OPINION: Russia is at something of a crossroads in terms of state involvement in its staple oil industry.

Rosneft, the country’s largest oil producer, has honoured a commitment to reduce the state’s involvement in its operations, with executives revealing an expected one-year extension to a share buy-back programme to the end of 2021.

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The company started buying back stock in the first quarter, following a transaction in which one of its subsidiaries obtained the state’s 9.6% stake in Rosneft as payment in kind for the company’s oil and gas holdings in Venezuela.

That deal left the Russian government holding less than 50% in Rosneft, with control now in the hands of chairman Igor Sechin — a close associate of Russia's President Vladimir Putin — and two minority shareholders, UK supermajor BP and Qatar Investment Authority.

Rosneft's management is now said to control close to 11% of the company's shares.

With BP’s shareholding of almost 19.8% and Qatar’s share of 19%, the trio are together close to being able to take formal operating control over Rosneft should they wish.

BP and Qatar are understood to support Sechin.

BP is attracted by Rosneft's access to large greenfield assets that are not directly available to foreign majors, while Qatar benefits from the hefty dividend payouts.

The Kremlin has been key to the rise of Rosneft as Russia's dominant oil producer after it took over the oil-producing subsidiaries of privately held Yukos when the latter was forced into bankruptcy by authorities in 2006.

In the past decade, Moscow also allowed Rosneft to buy state-controlled regional player Bashneft, which was intended to be sold into private hands.

Despite now all but ceding operational control, the Kremlin continues to provide Rosneft with favourable terms, recently agreeing to provide new tax concessions to its flagship greenfield development in East Siberia, the Vankor oilfield.

These concessions could boost Rosneft's bank balance by an estimated 46 billion roubles ($594 million) annually, easing the financial burden of the company's commitment to invest in developing large onshore oil and gas blocks in the Krasnoyarsk region — a project known as Vostok Oil.

By comparison, the state's tax take on other oil producers will increase from January as authorities cancel tax breaks for unconventional oil developments and hike other taxes.

Authorities have also remained silent on how Rosneft handled its share of the oil production cut this year under Russia's commitment to the Opec+ alliance — a co-operation between Opec and other key producing nations to slash output in an effort to help stabilise the oil price amid coronavirus-related demand destruction.

In what has proved a huge strain on some regional budgets, Rosneft ordered massive production cuts at key regional oil subsidiaries such as Bashneft and Tomskneft, as well as shutting down its Sakhalinmorneftegaz subsidiaryin Russia's far east.

The lack of government oversight over Rosneft, coupled with its favourable tax status, has created an unfair operating environment for other Russian oil producers, which are also suffering from the global market downturn and uncertainty over their businesses due to looming restrictions on carbon fuels.

Unless the state acts to restore its control over Rosneft or removes its favouritism towards the company, the oil-producing tail will continue to wag the political dog to the detriment of Russia's ailing economy.

(This is an Upstream opinion article.)