Corporate Debt Review

Glencore Scandals: Part II

Shake Oleg

The last edition of ECRG Intelligence detailed how Glencore had set up a network of operations to evade international sanctions first against Iraq and then against Iran. Instrumental in revealing the actions was the Paradise Papers event, a massive data breach late last year.

In this issue, I will be describing some more recent actions, concerning Russian assets. The subjects addressed are just as complex as those considered last time.

In the course of its moves the Swiss oil trader has had its interests combined with those of a Russian billionaire figuring prominently in the current Robert Mueller-Paul Manafort legal tango in the US.

Oleg Deripaska.

Until a few weeks ago, Deripaska had been the head of En+ and Rusal, respectively the largest private power generator and aluminum producer in Russia. The oligarch close to Russian President Vladimir Putin recently announced that he was stepping down as president of both firms, assuming a non-executive role on the boards and remains the ultimate owner of both companies through his company Fidelitas International.

The resignation has delayed an agreement by Glencore to acquire a 10% share of EN+. Sources indicate, however, that the deal will probably move forward nonetheless.

The acquisition is actually a stock swap by on London Stock Exchange. FTSE 100-member Glencore has agreed to move its 8.75% stake in Rusal to En+ in exchange for a 10.55% in the Russian company. En+ had listed in London late in 2017.

Under the terms of the deal, En+ would deepen its ties to 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 aluminum.

En+ subsidiary En+ Segment manages a series of Russian generating facilities with an aggregate capacity of 19.7GW. En+ also holds a 48% stake Rusal.

The rising Glencore exposure in Russian commodities has 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 current battle over Norilsk Nickel (Nornickel).

That €2.2 Billion Didn’t Invest Itself

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 related transaction, Glencore had also engineered a 0.54% holding in the Russian oil giant for what my source tells me was a payment of €300 million ($373.2 million at current exchange rates). In return, Glencore received the right to 220,000 barrels a day of Rosneft crude over the next five years.

Glencore subsequently acknowledged it expects China’s CEFC to acquire a 14.16% Rosneft stake from the company and QIA in a deal expected to be completed in the first half of 2018.

CEFC agreed to buy the stake last September for about $9 billion. Upon completion of the deal Glencore’s holding in Rosneft will decline to 0.5% and QIA’s to 4.7%. CEFC will 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.

Last September, 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 well as 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 has said it expects 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 the position of Glencore in all of this is intriguing. Let’s begin with the problems surrounding the sale to Glencore and QIA. Well after the transaction public records were not disclosing 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.

And the numbers just don’t add up.

For one: Glencore contributed only €300 million of equity to the deal, less than 3 per cent 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. The Singapore-registered investment vehicle is QHG Shares. It is owned by a London-registered limited liability partnership, QHG Investment, 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. The Cayman Islands do not require companies to record publicly who owns them.

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

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

Here is where it gets even more interesting. Public records in Singapore show that Russia’s second-largest bank, state-controlled VTB (formerly known as Vneshtorgbank and also figuring in the Mueller probe) loaned the Singapore vehicle QHG Shares the full €10.2 billion that it paid to the Russian state last month to buy the stake.

According to sources, VTB held the 19.5% position in Rosneft as collateral for the loan before sending it back to Rosneft’s s state-owned parent company Rosneftegaz, which in turn relinquished it back to the Singapore vehicle when Intesa’s loan arrived.

Glencore, by the way, just happens to have QIA as its largest shareholder. And according to sources, the entire adventure in smoke and mirrors had come as a complete surprise to BP, Rosneft’s largest outside owner.

The prospect that Glencore has been acting as a conduit for private interests in Russia, allowing them to participate in the Rosneft privatization through the series of LLCs set up, has been advanced by several of my contacts. The suggestion from a Rosneft board member that Sechin had orchestrated the Rosneft sale without the knowledge or instruction of Putin strains credibility.

There is some anecdotal information emerging from the Paradise Papers of how the Rosneft acquisition took place. Yet, to date, contacts tell me there is no further concrete information about the Cayman Islands vehicle in the center of it all.

The consensus developing among forensic analysts and commentators assumes a position has been carved offshore for Russian individuals with the blessing (and probably participation) of the Kremlin at the highest levels.

Nornickel Norproblems

That leads to the second Glencore Russian imbroglio currently underway. This one involves the largest nickel holding in the world and once again brings us back to Deripaska.

After a five-year “cooling off” period, competition for a stake in Norilsk Nickel (Nornickel) is again heating up. The power struggle is between two major Nornickel shareholders, Vladimir Potanin and Deripaska’s Rusal.

The contest has been simmering for the entire five years parties have agreed to delay action. At issue is the fate of a stake owned by Roman Abramovich. Abramovich is another close pal of Putin, owns London’s Chelsea football club, and was once listed as the wealthiest resident of both Russia and the UK.

Sources say he was installed as a Nornickel minority shareholder in 2012 by the Kremlin as part of the deal to keep the peace between Potanin and Deripaska. By acquiring Abramovich’s stake, Potanin would have even more control over the company, something Deripaska has opposed.

The contest took on an added element in late February with Deripaska’s Rusal announcing it would ask Nornickel shareholders for permission to authorize the board to take part in a potential shootout – i.e., an auction between Potanin and Rusal, essentially going back to the situation existing five years ago.

Enter Glencore.

As a part of the Rusal ownership structure, it certainly has an interest. But it also has a vested position in seeing Potanin’s influence reduced. Glencore has wanted to move into trading the nickel, cobalt, and other metals produced by Nornickel. However, Potanin has been selling product under long-term contracts and is known to object to Glencore becoming involved.

I now expect that Glencore will be orchestrating another round of offshore holdings to facilitate Rusal’s position in a shootout, should it take place. If that occurs, it will have to be with Putin’s blessing.

And that leads several in my network to conclude that “Putin and friends” will have offshore positions in this transaction as well.

About the Author


Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.