Streetwise Professor

December 25, 2016

A Christmas Miracle in Moscow?

Filed under: Economics,Energy,Politics,Russia — The Professor @ 12:27 pm

Putin gave his annual marathon address a few days ago. As usual, some of the things he said were quite sensible. Some things were more debatable. And some things were just codswallop:

Speaking at an annual press conference on Friday, Mr Putin said that “foreigners” had “transferred the money into the Russian budget in full.” The [Rosneft-Glencore-QIA] deal is worth Rbs700bn ($11.5bn).

This echoes a Sechin statement from 9 days ago:

Rosneft CEO Igor Sechin reported to Russian President Vladimir Putin that the federal received all proceeds from privatization of a 19.5% stake in Rosneft, according to Presidential spokesman Dmitry Peskov.

“Sechin told Putin that all funds from Rosneftegas were transferred to the budget,” Peskov said.

There is some ambiguity here: Putin could have been referring to “the foreigners'” equity stakes. But that would leave open the question of where the balance of the money came from, and there is no way that Russia has received the entire $11.5b from “foreign” sources. Note that the bank (Intesa Sanpaolo) that had been named–by Rosneft–as leading the funding for the purchase has said that it’s still thinking about it:

Intesa said earlier this week that its “potential involvement” in the deal was “still under evaluation.” Financial regulators in Rome are examining whether Intesa Sanpaolo’s financing of a €10.2bn investment in Russian oil group Rosneft complies with sanctions

No other foreign bank or banks have stepped up to provide funding.

Maybe Glencore and QIA would have made their equity investment without financing for the balance of the purchase price. But I doubt it. There is no way Rosneftgaz would have parted with ownership of the 19.5 percent stake in Rosneft without being paid in full. So where did the money come from? Either it came from Russian sources, or the deal is not done–both which would be contrary to what Putin asserts. And if it’s from Russian sources, that would give to lie to Sechin’s and Putin’s original claims that all the money would come from foreign sources.

So where did it come from (assuming that it came from anywhere at all)? Some possibilities:

  • Rosneftgaz. Note Sechin’s statement that “all funds from Rosneftegas were transferred.” Rosneftgaz owned (owns?) the shares. Perhaps it made a payment to the budget from its own funds, and retained ownership of shares in anticipation of selling them to the Glencore-QIA consortium at a later date. (This was the common belief as to how the “privatization” would occur prior to the announcement of the Glencore-QIA consortium.) But there is no way that Rosneftgaz transferred $11.5b received from foreigners.
  • Rosneft. It is interesting that on December 5 Rosneft announced plans to issue about $9b of bonds. Add that $9b to the amount allegedly being invested by the consortium, and you get pretty close to the purchase price for the 19.5 percent stake. (Coincidence?) The bonds haven’t been issued yet (apparently), but Rosneft could borrow from Russian banks in anticipation of repaying the loan with the proceeds from the bond issue. More speculatively, the Russian banks could have turned around and used a loan extended to Rosneft as collateral to a loan from the Central Bank of Russia, making the CBR the ultimate funding source. (John Helmer asserts that this is the case.)
  • Russian banks. Russian banks could have lent the money to the consortium. Alternatively, Russian banks could have lent to Rosneft, Rosneftgaz, or both.

But it is incontestable that either (a) the deal isn’t really done, or that (b) contrary to the statements trumpeted at the start of the deal, it was primarily funded by Russian banks, rather than western ones.

We now do have some idea of what an “appropriate Russian bank” is. (That was the mysterious phrase used in Glencore’s release to refer to a Russian bank providing an indemnity to Glencore.). RBC reports that Gazprombank is involved in the transaction. The Russian government operates under the fiction that Gazprombank is not a state bank. Putin had said that Russian state banks would not be involved, because that would not be a true privatization. The obvious inference is that an “appropriate” bank is a non-state one.

Even looking beyond whether Gazprombank is reasonably considered a non-state bank, (a) it was supposed to be indemnifying Glencore’s borrowing from western banks to fund the purchase, not providing the funding itself, and (b) on its own, it wouldn’t have the scratch to finance the entire purchase. Putting all this together, it means that either (a) the money is coming from other banks–which have to be Russian state banks (most likely Sberbank and VTB), or (b) the deal ain’t done.

It is interesting to note that neither Glencore nor QIA have made an announcement that the deal has closed. Indeed, they declined comment when asked about Putin’s statement. If the deal has closed, Glencore would have said something. Western banks funding the deal would have said something. The silence speaks volumes.

What accounts for the reticence of Intesa, and other western banks? Perhaps it’s coincidence, but Intesa was just fined $235 million for “anti-money laundering failures and violations of bank privacy laws.” The fine was levied by New York state regulators, not the Feds. Furthermore, lending to fund the transaction would not appear to violate sanctions, because it does not involve the purchase of new equity. However, Intesa and other western banks (and others have to get involved, because Intesa could not afford to finance it itself) know that there are many ways that the US government could express its displeasure at doing a deal that adhered to the letter of sanctions, but violated the spirit (as interpreted by the Treasury Department). The fine may have have gotten Intesa’s (and other banks’) minds right–and that may have been the point.

In sum, there is no way that $11.5b of western money has been transferred to the Russian budget to pay for a 19.5 percent stake in Rosneft. Thus, Putin was telling a stretcher at his presser.

Or perhaps it was a Christmas miracle. Money magically appeared in Rosneftgaz’s kitty, which it then generously transferred to the Russian government budget, out of the goodness of its heart in the spirit of the season. That would make as much sense as the story Putin spun.

And speaking of Christmas miracles, I hope that all my loyal readers are favored with one as well. Have a Merry Christmas, and a Happy New Year.

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  1. Russian commentators have been asking whether this is a very complex scheme that will end up being a veil for the theft of public assets akin to the loans-for-shares deals in the nineties. What do you think, professor?

    Comment by aaa — December 25, 2016 @ 3:33 pm

  2. Merry Christmas, Prof!

    Comment by Tim Newman — December 25, 2016 @ 5:17 pm

  3. Thanks, @Tim. Or should I say joyeux Noel? I see you are spending your holiday in Annecy,which is one of my favorite places. I try to get there when I’m in Geneva. I’ve really enjoyed reading your stuff recently. You’ve been on fire. I think we’ve been channeling the same thoughts.

    The ProfessorComment by The Professor — December 25, 2016 @ 8:25 pm

  4. @aaa. That’s always a possibility. I think that the most likely explanation is that this is a Potemkin privatization intended to make it look like outside resources are being used to fill budget holes, when in reality this is yet another way for the government to borrow money. What comes to mind is Enron, with a lot of financial engineering to conceal the additional borrowing. It is a shell game, for sure.

    That said, it is certainly possible that it will be used to transfer ownership to grasping hands. Further, these things are not mutually exclusive.

    What I am sure of is that everything that Putin and Sechin are saying about it is bullshit.

    The ProfessorComment by The Professor — December 25, 2016 @ 8:31 pm

  5. Did you hear about Sechin’s top assistant? Found dead in his car, today. Official cause of death, same as Lesin’s:

    Comment by dd — December 26, 2016 @ 2:51 pm

  6. @dd-Interesting. His background is rather amusing. Yes, KBG/FSB general, Dzerzhinsky Higher School of the KGB is the perfect preparation for a C-level executive of an oil company. Probably the only training in drilling that he got in the KBG was part of the interrogation course.

    The ProfessorComment by The Professor — December 26, 2016 @ 10:12 pm

  7. Professor, I think this can’t be ascribed to a Christmas miracle because the Russians celebrate Orthodox Christmas only in early January!

    This situation reminds me of the pre-announcement by Putin about this deal some weeks ago (with Glencore publishing a midnight press-release to confirm some of his statements). Seems that he is running ahead of the train, but there is no way to tell if he tells the truth about the payments now. Must say, however, that Glencore did say that the transaction was expected to close in mid-December, so the timing for the payments seems right.

    Merry Christmas & Happy New Year from a Geneva reader.

    Comment by Anonymous — December 27, 2016 @ 4:08 am

  8. @Anonymous-Work with me here! The Orthodox timing difference made me hesitate, but I went with it anyways. Also, I figured since no less of an authority than Zhirinovski is advocating that Russia move its celebration of Christmas to 12/25 I thought it was only a matter of time before Russia dropped the Julian calendar 😉

    Insofar as substance is concerned the official deadline for a sale was 12/15. I presume Glencore was going along with that. I do know that there was tremendous pressure from the Russian side regarding the wording of the press releases. But without western bank funding, there is no way that all the money could have come from foreigners to be transferred to the government. Perhaps Glencore and Qatar paid, and the money was effectively escrowed. But I can’t see them putting up their equity stake without the balance of the funding in place, and I can’t see Rosneftgaz formally transferring ownership to them without all the money in hand. I also think it’s odd that if the deal did in fact close, that Glencore wouldn’t announce it. Indeed, I would think that they would be under a legal obligation, and an obligation to the listing exchange, to do so.

    Thanks for the Merry Christmas/Happy New Years wishes. Same to you from Houston, where it’s a tad warmer–25C! I’ll be in Geneva for my annual sojourn in March. Drop me an email if you want to drop your mask of anonymity and have a drink or a coffee.

    The ProfessorComment by The Professor — December 27, 2016 @ 11:34 am

  9. Professor – absolutely, I will drop you an email closer to March, would be delighted to catch up with you for a coffee.

    Comment by Anonymous — December 29, 2016 @ 5:43 am

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