Qatar, Glencore invest €10.5 billion in Rosneft and fill a hole in Russia's federal budget
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Dec. 8, 2016

Qatar's fund and an oil trader Glencore managed to acquire a 19.5% stake in Russia's largest oil company, despite the active sanctions against Russia imposed by the West.

Yesterday, Russia's President Vladimir Putin announced the deal between state-owned Rosneft (LSE IOB: Rosneft [ROSN]) and a consortium of Qatar Investment Authority and British-Swiss trader Glencore (LSE: Glencore [GLEN]) that has been kept quiet in the past weeks with all eyes on OPEC's Vienna meeting. According to Putin's televised announcement, the parties agreed on the purchase of 19.5% of Rosneft for €10.5 billion, equally dividing the stake among QIA and Glencore. The surprise deal finalized Putin's plan of bringing the much-needed funds into Russia's struggling federal budget through Rosneft "private" privatization.

Rosneft's "private" privatization puts cash in Kremlin's pocket

Back in October, Rosneft bought a 50% stake of another state-controlled oil producer Bashneft and put the first $5.2 billion into the Kremlin's pocket. Shortly after the acquisition, Russia's government said that they planned to complete a sell off of Rosneft's 19.5% stake by the end of the year, something not many analysts expected to actually happen. However, with a strong hold of sanctions on Russia, bids from the European or American companies were quite unlikely whereas the Chinese and Indian players had long been interested in Rosneft. Yet, while the destiny of the oil market was decided in Vienna last week, Putin and Sechin have completed their strategic plan by partnering with Qatar. Together with the $5.2 billion of proceeds from the internal Bashneft deal, the Kremlin will get almost $16 billion to plug a huge hole in the federal budget.

"Given the very difficult economic circumstances and the extremely tight deadlines for this kind of project, I can report to you that we were able to land this deal thanks to your personal contribution, your support," Sechin told Putin during the meeting, as reported by Reuters.

At the same time, the deal disproves the opinion that Russia's recent isolation aggravated by the sanctions would scare away major foreign investors from making big investments into Russian companies, especially state-owned like Rosneft. In turn, it showed that the appeal of buying a stake in one of the world's largest oil companies far outweighs the risks associated with Russia's current political situation and sanctions over the Ukrainian conflict, explained Reuters.

"It is the largest privatization deal, the largest sale and acquisition in the global oil and gas sector in 2016," Putin said in the televised announcement.

The Telegraph said that Glencore and QIA were the first foreign investors to buy a stake in Rosneft since Russia's economy was weighed down by the plummeting oil prices and sanctions. Previously, only British BP (NYSE: BP [BP]) was among the major Rosneft's international investor after it had acquired an 18% stake in Rosneft back in 2013. Since that time, Rosneft's market capitalization has significantly suffered and currently amounts to only $59.17 billion, making it more affordable for investors to buy a larger stake. The Wall Street Journal added that Rosneft has pumped and sold more oil this year than before, yet the revenues from those sales were unsatisfactory due to constantly dropping crude prices. For example, in the first 6 months of this year, revenues of Russia's oil exports fell 27%.

Interestingly, CNBC mentions that the deal between Rosneft and QIA and Glencore was so last minute that the experts believed the parties couldn't complete it in time to meet the state's deadline for booking money into the federal budget. But, as Sechin said, everything was done in time thanks to Putin's "personal contribution". The Kremlin said they planned to gradually convert the money from the deal's proceeds into roubles to avoid further volatility of the currency when it receives such a big boost. Putin commented that the deal was closed at a good moment, considering the uptick in the oil prices.

Good time to invest in Russia

It was not the first foray into Russian market for Glencore and Qatar Investment Authority, as both of them have a long history of investing in Russia's companies, says the Telegraph. Glencore is already the second biggest oil trader in Russia, behind Vitol, and owns 25% of Russneft, a smaller Russian oil producer. Russneft doesn't provide the trader with enough oil, so additional 220,000 barrels per day of oil supply, agreed with Rosneft as part of the deal, would come in very handy for the trader. QIA has been also actively investing into Russian assets ever since the rouble lost big part of its value, what made the acquisitions much more attractive. The fund bought a stake in St. Petersburg's airport a few months ago as well as acquired a 25% stake in another state-owned company VTB bank (MICEX: VTB [VTBR]).

Investors also seem to approve the deal as after yesterday's surprise announcement, the shares of both Rosneft and Glencore gained value in today's morning trading. According to the Moscow Stock Exchange, Rosneft shares reached the all-time highs today by growing 6.6% to 380 roubles per share. Likewise, Glencore stock also jumped by 2.6% and reached £293.48.

The Financial Times called the deal "a triumph for President Vladimir Putin".

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