The recent privatization of a 19.5 percent stake in Rosneft has generated substantial media interest with greater details emerging.
The buildup of suspense following the sudden arrest of Russia’s economic minister Ulyukyaev fits well into a game plan involving President Putin, his chief oil boyar Sechin and a number of highly-placed officials and legal and corporate finance experts capable of putting together in ultimate secrecy a complicated deal structure with debatable business content yet high geopolitical and personal value.
The timing of Ulyukyaev’s arrest, just 20 odd days before the formal announcement of the deal, which had taken many months to assemble, relates directly to his stated opposition to the deal. The arrest of Russia’s economic minister by FSB counterintelligence officers also attests that Ulyukyaev posed a risk to the deal’s sponsors. Being perceived as a direct threat for knowing too much or for failing to align with the strategy approved by President Putin, he had to be silenced, by force if necessary.
The transaction that involves three partnering institutions – the Qatar Investment Authority (QIA), Glencore and Intesa Sanpaolo, an Italian bank – has striking inconsistencies that come out when juxtaposing stated goals, available information and end results. The professed objective – privatization proceeds to beef up the state coffers in Russia – is as remote as ever, at least as net value. Immediately following the announcement of the deal, both Glencore and Intesa went out of the usual restrained press briefs to explain that they had no exceptional financial exposure to the deal, i.e. the bulk of the money involved came from the Russian state and ended with the Russian state. Finally, the CEO of Intesa Carlo Messina told reporters that his bank was simply an adviser to the deal, not a creditor or loan syndicator.
Later in the week it became clear that Russian banks – Gazprombank and Rosneft’s pocket bank, All-Russian Bank for development of the regions (VBRR), had played a pivotal role in raising the bulk of the $7.4 billion debt piece of the deal. The balance of the $10.2 billion price tag for the 19.5% stake in Rosneft was financed by equity contributions, $2.5 billion by QIA and $0.3 billion from Glencore, the supposedly equal partners in the buying consortium.
The deal was marketed as a showcase for Mr. Putin’s ability to circumvent western sanctions. Now, it turns out that QIA and Glencore, which act as ‘Western’ parties in the play, were financed by Russian state money and hence may be operating under Kremlin’s script. So much for the propaganda coup of Mr. Putin, paid for by Russia’s own money.
However, this is not where our analysis will rest. We need to look beyond the obvious into the real motives, as the deal seems inconsistent with its stated raison d’etre.
Mr. Putin certainly needs propaganda coups every now and then to keep both the domestic and international public on the hook and thrilled by his political mastery. Yet, the resources used escalate exponentially and the risks taken seem well above anything that he could afford for a simple encore of propaganda against the newswire of negative growth, budget cuts, depleted reserve funds, rising debt and expanded economic sanctions.
The search for an explanation should follow the trail – who’s the ultimate beneficiary – as effectively the deal seems to shift a substantial chunk of Rosneft’s equity, worth $10.2 billion, from state to private hands, either within Russia, or abroad, or both.
Intesa is primarily specializing in retail banking, while the Rosneft transaction falls squarely in the domain of investment bankers. The deal size is well above the bearable credit exposure for Intesa, unless the deal involves solid back-to-back hedges. The Italian banking system is in a precarious state, and there is a lot of nervousness surrounding Monte dei Paschi’s and Unicredit’s handling of bad loan portfolios, which raise eyebrows in Germany and across the EU. In this environment, the chronically loss-making Intesa could have hardly expected that its oversized exposure will go unnoticed and unsavory details of the whole operation will not come out in the open.
Moreover, in implementing the game plan there are target dates and deadlines that have to be met and data that need to be reported to the Italian Central Bank and the ECB.
The release of information to date has been intentionally limited and details remains patchy, yet the master plan’s contours can be surmised, and the role of both Qatar’s sovereign wealth fund and Glencore could be further analyzed.
It is our belief that both entities might not be the only (if at all) ultimate owners of the 19.5% stake in Rosneft that changed hands. Glencore’s towering debt, exceeding $30 billion, clearly sets limits to the risks it could take in the deal. Ultimately, it looks like Intesa’s jumbo loan, if it exists at all, was fully hedged by Russian banks. Glencore’s own funds and risk exposure in the deal were also limited to only $300 million. Risking this amount is sensible for Glencore, given its contract for future Rosneft supplies of crude oil – 220,000 barrels per day for the next five years.
The whole scheme has been set in motion by Rosneftegaz placing a deposit worth almost $29 billion in Gazprombank in October, which enables the bank to act as main financier and risk-taker, while funding and hedging Intesa’s risks.
However, the Rosneft deal in the way conceived needed the ultimate backup of the Russian state. The company issued on December 5 a local currency denominated 5-year bond for RBL 600 billion, commensurate with the sought privatization proceeds. This massive debt issuance took the market by complete surprise. Given how swiftly the issue was placed without most banks being even invited, it was likely bought by the Russian central bank (whose assets coincidentally spiked by RBL 240 billion) as well as some with significant funding from Rosneft and Rosneftegaz, like Gazprombank and VBRR.
If so, Russian state-controlled funds, originating in state controlled Rosneftegaz, have ultimately returned via QIA and Glencore to end up as legitimate privatization proceeds in the Russian budget.
President Putin and CEO Sechin claim success – transferring funds originating in one state company to the state budget, and in the process leaving one fifth of the stock in the hands of new Kremlin-nominated owners.
These “unknown” hands could be traced if we scan the various options and modalities. The Russian media, most recently Rain TV, have speculated that the scheme fits into a standard pattern of state assets ending up with proxies – Russian top politicians (via their favorite oligarchs) – for a secondary or tertiary resale, with a premium landing in the scheme originator’s account.
Russian analysts further point out that there is only one man in Russia capable of giving a green light to the deal, while authorizing the arrest of the minister in charge of the privatization deal.
It won’t be a shocking revelation, as some have done in Russia, to claim that the main purpose of the operation is personal gains – a rainy day fund or a retirement plan that might trigger speculation of a pending change at the top and potential exit.
This, however, seems too trivial for a man who needs not bother about means in older age. If, however, we overlay the timeline of the events around Rosneft’s ”sale” and other events and people that make the headlines in international media, a different and probable scenario might emerge, suggesting that the transaction could be a part of a geopolitical bargain.
If one looks into what runs on top of the priority existential list of the Russian president, the answer is simple – Syria, OPEC, the US elections and Putin’s levers that could steer the US and later the EU foreign policy in a direction favorable for Kremlin.
There is no direct evidence at hand, or due to emerge any time soon, that the Rosneft deal is in any way related to events in the US, yet it is worth the merit of further investigation.
There is one thing that the Russian President frets most: a bipartisan anti-Putin majority in the US Congress.
But the Middle East might be the pivotal point in understanding the Rosnefts deal’s tacit geopolitical play.
The CEO of Exxon Mobil, destined to lead the US State Department enjoys close relations not only with Russia but with the Qatari emir and the Saudi King.
Mr. Putin himself has recently departed from previous restraint in dealing with OPEC, and has stated willingness to cooperate and cut production to help keep up the crude oil price.
The details might never be known, but there is one thing certain – oil and gas are big enough global businesses that generate geopolitical gravity on their own, slowly leading to a new modus operandi with the autocratic regimes in the Middle East and elsewhere.
It is highly questionable that Qatar would have openly dared to challenge the US and the EU by investing at least $2.5 billion and possibly guaranteeing more, thus potentially violating Western sanctions against Russia following the annexation of Crimea. Rosneft tops the list of Russia’s sanctioned companies.
This could not have happened unless the Qatari Emir Sheikh Tamim bin Hamad Al Thani had not received prior consultation regarding the deal in Washington and reassurances that punitive action will not ensue.
This theory fits well with the new line in Russian foreign policy – agree with President Trump and ignore the European Union until friendlier leaders emerge at the top of key EU states.
There are more moving parts in the Russia-Qatar rapprochement – Syria, OPEC and the “gas OPEC” aligning interests. Although the US and Western interests run counter to those of the oil cartel, high and volatile oil and gas prices could prove a fertile ground for influential circles in the West that engage in market speculation.
After all, Putin’s record stay in power has been made possible by the leap in oil prices that had resulted in the largest inflow of wealth in Russia’s modern history – more than 4 trillion U.S. dollars over the past decade and a half.
Russian media extensively covered a visit of Carter Page, a former aide to President-elect Trump, to Moscow on the very day the sale of 19.5% of Rosneft was announced. His meetings with the Rosneft top managers were reported in the daily Vedomosti as signaling a new moment for energy-based rapprochement of relations between the US and Russia. Mr. Page avoided meeting the ‘sanctioned’ CEO of Rosneft, Igor Sechin, stating clearly (quotes from TASS):
“The recent Rosneft deal, in which the Qatar Fund and Glencore could take part, is unfortunately a good example of how American private companies are limited to a great degree due to the influence of sanctions.
In a new era of relations between Russia and the US, most of all, effort must be applied to supporting the new US Administration, from the perspective of business.”
The Rosneft deal and Qatar’s involvement in it may indeed represent the beginning of a major reshuffle in global geopolitics and a reset in US-Russia relations. However, this is a potential, and not a guaranteed development.
Finally, the chain of events around Rosneft is indicative of what Mr. Putin would like to see in a new global world order, where he would be able to resolve his domestic problems via foreign policy solutions. His own assessment on the chances to diversify the Russian economy away from its overdependence on the export of energy commodities looks bleak.
Instead, he pursues deals such as Rosneft’s “privatization” and the acquisition of 98% of the Indian oil major Essar in a joint bid with Trafigura and UCP, a Russian fund affiliated with Rosneft. The total deal size is close to $13 billion and it is expected to close by the year end, or in early 2017. Rosneft’s stake has been deliberately kept under 50% to avoid US sanctions and it would be little wonder if the deal structure follows a similar pattern – with Trafigura duplicating QIA and Glencore as Rosneft’s or the Kremlin-appointed owners’ surrogate.
On the geopolitical level, President Putin’s recent attempts at opening up to Japan and seeking energy deals with it involving Rosneft, could also potentially mark the strategic baseline for rapprochements with Trump’s White house in managing China’s emergence as a global power.
In reality, few of the above aristocratic classics of Kissengerian balance of power applied foreign policy theories could work in an intertwined and globalized world with diffused political and economic powers.
Yet attempts to prove otherwise will persist.