Russian Economy Minister charged with extorting $2 million bribe

[November 15, 2016]  By Svetlana Reiter and Vladimir Soldatkin

MOSCOW (Reuters) - Russian investigators on Tuesday charged Economy Minister Alexei Ulyukayev with extorting a $2 million bribe from Rosneft, Russia's biggest oil company, in a case that threatens to expose fault lines in President Vladimir Putin's inner circle.

Ulyukayev, a 60-year-old technocrat whose ministry has been overseeing a sale of state assets, is the highest-ranking Russian official to be detained while in office since the collapse of the Soviet Union in 1991.

He faces up to 15 years in jail if found guilty.

The Investigative Committee, the state agency that investigates major crimes, said Ulyukayev had extorted the bribe in exchange for approving Rosneft's $5 billion purchase of a stake in mid-sized oil producer Bashneft <BANE.MM>.

In a twist reminiscent of the Soviet era, his detention was announced in the early hours of Tuesday morning, with state TV and pro-Kremlin politicians presenting it as part of a high-profile fight against corruption.

Others said it was evidence of infighting at the highest levels of power, possibly involving Igor Sechin, the chief of Rosneft <ROSN.MM>, a close Putin lieutenant who is one of Russia's most powerful men, and might herald a shake-up.

Low oil prices and Western sanctions mean the government is struggling to plug holes in the state budget ahead of a 2018 presidential election, and that competition for resources inside the tightly-controlled system has become more acute.

Law enforcement sources told Russian media the minister's phones had been tapped and his electronic communications monitored. Investigators set up a sting operation in which the alleged bribe was handed over on Monday, the reports said.

Investigators said Ulyukayev had threatened to use his position to cause problems for Rosneft unless it paid him.

They said they were not challenging the legality of Rosneft's purchase of the Bashneft stake or investigating it.

Putin was informed about the case when the investigation was first launched, Kremlin spokesman Dmitry Peskov told reporters. "These are serious allegations," Peskov said. "Only a court can deliver a verdict."

Previous high-profile prosecutions during Putin's rule have been a cover for settling commercial or political scores, according to people involved in those cases. The Kremlin and law enforcement agencies deny that, saying they only target criminals.

TURF WAR

Rosneft's acquisition of Bashneft last month was the focus of a major turf war between rival Kremlin camps, sources close to the deal and in the government have told Reuters.

Sechin lobbied hard for the green light to buy Bashneft, but the deal was fiercely opposed by economic liberals in the government, some with ties to Prime Minister Dmitry Medvedev, who believed Bashneft should go to private investors.

Ulyukayev initially opposed Rosneft buying Bashneft, one of the most lucrative state assets to be privatized in years, but eventually signed off on the deal.

A 19.5 percent state-owned stake in Rosneft is up for privatization next. Rosneft is poised to buy the stake itself to sell on to investors later.

Russian Economy Minister Alexei Ulyukayev speaks during an interview with Reuters in Moscow, Russia, November 1, 2016. Picture taken November 1, 2016. REUTERS/Sergei Karpukhin

Sources told Reuters last week that Rosneft's parent holding company may help Rosneft with funds for the deal. One state company helping another conduct a privatization is likely to be controversial among some members of the government.

Christopher Granville, managing director at TS Lombard Research, said Ulyukayev's detention might be linked to that.

"It must be because of what is happening next," Granville told Reuters. "To prevent any obstructions to what influential people want to happen next. I’m talking of course of the next phase of the privatization of Rosneft."

He said there was a question mark over whether Rosneft buys the stake in itself first to sell on or whether it is simply sold off to investors without that intermediary step.

Alexander Shokhin, head of the Russian Union of Industrialists and Entrepreneurs and briefly economy minister himself in the 1990s, said he was skeptical about the accusations against Ulyukayev.

There had been a widespread consensus that the Bashneft stake had been sold to Rosneft for a market price, so it was strange that a bribe would be given for a valuation that everyone agreed on anyway, he said.

In a country where bribes have sometimes totaled many tens of millions of dollars, there was also surprise in some quarters at the relatively small size of the alleged payment.

Medvedev and Putin spoke about the detention, Medvedev's office said, adding: "The prime minister believes that the most painstaking investigation of this case is required."

A Rosneft spokesman, Mikhail Leontyev, was quoted as saying by the TASS news agency that the company saw no risk to the Bashneft deal. "The deal is absolutely above board," he said.

The minister has been in his job since June 2013. He is not part of Putin's inner circle, which is dominated by people who favor a commanding role for the state in the economy, but neither is he a part of the rival camp of economic liberals.

Ulyukayev is close to Andrei Kostin, the influential head of Russia's second-biggest lender, state-owned VTB <VTBR.MM>, and chairs VTB's supervisory board.

A Moscow court is due to rule later on Tuesday how long Ulyukayev will be detained for.

(Additional reporting by Katya Golubkova, Maria Tsvetkova and Alexander Winning; Writing by Christian Lowe/Andrew Osborn; Editing by Richard Balmforth)

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