Occam’s Rosneft

Italy’s Intesa Sanpaolo bank has not approved the loan to Glencore and Qatar, NewsRu reported yesterday.

“Against this backdrop, there were suggestions that almost the entire amount received by the State from the transaction, was de facto financed by the printing press of the Central Bank.”

There has been no evidence of any movement on the currency exchange market, the article continues, which likely means it did not happen.

The FT reported earlier that Intesa was still exploring the possibility of participating in the privatization of Rosneft. But that they are constrained by the fact that the US and EU are looking to see if Intesa’s participation would violate the sanctions against Russia. Intesa was recently fined $235 million by the New York regulator for breaking the sanctions regime against Iran, and likely does not want to get involved in breaking another one.

So far, Intesa has only said that they are advising Rosneftegaz – the holding company that controls Rosneft on behalf of the State.

“Of the total transaction amount – 10.5 billion euros – the buyers [Glencore and QIA] have agreed to pay 2.7 billion from their own resources. The balance was to be provided by a pool of banks headed by Intesa…”

But the Russians have already claimed that the money from the transaction has reached the budget. How is that possible?

“…it can be assumed that part of the transaction in euros was financed by Russian banks,” Tom Levinson, a currency strategist at Sberbank CIB, said.

According to NewsRu, the money in the budget was provided by Gazprombank, but came from a deposit of $29 billion placed by Rosneftegaz in October.

“The delay in the inflow of currency into Russia for the privatization of Rosneft has already caused its deficit in the market,” says Levinson.

The situation, he said, is exacerbated by the fact that Rosneft must pay $3.8 billion for the purchase of the refinery in India in December. In addition, [Russian] companies need to pay off $3.8 billion in external debt.

So, the article reaches the same conclusion that many experts in Russia have already written: that the Central Bank printed money to pay for the scheme.

This is not actually an uncommon practice, the article points out. In the last week alone, the Bank of Russia printed money “…and poured into the banking system in the form of loans 650 billion rubles.”

But why go through such a complex set of steps?

The Central Bank could have printed rubles to bail out the government and fill the holes in the budget. But that would have been highly inflationary. And that is the one thing the Regime cannot and will not do. Because it is the one thing that will drive people out into the street en masse. So they had to come up with some other way to fill the hole in the budget, and they settled on their privatization scheme scam instead.

But “sanctions” prevented them from going abroad to borrow more money from foreign banks. The commodities traders don’t have a lot of money because everyone is in the same boat and still trying to recover from the collapse of the commodities market. Apparently an offer was made to Trafigura to do a similar deal to what Rosneft has with China: advance payments in exchange for steady supplies. But Trafigura was not interested in buying more supplies from Rosneft.

Everybody knows Russia and Rosneft are bad bets. Actually getting anybody normal to take the shares was going to be a problem. They could have gone to the “oligarchs” boyars to take the deal, but frankly, they’re feeling the sting of the bad market too. Plus, the people in the Regime are all about control, and they don’t trust anybody who is not in their group (and not even then). And what sane person is going to pay good money for a stake in a badly run company that they have no control over?

In the end, the only option the Regime had was to buy the shares themselves. But again, inflation. The deal had to be done in such a way that would not impact the market / ruble negatively. And that is why they had to come up with this seemingly complex scheme. The Central Bank printed money. They then “loaned” the money to the Russian banks. The Russian banks turned around and loaned the money to Rosneft in exchange for ten-year bonds.

Glencore apparently got a good contract from Rosneft for playing their part and providing at least some of the funding. It is still unclear what Qatar gets out of the deal. And the Italians? Well, that is unclear too, but it appears to be where the whole story about outside funding falls apart.

As Alfred Kokh wrote on Facebook:

Occam’s razor cuts off all of the superfluity.

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