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14 December 2016

Rosneft’s triumph?

The biggest energy deal of the year

The shock December 7 announcement that Rosneft was selling a 19.5% stake in itself to a joint consortium between Swiss commodity giant, Glencore, and the Qatari sovereign wealth fund, is undoubtedly the most significant development in Russian energy markets this year. It is a development of major geopolitical importance as well. When Rosneft CEO Igor Sechin himself stated, “the deal is not just a portfolio investment, but a strategic one” he was speaking not just for Rosneft, but for Russia. 

The sale wiped away much of the prevailing thought around Rosneft’s recent machinations that were widely believed to be preparation for the firm to effectively buy-back the stake itself. Furthermore, it heralds a burdening relationship with Qatar, whose political influence in the Middle East expanded significantly in the last decade, while underscoring the vast power entrusted in Rosneft CEO Igor Sechin. Finally the involvement of Glencore – whose directors include leading American business figures – despite continued sanctions against Rosneft may be the clearest signal that the post-Crimea era of Western investors avoiding Russia is drawing to a close.

It was widely assumed that Rosneft was essentially seeking to buy back the 19.5% cent stake itself in an accounting move that would ensure the Kremlin met its budget deficit target, thereby also demonstrating Rosneft’s continued importance and Sechin’s loyalty to the Kremlin two years after requesting significant aid from the state. Rosneft itself publicly made clear it was preparing to do so. However, while is unlikely that the Rosneft, Qatar and Glencore deal was arranged entirely at the last minute, Glencore’s announcement of the deal indicated that initially it will be taking only a 0.54% stake in Rosneft for 300m Euros. The deal’s financing appears to have been fairly quickly arranged with a series of Russian banks and Italy’s Intesa SanPaolo, which has raised questions in some corners the deal could be used to eventually allow Russian actors to take back some of the stake. The shortened time-scale needed to agree the deal can be explained by the fact the Qatari wealth fund is far more liquid than Glencore, which pledged to restart dividend payouts while also stating it would aim to maintain a net debt-to-earnings ratio of two or less the previous week.

While Sechin noted that a Western bank was involved in the financing of the deal, later revealed to be Intesa Sanpaolo, the heavy lifting for the bank and the Russian banking consortium also involved in the loan the bank, will be in arranging the contractual structure of the 5 years of oil off-take contracts between Glencore and Rosneft agreed as part of the deal rather than financing the immediate cash transfers from the Qatar Investment Authority as well as in the options contracts likely used to secure the deal. Given Rosneft sold 600bln rubles (US$9.43bln) worth of domestic bonds in just thirty minutes, just two days before the deal was announced, Rosneft is already cash rich enough to ensure that it will be able to finalise any transfer of cash in line with the 15 December deadline set out in the government decree that formally ordered the part-privatization. While the structure of the aforementioned off-take contracts will provide a guaranteed buyer for 220,00 barrels of oil per day – 2% of the 11.22m per day barrels of oil all of Russia produced in November, a post-Soviet record high.

By securing off-take contracts with Glencore he has found a company with extensive sales networks across the globe to sell Russian oil for quite some time that will help insure against a renewed escalation of Western sanctions. He has also shown himself adept at handling international oil markets. Sechin increasingly made Trafigura – who partnered with Rosneft in the October purchase of Indian oil firm Essar, despite having to specifically structure the deal to dodge Western sanctions – its preferred trading partner over the last two years only to now secure the long term partnership of Glencore in a move that undermines Western sanctions’ efficacy will undoubtedly be hailed as a political victory in Moscow. Doing business with Rosneft is one matter, being directly invested in it is far more significant, particularly as Glencore's board includes the former CEOs of major Western firms such as Bloomberg, Morgan Stanley, and BP. If they can approve a deal that ignores the intent, if not the letter, of sanctions on Russia and Rosneft, the future of Western sanctions is increasingly doubt, particularly those targeting Russian business interests if not those targeting individual politicians and military actors.

Qatar’s involvement secures Moscow a much needed partner in the Middle East. The deal of course has its benefits for Qatar as well and interestingly gives an OPEC-member state a direct stake in the largest oil company in Russia, the largest non-OPEC oil producing country. The new partnership with Rosneft is a stark reversal from 2012, when Russian Ambassador to the UN Vitaly Churkin had to deny having threatened to destroy Qatar. While Qatar’s relationship with Saudi Arabia is often strained, it is undoubtedly an increasingly active geopolitical and regional player. As Qatar is well aware of the potential for future tensions with Saudi Arabia and other Gulf states, despite their recent easing, it too may see a strategic benefit from becoming Moscow’s closest partner in the region.  Furthermore, strengthening the Moscow-Doha relationship may grant the Kremlin additional cards to play in its relationship with not only Saudi Arabia but also Turkey as well given the burgeoning Qatari-Turkish alliance.

That Rosneft was able to attract such a large investment, despite sanctions, and at a price around that which Russia hoped to receive, and despite the fact that the same economy minister was arrested just last month – potentially on Sechin’s orders – is not just a coup for Sechin personally but a significant strategic victory for the Kremlin. The strongest indication to date that Western businesses are rejecting their earlier sanctions-inspired hesitancy, which were structured to freeze rather than reverse business ties as the since-lifted Iran sanctions were, and the strongest sign of a Qatari commitment to a healthy bilateral relationship with Russia to date are nothing to scoff at. Sechin is likely to be further rewarded by the Kremlin, a stark contrast to rumors former economy minister Alexei Ulyukayev’s downfall would presage Sechin’s own. Sechin will of course retain sole decision-making power at the still majority-state-owned oil company.

Russia’s partners have long known the risks associated with dealing with Putin’s Kremlin, as well as the potential high returns still on offer both from a political and an economic perspective. Sechin gambled that enough political and economic actors would eventually return to the temptation of those returns despite Russia’s invasion of Ukraine and the subsequent Western implementation of sanctions. For now, that bet appears to have paid off. 

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