Why These Quiet Russian Moves around Glencore Are Important

Why These Quiet Russian Moves around Glencore Are Important

by | published December 31st, 2019

My last Oil & Energy Investor detailed how Swiss-based oil, commodities, and metals trader Glencore had set up a network of operations to evade international sanctions first against Iraq and then against Iran. Instrumental in revealing the actions were the Paradise Papers, a massive data breach dumped in late 2017.

This time I will be describing some more recent actions.

And these concern Russian assets.

The subjects here are just as complex as those considered last time. In this, once again, I have employed my personal network of contacts in developing the narrative. The report resulting was provided to some of my international clients.

In the course of its moves, Glencore has had its interests combined with those of a Russian billionaire figuring prominently in Special Counsel Robert Mueller’s investigations into Paul Manafort and Russian interference in the 2016 elections…

His name is Oleg Deripaska…

Glencore’s Russian Connection

Until last year, Deripaska had been the head of En+ Group ($368.5 billion market cap) and Rusal ($58.04 billion market cap), the largest private power generator and aluminum producer in Russia respectively.

The oligarch close to Russian President Vladimir Putin announced that he was stepping down as president of the electricity major, but would continue to run the largest aluminum company outside China.

That has delayed an agreement by Glenore to acquire a 10% in En+. Sources indicate, however, that the deal would be moving forward nonetheless.

The acquisition is actually a stock swap on the London Stock Exchange (LSE). Glencore is a member of the Financial Times Stock Exchange 100 Index (FTSE 100), and agreed to move its 8.75% stake in Rusal to En+ in exchange for a 10.55% position in the power producer. En+ had listed in London late in 2017.

Under these terms, En+ would deepen its ties to Deripaska’s Rusal. The connection between the two had always been considered a pure vertical play, since electricity is the single largest cost in the production of aluminium.

The managerial connections between the two Russian giants moved forward.

En+ CEO Maxim Sokov replaced Deripaska as president, and Vladislav Soloviev, the CEO of Rusal, moved over to become CEO at En+. Meanwhile, Deripaska assumed a non-executive role on the board and remained the ultimate owner of both companies through his company Fidelitas International.

En+ controls 48% of Rusal, while its subsidiary En+ Segment manages a series of Russian generating facilities that have an aggregate capacity of 19.7 gigawatts (GW).

The rising Glencore exposure in Russian commodities had been highlighted by two other developments.

The first is the ongoing saga of who really acquired a position in Russian state oil major Rosneft and where the purchase funds went.

The second is the battle over Norilsk Nickel (Nornickel).

Bringing China into the Mix

Glencore and the Qatar Investment Authority (QIA) had apparently paid some $10.8 billion for a 19.5% Rosneft stake in 2016. In a separate but included transaction, Glencore had also engineered a 0.54% holding in the Russian oil giant for what my sources tell me was a payment of €300 million.

In return, Glencore received the right to 220,000 barrels a day of Rosneft crude over the next five years.

Now, Glencore acknowledged that Chinese energy company, CEFC China Energy, would acquire a 14.16% stake from the company, and QIA in a deal to be completed in the first half of 2018. It’s still unclear who actually ended up with that position.

CEFC agreed to buy the stake for about $9 billion. Upon completion of the deal Glencore’s holding in Rosneft would decline to 0.5% and QIA’s to 4.7%. CEFC would become the second-biggest minority shareholder in Rosneft after BP (acquiring 19.75% in the initial round of Rosneft privatization a decade ago). Russia’s state holding company Rosneftegaz also holds a 50% stake in Rosneft.

Rosneft President Igor Sechin described CEFC as a strategic partner, with the two companies signing an agreement to consider joint exploration and production projects in Siberia, as on refining, petrochemicals and crude and product trading. Rosneft and CEFC also signed a five-year supply contract amounting to 244,200 barrels a day beginning in January of 2018.

Rosneft expected overall crude deliveries to China in 2018 to grow by 10 million tons (about 70 million barrels) to 50 million tons following the contract with CEFC. The bulk of Rosneft’s deliveries are made to CNPC under two long-term intergovernmental agreements, with the first supplies launched in 2010.

But Glencore’s position in all of this remains intriguing.

Beginning with the problems surrounding the sale to Glencore and QIA.

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A Dizzying Array of Companies

After the transaction public records did not disclose the actual owners. The stake was sold for €10.2 billion to a Singapore investment vehicle that Rosneft said was a 50/50 joint venture between Glencore and QIA.

But important facts about the deal have not been disclosed, cannot be determined solely from public records, or appear to contradict the straightforward official account of the stake being split 50/50 by Glencore and the Qataris.

The numbers just don’t add up.

For one: Glencore contributed only €300 million of equity to the deal, less than 3% of the purchase price. In addition, public records show the ownership structure of the stake ultimately includes a Cayman Islands company whose beneficial owners cannot be traced.

And while Italian bank Intesa SanPaolo lent the Singapore vehicle €5.2 billion to fund the deal, and Qatar put in €2.5 billion, the sources of funding for nearly a quarter of the purchase price have not been disclosed by any of the parties.

As Reuters explained after the sale, the privatization utilized a structure of shell companies owning shell companies. Following the trail of ownership leads to a Glencore UK subsidiary and a company that shares addresses with QIA, but also to a Cayman Islands firm. Cayman does not require companies to record publicly who owns them.

The Singapore-registered investment vehicle is QHG Shares. It’s owned by a London-registered limited liability partnership, QHG Investments, which in turn lists as one of its two owners another London-registered limited liability partnership, QHG Holding. One of the partners in QHG Holding is QHG Cayman Limited, registered at an address of the Cayman Islands office of Walkers, an international law firm.

It is known that the Singapore vehicle is also the borrower of at least €5.2 billion from Italian bank Intesa Sanpaolo. QHG Holdings, the London partnership that includes the Cayman Islands firm, is listed as the loan’s guarantor.

Glencore, QIA, and Rosneft have steadfastly refused to comment on the identity of the Cayman Islands firm.

However, the full funding stream for the transaction remains unknown.

While Qatar has been silent on what it paid, or even the size of the stake QIA acquired, Reuters confirmed that Glencore and Rosneft say it contributed €2.5 billion. Along with the €300 million from Glencore and the €5.2 billion loaned by Intesa, that still leaves a shortfall of €2.2 billion.

Glencore has said this additional money came from other, undisclosed banks, including Russian banks, but has given no further details. QIA and Rosneft has refused any further comment.

And here is where it gets even more intriguing, and, as we’ll see later this week, potentially profitable for regular, individual investors.



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