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.

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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.

Nationalization Victim

“Gazprom may lose its biggest asset in Turkey,” Kommersant reported today.

“Turkish authorities in early December de facto nationalized Akfel Holding – the largest private gas importer in the country on suspicion of having links with the Gulen organization – in which Gazprom and Gazprombank have shares.”

The article continues:

“…[Gazprom’s] attempts to establish a dialogue with the Turkish authorities have so far failed…”

Gazprom is in a bind because they need to stay in the Erdogan regime’s good graces if they want the Turkish Stream project to be implemented. Meanwhile, the price discount for private importers which Gazprom reached with Turkey in April, will be defunct starting in January. “As a result, a new gas dispute with Turkey seems almost inevitable,” Kommersant informs its readers.

Gazprom holds a minority stake in Akfel Holding (the parent company of Akfel Gas). In early 2015, Turkey’s Daily Sabah reported that Gazprom was looking to acquire a majority stake in Akfel Gaz, but that deal never got approval from the Turkish authorities.

Turkey granted licences to four companies in 2012 to import six billion cubic meters of Russian gas between them. Kommersant writes that 55% of Gazprom’s supplies to Turkey go through Akfel. And that Akfel accounts for 20% of all Russian gas deliveries to Turkey.

According to an article in Hurriyet from April of this year:

“Turkish companies import 10 billion cubic meters of gas from Gazprom annually, in line with a 2013 contract. Russia is Turkey’s largest gas supplier with annual sales of 28-30 billion cubic meters worth around $6.5 billion. Turkey imports 60 percent of its gas and 35 percent of its oil from Russia.”

Turkey has nationalized nearly 1200 companies since July, accusing them of financing Gulen, according to Kommersant. Akfel Holding’s board of directors has already been replaced. One of the founders of the company has been arrested, the other has fled Turkey. But according to Kommersant’s sources, the two no longer hold a controlling stake in the company anyway.

Gazprom’s Alexei Miller met with Turkey’s Prime Minister shortly after the takeover of the company, but apparently could not get a straight answer about what was happening.

In nationalizing Akfel, Turkey has made “the bundle of Turkish gas problems” [i.e. import pricing, Turkish Stream, etc.] “permanently interconnected and politicized…”. Because on all the issues, the same people will be at the negotiating table, Kommersant concludes.

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.

 

Rosneft Scam

It is now pretty clear that some kind of scam is being perpetuated with the Rosneft “privatization” in order to avoid Western sanctions.

Dmitry Gudkov writes on Facebook:

It seems that Igor Ivanovich Sechin is not telling us something. The triumphant sale of Rosneft shares to Glencore and Qatar’s sovereign fund no longer appears so triumphal. The trader claims that rather than billions, it’s contribution will be limited to a modest 300 million euros.

And as for Intesa, the head, Antonio Fallico “…is openly called “Putin’s man” in Italy.”

In an interview in late 2014 with RT, Fallico openly stated that the “EU sanctions against Russia are suicide”.

Intesa was also the organizer of the sale of Rosneft’s shares.

Gudkov sites an article in Finanz.ru:

A source told Finanz.ru that “Glencore and the Qatar Fund appear to be a ‘cover’ in the deal.” The scheme may work as follows: Rosneft issues bonds and invests cash in a certain fund, which then buys its shares and gets a commission, similar to the mechanisms used for privatization in Russia in the 1990s.

That is Rosneft took the approximately $9.42 billion that they made off the bond auction last week, and that money was then used to buy Rosneft’s own shares. But it was done in such a way so as to avoid any problems with the sanctions regime.

Alfred Kokh replied to Gudkov’s post, suggesting that it may have been something along the lines of a managerial buyout. Usually, in such cases the managers have no ready capital, and so have to take loans from banks to make their purchase. But Kokh noted that in the 1990s Lukoil and others made no secret of what they were doing. So why, he asks, is Sechin hiding something?

Meanwhile, Vladimir Milov, who has written about Rosneft quite a bit recently, wrote in Forbes Russia: “…that it was possible that Rosneft is turning over some of its shares in payment of its bonds placed for 600 billion rubles. Rosneft received pre-payments from Glencore in 2013-2015 of up to $5 billion for future deliveries, he noted. Therefore, the sale of the bonds would cover Rosneft’s debts to Glencore but would be sent to the Russian budget as if “new money.” Milov also noted that Qatar owns 9% of Glencore.”

What likely happened is that Rosneft either couldn’t or wouldn’t spend their own money to buy the shares, so some way was needed to get more capital. But because of the sanctions that was problematic. I have written before about the company’s money woes. In addition, numerous analysts have stated concern about the effect Rosneft’s purchase of its own shares would have had on the ruble. So this was the best way they could come up with to skirt the sanctions and get capital.

Rosneft Privatization

Contrary to rumors, Rosneft has not bought its own 19.5% stake in the company from Rosneftegaz. Instead the privilege has gone to commodities trader Glencore and Qatar’s sovereign wealth fund. Each will own half of the stake, according to Rosneft CEO Igor Sechin.

The discussions were kept very quiet. There was no hint in the media at all that Glencore was even interested. I personally still have questions about the legality of the transaction, since Rosneft is (technically anyway) under sanctions. But I doubt that Glencore would have gone through with the deal if there had not been guarantees that they would not be taken to court or fined for participating. They have managed to keep to the letter of the sanctions, but not the spirit. But we are talking about Glencore, after all, as many Russians were quick to point out on Twitter.

So the deal has gone through, Sergei Aleksashenko writes on his blog, and the Reserve Fund can “sit untouched for another couple of months.”

There are four main takeaways from the deal, he says.

First, Igor Sechin came out the winner in this round. It is clear that Prime Minister Medvedev and his government knew nothing and had no involvement in the transaction. As a result, “we need to expect some external manifestation of this.” That is, Rosneft may win in other conflicts as well. For example the ongoing legal battle to access of Gazprom’s Sakhalin-2 pipeline.

That being said, it does appear that Sechin did lose on at least one of his preconditions for the sale to “outsiders”: that new shareholders would have to wait to get seats on Rosneft’s board of directors. But, Aleksashenko writes, “…judging by the words of the president… this condition has been removed, and, to some extent, Igor Sechin will be forced to live by the rules and not by concepts.”

“Third, we won’t know the whole truth about this deal for a long time. At least as long as it [Rosneft] is headed by Igor Sechin. And the main thing here is the unknown question: did the new shareholders receive any other benefits as part of this transaction or not? With Glencore it is easier. The company could be satisfied with the long-term contract with Rosneft to sell a substantial portion of its oil [220,000 barrels per day – ed.], perhaps even at about market conditions – as one of the world’s largest traders, Glencore can earn on sales of oil, and its purpose is to hold the maximum share of the market.”

But with the Qataris it is more difficult to say, Aleksashenko continues, “…they don’t need oil”, but they’re businessmen and don’t want to take a loss on their purchase.

“And, judging by how all the other transactions of Arab funds in Russia are structured, we can assume that Rosneft (or Rosneftegaz) issued the sovereign fund a protective option in case of falling prices, pledging in this case to buy back the shares.”

And finally, but not the least important, Aleksashenko concludes: “the privatization of Rosneft has not happened.” The State (in the form of Igor Sechin) is still calling the shots, with nobody to check it, “and will continue to do so.”

Russia’s “Liberals” & the Crimea Question

Alexander Sytin writes on Facebook about Russia’s so-called “liberal” opposition and why they cannot and will not garner support among the population on their current trajectory.

For more than a year now, he begins, the Russian “liberals” have been discussing two questions:

“What will happen to Russia after Putin?” and “What should be done about the future fate of Crimea in this context?”

This latter question has become something of a political litmus test. Sytin compares it to the period of the Bolshevik revolution when the question was “are you for the Reds or the Whites?”

He says that he has no political ambitions and has no desire to place himself in any “political camp”. Most terms like “liberalism”, “democracy”, “communism”, and “fascism” are nothing more than “empty labels which have lost all meaning in our post-modern era…”

Nevertheless, Sytin continues, “I think that sovereignty and, therefore, the territorial integrity of Ukraine, has been recognized by the international community since the proclamation of its independence, [so] it should be fully restored.”

And whatever decision is made should be made locally and “…not by the unilateral will of the Kremlin.”

The only significant position is that of the Western governments who “are not inclined to accept the results of the “referendum” nor the accession of Crimea to Russia. Everything else is just words… demagoguery: “annexation,” “reunification”, “the restoration of historical justice”, all of these statements speak only of the position of the speaker – no more!”

And as for the first question, Sytin says, it is “…similar to the debates [between] the Westerners and Slavophiles during the reign of Nicholas I, [and] there is absolutely no sense [in it].”

“The liberal discourse today in Russia is not a question of change in Russia, [but rather] the integration of “leaders of liberalism” into the existing power structure, with Putin or not is a secondary question. They want to inherit / participate / privatize the system of government which was created in the last decade and a half.”

And they are not interested in a Russia “without its imperial component”. All they are interested in is a seat on the board of “Russia Inc.”

The reason Russians do not go out to protest is not because they are committed to the current group of elites, or even to the annexation of Crimea. In fact, nobody really cares about Crimea now except a few “frostbitten patriots”, and Kremlin propagandists. But people don’t take to the streets because they see no difference between what they currently have and what the so-called “liberal” opposition is offering them.

“This is implicitly felt by those representatives of the liberal party, who speak of the absence among them of a “moral authority”.”

And when Khodorkovsky is interviewed, he is always asked about Crimea.

“And he cannot answer this question, because it has no answer to the main eternal Russian question: who will be the successor, as well as what will be possible with this successor…”

The Kremlin really shot itself in the foot by incarcerating Khodorkovsky rather than letting him either go abroad like Gusinsky and Berezovsky, and let him reside there with them in relative obscurity. Or Sytin jokingly says that the Kremlin should have given Khodorkovsky a position in the government, and then blamed him for the economic crisis. But everybody still wants to talk about Crimea.

“Real democratic liberal opposition to the current Russian regime does not exist and I do not see any prerequisites for its appearance.”

It is possible to train the future leaders, but who would teach them? Mikhail Khodorkovsky and Alexei Kudrin? Then the Regime can rest easy because “with or without Putin it will exist forever.”

“What will the outcome of this whole situation be? There are two options, as Inozemtsev explains, either a more or less long period of decay followed by decomposition and the almost inevitable end of… [those currently in power] or defeat in a cold / hybrid / hot war (desired by the Kremlin). Therefore the only question that can replace the question of what will happen to Russia after Putin is: as a result of any sociopolitical, economic and temporary perturbations will the present regime give way to the new? In other words, what is the mechanism for the transfer of power from the current ruling elite to the new?”

And what should be done about Crimea? Sytin leaves that in the hands of the Ukrainians. They should take their case to international court and have it decided “at the highest level.”

“Claim that the sanctions regime cannot be reviewed every six months, but it will remain the same and subject to change only in being made stricter, as long as the territorial integrity of Ukraine is not fully restored.”

It also needs to be emphasized “…that the sanctions are not the result of the failure of some sort of the Minsk agreements, but a response to the aggressive policy of the Kremlin, posing a threat not only to Ukraine but also to the entire world order. Moscow says that the problem of Crimea is settled and closed? And exactly the same attitude should be in relation to the sanctions – the question of which is settled and closed.”

He concludes:

“I was asked to submit recommendations for a future mythical President of Russia about what to do about Crimea. The answer is simple: convene an international conference under which to issue the relevant procedural forms to return Crimea to Ukraine.”

After three months out from under the thumb of Russian domestic policy, the lives of peoples living in Crimea will improve, and nobody in Russia will even remember what happened.

As for Ukraine, they must do their part too. By ensuring some autonomy for the peninsula, and lustration (but not reprisals) will be necessary for the leaders of the “Crimean Spring”.

“At the same time, especially at first, it will be necessary to carefully monitor to ensure the path to power in the peninsula is firmly closed to Russian nationalist radicals.”