Russia's biggest oil producer Rosneft has created a "master plan" that can kill two birds with one stone: further increase Rosneft's influence in the sector and bring roughly $17 billion into Russia's struggling federal budget.
The plan of Igor Sechin, Rosneft's chief, was merely just a plan until this week, when the company realized its first part that included buying out a controlling 50% stake in a smaller Russian oil producer Bashneft for $5.2 billion. The majority stake of Bashneft (MICEX: Bashneft ANK [BANE]), the one that Rosneft (LSE IOB: Rosneft [ROSN]) has successfully acquired, was previously owned by the Russian government through another state-owned oil company Rosneftegaz. This means that Kremlin has retained control over Bashneft through Rosneft, 69.5% of which is owned by the government, and made some cash on the way.
Sechin has been a long-time ally of Vladimir Putin, so the outcome of the Bashneft's deal didn't come as a surprise. However, Rosneft's decision to buy Bashneft was objected by some in the government including Russia's Prime Minister Dmitriy Medvedev who claimed that the deal between Rosneft and Bashneft counteracts the state's promise to reduce the control of the economy. Even though Putin agreed that the deal is "not the best option", reports Bloomberg, Sechin won anyway. Bashneft was acquired by Rosneft on Wednesday, surpassing the public bidding. Indeed, Bashneft simply jumped from one state pocket to another while the government got what it wanted: cash. On the day of October 12, Rosneft transferred 330 billion rubles to Russia's federal budget.
Already since yesterday, Bashneft's operations were fully shifted to Rosneft and the company made some drastic changes just within the first 24 hours. According to the Russian newspaper Vedomosti, Sechin has fired everyone from Bashneft's "old" management board, including the company's CEO Aleksandr Korsik who was asked to immediately "leave the building" together with the other managers. All Bashneft's managers were directly substituted with the employees coming from Rosneft. Sechin appointed Andrey Shishkin, Rosneft's Vice President, to be a new CEO of Bashneft with a 5-year contract. Vedomosti said that Shishkin's colleagues often referred to him as a "100% Sechin's man".
Selling the stake on their own terms
The second part of Sechin's plan includes convincing the Russian government to privatize 19.5% of Rosneft while still retaining the majority stake of 50% in order to get additional earnings to the federal budget. Therefore, according to Sechin, by implementing these 2 "internal" deals, Kremlin will be able to add about $17 billion to its pocket and at least partially compensate for the large breach in the federal budget. According to Bloomberg, the Russian government is faced with the biggest budget deficit of the last 6 years and the worst economic situation since Putin's first year as a president 16 years ago.
Bloomberg's expert Liam Denning have analyzed both deals proposed by Sechin to Kremlin and concluded that they were most likely to get approved. Denning said that, according to the preliminary estimation, Putin's government could make at least $11 billion by selling the 19.5% stake of Rosneft in smaller stakes of no more than 5% each. This would allow the government to protect itself from giving away partial control over the country's biggest oil company to the investors from India or China that have been interested in growing their stake at Rosneft for a long time. He adds that Sechin's privatization idea echoes Kremlin's recent deal when the government sold a minor 10.9% stake in a Russian diamond producer Alrosa (MSX: ALRS) for about $802 million.
Russia's Minister of Economic Development Alexey Ulyukayev announced this week that the sale of 19.5% of Rosneft's shares will be completed by the end of this calendar year. Dmitriy Medvedev added that the deal is aimed at "replenishing the state budget", as reported by Vedomosti and RBC. If Sechin's plans work out, Kremlin will own 50% of Rosneft and about 35% of Bashneft, practically maintaining the same level of control over the organizations.
The $17 billion of earnings that the government will get from these deals will be used to compensate for the major losses induced by the crash of the oil prices, plunge or rouble and shrinking foreign reserves, adds Denning. This would bring the country's federal budget deficit to about 3% of the GDP, what would be much bigger without the earnings from the aforementioned deals.
Interfax reported yesterday that Rosneft came up with some strict requirements for the potential buyers of the 19.5% company's stake. According to Rosneft, the buyer is not allowed to sell the stake in Rosneft for at least 3 years since the moment of purchase and is obliged to participate in the votings for the Russian Parliament as part of the management board. The last requirement only emphasizes the political aspect of the deal. The company commented that these requirements were necessary to fend off the investors that were only interested in the "short-term benefit".
"We are talking here about a strategic investor. An investor that has a corresponding qualification and will ensure the synergy in Rosneft's operations," said Igor Sechin.
The Russian RBC says that an Indian company ONGC as well as the China's National Petroleum Corporation are expected to bid for Rosneft's stake. However, in the light of the new requirements presented by Rosneft, the number of interested investors can get much smaller. CNPC already owns a small 0.62% Rosneft's stake that the company acquired back in 2006 during Rosneft's IPO. CNPC' Chairman Wang Yilin said in the interview for a Russian TV channel "Russia 24" that the company is interested in growing its stake in Rosneft but the new requirements may influence that:
"If Rosneft comes up with a proposal [about selling its shares], we will actively consider it. There is interest from our side and we will study the possibility to increase the presence in Rosneft's shares. In case of growth of our share, we would like to get the right to participate in management of the company in full concordance with the purchased share," Wang said in an interview with Russia's Rossiya-24 TV channel in May.
Therefore, it is yet to see whether an interested buyer who accepts the strict Rosneft's requirements limiting the investor's participation in the management and is ready to pay a generous price for the 19.5% stake will actually turn up.
Why OPEC members should worry?
Lastly, Dennings makes a connection between these 2 privatization initiatives of the Russian government and the country's stance in this week's hot topic of the oil production freeze. On Monday, President Vladimir Putin announced that Russia is ready to cooperate with the OPEC countries on the long-awaited oil production cap that is expected to stabilize the situation in the market.
However, shortly after Putin's speech, Sechin told the reporters that Rosneft was not interested in freezing the production, what raised a lot of questions among the investors. The expert says that Sechin's "misunderstanding" only confirms the symbolic nature of Russia's agreement to cooperate with OPEC after long months of disputes around the freeze.
More than that, these 2 deals should be a warning sign for the OPEC members and investors indicating that Russia's main goal in the current situation is raising cash. That is why, the country's readiness to freeze the oil production is quite likely be a "short-lived" promise aimed at pushing other OPEC countries towards the agreement and "free-riding" on its result.