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.

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.

State Fire Sale

Vedomosti reports today that the Federal Property Management Agency is debating new ways to dispose of its assets in order to get the best deal.

According to the law on privatization, the state’s shares in companies must first be put up for auction. And if that process doesn’t work, then they move to a public auction where there is a minimum set price, and anyone can bid above that. This year, 90% of the auctions did not take place, and they moved to public auction. Meaning that the State did not get the market value or even as much as they had anticipated for the stakes they sold. For example, the sale of a stake in the state diamond corporation, Alrosa.

As a result, the Federal Property Management Agency is discussing options to rectify this.

One option, Vedomosti reports, would be an auction without naming a minimum price. But this is complicated by the fact that you would need some minimum set of people or companies bidding, otherwise you could potentially have issues with collusion, as happened with the loans-for-shares auctions in the 1990s. Yukos, for example, bid against itself by creating shell companies that appeared to have no connection with Khodorkovsky’s bank. Thus guaranteeing that they would be the only ones bidding on the assets, and keeping the price low.

But this option is slow and cumbersome because what happens is that you have to keep going to auction if you don’t have enough companies to meet the requirements.

So officials recognize that it is necessary to simplify and speed up the process. One idea that is being considered is “declaratory privatization – when the asset is sold at the request of the investor”.

How would this work? “…any organization, without waiting for ads [by the Agency], can apply for privatization; an investor can pay for an audit and evaluation [of the company].” The Agency would then have to “…notify the public about the application, [and] wait, for example, three months…” If there are no opposing applications, the asset would go to the initiator.

“Experts have suggested this method for a wide range of assets.” But the Agency wants to tread carefully because they think this is really only appropriate for smaller assets, and not larger ones.

“According to the Federal Property Management Agency, in the first half of 2016, the State was a shareholder or had the right to participate in the management of 1627 joint-stock companies.”

But “state-owned companies are active in the acquisition market” (see, for example Rosneft’s purchase of the Bashneft shares and its plans to purchase a stake in itself next month).

640 JSCs are under the control of the State, and of those, 83% are up for sale, according to the Agency.

“Since the 2000s, the government has contributed to the charter capital of some state-owned companies [e.g. Rosnano, Rostec, etc.], but the law forbids the 100% ownership of the company… therefore the State wasn’t given 100%, but 100% minus one share. And these are the shares now hanging in the balance. Another 19% of companies are in the process of bankruptcy.”

Meanwhile, the Agency is attempting to improve its marketing strategy, in order to widen the pool of buyers. They have begun “posting information on websites, and in news agencies, buying advertising in the mass media and billboards, and print booklets.

It is unclear what President Putin actually thinks about all of this, Vedomosti concludes.

“On the one hand, large-scale privatization has shown that it is very difficult for the authorities to part with state property…” an official told Vedomosti. They would prefer to keep going round and round until they get the best price. At the same time, Putin said this week that there are other considerations besides money.

In other words, the Regime is anxious to get these assets off their hands, and collect what cash they can, rather than wait to get the best price. This is even more necessary now as the 2017-2019 draft budget anticipates draining both of the Finance Ministry’s reserve funds.

Rosneft Debt

More bad news about Rosneft.

The Central Bank’s governor, Elvira Naibullina, told reporters this week that “she saw no risk to the ruble from oil firm Rosneft possibly buying its own shares from state holding company Rosneftegaz.”

But Raiffeisenbank is saying that Rosneft’s expansion plans could cause problems for the ruble.

Rosneft could reduce the sale of foreign currency earnings on the Moscow Stock Exchange in 2017 and cause a “double blow” to the ruble.

Why?

Rosneft is the biggest single seller of dollars on the Moscow Stock Exchange. In 2015, the company sold $45.5 billion and in 2014, it sold more than $90 billion.

But due to its rapid expansion and current debt problems (which I discussed here earlier this week), Rosneft may have to cut back on that activity.

Analysts at Raiffeisenbank calculated that at the end of the first half of the year, Rosneft had about $20 billion in foreign currency on their accounts, another approximately $4 billion that the company should obtain from the sale of shares in Vankorneft and Taas-Yuryakh.

That is it should have $24 billion in readily available foreign currency.

Of that [$24 billion], $5 billion [it was actually $5.3 billion – ed.] was spent on the purchase of Bashneft (the transaction was completed on 12 October), $4.7 billion in scheduled loans are due by the end of the year. Another $11 billion will be used to buy back its own shares from the State.

That is, as mentioned above, Rosneft plans to participate in its own privatization by buying the 19.5 percent stake in itself that the State will put up for sale before the end of the year.

If it does so, Raiffeisenbank says that “…at the end of the year Rosneft will have about $5.7 billion (including rubles), which covers only half of the $11.7 billion debt that needs to be paid in 2017…”

“In the next year, Rosneft could reduce the sale of foreign currency earnings to replenish its foreign exchange assets depleted due to the repurchase of shares (in the case of “self-privatization”), at least until the resale of shares to foreign investors,” warned Raiffeisenbank analyst Denis Poryvai.

In his view, the result is a double blow for the ruble: the company will take a substantial amount of currency from accounts in Russian banks, as a result of which the market will run short of dollar liquidity, and later reduce the sale of foreign currency earnings on the stock exchange.

 

The Deluge

Sergei Shelin writes in Rosbalt:

The new Duma, hastily convened for stamping multiple emergency laws and, in particular, the draft budget for next year, will have to first approve the final version of the 2016 budget. It was just released by the Ministry of Finance and was full of surprises.

Though federal revenue this year will be significantly lower than planned, government spending increased significantly (from 16.1 trillion to 16.4 trillion), the “open” part of government spending has been reduced by almost 0.4 trillion and the “closed” has grown about 0.7 trillion.

“Closed” consists of secret and top secret, he notes, “firstly, the military (but not only them).”

Almost everything that is connected with the immediate benefit to ordinary citizens, is to be put under the knife, in contrast to last year, they are no longer hesitant and even transfers to the Pension Fund increased by a couple hundred of billions of rubles. But the main prize is prepared for the military. More precisely, the military industrialists, as you might expect.

“In making these proposals,” he continues, “the Finance Ministry has abruptly changed course…”

“Numerous statements by Finance Minister Anton Siluanov expressed the invincible will to further reduce the budget deficit by cutting down on government spending, including the military, and to reduce inflation to the unprecedented in the post-Soviet era four percent in the next two to three years.”

The budget deficit could be as high as 3.9%, he writes. The Russian Finance Ministry has already conceded that they have exceeded their targets, and that the deficit could sit at 3.7% by the end of 2016. Shelin also acknowledges that the government is manipulating these numbers, and using the Reserve Fund to cover their losses, among other things.

The current relative stability of the Russian economy and finance (albeit without any prospects for the transition to growth), slowing the rate of decline in living standards and a fairly impressive reduction of inflation – is the fruit of the policy of containment of public expenditure, which, until recently, was held by Siliuanov’s Ministry of Finance, in alliance with Nabiullina’s Central Bank.

I do not know if this is a one-off surge in government spending, which will happen between October and December, but if something like that will continue in 2017… stability can be scrapped.

Shelin then attempts to defend Finance Minister Siluanov, and places the blame at Putin’s door:

The supervisor of Anton Siluanov is Vladimir Putin. The reason for the sudden change in the budget views of Minister can only be obtained on his [Putin’s] orders.

It is clear that first and foremost this is an additional lever for the Supreme Commander and the Minister-redistributor will be only an advisor and a responsible executor [of the President’s will].

The author thinks that there are two explanations for what is happening. One is political. The so-called “detente” with the US is not working. Syria is a problem, and the new report about the shooting down of the Malaysian flight MH17 did not help matters. Meanwhile, the Russians have halted cooperation on a 2000 agreement on disposal of weapons-grade plutonium.

So the emotional atmosphere in October can in principle be considered suitable for impulsive arms build-up, without regard for economic consequences.

But you cannot count, because financial realism sometimes (and this is not uncommon) coexists with the most acute foreign policy conspiracy theories.

Shelin also suggests that the move could be what he calls “tactical”. Essentially that the government is robbing Peter to pay Paul (to use the cliche). Which he already suggested in his reference to the Reserve Fund.

There is one other explanation that Shelin does not offer. The Reserve Fund and the National Welfare Fund fell by nearly 155 billion rubles in September. The two funds collectively have about $105 billion left in them (on paper, anyway). If the government stays on this trajectory, the funds will likely run out in the next six months. And after that, it is unclear what the government will do.

They are still offering bonds and so on, but the money they are getting from that is minimal at best. Their privatization scheme scam (which I have written about previously) is not going well. Bloomberg recently reported that the government took a loss on its sale of a stake in diamond miner, Alrosa.

I don’t anticipate that the newly re-instituted sales of stakes in Bashneft and Rosneft will go any better.

And what then?

Après nous le déluge

After us, the deluge

Privatization Russian Style

There was a short post in The American Interest on Friday about the rumor that Rosneft is now off the list of potential purchasers of the government’s approximately 50% stake in Bashneft. And I want to clarify a few things.

First of all, Rosneft is still denying this story, as far as I know.

Here is what we know (or are being told). VTB Capital was given responsibility for the so-called privatization of Bashneft. They drew up a list of potential groups who might be interested / capable of making the purchase of Bashneft. Rosneft was on that list. In addition, there were several other state-owned companies who made the final cut that was presented to the Kremlin.

Lukoil has also expressed an interest in purchasing Bashneft, but says the price is too high. In fact, they are saying the whole company is worth about $4 billion, which is just a little more than what the government is asking for its 50% stake.

I do not see this as a political decision, to be honest. In fact, I would say it is more likely a way for Rosneft to bow out and save face. Rosneft is just as cash poor as any other corporation in Russia at the moment. They do not really have the money to buy anything. And they are under sanctions, which limits their access to capital markets, so borrowing money to buy a stake in Bashneft is problematic.

In the meantime, Rosneft is also supposed to be on the list of future privatization action. They are slated to sell a 19.5% stake in the company either this year or next year.

But I also want to explain the so-called “privatization” that the Russian Regime is currently carrying out. What is really happening is that the money and shares are being moved around. So it looks like Russia is making money, but in reality, all that is happening are trades.

Think of Russia as a giant conglomerate. Each of the state (and “private”) corporations are subsidiaries of the massive Russian Corporation. This “privatization” project is being carried out to make it look like these subsidiaries, and therefore the State, are more solvent than they actually are.

For example, VneshEconomBank (VEB) recently sold its stake in Gazprom back to the gas company (at market rate). Both are state corporations, so all that really happened was that both the money and shares switched hands from one subsidiary of the State to another.

And that is what will happen here again with the sale of Bashneft.

Scraping the Bottom of the Barrel

Russian President Vladimir Putin announced yesterday that the government was considering selling stakes in state-owned companies.

The Russian government has been discussing this issue for years, but nothing has ever come of it. However, now that the Russian economy is so bad, it seems the authorities feel they have no choice.

Reuters reported:

Two senior government officials said the plan may only raise between 50 and 80 percent of the trillion rubles envisaged.

In addition, given the parameters set out by the Kremlin:

“The only option is to force some oligarchs, loyal to the Kremlin, to buy stake with a premium to market prices,” said the investment banker, who is close to the process.

“Then it will look more like a tax on a group of people, which would be quite a realistic scenario, given Putin’s style of management.”

This would also be in line what what we saw in the mid-1990s with the loans-for-shares scheme that saw many of Russia’s biggest companies “privatized”.

Amid jokes of a “fire sale”, Duma Deputy Dmitry Gudkov had this to say:

The headlines look lovely. “Putin chaired a meeting on the upcoming “great privatization”. Now let’s consider their essence.

At first glance, the state wants to get rid of the state-owned companies –  “Aeroflot”, “Rosneft”, Russian Railways, VTB [VneshTorgBank], etc. But secondly, they want to keep a controlling stake [in those same companies]. This will not achieve the main task of privatization – increasing efficiency. The money from privatization is a one-off gain, and will be eaten through easily. But if the company begins to operate efficiently and in a new way in private hands, it will increase profits, and it will pay more taxes. That is the real result.

Alas, this is not the result we get from the “great privatization”: like at “Rosneft” sits Sechin, and he will continue to sit, and the new owner cannot sack him because the state has a controlling stake. Who, then, will take the shares? And here is a look at the other conditions of the anticipated transactions.

Buyers should be in Russia’s jurisdiction and not ask for money from state-owned banks for the purchase. In addition, those buyers will be required to have clear vision for the company.

What does this all mean? What shares will be given for cheap state-owned companies by their own managers? This is all that is meant by privatization – a reason for Igor Sechin to get a bit richer. There will be no question of new owners. He [Sechin] buys a little more of “Rosneft” and certainly not at a realistic price, but at a reduced one…

If you think they cannot, just like that in front of everybody, don’t worry: they can. This is exactly the same story that I recently wrote about when “Russian Helicopters” first appointed [former Defence Minister] Serdyukov, and then recall the “virtually unused” in Russia mechanism to repurchase shares of the company by its top management. Well, here is your privatization.

But in fact it [privatization] is necessary – the state as an owner is ineffective. But what we are now sold as “privatization” is in fact scraping the bottom of the barrel.

As you can see, no proper economic measures can be implemented in the absence of institutions. After all, the authorities in Russia have one problem – and it is not development.