Russia's transparency hopes dashed with opaque deal: Fuel for Thought

When Russian authorities first announced they would privatize some major state-run assets several years ago, they cited improving the investment climate by increasing transparency and efficiencies among its main goals, but the deal to privatize Rosneft is unlikely to help meet them.

In fact the opposite effect could be said of Russia’s 2016 privatization round. This included the sale of a controlling stake in then Russia’s sixth-largest crude producer Bashneft and a 19.5% stake in Russia’s top oil company Rosneft, with output at over 4 million b/d.

The deals have sparked plenty of controversy and speculation, which has raised new reputational risks, and is likely to have a wide-ranging negative impact on the market as a whole.

“It is remarkable how a relatively simple task to sell a stake in the publicly listed company has turned into a complicated and opaque mechanism …with unclear structure of the capital,” analysts at Sberbank CIB said in a mid-December note.

In early December, while many in the market continued to guess why the government was going ahead with selling nearly a fifth of a key asset in a weak market environment, the authorities announced it had reached a deal with a consortium of the Qatar Investment Authority and trader Glencore.

When the deal was announced, Rosneft CEO Igor Sechin said the buyers would take equal stakes upon completion of the “strategic” deal, which was worth Eur10.2 billion (about $11 billion).

But then seemingly contradicting that was an announcement the same day that Glencore said it would pay just Eur300 million in return for a 0.54% equity stake in Rosneft, and the right to offtake 220,000 b/d of Rosneft’s crude for the next five years.

The balance of the $11 billion would come from the Qatar Investment Authority (QIA), which is also a Glencore shareholder, and non-recourse bank financing, Glencore said.

Following weeks of speculation, it turned out that the 19.5% stake is owned by Singapore-based QHG Shares Pte Ltd. The new owner is controlled, through a chain of joint ventures, by JV of QIA/Glencore consortium and QHG Cayman Limited, Russia’s RBC reported.

The involvement of an offshore company registered in the Cayman Islands raised new questions over the deal’s transparency. Meanwhile, details revealed on payment schemes fueled concerns that the stake was bought with money from Russian state-run banks, a scheme which President Vladimir Putin warned against.

Hard to follow the money

While officials said that all the proceeds from the sale were transferred to Russia’s budget in December, data from Russia’s Central Bank showed that net inflow of foreign capital to Russia, the category under which money for the sale of Rosneft’s stake falls, was at just $700 million in December.

The results of Rosneft’s privatization may have been offset by Rosneft’s purchases abroad, analysts at Sberbank CIB suggested. Financing of the deal via an initial loan from Russian state-run bank VTB could be another explanation, other analysts said.

Comments by Antonio Fallico, chairman of Banca Intesa Russia, followed speculation that European banks were uneasy to take part in a deal, involving unknown beneficiaries and an opaque structure. Fallico, however, said many banks expressed their interest to the deal but the bank “decided not to attract partners… [as] Rosneft is a very reliable partner. We aren’t worried,” he said in Sochi late in February, as quoted by Russian Prime news agency.

The deal was fully transparent, he claimed.

But not everyone agreed with Fallico. “I don’t consider this deal transparent. I believe it creates image risks [to Russia],” said Alexei Kudrin, former Russian finance minister.

To add to the general negative sentiment surrounding the deal, a few weeks prior to the sale of Rosneft stake, Russian economy minister Alexei Ulykaev was arrested for allegedly taking a $2 million bribe in return for supporting Rosneft’s acquisition of a 50% stake in Bashneft in October.

Many were puzzled as they struggled to understand why Ulyukaev would demand money from Rosneft for supporting a deal already blessed by President Putin.

The deals are likely to cast their shadow over the next privatization round slated for 2017-2019. The next round was approved by the government in early February, and includes Russia’s biggest shipper Sovcomflot, which owns a big chunk of Russian oil tankers.