Russia's Rosneft Stake Sale Had a Twist -- WSJ

By Sarah McFarlane in London and Summer Said in Dubai Features Dow Jones Newswires

Qatar agreed to provision allowing Moscow to reacquire at least portion of shares

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Russia's sale of one-fifth of its state-owned oil company to Qatar and commodities giant Glencore PLC last year had an unusual provision: Moscow and Doha agreed Russia would buy a stake back, people familiar with the matter said.

Russian President Vladimir Putin hailed the EUR10.2 billion ($11.5 billion) sale of the PAO Rosneft stake in December as a sign of investor confidence in his country. But the people with knowledge of the deal say it functioned as an emergency loan to help Moscow through a budget squeeze.

Moscow agreed with Qatar that Russia would buy back at least a portion of the stake from the rich Persian Gulf emirate, the people said. The Qatar Investment Authority and Glencore, the Swiss-based commodities giant, formed a partnership to buy the 19.5% stake in Russia's energy jewel at a time when Mr. Putin's government needed cash.

The people with knowledge of the deal say the buyback arrangement was negotiated with involvement from Mr. Putin and the emir of Qatar, Sheikh Tamim bin Hamad Al Thani. Russia and Qatar saw it as an opportunity to build a bridge between countries that had taken up opposite sides in the Syrian civil war, the people said. One of the people said the buyback would happen in the next 10 years.

Kremlin spokesman Dmitry Peskov said he didn't agree with the characterization of the deal as an emergency loan. He didn't respond to further questions.

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Glencore and the Qatar Investment Authority said the deal's contract contained no right for Russia to buy back Rosneft shares from the consortium they created.

"The transaction did not include an option or agreement for Rosneft, Rosneftegaz or the Russian state to buy the stake or parts of the stake acquired by the consortium," Glencore said.

"The consortium alone controls the future ownership of these shares," the Qatar Investment Authority said through a London public-relations firm.

Rosneft, the world's largest listed oil producer, is traded publicly in Moscow, but it isn't easy to buy and sell large pieces of the company because it remains majority-owned by the Russian state and is an instrument of economic power for Mr. Putin.

The people familiar with the deal said a time-limited structure and a buyback agreement for the deal worked for both Qatar and Russia.

Qatar wanted its Rosneft stake to be temporary, the people said. The emirate believes it will profit from selling the shares back to Russia at a later date, the people said, betting that oil prices will rise and push up Rosneft's share price. Qatar saw the political benefits of giving Russia access to quick cash as a sort of loan to address a budget deficit that had widened due to lower oil prices, the people said.

After the deal, a range of talks opened between Russian and Qatari businesses on a scale not seen before, Russian news agencies have reported.

For Russia, a temporary deal was also preferred by Igor Sechin, a Putin confidante who runs Rosneft and its parent company Rosneftegaz, one of the people said.

Until the deal with Qatar and Glencore, Mr. Sechin had publicly opposed privatizing any more of Rosneft, which is already 20% owned by BP PLC. That ownership slice came about when BP sold its share of Russian oil company TNK-BP in exchange for the piece of Rosneft, and cash.

According to people familiar with the matter, Mr. Sechin approached Glencore about a deal under pressure from Mr. Putin, who needed to raise cash during a 2016 budget crunch, when oil prices fell to 12-year lows. Russia's federal budget relies on the oil-and-gas industry for about a third of its revenue. Glencore executives said the stake was too big for it alone, the people said, so the company brought in its biggest investor, the Qatar Investment Authority.

When the deal was announced in December, Mr. Putin denied it was done "because we lack money for particular budget expenditure items." He said at a news conference that Glencore and Qatar would "improve the management quality" of Rosneft. The deal was called the largest-ever foreign investment in a Russian company.

Shares in Rosneft rallied around 20% higher in the four weeks following the deal's announcement on Dec. 7. Those gains have been erased, with the share price down around 25% since the start of the year.

Russia has since pushed Glencore and Qatar to find other investors to demonstrate the foreign interest in the Rosneft stake, sparking talks with companies and sovereign wealth funds, according to people familiar with the matter.

Glencore shares rose after the December announcement, partly because it gives the company access to trade 220,000 barrels a day of Rosneft crude for five years -- a lucrative piece of Russian market share.

Subsequent public disclosures have revealed parts of the deal's complex structure.

Glencore says it only put up EUR300 million ($338 million) in equity for its stake, not the more than EUR5 billion implied by taking half a 19.5% piece of Rosneft valued at more than EUR10 billion. Qatar's investment totaled only about EUR2.5 billion, Glencore said.

In an unusual arrangement, the rest of the financing was provided by Russian banks, which contributed EUR2.2 billion, and Italian bank Intesa Sanpaolo SpA, which lent EUR5.2 billion to the Glencore-Qatar consortium, according to a Dec. 10 new release issued by Glencore. The financing is "non-recourse," Glencore said in the release, meaning the lenders couldn't pursue Glencore and the Qatar Investment Authority if they weren't repaid.

An Intesa spokesman said the loan to the Qatar/Glencore partnership "is covered by a robust package of guarantees." Intesa is trying to spread the risk of its loan by syndicating it to other banks, but a person familiar with the matter said the bank hasn't yet found willing banks.

Under the deal, the Rosneft shares aren't held directly by Glencore and Qatar but by a U.K. limited liability partnership, according to British corporate records.

If there is an option for Rosneftegas or Rosneft to buy back a stake, then such a LLP entity is exempt from having to pay capital-gains taxes, said Sergey Vakhrameev, a Zurich-based portfolio manager of GL Asset Management, which invests on behalf of private clients, family offices and funds.

Mr. Vakhrameev said he studied the corporate records of the deal as part of his work focusing on Russian companies. He said he had no knowledge that Rosneft plans to buy the shares back.

"The structure of the deal is unusual," said Mr. Vakhrameev, who, among other aspects, referred to the several limited-liability partnerships set up in the U.K., along with entities in Singapore, that apparently will facilitate the original deal. "It is nontransparent."

After the deal was announced, Mr. Putin awarded one of Russia's top honors for foreigners -- the Order of Friendship -- to Qatar Investment Authority's chief executive, Sheikh Abdullah bin Mohammed bin Saud Al-Thani, Intesa's chief executive, Carlo Messina, and Glencore's chief executive, Ivan Glasenberg.

--Giovanni Legorano, James Marson and Scott Patterson contributed to this article.

Write to Sarah McFarlane at sarah.mcfarlane@wsj.com and Summer Said at summer.said@wsj.com

(END) Dow Jones Newswires

June 08, 2017 02:47 ET (06:47 GMT)