The sale of a 19.5 percent stake in the Russian energy giant Rosneft is a serious signal about the future direction of the nation’s economy as well as Russia’s ability to withstand international sanctions.
Igor Sechin, head of Russian oil giant Rosneft. Photo: TASS
Newswires lit up on Dec. 8 with headlines of a surprise deal, as commodity trader Glencore Plc and Qatar’s sovereign wealth fund (Qatar Investment Authority, or QIA) agreed to buy a 19.5 percent stake in Rosneft, the huge Russian state oil production company that has been facing punitive sanctions from both the U.S. and the EU.
It’s immediately obvious why this deal means so much to Russia – the Russian government was able to offload a stake in the company to raise billions of dollars in badly needed cash, Rosneft was able to show that its privatization efforts are once again underway, and President Vladimir Putin could show that even international sanctions could not stop this deal from getting done. This is the biggest foreign investment in Russia since the start of the Ukraine crisis in 2014.
On Dec. 12, the formation of a 50:50 consortium was announced between Glencore and QIA to handle the approximately $10 billion deal. A key consideration, however, is the confirmed funding for the deal: Glencore is committed to just $300 million in equity and QIA another $2.5 billion, with financing for the remainder to be handled by Italy’s Banca Intesa Sanpaolo. [QIA is the largest shareholder in Glencore – Editor’s note]
With such a large gap between committed funds and the announced total value, there has been some speculation about the true nature of the deal, especially after Rosneft hinted in October that it might buy back shares from itself to be sold back later. Even the announcements have varied significantly in style: Putin congratulated Rosneft CEO Igor Sechin on completion of the deal, while the Glencore announcement noted “final-stage negotiations” and that things would be finished in mid-December.
Also read: What you need to know about Rosneft
Meanwhile, Rosneft had been in the midst of a “self-privatization exercise,” having had trouble finding foreign buyers – perhaps no surprise, given the sanctions overhang that clouds any deal with the company. Reportedly, 30 different buyers had already passed on the deal.
Close observers note that the company recently raised about $9 billion through bond sales, a figure that is interestingly close to the missing sum between the $10 billion announced value and the $2.8 billion in concrete commitments. Until further details come out, however, the terms remain speculative.
One clear winner is Glencore and its flashy CEO, Ivan Glasenberg, who, for a comparatively tiny stake of $300 million, secured trading rights to 220,000 barrels per day (bpd) of Rosneft oil. Rough calculations put their potential profit on just this part of the deal at around $75 million per year.
Russia’s benefits are a bit murkier, but this is often the case. While the economic fundamentals of Moscow’s energy and business deals are usually very solid, global-scale announcements and plans are often tinged by political motivations, from both Russia and its counterparts.
One can point to the seemingly ever-changing gas pipeline supply routes: Nord Stream I was completed, but since then, different proposals like South Stream, Turkish Stream, Nord Stream II, and the continuation of Ukraine gas transit have spawned hundreds of analyses trying to understand the political, legal, and economic considerations of Russia, the EU, Turkey, and other partners.
The implications on global energy markets of the Rosneft sale are likewise open for some interpretation. Foreign investors interested in Russia, yet stymied by the ongoing sanctions regime, could take it as the latest positive sign. White House spokesman Josh Earnest said that the deal was being looked at, but other sources are clear that due diligence was thorough and everything is perfectly legal.
The G7 has fallen back on statements of solidarity about the continuation of sanctions, such as that from Japan's trade minister, Hiroshige Seko, on Dec. 12. However, cracks have been popping up for a while. While the EU will reportedly extend sanctions for another six months, when leaders meet on Dec. 15, Austrian Vice Chancellor and Economy Minister Reinhold Mitterlehner recently stated that "the extension of Russia sanctions must not be self-sustaining," and "[they have] to be discussed more intensively in the future."
Of course, the largest boost to Russia’s international fortunes came on Nov. 8, when Republican candidate Donald J. Trump won the U.S. presidency. On Dec. 12 it was announced that Trump selected Rex W. Tillerson, the chief executive of Exxon Mobil, to be Secretary of State.
Tillerson was due to retire from Exxon next year, but his business ties will be impossible to disentangle completely, and he has been an open critic of sanctions. Exxon has a number of ongoing projects that are legal under the restrictions, but has had to forego other lucrative possibilities possibly worth tens of billions.
With such a prominent pro-sanctions voice as the United States about to sharply change direction, and ongoing signs of disunity in the EU, the continuation of sanctions should not be taken for granted. If they are abandoned, Glasenberg and his Qatari counterparts will have a nice advantage in reputation and access for future developments.
In economic terms, for Russia, the deal is a great success that will funnel billions into the state budget (depending on how the funding is resolved). Of course, the primary reason that budget holes need to be filled at all is the continued weakness of Russia’s economy and foreign currency reserves, which were hammered by the one-two punch of sanctions and low oil prices.
As such, one can point to the Glencore-QIA-Rosneft deal as an important sign of Moscow’s growing geopolitical clout and the continued strength of their resource base, but not as an indication that the recession is over. For that, oil price remains one of the most important indicators.
Happily for Moscow, there is positive news on that front as well. In a historic agreement, Organization of the Petroleum Exporting Countries (OPEC) members joined with 11 of the largest non-OPEC oil producers to recently announce a significant production cut, which will be implemented starting in January.
The deal will last for a period of six months: OPEC will cut output by 1.2 million bpd (with the Saudis making the largest drop, of 486,000 bpd), and the non-OPEC members reducing output by a combined 558,000 bpd. Of this total, Russia will cut production by 300,000 bpd. Given the involvement of the QIA in the Rosneft deal, it’s worth noting that Qatar is a key OPEC member – showing the multiple layers involved in any deal involving Russia and a state-owned company.
The announcement, the first on such an international scale over the last 15 years, caused oil prices to immediately jump up near $58 a barrel. This, the highest price since mid-2015, will be welcome relief for budget planners in production countries. Russian Energy Minister Alexander Novak noted that $50-60 per barrel was a good price for the market, and that “The country’s budget is based on a price of $40, so with the price in the range of $50 to $60 we will definitely be more comfortable.” Of course, since price increases will only be sustained by holding to production cuts, it is not a complete benefit to the Russian budget and larger economy.
This last note highlights the pitfall of any such agreement: noncompliance. Studies of historical compliance find that OPEC members hold to about 80 percent of announced production cuts. The difficult thing is in predicting the non-OPEC members, which have less oversight, history, and enforcement mechanisms. Of those, Moscow is a key broker of the deal and will likely toe the line, on paper. There is wiggle room, however: Russia will cut its 300,000 bpd “based on its technical capacity,” and some bookkeeping tricks, such as closing down old, expensive wells and cancelling “theoretical barrels” (planned 2017 production increases).
The Glencore-Qatar Investment Authority-Rosneft deal should best be viewed in the context of Russia’s recent geopolitical successes and the faint-but-growing thought of sanctions ending. It is a significant deal with some key international players, and sends signals for the near future. In strict monetary terms, however, this deal is much less important. Ultimately, the strength of Russia’s energy sector and wider economy remains tied most directly to oil prices and related production agreements, and to unpredictable political developments, such as Trump’s ability to change direction regarding sanctions.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.