receives about half of its budget revenue from oil and gas exports.
The EBRD said in December 2012 that Russia has become perilously dependent on commodities and is failing to prepare for falling oil output in 20 years. Lev Snykov, a partner at Greenwich Capital in Moscow, says the price needs to be at $120 a barrel or higher for the government to balance the budget. The price of Brent crude was $107.23 on Jan. 29.
When Sechin became chief of Rosneft, he had been deeply involved in the company. As chairman beginning in 2004, he had a decisive say in strategic decisions because of his unrivaled access to the president, according to Vladimir Milov, who was deputy energy minister in 2002.
As a boss, Sechin displayed a ruthless streak, Milov says. In 2010, he initiated the sacking of chief executive Sergei Bogdanchikov, a lifelong oilman who had kept Rosneft afloat through the volatile economic times of the late 1990s, Milov says.
While serving as Rosneft chairman, Sechin was also appointed deputy prime minister with responsibility for the energy sector in 2008. He held the Rosneft position until 2011.
He was the most effective bureaucrat in the government, says former central bank first deputy chairman Sergei Aleksashenko.
“From the point of view of bureaucratic management, he was simply amazing,” says Aleksashenko, director of macroeconomic research at the Higher School of Economics in Moscow. “He worked like a machine.”
Under Sechin, Rosneft has grown into a leviathan. From 2010 through 2013, its annual revenue increased 128 percent to an estimated $143.6 billion.
Its oil and gas output of 4.88 million barrels a day as of the end of the third quarter of 2013 was greater than Exxon Mobil’s 4.02 million and PetroChina’s 3.8 million; its proven oil and gas reserves, including TNK-BP, rose to 29.6 billion barrels at the end of 2012, above Exxon’s (25 billion) and PetroChina’s (23 billion).
The company posted an eightfold rise in third-quarter profit in 2013, after recording a $4.98 billion gain on the value of TNK-BP. Sechin clinched his latest deal Dec. 20 — the day of Khodorkovsky’s release — with the acquisition of Morgan Stanley’s global oil-trading and transport business for an undisclosed sum.
Sechin has also presided over a $270 billion supply deal signed in June that will make China Russia’s largest crude customer during the coming decade.
Compared with non-state-owned energy giants such as Exxon, Rosneft is inefficient. Even though Rosneft’s lifting costs — the cost of getting oil out of the ground — are less than a third of Exxon’s, the Russian company’s workforce is less productive.
Net profit per employee at Rosneft was $70,815 in 2012, vs. $620,026 for Exxon. Rosneft’s price-to-earnings ratio was 5.4, compared with Exxon’s 13.2 as of Jan. 13. Rosneft shares fell 6.87 percent in 2013, while Exxon shares rose 16.93 percent.
“The main reason to hold Rosneft is the reserves,” Greenwich Capital’s Snykov says.
In college, Sechin pored over Marxist-Leninist texts and could cite from memory biographical details of Communist leaders through the decades, recalls Larisa Volodimerova, a fellow student.
After graduating in 1984 with a PhD in economics and being fluent in Portuguese and French, Sechin joined the Soviet Army and served as a translator in Portuguese-speaking Mozambique and Angola, where Soviet- and U.S.-backed factions competed for dominance during the final decades of the Cold War.
When Putin went to Moscow in 1996 to work as a senior Kremlin official under Yeltsin, Sechin followed as a lower-ranking bureaucrat in the presidential administration. When Putin became president in 2000, Sechin spent eight years as his deputy chief of staff.
Constitutionally barred from serving more than two consecutive terms as president, Putin bided his time for four years as prime minister and installed Sechin as deputy prime minister while Dmitry Medvedev sat in as head of state. When Putin reclaimed the presidency in 2012, he appointed Sechin as chief of Rosneft.
In acquiring first Yukos and then TNK-BP from BP and its billionaire partners in March, Rosneft gained control of companies that had pioneered the use of Western technology and management in Russia.
Yukos hired foreign executives such as Bruce Misamore, who made it the first Russian company to switch to quarterly financial reporting under U.S. accounting standards. Yukos also introduced drilling techniques to bolster crude output, which declined in the 1990s.
BP set up TNK-BP in 2003 with Putin’s blessing. While the new company paid $19 billion in dividends to BP from its inception, according to BP’s 2012 annual report, infighting between the Russian and British partners eventually led to last year’s takeover.
Under that deal, BP has a 19.75 percent stake in Rosneft and BP chief Bob Dudley occupies one of two seats BP will eventually be entitled to on Rosneft’s nine-person board of directors. Former Exxon senior vice president Donald Humphreys and former Morgan Stanley chief executive John Mack are among the four independent board members.
TNK-BP increased production by more than 40 percent during the nine years before Rosneft bought it.
“The concern is, will Rosneft be able to achieve that same level of operating efficiency as TNK-BP did before it was acquired?” says Rob West, an oil analyst at Sanford C. Bernstein & Co.
Rosneft is also shouldering huge debts, says Tatiana Mitrova, of the Energy Research Institute of the Russian Academy of Sciences. Following the TNK-BP deal, the company’s debt more than doubled, to $72 billion.
To ease financial pressures, Rosneft has drawn down the first tranche of up to $70 billion in advance payments from China National Petroleum in exchange for supplies.
In October, Rosneft separately signed a provisional $85 billion agreement to supply China Petrochemical with 100 million metric tons of crude over 10 years. The agreement may restrict Rosneft’s ability to supply other customers at potentially higher prices, West says.
Sechin is a go-to man, says Sovcomflot’s ex-head Skarga.
“The richer Rosneft becomes, the more his influence grows,” Skarga says.
Unlike Russians who accumulated vast wealth during the privatization of state industries, Sechin isn’t preoccupied with money, he says. “He doesn’t have any billions,” he says.
What Sechin does have, Skarga says, is power. He will have it as long as Putin does, says Masha Lipman, an analyst at the Carnegie Moscow Center.
Sechin has his eyes on a post-communist breakthrough: In a Jan. 9 research note, Sberbank said Russian oil output will probably approach the Soviet-era peak of 11.4 million barrels a day by 2016 or 2017.
“It would be a very big psychological milestone for Russia to get back to the Soviet-era peak production,” says Julian Lee, a senior analyst at the Center for Global Energy Studies.
The full version of this Bloomberg Markets article appears in the magazine’s March issue.
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