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The puzzling Glencore-Qatari-Rosneft deal

The sale of a stake in Russia's largest oil producer might not be as significant as many thought

On the surface, the €10.2bn ($10.8bn) sale of a 19.5% stake in Rosneft, to Glencore and the Qatar Investment Authority (QIA), looks good business all around. The Russian treasury gets some much-needed cash; Qatar diversifies into Russian oil; and Glencore will buy another 220,000 barrels a day of Rosneft's crude for the next five years. Glencore chief executive Ivan Glasenberg said the deal showed the "strong relationships that already exist between Rosneft, QIA and Glencore". Western sanctions have sought to prevent such relationships - and investments - and hurt Russian firms. This deal showed Russia's resilience to the financial embargo. Announced on 10 December, it valued Rosneft at €52bn, or about 30% more than it was worth at the start of 2016.

Yet behind the headlines things look much less obvious. Switzerland-based Glencore and the QIA seem to have played cameo roles in a byzantine transaction orchestrated by an Italian bank.

Igor Sechin, Rosneft's chief executive and Russia's most powerful oilman, had actively been seeking a buyer for a stake in the Russian company since appointing Italy's Intesa Sanpaolo to handle the sale in May 2016. Most industry insiders assumed that foreign companies would steer clear: Rosneft remains the target of US and European sanctions put in place after Russia annexed Crimea in 2014.

Although Western investors are not banned from buying shares in Russian companies, many have been cagey about doing deals in Moscow, fearful of US regulators. Yet the Kremlin wanted Rosneft to sell its stake by the end of 2016, and the clock was ticking. It was widely expected that Rosneft would buy its own shares and hold on to them. That looked even more likely after Russia's largest oil producer pulled off a shotgun R1.07 trillion ($17bn) bond sale in late November. It raised more than enough to fund the purchase.

Analysts wonder if the deal was actually financed by state funds generated from Rosneft's November bond sale

Instead, the QIA-Glencore deal, which closed in early January, resulted in the two investors forming a 50:50 joint venture. Even the structure of that part of the deal raised eyebrows. While the QIA paid €2.5bn towards the purchase, Glencore contributed just €300m of capital.

The rest of the funds came from Russian banks. Vedomosti, a Russian business newspaper, reported that state-controlled Gazprombank provided up to €3bn. For its part, Intesa said on 2 January it was underwriting €5.2bn of the deal. Several questions remain about the structure of the deal; not least how the Italian bank could assume a debt that amounts to 20% of its equity.

The sale was immediately heralded by Kremlin officials as proof of the government's ability to sidestep Western sanctions. Analysts, though, wonder if the QIA and Glencore are the main participants in the deal, or whether it was entirely financed by state funds generated from Rosneft's bond sale.

"There is no way that $10.5bn of Western money has been transferred to the Russian budget to pay for a 19.5% stake in Rosneft," says Craig Pirrong, a finance professor at the University of Houston. "Or perhaps it was a Christmas miracle. Money magically appeared in Rosneft'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."

Even analysts from state-controlled investment bank Sberbank CIB were sceptical about the origin of the financing. Alexei Bulgakov, a senior analyst at the firm, wonders if the ruble funding came from Kremlin banks using repurchase agreements, or repo, with the Russian Central Bank, with Rosneft bonds as collateral.

"It is remarkable how the fairly straightforward task of selling a stake in a listed entity evolved into the creation of a complicated, non-transparent leveraged vehicle with an unclear capital structure," says Bulgakov.

Driving a hard bargain

Qatar has been steadily building influence in Russia through the acquisition of Kremlin-controlled assets. In 2013, the QIA invested $1bn for a 5% stake in VTB, Russia's second-largest bank, as part of a $3.2bn capital raising. In August 2016, the QIA took a 25% stake in St Petersburg's Pulkovo airport for an undisclosed amount. In 2014, the QIA also allocated $2bn to Russia via joint investments with state-backed private enterprises, in an alliance with the Kremlin's own sovereign wealth fund.

But the emirate has gained a reputation among investment bankers for driving a hard bargain. It generally won't take part in auction process and has to be offered a deal on a silver platter.

Both the VTB and Rosneft privatisation deals also reflect the Kremlin's preference for a state-driven capitalist model based on long-term strategic partnerships with sovereign funds such as the QIA. President Vladimir Putin knows he can no longer rely on Western portfolio investors and Wall Street banks, which have largely decamped from Moscow since Russia was isolated by sanctions in 2014.

Aside from building on its relations in Russia, Glencore stands to benefit from the deal by gaining access to Rosneft's crude volumes. As part of the deal, the trader agreed a new five-year supply agreement for the purchase of an additional 220,000 b/d.

Investment bankers in Moscow suggest that Glencore's participation could be part of an obligation to its own largest shareholder - the QIA. The Qatari investment vehicle holds a 9% stake in Glencore and took part in the embattled trader's $2.5bn rights issue in 2016.

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