US Scrutinizing Rosneft Deal Over Sanctions; Russian News Sites Critical of Deal; RBC Struggles with Rosneft Libel Suit

The White House is taking a close look at the $11.3 billion deal reported yesterday involving the purchase of a 19.5% stake in Russia’s oil giant Rosneft, to determine the impact of existing US sanctions on Rosneft, UPI and RFE/RL reported.

White House spokesman Josh Earnest said:

TASS reported that US and EU sanctions on Rosneft do not formally ban US and European companies from purchasing a stake in Rosneft because the proceeds reportedly go to the Russian government, not the company. Some investors assessed the risk as too great. Presidential spokesman Dmitry Peskov said that sanctions would not impact the deal due to “its structure,” newsru.com reported.

Russia is expecting such a great influx of foreign currency from the deal — estimated on December 6, the date of the announcement, at 711.543 billion rubles at that day’s ruble/euro exchange rate — that President Vladimir Putin has ordered that the currency be exchanged in stages so as not to upset currency markets, Gazeta.ru reported.

The Kremlin was very eager for the sale, given the need to cover budget deficits induced by deteriorating economy, caused by falling oil prices and Western sanctions. Rosneft itself has been performing poorly, with it’s third-quarter profit off by 77% compared to 2015, UPI reported.

Russian press coverage of the “deal of the year” as it has been dubbed has been generally upbeat. But Gazeta has reported that the deal has not yet been finalized as we reported yesterday and may not bring Russia as much as claimed. Gazeta cited a minority shareholder who warned that Glencore may have made the deal to get discounted shipments of Rosneft oil.

Article Critical of Rosneft Deal on Financial News Site

Ekho Moskvy’s editor-in-chief Aleksei Venediktov tweeted a link to a story in finanz.ru today:

Finanz.ru wrote that the “deal of the year” was “starting to acquire some dark spots” as Glencore had “virtually disclaimed the fact of large investments of its own cash in shares in the Russian company.”

Glencore’s press release said it had acquired only 0.54% of Rosneft’s shares; it also spoke of the total of the deal as valued at 10.2 billion euro, and not the 10.5 billion announced by Rosneft CEO Igor Sechin. Furthermore, Glencore said the deal was finalized and was contingent on non-recourse financing.

Reuters has reported citing a source close to the Rosneft deal that the Italian bank Intesa may be supplying the lone; Intesa has a long history of cooperation with Rosneft and was looking for investors in Rosneft this year.

A source told Finanz.ru that “Glencore and the Qatar Fund appear to be a ‘cover’ in the deal.” The scheme may work as follows: Rosneft issues bonds and invests cash in a certain fund, which then buys its shares and gets a commission, similar to the mechanisms used for privatization in Russia in the 1990s. 

Vladimir Milov, an opposition member and head of the Institute for Energy Policy said in an article for Forbes.ru on December 8 that it was possible that Rosneft is turning over some of its shares in payment of its bonds placed for 600 billion rubles. Rosneft received pre-payments from Glencore in 2013-2015 of up to $5 billion for future deliveries, he noted. Therefore, the sale of the bonds would cover Rosneft’s debts to Glencore but would be sent to the Russian budget as if “new money.” Milov also noted that Qatar owns 9% of Glencore.

Milov criticized the deal for bringing in a “comfortable portfolio investor who has no goals related to gaining access to Russian reserves, development of oil fields and so on” instead of strategic investors, saying the fact that “too many unknown and differing ‘testimonies’ from the sides only confuses it more.” He said Glencore could have been motivated by “a number of favorable tactical terms (including the bonuses offered by Rosneft itself, such as the off-take contract)”.

Sechin reported to Putin that Glencore and Qatar were in the deal “50-50,” but Glencore is paying only for 0.54% of the shares; there are also discrepancies in the numbers, as noted, and even the entity that was formally the seller isn’t clear — Rosneftegaz or Rosneft.

Milov said likely Putin was not happy with the idea of Rosneft buying its own shares, as has been discussed for months while investors were not yet found. He believes that Aleksei Ulyukayev, the former minister of economic development arrested last month, may have angered Sechin by insisting on Rosneft meet its obligation to sell to foreign investors

After failing to convince Indian or Asian investors in the Rosneft shares, Milov said, the the Kremlin was forced to find a trader who would be glad for the bonuses. He said Qatar was concerned about the fall of Glencore’s shares and its long-term problems and wanted to “take part in salvaging this investment.” Although Rosneft’s dividends are less than private companies, it has recently increased them and Milov estimates that Glencore and Qatar stand to get about $400 million a year or more from their shares. BP, which owns another 19.75% of Rosneft’s shares has improved its financial indicators with Rosneft’s dividends, he said.

Milov also pointed out that Glencore has been shedding its assets to relieve its heavy debts and is purchasing only 0.54% of Rosneft’s share in a departure from this trend.

Milov discounts the idea that Qatar was involved in the Rosneft deal as a pay-back for the OPEC agreement to reduce oil production:

RBC, the independent wire service that has been struggling with a lawsuit from Rosneft over purported “damage to its business reputation,” has been hoping that the judge reviewing the case would realize the obvious — that a company that is making more profits could hardly be said to suffer a loss.

As we reported, in September, Rosneft launched a potentially crippling lawsuit against RBC totaling about the equivalent of $50 million, for “business reputational damage” — the largest such lawsuit in Russian history.

RBC reported on officials who told them that in the privatization of 19.5% of Rosneft’s stock, the Kremlin was asking prospective investors not to make any deals with BP which owns 19.75% of the stock. Supposedly fearing that a new shareholder could team up with BP to create a blocking number of shares, government officials insisted that at least two Asian companies or funds should buy the shares. 

Rosneft declared the story “false” and “baseless fantasy”; RBC did not reveal its sources. This week as the Rosneft deal was discussed, RBC said only BP could save it from “total destruction,” The Moscow Times reported.

If BP could confirm publicly what it knew about this informal government ban on its purchase, that might save RBC. Otherwise, if successful, the lawsuit would bankrupt RBC. Sechin has won other libel suits against the media, notably against Vedomosti and Novaya Gazeta for publishing reports estimating his wealth. By pursuing a “reputational damages” suit instead of a straightforward libel suit, Rosneft ensues that it does not have to prove the claims were false.

Yevgeny Reznik, RBC’s attorney, said the news outlet had trouble getting experts to testify in court because they feared Sechin’s wrath. 

As Moscow Times reported:

The next hearing in the case is December 12.

— Catherine A. Fitzpatrick