Rosneft Distraction

I got another notification in my Google Alerts yesterday about the Rosneft “privatization” scheme. According to the Russian press, the money for the purchase of the 19.5% stake in Rosneft came from Russian bank VTB:

But this just raises more questions, as Russia’s former deputy Finance Minister Sergei Aleksashenko points out.

First, Aleksashenko points out, despite the Russian government’s claims to the contrary, the money from the “sale” did not reach the federal budget last year. Of course, we already knew this based on both the statements of Glencore and Qatar, and on the filings I shared in my last post on this subject.

But a government official lying about something in Russia is nothing new, and you can’t fire them for it. So there cannot be “any political continuation of this story”.

Then there is still confusion about how the money is supposed to be transferred to the federal budget. Technically, the money should be paid to Rosneftegas, then paid to the budget as a dividend on profits earned from the sale. But that would not equal the full 692 billion roubles. And it would not show up on the books until this year or even next year.

But nobody in Russia cares about any of this, Aleksashenko says. Rosneftegas won’t be audited, and won’t be investigated. And these are all just “technical details” anyway. The main question that nobody seems to be able to answer is “who is the real buyer of the 19.5% stake in Rosneft?”

“The official version of a parity partnership of Glencore and QIA (Qatar investment fund) does not maintain the minimum checks on plausibility. Indeed if the partnership is created on the principle of 50/50, then why do the financial contributions of the participants differ by an order? The Qatar foundation paid 2.5 billion euros, and Glencore only 300 million [euros]?”

And then there is the question of why Glencore got a contract for gas deliveries, and Qatar didn’t. “Where is the equality there?” Aleksashenko asks.

Note: this is not entirely true. As I wrote last week, the deal on the gas deliveries was with QHG Trading LLP (which is equally split between a QIA subsidiary and Glencore Energy UK).

“Continuing on. We still do not know who Intesa’s partner is and who lent the buyer [Qatar] 2.5 billion euros.”

Then Aleksashenko casts doubt on the ability of the “borrowers” [Qatar & Glencore] to repay the loan. He also notes that the terms of the loan from Intesa are still a mystery.

But this is also not quite true. The paperwork for the three loans (possibly only two?) has been uploaded on the website of Companies House in the UK, but I am having difficulty making any sense of them. The numbers don’t match what we were told, and the participants are still murky. Who is QHG Cayman, for example. And Intesa is still listed as the lender.

Even so, Aleksashenko writes, if the “borrowers” (QHG Investment & QHG Holding) cannot repay the loans, then the “lender” (technically still Intesa) will own the shares.

“And that, it seems, is the essence of the transaction.”

He then reminds his readers that the initial proposal was for Rosneft to “buy” its own shares from Rosneftegas and then sell the same shares to an outside buyer at some later date. But this idea was allegedly rejected by Russian President Vladimir Putin.

But, Alexsashenko continues, that it seems likely that Sechin’s original plan was implemented, but “with modifications”. And he alleges that VTB’s role here was to distract from this fact.

Depleting Russia’s Reserves

The Ministry of Finance posted a long explanation at the beginning of the week on the state of Russia’s two reserve funds. I was planning on breaking it down, but Vladimir Milov has done my work for me. Some key points:

In the Reserve Fund as of 1 January [2017], there were only 0.97 trillion rubles, [that is] more than a trillion rubles were spent [in December alone];

It is unclear, Milov continues, what happened to the money supposedly received from the “privatization” of Rosneft [see my previous blog post on this].

In the SWF [Sovereign Welfare Fund] remains 2.8 trillion rubles that are “liquid” (© Siluanov).

And finally, Milov writes, the budget deficit for 2017 is slated to be 2.75 trillion rubles.

If everything continues in the current trajectory, by the end of this year the two funds will be depleted.

“Anyone who tells you that this supposedly “does not matter because the government is selling the currency to the Central Bank, while maintaining the same volume of gold reserves” is dissembling or does not understand the essence of the matter, because to finance the budget deficit with the gold reserves is useless.”

And once the reserves are empty, then “the fiscal deficit can only be financed by borrowing (and in this respect, the removal of the sanctions acquires a decisive role), or the Central Bank has to loan money to the government…”

Or the third option the government could take is budget cuts.

For reference – even at today’s frozen budget expenditures:

  • real pensions declined by 3.5% for 11 months of 2016;
  • the indexation of wages in education and health care for 11 months in 2016 were 4.2% and 6%, respectively (Rosstat).

By reducing budget spending you can imagine what will happen.

Rosneft Mysteries

Yesterday Reuters had a headline that caught my eye: “Rosneft signs 5-year oil supply deal with QHG Trading”.

Of course, I had questions. So I went digging. It turned out that this was the deal that had been agreed to last month with Glencore as part of Rosneft’s “privatization” scheme. But more than that, filings with Companies House in the UK revealed that Glencore had set up a complex structure just prior to the deal’s announcement in early December.

This is perhaps not so strange if you had read Glencore’s statement from early December about the proposed partnership with the Qatar Investment Authority.

In the press release, Glencore stated that they had put together a “limited liability structure fully ring-fenced and non-recourse to Glencore…”

So what does the structure look like?

On 5 December 2016 Glencore registered three LLPs (Limited Liability Partnerships) in the UK. They are as follows:

QHG Investment is split equally between QHG Holding & Qatar registered Qatar Holding LLC (a subsidiary of Qatar Investment Authority). The structure had initially been divided between Glencore UK Limited and Glencore Energy UK Limited. QHG Holding replaced Glencore UK on 28 December, and Qatar Holding did not sign on until 30 December, replacing Glencore Energy UK.

QHG Holding is split between Glencore Energy UK, Qatar Holding LLC, and an entity called QHG Cayman Ltd. (more about this later). Again the pattern repeats, and Qatar did not sign on until 30 December, this time replacing Glencore UK.

And finally, QHG Trading is split equally between Glencore Energy UK and Qatar Holding LLC. And Qatar again replaces Glencore UK on 30 December.

Now here is where it gets interesting. On 3 January 2017, three charges are registered. QHG Investment registers two “fixed charges” from “Intesa Sanpaolo S.P.A., London Branch”.

 Unfortunately there is no paperwork to show exactly what the deals entail, but according to Companies House, one of the charges:

  • Contains fixed charge.
  • Contains floating charge.
  • Floating charge covers all the property or undertaking of the company.
  • Contains negative pledge.

And the other charge:

  • Contains fixed charge.
  • Contains negative pledge.

QHG Holding also registers a “fixed charge” from “Intesa Sanpaolo S.P.A., London Branch” on 3 January 2017:

  • Contains fixed charge.
  • Contains negative pledge.

A quick look at “Intesa Sanpaolo S.P.A., London Branch” shows no such charges, but that doesn’t necessarily mean anything. But it does raise more questions about where exactly the money for the transaction came from, and where it went, or if it even existed at all. Meanwhile, Reuters reported on 3 January that Intesa said they were underwriting “a loan for up to 5.2 billion euros ($5.4 billion)…”.

According to the Russian business daily RBC, Rosneft was supposed to conclude the privatization deal by 15 December 2016.

“On the same day, Rosneftegas transferred funds from the transaction to the federal budget. However, Glencore only confirmed the completion of the settlements on 3 January 2017 [the same date as the charges mentioned above, -ed.] and Rosneftegas on 4 January. In [its] January report the state holding company reported “the end of all corporate and technical procedures of closing and settlement”, associated with the transaction. Rosneftegas specified that it came to… more than 50 documents and agreements signed in “more than five” jurisdictions.”

RBC also reported that QHG Investment LLP holds a 100% stake in QHG Shares PTE which was registered in Singapore on 8 December 2016. The authorized capital of QHG Shares PTE is divided into 201 ordinary shares & totals €10,243 billion. QHG Shares PTE holds the 19.5% stake of Rosneft that Russia “privatized”.

And another mystery remains: who is the beneficial owner of QHG Caymen Ltd.?  RBC couldn’t find it, and neither can I.

Default is Impossible

At Vladimir Putin’s annual press conference in December, the President “…said that according to the rules of the government and the Ministry of Finance that a region’s debt should not be more than 50% of its own revenue. At present, five Russian regions have already crossed this threshold. Is the situation serious?”

Rosbalt talked to Professor Natalia Zubarevich from the Independent Institute of Social Policy about the situation.

“Putin said nothing new. The situation in the regions is not worse in comparison with the previous year, they did not increase debt. Between January and early October 2016, it even declined slightly. But in different parts of the country it is a different story, so that the total numbers never reflect the situation in each region.”

Additionally, she continues, “two-thirds of the regions in 2015 had a budget deficit… larger than half of their own revenues. That is, income less the money that they get from the federal government.”

Zubarevich rejects the idea that the regions can default because they are “not a company.”

There are other options, however.

“If they are low cost loans, and many are, then, firstly, it is virtually free money – with a one percent annual rate. Secondly, they can roll over [the loan]. During the preparation of the Sochi Olympics and during the preparation of the Universiade in Kazan, Krasnodar Krai and Tatarstan had their loan extended by 20 years.”

But how can the regions escape this? Rosbalt asks.

“Wait and see. Never say “never” — this is Russia.”

Rosbalt then asks about Federation Council Speaker Valentina Matviyenko’s recent suggestion that the Kremlin resume its amalgamation program in Russia’s regions.* Matvieynko has made such comments before. See for example this statement from 2013:

Speaking in Kazan on Wednesday, Matviyenko said that the current number of federal subjects—83—is “too large” and that the differences in economic and social terms among them are too great. Consequently, some of them should be combined together by referendum, although she refused to say which ones (www.kommersant.ru/doc-y/2126614).

Zubarevich answers Rosbalt’s question:

“They think it is easier. Connect fat with lean, you get average. It seems to me that this is a very simplistic view of the problems in the regions.”

She also seems to think that it is unlikely that Matviyenko’s suggestion will be heeded because it will create “turbulence. The elites do not want it. We would have to dramatically change management. And the population also does not want this, people are accustomed to their regions.”

* If you are interested in reading more on the Kremlin’s amalgamation plans Paul Goble has written extensively on this subject over the past several years.

Central Bank Scheme

In February of last year I started to list the banks that had been shut down (retroactive from 1 January 2016) by Russia’s Central Bank. The idea was to see if they could beat their own record from 2015. Last week the final bank was closed for the year and when tallied the Central Bank did indeed beat their own record from 2015: 97 banks shut their doors in 2016 as compared to the 93 closed by the Central Bank in 2015. To put that in perspective, 32 Russian banks lost their licences in 2013, and 86 in 2014.

In December 2015, Sberbank’s German Gref predicted that 10% of Russian banks would have their licences pulled in 2016. That would have been approximately 70. The Central Bank exceeded that.

Gref said that he supported the revoking of licenses from banks that are involved in “anything other than banking activities,” Interfax reported.

In May this year the Russian news agency Rosbalt reported:

The Central Bank is selling this process as an anti-corruption campaign to clean up the banking sector. There are too many banks, the narrative goes. Thus it is necessary to close the weaker players, many of whom are using their clients’ money to make bad loans to themselves and their cronies, and moving the money offshore. See, for example, billionaire Alexander Lebedev’s version of events here.

Former deputy chairman of Russia’s Central Bank Sergei Aleksashenko wrote in October that the scheme:

“…has already cost over one and a half trillion rubles and, taking into account the interest to be paid, the federal budget is going to have to shell out considerably more than two trillion rubles.”

It does not appear that this process will end anytime soon. In July of 2015, VTB’s Andrei Kostin “…predicted that 500 Russian banks will be shut down over the next 5 years…”

“There are too many banks in Russia now — about 800 institutions. In five years, this number may be reduced by 500, but we could achieve a steady level even with 100 banks,” Kostin said in an interview with the German newspaper Die Welt, according to Interfax.

Work But No Pay

“The current economic crisis is in many ways different from the 2008 economic crisis.” People are not being laid off “en masse”. Instead, Dmitry Remezov writes:

“Many [employers] prefer to cut wages or send employees on unpaid leave. They have also started to increase the delay of salaries. Therefore a sharp surge in registered unemployment has not occurred, but there has become an enormous reservoir of hidden unemployment.”

In Primorye, for example, thousands of workers are owed hundreds of millions of rubles, though officially the unemployment rate sits at 5.9%.

One indicator of how bad the situation is in Russia’s Far East is that since the beginning of 2016, approximately 4000 people attempted to migrate to South Korea to work without visas, but were turned away. It is unclear how many tried and succeeded.

“The Russian Foreign Ministry called the situation in Vladivostok “appalling” and compared it to the 1990s, when thousands of Primorye residents also sought salvation from lack of money in South Korea.”

On the opposite side of the country, in Kaliningrad, wages fell and hidden unemployment increased due to the region’s loss of its status as a “special economic zone”.

According to a local trade union leader:

“Enterprises have cut working hours, people were more likely to be sent on unpaid leave. This is especially noticeable in the private sphere. But the general crisis also affected public sector workers: they also started curtailing wages and earning capacity. In general, people are living worse.”

He said that the reason there has been little “social unrest” is due to three factors:

  1. “…that job cuts took place progressively”;
  2. “the salary cuts were small”; and
  3. “part of the dismissed workers managed to find another job with roughly the same level of pay.”

“Employers curtailed production…. Therefore, workers gradually changed workplaces. And the salaries at the enterprises in the Kaliningrad region are small. Even at “Avtotor” [the local automobile manufacturing company] which imagines itself a leader of regional industry, the wages of mechanics and assemblers are often less than the average for the industry. Therefore it was not difficult for people to get another job with the same “not exorbitant” salaries,” he said.

“The crisis has hit the economy of the Russian regions in varying degrees.” In Kaluga, for example, the authorities shut down the central market.

“According to Rosstat, the unemployment rate in Kaluga is 4%, which is higher than the average for the Central Federal District (3.4%). Three hundred workers from the market who had to join the army of the unemployed, came to the rally.”

Of course, the places with the highest unemployment rate are in the North Caucasus Federal District [Chechnya, Daghestan, Ingushetia, etc.]. “As a whole, the unemployment rate in the district was 10.7%. The leaders are Ingushetia (29.7%) and Karachevo-Cherkessia (16%).”

“The high level of corruption and the outflow of the qualified workforce leads to higher unemployment in many Russian regions,” said State Duma deputy and vice-president of the Confederation of Labor of Russia, Oleg Shein. “And the North Caucasus Federal District has been hit the hardest by these social plagues.”

And it is driving local investment away, Shein continues. Not only will outsiders not want to invest there, but neither will local businesses seek to expand in the region, but look outside of it.

“Another factor undermining economic development is the departure of most of the skilled working population. This factor too has hit the regions of the North Caucasus Federal District, guaranteeing economic depression.”

“There was a serious “emigration” of ethnic Russians and Ukrainians from the North Caucasus which peaked in the 1990s. This departure was an additional blow to the local economy. And agriculture cannot be the basis of the national economy in the 21st century. It is, indeed, the product that provides the security of the country, but it does not create a high added value.” said Oleg Shein.

In Rostov the general director of a coal company was arrested and charged under several articles of Russia’s Criminal Code. The company itself is undergoing bankruptcy proceedings. The miners have not been paid and have been holding protests. “The total amount of the debt to the miners was 340 million rubles.” 2300 employees have been affected by the ongoing problems. “Many could not find new jobs locally and have left the region to work in other cities.”

“The leader of the protests said he believes regional authorities and law enforcement agencies are responsible for the current crisis…. The government has long turned a blind eye to the violations of the company.”

And in Tolyatti the automobile component manufacturer AvtoVAZ Aggregate owes 1500 employees back pay.

OLYMPUS DIGITAL CAMERA
Photo of AvtoVAZ Aggregate taken in 2010 (from Wikipedia entry)

 

“The company was declared bankrupt in August and the top managers of the company were involved in criminal cases. According to the prosecutor’s office, the debt amounted to almost 53 million roubles as of 1 November.”

The head of the trade union at Tolyatti noted that over 40% of the shares of “AvtoVAZ” are owned by a company registered in the British Virgin Islands. “The reason for not paying workers is that there is no money. The court bailiff could not find the account of director Viktor Kozlov. We understand that the money went offshore. Perhaps in the near future this will be the case for many companies: no money, because they go offshore to violin and cello [a reference to the Rodulgin story and the Panama Papers.]”

The situation where people are formally employed, but not paid, has become one of the signs of the current crisis.

Georgia

Like many countries in the region, Georgia’s economy is struggling. The local currency, the Georgian lari, has fallen about 17% since October. Georgia’s Central Bank is still spending money from its reserves to prop up the currency, selling another $40 million this past Tuesday alone. It had not intervened in the market since the middle of October. But the interventions do not seem to be doing much good, as the lari continues to fall daily.

The government has now turned to a combined package of austerity measures and new taxes to fill holes. The government is apparently planning layoffs and pay cuts in various ministries, and will impose additional tariffs on items such as cigarettes starting after the first of the year.

In addition, the government is discussing selling off stakes in the state-owned railway company, and the “Georgian Oil and Gas Corporation“.

“We had a conversation with several investment banks about the placement on the stock exchange of a 25% stake in the railway and the “[Georgian] Oil and Gas Corporation”, Georgia’s acting Prime Minister Giorgi Kvirikashvili was quoted as saying in late November.

“If there are appropriate market conditions, we will make this decision, but we want to wait for the best time, and it must be said that last year was not the best time for this,” said Kvirikashvili, adding that this issue needs to be solved “very carefully and correctly.”

The Saakashvili government had previously planned a similar transaction a few years ago, but those plans were shelved due to the unfavourable market situation at the time.

There is some concern in Armenia about the proposed plan because the pipeline that supplies Georgia also supplies Armenia with natural gas from Russia. Georgia gets to take a 10% cut of the natural gas supplied to Armenia in exchange for acting as carrier of the gas. The deal was first reached in 1992, and is renewed each year. Last year there was some conflict because Gazprom decided that it wanted to be paid in cash for the transit fee rather than continue with the previous deal. The negotiations went on for about six months and culminated in an agreement with Azerbaijan’s SOCAR to increase supplies.

An article in the Russian press last week speculated as to who would be interested in buying a stake in the pipeline.

“Yerevan is in a panic: the Georgians could sell to Azerbaijan [SOCAR] the gas pipeline that transports Russian gas to Armenia. Tbilisi is also nervous: what if the government gives it to “the enemy” Gazprom?”

Another option would be the Iranians, the article’s author suggests.

Of course, none of this might actually happen. Things are always changing in the Caucasus, and this could end in a way similar to what happened the last time Georgia tried to sell the pipeline to Gazprom:

“…Mikhail Saakashvili when he was president of Georgia, despite the extremely strained relations with Russia, strongly attracted Russian capital into the country. Now it [Russia] owns almost all of the strategically important and profitable industries, including electric power, but it was not a catastrophe. So in 2005, Saakashvili thought to sell the main pipeline to Gazprom. And then not only Georgian politicians and experts whined, but also the Americans: the US did everything to torpedo the deal, and money was allocated for the rehabilitation of the pipes and the gas infrastructure….”

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.

Rosneft Quick Sale

Albert Bikbov offers an alternative version of what happened with the Rosneft privatization deal.

Bikbov first reminds his readers that in late 2014 Rosneft got a “loan” from the government of 625 billion rubles. That money was used to purchase foreign currency. But in doing so, the currency market was hit, and the Central Bank had to increase the key interest rate to 17%.

He connects that to the bond placement that Rosneft did last week for nearly the same amount: 600 billion rubles.

“…market participants are convinced that the deal was non-market in character, i.e. it was financed by one or two state banks (presumably “Gazprombank”). In the market it is impossible to quickly raise 0.6 trillion rubles [the placement lasted only 30 minutes -ed]: because the base of Russian investors is limited, the short-term liquidity of Russian banks, and the sanctions [Rosneft cannot borrow from foreign entities under the sanctions].”

What likely happened is that the State provided the money to Gazprombank in a one-time injection of cash, which was then transferred to Rosneft using the bond placement, Bikbov alleges.

But why did Rosneft need that money? Bikbov thinks that the money was a back-up plan in case the deal with Glencore and Qatar did not work out by the 12 December deadline set by the Russian government. The money would then be used as a stopgap until Rosneft could get a deal with another [foreign] purchaser early next year.

But instead “a miracle happened”, and Rosneft was able to announce its deal with Glencore and Qatar at the last minute.

Ignoring the history and morals of Glencore which everyone already knows, he continues, “the main thing is what will happen to the market” as a result of the transactions.

There were two simultaneous deals: the deal with Glencore and Qatar, and the bond placement.

So now Rosneft has an extra 600 billion rubles that it doesn’t really “need”. And the Russian budget has 10.2 billion euros. But the budget doesn’t need euros, it needs rubles “to plug the holes in the budget”. So the government needs to sell the euros and buy rubles (it should get about 688.5 billion rubles for the transaction). But in doing so they would be in a similar situation to what happened two years ago with Rosneft’s purchase of foreign currency, and the market would be destabilized. So instead Rosneft will “buy” the government’s euros with its rubles.

“The most important point: the transaction would have no impact on the market, because it will take place “outside of the market”, which, in turn, means there won’t be any acute fluctuation of the ruble…”

He cites Putin’s meeting with Sechin where this was discussed. He also quotes Alfa Bank’s Natalia Orlova who said:

“I think these deals are not linked. Rubles were purchased for Rosneft’s future liabilities, and Glencore and Qatar Investment Authority’s currency is designed to pay the budget that needs rubles. This is why probably Rosneft will give the rubles, which were borrowed on the domestic market, to the budget and use the currency [euros] to pay its external debt. For this reason, in general, I think that the negative effect for the currency market can be equal to zero. Even if the currency will directly go the budget, anyway, it won’t affect [anything]. If the borrowing through ruble bonds for Rosneft were a backstop deal, it is probable that such bonds can be paid off in advance because bond holders will receive interest.”

And all of that is fine, Bikbov says, but… and it is a big but, now Rosneft has an extra 10.2 billion euros that it doesn’t really need.

“To tell the truth, Rosneft doesn’t need the currency. By the beginning of October, it accumulated $20,2 billion on its accounts. Moreover, Bashneft has about $350 million. In October, Rosneft sold its shares in Vankorneft and Taas-Yuryakh Neftegazodobycha for $4 billion [to an Indian consortium – ed.] and is going to get $1,1 billion for Verkhnechonskneftegaz‘s 20% from Beijing Gas Group. Rosneft needs to pay its external debts equal to at least $4 billion in the 4th quarter. In 2017, Rosneft will have to pay off $12.9 billion in debt. As you can see, the company has currency in surplus even if we don’t consider export transactions in 2017.”

See here for more on Rosneft’s debt.

So what is Rosneft supposed to do with an extra 10.2 billion euros? Just sit on it? Save it for a rainy day? They could buy foreign assets, but that’s a risk because of the sanctions, Bikbov asserts.

Rosneft doesn’t seem to have such qualms, and is buying stakes in foreign projects. See for example, the recent $12-13 billion deal with Essar in India, and the purchase of a 30% stake in Eni’s project in Egypt, among others.

However, Bikbov suggests that Rosneft’s next acquisition may be Tatneft (Russia’s sixth largest oil company).

“…Tatneft is quite attractive as a company, the oil price is still low, and the Russian stock market is very far from world levels.”

He points out that the nearly 20% stake in Rosneft went for $11 billion, which means that Rosneft is worth only $56 billion, according to the market.

“And this is despite the fact that just a few years ago, Rosneft bought TNK-BP for about the same amount of money. And for Bashneft they paid about $5 billion. That is, not including Rosneft, about $60 billion was paid for Bashneft and TNK-BP which is more than all of yesterday’s assessment of Rosneft.”

Nevertheless, he says, the point is that Rosneft has extra cash and what do they plan to do with it?

“Putin has warned Rosneft about a converting “rubles from bonds in the budget currency”. But what about the reverse conversion (Rosneft’s euros into rubles) he said nothing, leaving everything to the discretion of Rosneft. So we can only pray and hope that Rosneft will not collapse the currency market…. Hope for the prudence of Igor Sechin, although 2 years ago Rosneft caused the collapse of the ruble roughly in the same amounts, absolutely regardless of the consequences for the market.”

And meanwhile Tatneft is looking quite attractive.

“In the past month the stock price has increased by 26%, which strongly hints about the interest in it. It would be appropriate to think about this. It would be good if it is not Rosneft…”

Triumph for Two

Sergei Shelin writes about the “deal” Rosneft made with Glencore and Qatar.

“…this has been presented as a personal triumph for Vladimir Putin, as unprecedented material gain for Russia, as well as a sort of grand initiative – an example of a breakthrough of Western sanctions and blockades, after which, of course, will follow all other foreign investors.”

Starting with the last point, Shelin says, the sanctions have nothing to do with it. Investors are just not interested in what Russia is selling. And they see no long-term gain from working with Russia. This deal with Glencore and Qatar “…will not change the atmosphere.”

“Glencore is a company that has long specialized in a particular kind of business, and cannot serve as an example for conventional investors.”

And the Qataris are “…prone to international adventurism”.

As for the claim that this deal will make Russia’s business environment more robust, Shelin shoots that down by noting that this deal “…does not give them [the “purchasers”] any control over Rosneft.” Everything will remain the same. Rosneft wanted to maintain control, and was not interested in sharing with others, which is why China dropped out of the running, he asserts.

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President Putin meeting with Rosneft’s Igor Sechin (kremlin.ru)

Russia is also bragging about the profit made from this deal, but Shelin notes that while 10.5 billion euros is “impressive”, it is not “a revolution in the state of material affairs…”

“This amount is equal to twelve days of exports of Russian goods. Or, say, the routine three-week fluctuations in the value of Russia’s international reserves (from $395.7 billion to 385.7 billion between the 4th and 21st of November), caused by such a prosaic reason as the weakening in the exchange rate in that period of the non-dollar currency exchange rates and the resulting revaluation of the non-dollar portion of the reserves.”

So, if this was in fact the triumph that everybody is claiming, Shelin says, it was not a victory for Russia, but for two people: Putin and Sechin. And this was clear from the TV coverage of Sechin meeting Putin to report on the transaction. When in reality it should have been an official “in charge of the sale of state property, not the corporation’s top manager…” Instead Sechin was portrayed as some kind of hero, and Shelin concludes, this “says a lot about who is who in…” Russia’s elite.