The terms of the privatization of Russian oil giant Rosneft, which the Financial Times called “a triumph for President Vladimir Putin” (since he managed to make the deal despite Western sanctions), were finalized yesterday. And indeed, the deal could turn out to be a triumph for Russia’s President—a personal financial triumph.
The buyer—a consortium comprising Swiss oil trader Glencore and the Qatar Investment Authority sovereign wealth fund (which itself is a major shareholder in Glencore)—will pay €10.2 billion for the 19.5 percent of Rosneft that was previously owned by the Russian government. A critical detail emerged shortly after the details of the deal were leaked on Tuesday: Glencore will only pay €300 million, the Qataris will throw in €2.5 billion, with the remaining €7.4 billion will be financed by banks. In addition to the ownership stake, Glencore is getting the rights to 220,000 barrels of Rosneft oil per day for the next five years.
Reuters reported earlier this week that the bank in question would be Intesa SanPaolo, an Italian institution with a colorful background. Today, it was revealed that Intesa would provide over 50 percent of that €7.4 billion, with the rest coming from several unnamed Russian banks.
Intesa SanPaolo has long been a good friend to Vladimir Putin and his various projects. It loaned €350 million to Gazprom in January of 2015; it recently participated in floating a sale of Russian government bonds; and in 2014 it financed Metalloinvest, the holding company owned by Alisher Usmanov, a Russian tycoon very close to Putin. Moreover, the CEO of Intesa SanPaolo in Russia, Antonio Fallico, has been a close friend to Silvio Berlusconi since the 1980s. When Intesa opened its branch in Russia in 2004, Berlusconi called Fallico “his trustee in relations with Putin”. In 2008 Fallico was awarded the Order of Friendship by Putin himself, and has since been known as “Putin’s man in Italy.” (The warm relations between Putin and Berlusconi don’t need mentioning. They are the stuff of legend.)
Though the Kremlin is predictably crowing about having pulled off such a deal in the face of Western sectoral sanctions, the more interesting story is in the details of the privatization itself. Glencore is putting in a surprisingly small amount of equity into the deal, and has stressed again and again over the course of the week that it will be limiting its exposure to the value of Rosneft’s stocks. A person with knowledge of the deal told RBC today that Glencore will strongly hedge its position by mortgaging more than 50 percent of its stake.
Glencore’s caution suggests what’s coming next: If the value of Rosneft were to somehow tank, Glencore would get a margin call from the murky Intesa-led creditor consortium. Glencore this past week ruled out anteing up more money—its real interest is in getting the oil for trading. The banks would then have the right to foreclose on Glencore’s stake. If Rosneft stocks were to take a tumble exactly a year from now, people ought not be terribly surprised. After all, €300 million looks a lot like an annual interest payment on a €4.8 billion loan.
Once that happens, Glencore’s 9.75 percent stake will be sold to third parties, many who are almost certainly involved with the unnamed Russian banks helping finance the deal. That transaction will be private and not open to scrutiny, but we can expect that the shares will ultimately show up in Alina Kabaeva’s grandmother’s account. (Think of it as very tidy means of laundering billions that have been stashed away over the years.)
Furthermore, consortium agreements often contain opt-out clauses, giving members the right to sell their stakes if the ownership structure changes—something that the Qataris might also avail themselves of. Thus Vladimir Putin might in the end get a full 19.5 percent ownership stake of Rosneft—a very good end-of-assignment bonus for Russia’s President.