The Privatization That Wasn’t

Now it’s official: the much-hyped “privatization” of Russian state-owned oil giant Rosneft in 2016 was anything but. Citing nine sources familiar with the deal, Reuters reports that over half of the sale’s value, $6 billion, was financed by the state-owned Russian bank VTB.

When the Rosneft deal was announced two years ago, it was touted by the Kremlin—and interpreted by some gullible Western journalists—as a meaningful turning point, a sign that Russia was back in business and still capable of attracting global investors despite the burden of Western sanctions. Now, the market distortions and public deceptions surrounding the deal have been laid bare, and the Kremlin’s narrative is collapsing. (Predictably, VTB is denying the new reports.)

In many ways, however, the truth about Rosneft has been hiding in plain sight all along. From the beginning, when details of Rosneft’s 19.5 percent “privatization” first emerged, I called it out for what it really was: a murky transfer of one-fifth of the Russian oil giant from the government to someone else. We now know the deal was financed by VTB; and the only person in Russia who is entitled to approve $6 billion in credit lines by state-owned bank is Vladimir Putin himself.

Here’s what we know: In December 2016 Rosneft announced that it had finalized the sale of 19.5 percent of its assets to private owners. The buyer was a consortium consisting of the Swiss oil trader Glencore and the Qatar Investment Authority (QIA) sovereign wealth fund, which itself is a major shareholder in Glencore. Together, they agreed to pay €10.2 billion for the shares. However, Glencore committed to pay only €300 million, while the Qataris threw in €2.5 billion, with the remaining €7.4 billion to be financed by undisclosed banks. The Italian Intesa Sanpaolo bank was rumored to have provided half of that €7.4 billion. The acquired Rosneft stake would have been mortgaged.

A month later it became known that VTB had given a bridge loan of 693 billion rubles (the equivalent of €10.2 billion at that time) to QHG Shares, Ltd., a vehicle co-owned by Glencore and the Qataris, just days after the privatization deal was announced. The loan was secured with the privatized shares. The money was paid by QHG to Rosneftegaz, the state owner of Rosneft, after which VTB transferred the loan onto Rosneftegaz’s books. Then, it was said, QHG received its €10.2 billion credit from Intesa and paid the balance to Rosneftegaz. Rosneft explained the involvement of a state-owned bank in the deal by referencing a desire “to avoid market volatility,” and strongly denied the deal was financed by VTB. It was strictly about money conversion, Rosneft’s spokesman Mikhail Leontiev said.

As the Reuters reporting now appears to confirm, this was a flat-out lie: The deal was financed by VTB, which provided a $6 billion loan to QIA. Even more cynically, VTB had borrowed the ruble equivalent of $5.4 billion from the Russian Central Bank before issuing this loan.

What was obvious from the very beginning has only become clearer: the deal that was officially supposed to refill depleted state coffers has instead filled someone’s pockets. And no one but Vladimir Putin could have approved both the “privatization” deal and the VTB loan to the Qataris. It Putin were lining his own pockets, how exactly would the scheme work? As I initially suggested, the Rosneft share that was mortgaged on the $6 billion VTB loan (worth roughly 11 percent of the company) would be quietly transferred to third parties after QIA cannot pay the debt and the lenders foreclose. This part is of the maneuver will likely remain out of sight.

The Rosneft deal was indeed “a triumph for President Vladimir Putin,” as the Financial Times rushed to proclaim in 2016. But it was not the triumph of a capable leader as much as most likely the financial triumph of the world’s greatest kleptocrat, achieved at the expense of the struggling Russian people.

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