In December of last year, the Russian government privatized 19.5 percent of the oil giant Rosneft, an act hailed by some Western writers as a “personal triumph” of Vladimir Putin. It took less then a month for Russian media to more or less confirm the healthy skepticism of those familiar with how Putin’s regime operates: the so-called privatization was anything but a transparent sale to a private buyer. Yesterday RBC reported that the cash paid to the Russian budget—€10.2 billion—was wholly financed by VTB, a bank in which the Russian government has a 60.9 percent ownership stake.
On the surface, the deal at first looked pretty descent. A consortium comprising Swiss oil trader Glencore and the Qatari sovereign wealth split the stake in Rosneft equally. The Italian bank Intesa was financing the deal, but was said to be bringing in several unnamed Russian banks to participate.
But in reality the scheme went something like this: on December 15, VTB gave a bridge loan of 693 billion rubles (the equivalent of €10.2 billion) to QHG Shares, Ltd., a vehicle co-owned by Glencore and the Qataris. The loan was secured with the privatized shares. QHG paid the money to Rosneftegaz, a company fully owned by the Russian government, which was the previous owner of the controlling take in Rosneft. Rosneftegaz then transferred the money to the federal budget. A week later, VTB transferred the loan onto Rosneftegaz’s books. Then, finally, after QHG received its €10.2 billion credit from Intesa on January 3, QHG paid the balance to Rosneftegaz.
This much is publicly known, but several murky details remain.
First of all, it’s unclear if Rosneftegaz ever paid back VTB its full 693 billion ruble loan. The bank’s past lenient dealings with Kremlin-aligned interests doesn’t inspire confidence. For example, in March 2015 VTB forgave a $500 million loan to a sanctioned Russian businessman, Konstantin Malofeev, who was named as a major private sponsor of the war in Ukraine’s Donbas region. Even media directly controlled by the Kremlin didn’t hesitate to call it as it is: “VTB forgave the loan to Malofeev for his aid in Donbas”, Lenta.ru declared.
A year later, VTB’s CEO Andrey Kostin, paid an unofficial visit to Washington, DC. As we noted at the time, Kostin hired a lobbyist to help him work the Obama Administration and the Hill for easing sanctions on the bank. Kostin argued that VTB was wholly independent from the Kremlin, going so far as to suggest that since VTB conducts business in Ukraine, helping VTB would amount to helping Ukraine. (It didn’t work out for Putin’s banker. The pleas fell on deaf ears.)
As to Rosneftegaz, independent Russian experts have call it Putin’s personal slush fund for some time now. Rosneftegaz, despite being wholly owned by the Russian government, is formally a joint-stock company. Apart from its shares in Rosneft, it owns stakes in Gazprom and energy consortium Inter RAO. But Rosneftegaz never reports to its nominal owner, the Federal Agency on For State Property Management: the company has never responded to numerous Agency request for information about its various investments.
At the same time, Rosneftegaz pays out only half, or sometimes only a quarter, of all the dividends it accumulates from its three major assets. In 2016 Rosneftegaz earned 107 billion rubles, while paying only 35 billion rubles into the budget. The board’s director, Igor Sechin, has stated that he reports directly to Vladimir Putin and no one else. Every time Sechin needs to pay less to the budget, he claims the money is being plowed back into the company’s various investments. Those schemes, and the amount invested in them, remains opaque to the public.
So if the full amount was not repaid, the difference likely ended up an account somehow accessible by the Russian President.
The other murky area in the Rosneft privatization is the question of who has officially secured the 19.5 percent stake in Rosneft. According to RBC’s reconstruction of the events, that should be Intesa, as the Italian bank for is the ultimate creditor. If so, our original speculation as to how the looting of Rosneft might proceed still stands: the consortium (which we now know is called QHG Shares Ltd.) would default on its loan and Intesa (known for its ties to the Kremlin) would have the right to foreclose. After that, the shares would be sold to some third party—a private deal of which we could never know the details. The shares would then likely one day appear in some account associated with Putin’s girlfriend’s grandmother. (If you end up reading about it in a year or so, don’t forget you heard it here first.)
And the most amazing part here is that for the past year, Russia’s Reserve Fund, a rainy-day fund set up with oil surpluses in the mid-2000s, has shrunk 3.7 times to less than 1 trillion rubles ($16 billion). One trillion rubles was spent from the Reserve Fund in December alone. At the same time, Russia’s National Wealth Fund, a similar fund set up to help guarantee pensions, is down to 4.3 billion rubles, with liquid assets totaling just 2.8 trillion rubles. In 2017 the government will spend down the Reserve Fund and will proceed to tap the National Wealth Fund, the Accounts Chamber Head Tatiana Golikova said in December. And since the budget deficit for 2017 is estimated to be as high as 2.75 trillion rubles, the Reserve Fund will almost certainly be depleted in the first half of this year. After that, there will be two ways of covering the deficit, former Deputy Energy Minister Vladimir Milov said: printing money or external borrowing.
No wonder, then, that Moscow is all excited about the prospect of negotiating with President Donald Trump about sanctions relief…