Streetwise Professor

June 8, 2017

Rosneft Follies, Redux

Filed under: Commodities,Economics,Energy,Russia — The Professor @ 1:16 pm

Sarah Mcfarlane dropped a long piece in the WSJ claiming that the already sketchy Rosneft-QIA-Glencore deal was even sketchier than it appeared at the time, hard as that is to believe. Specifically, according to Sarah (and Summer Said), Putin and the emir of Qatar, Sheikh Tamim bin Hamad Al Thani, agreed in that Russia would repurchase the stake at a future date:

Moscow agreed with Qatar that Russia would buy back at least a portion of the stake from the rich Persian Gulf emirate, the people said. The Qatar Investment Authority and Glencore, the Swiss-based commodities giant, formed a partnership to buy the 19.5% stake in Russia’s energy jewel at a time when Mr. Putin’s government needed cash.

The people with knowledge of the deal say the buyback arrangement was negotiated with involvement from Mr. Putin and the emir of Qatar, Sheikh Tamim bin Hamad Al Thani. Russia and Qatar saw it as an opportunity to build a bridge between countries that had taken up opposite sides in the Syrian civil war, the people said. One of the people said the buyback would happen in the next 10 years.

Color me skeptical. For one thing, Glencore is a principal in the deal, and it would have to sign off too: the story does not assert, claim, suggest, or imply that Glencore did so. Both Glencore and QIA vigorously deny the story, for whatever that’s worth, as do the Russians. (As an aside, a source in Russia tells me that Ivan Glasenberg refused to discuss anything about the deal recently. Why the UK authorities and the LSE are so willing to accept the extremely deficient disclosure by a major UK issuer relating to a major transaction is beyond me. Maybe they are trying to convince Saudi Aramco that if it lists in London, it can do pretty much anything anywhere, no questions asked! BP’s silence is also curious.)

For another thing, Putin saying “I’ll buy it back later” without a mechanism to determine price is meaningless. I smile when I think about the number of times going back to at least 2006 the Russians announced that they had almost completed a gas deal with China: all that remained to determine was the price! And this went on year, after year, after year.  In other words, no agreement on pricing means no real agreement.

This is pretty funny:

Qatar wanted its Rosneft stake to be temporary, the people said. The emirate believes it will profit from selling the shares back to Russia at a later date, the people said, betting that oil prices will rise and push up Rosneft’s share price. Qatar saw the political benefits of giving Russia access to quick cash as a sort of loan to address a budget deficit that had widened due to lower oil prices, the people said.

In the 7 months (to the day) since the deal was announced, this has turned out to be a bad bet: Rosneft’s stock is down about 12 percent in Euros. (It’s down about 18 percent in rubles.)

This raises some other crucial issues. The €2.8 billion that QIA and Glencore put down represents about 26 percent of the value of the deal. Meaning that about one-half of the equity cushion is gone. Thus, the indemnities and guarantees that the Russian banks provided Glencore (there is no clarity on whether they similarly indemnified the QIA portion of the loan, but its non-recourse nature suggests they did) are getting pretty close to being in the money. Given the recent bloodbath in the oil market there is a decent probability that the loan will be underwater in the near to medium term.

Intesa’s statement suggests that QIA is indemnified/guaranteed too:

An Intesa spokesman said the loan to the Qatar/Glencore partnership “is covered by a robust package of guarantees.” Intesa is trying to spread the risk of its loan by syndicating it to other banks, but a person familiar with the matter said the bank hasn’t yet found willing banks.

The syndication part makes me laugh. Um, you’re kinda supposed to arrange the syndication at the front end, either before the deal or shortly (I mean days) afterwards. Seven months later, when you have zero negotiating leverage because you already are wearing the entire loan? With about half the equity cushion gone? With the loans being backed by Russian banks that are (a) not in the most robust health, and (b) under a cloud due to Russian sins real, and recently, feverishly imagined? Yeah, that will be an easy sell! I’m sure other banks are just lining up for a piece of that!

In bocca al lupo, signori!

The story suggests that Putin pressured Sechin to stitch together this Frankenstein’s monster to address pressing budget issues. I have no doubt that this was done under duress, but less because of budget than because of prestige and reputation. Putin had said that a stake in the company would be privatized in 2016, and to a non-Russian buyer. So Putin put his reputation on the line, and Sechin had to come through.

But virtually all the downside risk resides in Russia (something I pointed out early). So although the deal (a) generated some cash inflow that did address some budget issues, and (b) provided some reputational benefits (for a few weeks, anyway), it did nothing to mitigate the Russian government’s exposure to Rosneft’s downside, but did give away the upside. In essence, Putin and Sechin got their PR play by giving away a put on Rosneft. That’s what enticed QIA and Glencore.

In other news from the bizarre world of Russian–and Rosneft specifically–transactions, the Rosneft/Sechin-Sistema litigation rolls on. Indeed, Sechin increased his demands by more than 50 percent, from $1.9b to $3b. My same Russian source says all of Russia is mystified by this, but he did provide a valuable tidbit.

What had mystified me was how Rosneft could go after Sistema when it bought Bashneft from the state. Well, apparently Igor was in such a hurry to complete the deal that Rosneft didn’t begin the audit/due diligence until after the deal was completed! 

Why was Igor in a hurry? My guess is that Putin had opposed Rosneft’s purchase in August, and changed his mind in September, and Sechin wanted to move before Putin changed his mind again.

Perhaps Igor was thinking that if the audit uncovered irregularities, he could get a Russian court to give him a mulligan and claw back the money. In which case, the current litigation might have been part of the plan (at least as a contingency) all along.

I’m still puzzled, though, because some of the things Sechin goes on about (e.g., the sale of Bashneft’s oilfield services business to a Sistema entity, and the subsequent contract between Bashneft and that entity for said services) was known about before. So maybe Igor is just throwing everything into the litigation claim, even when it doesn’t make any sense. After all, this isn’t being heard in a London court or arbitration in a European country: although this is an intra-Russian dispute, Sechin definitely has home field advantage.

Keep this all in mind whenever anyone (and now it seems that means pretty much everyone) tries to scare you about the Russian bogeyman. The follies of one of Russia’s premier companies, a so-called national champion, illustrate just what a ramshackle, and at times clownish, contraption the Russian state is. Putin does a great Wizard of Oz imitation, but when Toto pulls back the curtain as has happened with the Rosneft/Glencore/QIA deal, you’ll see that there’s a little man blowing a lot of smoke.

 

 

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2 Comments »

  1. Two things really jump out at me on this deal; that it is so complicated and so much trouble for all involved, and, it’s not even that much money. It makes me wonder how far on the edge they are.

    Comment by Howard Roark — June 8, 2017 @ 8:20 pm

  2. […] Rosneft Follies, Redux […]

    Pingback by Links, 16 June 2017 | illiquid ideas — June 16, 2017 @ 2:38 pm

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