The sale, which the government hoped would net it around half of Bashneft's $10 billion (7.65 billion pounds) market value, was part of a privatisation drive meant to raise cash to plug budget holes amid low oil prices and Western sanctions imposed over Ukraine.
With Russia's reserve fund forecast to run dry next year, the proceeds, though a fraction of the annual budget deficit expected in 2016, were eagerly awaited. But on Tuesday evening, the Russian government abruptly said the auction was, for now, off. It did not explain why.
Three Industry and government sources told Reuters on Wednesday that as the battle for Bashneft between Rosneft, which is run by energy Tsar Igor Sechin, and private companies heated up the Kremlin decided to delay the sale to avoid clashes among Russia's elite before parliamentary elections next month.
"One reason for the move was to avoid various influential groups being at each other's throat ahead of the election," said one source at a company that was planning to bid for Bashneft.
"The sale was already creating too much noise, so the delay will allow everyone to take a break," said another source close to the sale process.
A Kremlin spokesman and a government spokeswoman declined to comment on the reasons why the sale was postponed or whether it was linked in any way to the upcoming elections. Spokesmen for Bashneft and Rosneft declined to comment on the reason for the delay.
Despite an economic crisis that has cut people's incomes and eroded living standards, the main pro-Kremlin United Russia party is expected to comfortably win the Sept. 18 elections, which are seen as a dry run for Putin's presidential re-election campaign in 2018.
But its margin of victory is expected to be slimmer than recent years with some polls showing apathy levels are high.
There have been other signs of Kremlin nervousness; it carried out a reshuffle of regional leaders in July in areas where dissatisfaction with living standards was above average and Putin last week replaced his long-time ally Sergei Ivanov as Kremlin chief of staff.
Avoiding clan infighting over Bashneft is important for the Kremlin because it risks destabilising a political system in which Putin has traditionally mediated between competing groups to maintain stability.
At a time when Putin and his allies are focused on appealing to an electorate worn down by economic problems, the Bashneft saga could also turning into an unnecessary distraction that threatened to dominate headlines and undermine the idea that the ruling elite is united.
Bashneft also has most of its assets in the Urals republic of Bashkortostan, Russia's most populous, and its officials, including the region's head Rustam Khamitov, have said the sale of the key asset was creating concern among the population.
VTB, the state bank that was running the sale of the government's 50.1 percent state stake in Bashneft, sent invitations to over 10 companies to participate in what would have been Russia's first big oil privatisation in a decade.
Lukoil, Russia's largest private oil firm run by billionaire Kremlin-loyalist Vagit Alekperov, had long been seen as the favourite bidder until arch-rival Sechin said Rosneft also wanted to participate in the auction.
Tensions swiftly surfaced with several Russian government officials including Deputy Prime Minister Arkady Dvorkovich saying they opposed Sechin's plans to expand further.
One state-controlled company, Rosneft, buying another, Bashneft, could hardly be called a proper privatisation, they said.
Sechin hit back, saying his company's participation would boost competition and the price of Bashneft as well as the value of Rosneft ahead of a government auction to sell a minority stake of 19.5 percent in Rosneft.
"The delay of the sale is clearly a victory for Sechin," said another source with a company which was planning to bid for Bashneft.
Six industry sources said that the sale had created confusion and infighting between businessmen and state officials because Putin has kept silent on whether he would allow Rosneft to bid.
As a result, dozens of letters were written to the government and by the government on the subject with most ministers refusing to take a final decision.
"There were times when it (Putin's silence) looked like a test for Sechin and there were times when it looked like a test for everyone else," said the same source who interpreted the result as a victory for Sechin.
SMALL CASH FLOW
Over the past 15 years, Sechin has led ex-KGB spy Putin's drive to renationalise the oil industry after the chaotic privatisation of the 1990s, building Rosneft into the world's top oil producer by output among listed firms.
Sechin, 55, served under Putin when the latter was deputy mayor of St Petersburg in the 1990s and has progressed steadily with his boss, serving as Kremlin deputy chief of staff and deputy prime minister for oil.
Mikhail Khodorkovsky, Russia's fallen oligarch, has repeatedly accused Sechin of orchestrating a campaign against him which led to the demise of YUKOS, Russia's largest private oil firm, on tax evasion charges.
Khodorkovsky spent 10 years in jail, an experience he has described as the Kremlin's revenge for his political ambitions. Putin and Sechin have repeatedly denied that charges against the oligarch were politically motivated.
Rosneft ended up owning the bulk of YUKOS and later amassed other large oil assets, including TNK-BP, in 2013. It now controls over a third of Russian output, the world's largest.
But as oil prices collapsed, Rosneft's own value fell to under $50 billion, the sum it paid to acquire TNK-BP. That irked Putin, according to industry sources, though the Kremlin boss never publicly expressed his dissatisfaction with Sechin.
For the Bashneft sale stake, Putin stipulated that buyers were not allowed to borrow money from state banks. Rosneft said it could raise money from foreign banks and its own cash flows.
However, Rosneft this week, declared free cash flow of just $1.3 billion in the second quarter, down from $1.5 billion a quarter earlier, with net debt broadly steady at $23.4 billion.
The delay gives Rosneft - which at the moment cannot raised money from Western banks due to sanctions - more time to accumulate funds.
(Writing by Dmitry Zhdannikov; Editing by Andrew Osborn and Anna Willard)
By Katya Golubkova, Olesya Astakhova and Dmitry Zhdannikov