How Russia sold its oil jewel: without telling who bought it

MOSCOW/LONDON/MILAN (Reuters) – More than a month after Russia announced one of its thickest privatizations since the 1990s, selling a Nineteen.Five percent stake in its giant oil company Rosneft, it still isn`t possible to determine from public records the utter identities of those who bought it.

The stake was sold for Ten.Two billion euros to a Singapore investment vehicle that Rosneft said was a 50/50 joint venture inbetween Qatar and the Swiss oil trading rock-hard Glencore.

Unveiling the deal at a televised meeting with Rosneft`s boss Igor Sechin on Dec. 7, President Vladimir Putin called it a sign of international faith in Russia, despite U.S. and EU financial sanctions on Russian firms including Rosneft.

«It is the largest privatization deal, the largest sale and acquisition in the global oil and gas sector in 2016,» Putin said.

It was also one of the fattest transfers of state property into private mitts since the early post-Soviet years, when allies of President Boris Yeltsin took control of state firms and became billionaires overnight.

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

For one: Glencore contributed only three hundred million euros of equity to the deal, less than three percent of the purchase price, which it said in a statement on Dec. Ten had bought it an «indirect equity interest» limited to just 0.54 percent of Rosneft.

In addition, public records showcase the ownership structure of the stake ultimately includes a Cayman Islands company whose beneficial owners cannot be traced.

And while Italian bank Intesa SanPaolo leant the Singapore vehicle Five.Two billion euros to fund the deal, and Qatar put in Two.Five billion, the sources of funding for almost a quarter of the purchase price have not been disclosed by any of the parties.

«The main question in relation to this transaction, as ever, still sounds like this: Who is the real buyer of a Nineteen.Five percent stake in Rosneft?» Sergey Aleksashenko, a former deputy head of Russia`s central bank, wrote in a blog last week.

Glencore would not comment on the identity of the Cayman Islands hard or give a further explanation of how ownership of the Nineteen.Five percent stake was divided.

The Qatari Investment Authority said it would not comment on the deal, beyond confirming that it has participated in it.

Rosneft declined to react to questions posed by Reuters, including a request for comment on how ownership of the Nineteen.Five percent stake was divided, information about the identity of the Cayman Islands buyer, or details of the source of any undisclosed sources of funds.

The Kremlin did not react to a list of questions about the deal sent by Reuters.

MATRYOSHKA DOLL

Like many large deals, the Rosneft privatization uses a structure of shell companies possessing shell companies, commonly referred to in Russia as a «matryoshka», after the wooden nesting dolls that open to expose a smaller doll inwards.

Following the trail of ownership leads to a Glencore UK subsidiary and a company that shares addresses with the Qatari Investment Authority, but also to a rock hard registered in the Cayman Islands, which does not require companies to record publicly who possesses them.

The Singapore-registered investment vehicle that holds the freshly privatized Nineteen.Five percent stake in Rosneft is called QHG Shares. It is wielded 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, created on Dec. Five.

One of the fucking partners in QHG Holding is QHG Cayman Limited, registered at an address of the Cayman Islands office of Walkers, an international law rock hard.

Jack Boldarin, Walkers managing playmate in London, told Reuters the law hard would not be able to confirm whether any company was its client, or comment further.

The use of an offshore company is by itself no indication of wrongdoing, but it can make it unlikely to determine the true possessor of an asset from public records.

The Singapore vehicle is also the borrower for Intesa`s Five.Two billion euro loan, and QHG Holdings, the London partnership that includes the Cayman Islands rock hard, is a guarantor of that debt.

Banking experts say Intesa would be required by «know your customer» rules to verify the borrowers` identities. Regulators would exercise heightened scrutiny because of the size of the deal and the need to serve with sanctions on Russia.

Reuters asked Intesa whether it knew who the beneficial owners of the Cayman company were. The bank replied with a statement: «Intesa Sanpaolo does not comment on the details of its client operations. But we wish to reiterate that the financing was finished with stringent adherence to the regulations applicable to embargoes. Italian authorities found nothing that would prohibit such an operation.»

The Italian central bank, which serves as Italy`s banking regulator, declined to comment.

(For a graphic displaying the ownership of the privatized stake, click on: tmsnrt.rs/2jJvBpk )

MYSTERY FINANCING

If the total identity of the fresh owners of the Rosneft stake is a mystery, so too is the accomplish source of the funds with which they bought it.

Albeit Qatar has never publicly confirmed how much it has contributed to the deal or the size of the stake that it bought, Glencore and Rosneft say it contributed Two.Five billion euros. Along with the three hundred million from Glencore and the Five.Two billion loaned by Intesa, that still leaves a shortfall of Two.Two billion euros.

Glencore has said this extra money came from other, undisclosed banks, including Russian banks, but has given no further details. The Qataris and Rosneft have declined to comment on the source of this funding.

The purpose of Russia`s privatization program is to attract overseas money to cover a budgetary shortfall caused by low oil prices and Western sanctions. Putin has therefore banned Russian state-owned banks from participating in the financing of privatization deals, which would defeat the aim of bringing in foreign capital.

But public records in Singapore showcase that Russia`s second-largest bank, state-controlled VTB, loaned the Singapore vehicle QHG Shares the utter Ten.Two billion euros that it paid to the Russian state last month to buy the stake.

VTB held the Nineteen.Five percent Rosneft stake as collateral for that loan for part of December, before relinquishing it back to Rosneft`s state-owned parent company Rosneftegaz, which in turn relinquished it back to the Singapore vehicle when Intesa`s loan arrived in January.

VTB and Rosneft say VTB`s role in the deal was solely to reduce market turbulence which would have arisen if the Ten.Two billion euros had arrived abruptly from abroad to be converted to roubles on the open market.

Apart from telling that its role was to reduce market volatility, VTB declined to comment further, including when asked if the utter Ten.Two billion euros was paid back, or by whom.

FINDING A BUYER

Rosneft is the world`s thickest listed oil company by output and, along with natural gas export monopoly Gazprom, one of two crown jewels of the Russian state.

Even at the best of times without the added risk of Western sanctions, there would only be a few foreign investors with deep enough pockets to buy a big stake.

Glencore, one of the main buyers of Rosneft`s crude, has Qatar`s $335 billion sovereign wealth fund, the QIA, as its largest shareholder.

Russia and Qatar have backed opposite sides for years in the war in Syria, but as the world`s two leading natural gas exporters they have good reason to cooperate on energy issues and bury some of their differences over Middle East policy. «The idea looked appealing to Qatar. They like investing in energy. They eyed upside in Rosneft. They spotted upside in building relations with Russia, whose role in the Middle East politics is only set to rise,» said one source involved in talks among members of the Qatar/Glencore consortium about the purchase. According to a source close to Rosneft`s management board, the deal came as a surprise to Rosneft`s shareholders, including Britain`s BP ( BP.L ), which itself wields Nineteen.75 percent of Rosneft and is represented on its board.

The Rosneft board learned about the sale from Sechin himself only on Dec. 7, several hours after Sechin recorded his televised meeting with Putin announcing it, the source said.

In response to questions from Reuters, BP said: «Matters of the board of directors are confidential.»

Two sources in the Russian government said the deal was also a surprise there: it had been agreed inbetween Sechin and Putin`s Kremlin, above the cabinet. «Sechin did it all on his own – the government did not take part in this,» one of the sources said.

Prime Minister Dmitry Medvedev`s spokeswoman Natalia Timakova said: «All documents and procedures needed for privatization were ready and executed on time.»

($1 = 59.2518 roubles)

Extra reporting by Peter Graff in LONDON, Valentina Za in MILAN, Tom Finn in DOHA, Vladimir Soldatkin, Oksana Kobzeva, Darya Korsunskaya, Polina Nikolskaya, Andrey Ostroukh and Vladimir Abramov in MOSCOW; Writing by Dmitry Zhdannikov and Peter Graff

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