Владимир Милов (v_milov) wrote in demchoice,
Владимир Милов
v_milov
demchoice

Why Trump has nothing to do with Rosneft "privatization" deal

There's been some speculation in the media that Trump or someone related may actually be an end-beneficiary of the sale of Rosneft's 19,5% equity stake sold by Russian Government. The speculation is nonsense and is only based on two "facts":

  • Obscurity of ownership of one of the beneficiary buyer companies registered in Cayman Islands;

  • Coincidence between timeline of Rosneft stake sale events and certain meetings of someone named Carter Page, who is often referred to as being "Trump's adviser" (this issue is actually discussed below).


I wrote about it briefly on Twitter, but received a number of follow-up questions about my position, since the topic is somewhat popular.



Here are some explanations why I believe Trump has absolutely nothing to do with this.

There are no benefits for Trump in owning 19,5% in Rosneft

There are two major problems with this equity stake:

  1. It gives no real governance rights. In the Russian corporate governance tradition, minority shareholders rarely have meaningful influence on governance, and the one who has control equity stake normally wholly runs the show. This is particularly true with the state-owned "strategic" big players, where decisions are largely made politically and minority shareholders are not even asked for their opinion. In case of Rosneft, it becomes quite obvious when one looks at even bigger stake (19,75%) currently owned by BP - its bigger than the recently sold stake, but BP was not noticed during past years to have any influence over strategic decisions made by Rosneft - new acquisitions, investments in Venezuela, India, Indonesia, China, etc.

  2. Due to reason (1), the stake has low liquidity - you can't sell it, no one would show up, it's way too expensive for just a "prestige" to be able to sit down two silent folks onto the Board of Directors chairs without real influence. This was quite visible during 2016, when Russian Government was making heavy attempts to promote its sale, citing interest from "Chinese, Indian, Japanese, European companies" - but at the end of the day, none have shown up, and the Govt was forced to invent an artificial scheme with participation of Glencore/QIA (who previously expressed no interest either) to make it look like the stake was "sold to an outside investor" (see more on the Glencore/QIA role below).


So this stake is basically a very expensive "suitcase without a handle", very hard to imagine someone would really be interested in it, particularly given the existing BP experience. Yes, it yields dividends, but if Putin wanted to "bribe" someone, it's much easier to just give him cash, and not the politically "toxic" stake in a company under Western sanctions, with no real influence over decision-making.

Sechin clearly wants this stake for himself, and "He Does Not Share Power" (c)

I am strongly convinced that this is the case, and here are the key supporting arguments.

  • It is normal practice for Russian oil & gas companies to end up in the hands of their management. Two other biggest Russian oil producers, Lukoil and Surgutneftegaz, are actually owned (and were privatized) like that. Gazprom also traditionally have had a big treasury shares stake, as high as over 17% at peak in 2003, after which it had sold part of this stake to Government, but also retains control over some of its own shares (6,6%) to have influence over decision making.

  • Unlike outside investors, the motivation for Sechin to gain control over his own stock is very clear. Currently, he is just a hired manager in the company owned by the state. He has to follow state guidelines and directives, and has no formal influence over shareholders decisions. This is often a very painful problem for him. Becoming a shareholder fundamentally changes that: he somewhat equalizes himself with the Government as a co-owner of his company, severely limiting Govt's ability to impose decisions that he doesn't like (or to restrict implementation of his own plans). Moreover, this opens way for further accumulation of Rosneft's shares toward ultimately becoming a shareholder at least comparable in size with the state.

  • Sechin already practices this scheme with his other company, Interrao, second biggest Russian thermal power generation company. Sechin chairs the board there, whereas Interrao itself controls over 20% of its own shares, plus other 27,6% are owned by Sechin-chaired Rosneftegaz. So, quite a familiar scheme.

  • Rosneft had directly announced its intent to buy the stake in question, and until the very last moment when Glencore/QIA were found as "investors", this was considered as a done deal (Rosneft buying its own shares).

  • To add to the last point, during the history of Government's attempts to privatize Rosneft, Sechin was always fiercely against it, but changed his mind only recently, after the perspective of ending up as the ultimate owner of this stake had surfaced.

So, at the end of the day, I am fully convinced that, after maybe a series of private transactions, the 19,5% Rosneft equity stake (or slightly less) will end up in the hands of Sechin somehow, because this is a strategic aim for him. Will Putin be involved? Maybe; I personally think that Putin stands behind all major assets of his fellow oligarchs as the ultimate owner, with these guys serving really as just minority partners and public fronts for him, but we have no proof of that (yet). But that's not really an important issue now; an important issue is that ultimately Sechin will establish control over Rosneft's 19,5% equity stake in question.

Why Glencore/QIA are not real owners

They are clearly acting just as public fronts here. Putin was obviously disappointed with negative publlic reaction to the announced buyoff of Rosneft shares by Rosneft itself, and had personally engaged in recruiting potential investors to front the deal (press had widely reported on him approaching Alekperov with such a request).

Finally, out of the blue, Glencore was found, which previously have never expressed any interest in buying Rosneft and even now, after "buying" the stake, is not planning to nominate its member to Rosneft's Board of Directors... DUE TO LACK OF INTEREST IN GOVERNANCE OF ROSNEFT. Stunning, isn't it? Buy a huge stake for billions of $ and then have no interest in managing it. A clear proof than Glencore is no more than just someone's front in this deal.

The mystery of Glencore/QIA participation is solved easily: Glencore was in a financial trouble, heavily leveraged with debt, its shares down, and Rosneft has offered it a generous 5-year 220 kbd offtake oil contract, which would greatly help to stabilize Glencore's finances. The offtake contract is also very bankable, future revenues may be used as collateral, etc.

For Qatar Investment Authority, motivation is also very clear. Normally it doesn't invest in oil companies - the fund's purpose is exactly the reverse, to diversify investments into non-oil areas like financial, transport, manufacturing sectors. Why invest in Russian oil then? Because QIA is the biggest shareholder of troubled Glencore, that's why!! So when Russians offered a scheme how to improve Glencore's positions, QIA has jumped in, because it can save its investment in Glencore. Plain and simple.

None of these two players are truly interested in Rosneft and are onboard just for the benefit of the oil offtake contract (and maybe some other benefits as well) that would help repair Glencore's financial situation. As said above, Glencore is publicly admitting not having even a slightest interest in managing this stake.

In which hands the stake would end up - we don't know, but I assume it will be Sechin's pockets (see above).

This "Carter Page" guy is nobody

One thing which is really foolish is to draw any long-standing conclusions from to the fact that a guy named Carter Page have met someone in the Russian Govt, or Rosneft, etc. As Julia Ioffe has brilliantly explained, this guy is literally nobody. There is zero evidence that he has real political connections with Trump.

* * *

Just a few words about myself, for those who may not know me: I used to work in the Russian Government in 1997-2002 among the energy reformers team, in 2000 and 2002 I was the major author of the two consecutive drafts of Gazprom unbundling programs which were both rejected by Putin who've chosen to keep Gazprom's monopoly. I also have a great deal of knowledge about governance of Russian oil & gas assets - for instance, in 2002, I was a member of the board of Komprivatizatsiya venture (together with Gref, Zlatkis and others), which sold 6% of Lukoil shares at the London Stock Exchange. My approval signature as Deputy Minister of Energy also appears on the archived plans of complete privatization of Rosneft, which circulated in the Russian Govt in 2002, but were later scrapped due to changing policy winds in the Govt. So, I have enough understanding of the discussed matter.

As to Trump: I have an extremely negative view on the current U.S. President, I think Uganda now has more competent Government than the United States does, but Trump-Rosneft connection is clealy a fake and a worthless conspiracy. There's enough about Trump to make you mad without inventing fake stories about him.
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