Streetwise Professor

March 20, 2014

Obama Sanctions Timchenko: Will FUD Kill Gunvor?

Filed under: Commodities,Politics,Russia — The Professor @ 2:44 pm

Obama finally did something halfway serious about Putin.  The Treasury Department added several prominent names in Putin’s inner circle to the sanctions list.  Prominently featured were several judo buddies, the Rotenberg brothers and Gennady Timchenko of Gunvor and Novatek.  Also sanctioned were Ivanov and Yakunin.

Timchenko is of particular interest.  The Treasury Department specifically alleged that Putin is a part owner of Gunvor, and might have access to Gunvor funds.  I don’t know, but would love to know, whether this is based on information that UST has developed, or is just a repeat of the allegations from Milov and others that have been made in the past.  If the former . . . that would be a bombshell.

This puts Gunvor in a very delicate position.  Some of its contracts likely have illegality clauses which could conceivably permit counterparties to void the contracts.  Gunvor would no doubt fight this.  But the main threat is that no company is likely to want to deal with Gunvor going forward, and more importantly, that banks are very like to cut or pull altogether credit lines.  These lines are the lifeblood of any commodity trader.  It cannot finance inventories and trades without access to credit.

The fading away of counterparties and banks can set off a death spiral that causes the rapid demise of a trading firm.

The market is already hammering the firm.  Yield on its bond rose 340 basis points to 10.91 percent.

Meaning that we may soon get a live test of an argument that I’ve been making for over a year now, and which I made today at a conference in Brussels (and made to various European regulators yesterday): namely, that commodity trading firms are not systemically important like banks are.  Commodity trading firms can die, without fear of contagion that affects the broader economy.

Gunvor announced that Timchenko has sold his shares to co-founder Törnqvist (a Swede).  I doubt this will clear the serious doubts now swirling around Gunvor.  Banks and potential counterparties will wonder whether there is an explicit or tacit option for Timchenko to repurchase his shares.

Trading firms depend very heavily on reputation, and the trust of counterparties and lenders.  Gunvor is so closely associated with Timchenko-and Putin-that it is hard to see how counterparties and banks would be willing to take the risk of dealing with the firm.   How can they be sure that the firm is out of any threat from action by the US (or the EU, if it follows suit)?  Will they really trust this claim of a miraculous sale that severs all ties between Timchenko and Gunvor?  (If the bond price doesn’t rebound tomorrow, we’ll have our answer.)

There is no doubt that Fear, Uncertainty, and Doubt are swirling around Gunvor right now, and there is little that Timchenko or the company can do to dispel it.  And FUD is often more than enough to kill a trading firm.

The US government can feed the FUD by opening an investigation, not just of the alleged sale, but of other Gunvor activities.  I am sure there is more than enough grounds: the hint,hint; nudge, nudge about the connection between Gunvor and Putin is alone sufficient to give those thinking of dealing with Gunvor the yips.  And the announcement of an investigation, particularly in this environment, is likely to be as fatal as a conviction would be.

I will note that in the aftermath of the Georgia War I specifically called out Gunvor as a firm that deserved special scrutiny as a way of pressuring Putin.  It’s about damn time.

The storm that is brewing around Gunvor will be a gentle spring breeze by comparison to the tempest that would occur if the administration moves to add a name conspicuously absent from today’s list: Igor Sechin.  Again, illegality clauses are likely to come into play, which could permit the banks to pull the prefinancing that was provided in conjunction with prepay contracts between Rosneft and Glencore, Vitol, and Trafigura.  Invocation of these clauses would require Rosneft to repay the loans immediately.  The sums involved are immense, totaling around $12 billion.  Rosneft had announced it was looking to go to the capital markets to raise funds.  Those plans would likely have to be scuppered if Sechin gets named to the Treasury list.

But that’s for another day.  For the immediate future, all eyes on Gunvor.  Let’s see if it can find some legal maneuver to convince lenders and counterparties that it has severed all ties with Timchenko, and therefore has no exposure to punitive actions by the Treasury.  I suspect that many will argue that the downside exposure is so great, that they are unwilling to run that risk.  If that happens, Gunvor will soon implode.  The question is: will much of Putin’s wealth implode with it?

Finally, a personal note. I have had several excellent students in the Masters Program in Commodity Trading and Finance at the University of Geneva who work for Gunvor.  I feel very badly for them.  I know that being young, and bright, and having general human capital  they will wind up on their feet.  But I do sincerely regret what they must be going through now.

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  1. This is one of your best posts yet.

    Thanks for the blog- keep it coming….

    Comment by Tom Henderson — March 20, 2014 @ 3:22 pm

  2. Excellent points. Gunvor may indeed implode, but the Gunvor of 2014 is not the same as that of 2008. It has lost much of its “premium”, high-margin (by traders’ standards) Russian business. Apparently Timchenko saw that coming and has diversified his holdings, investing into Russian gas and NGLs (Novatek); petrochemicals (Sibur); construction (StroyTransGas) and food (Russian Sea, Aquanica).

    If Sechin is sanctioned as an individual, I guess he would resign at once and keep running Rosneft like Deng ran China.

    Comment by Alex K. — March 21, 2014 @ 12:44 am

  3. Fantastic post. Congratulations on the link from the FT BTW.

    Comment by richard — March 23, 2014 @ 2:48 am

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