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.

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…”

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.”