Summary- Glencore and Qatari Investment Authority draw down their stake in Rosneft.
- Why did China so obviously overpay?
- A quid pro quo and a statement to the Saudis about the future of oil pricing.
Glencore (OTC:GLNCY) and the Qatari Investment Authority are selling the stake in Russian oil major Rosneft (LON:ROSNq), (OTC:RNFTF) to a small, mostly state-owned Chinese firm, CEFC China Energy Co., for $9 billion. This deal creates a lot of questions while also answering a few others. The equally owned joint venture between QIA and Glencore will divest themselves of most of the stake in Rosneft with Glencore retaining 0.5% and QIA 4.7%. CEFC gets the remaining 14.6% of the Russian oil giant.
Also, Glencore retains its 220,000 barrel per day offtake agreement with Rosneft. The terms of the deal were misreported by Zerohedge as QIA and Glencore taking a 25% hit on the value of the stake they bought only this past December. But that $12 billion deal's value is still in effect here with CEFC buying 75% of the stake for $9 billion.
Qatari Questions
So, the question is why is QIA selling this stake in Rosneft now? Craig Pirro only looked at this deal from what Russia gets out of it and how everyone is somehow Putin's little pawn. I don't completely disagree, but Mr. Pirro fails to take into consideration the massive changes to the geopolitical landscape in the past ten months since the original sale occurred.
First, the deal was always geopolitically-motivated. Anything involving Qatar, Russia and oil is first and foremost geopolitical and not balance sheet profit/loss driven. Qatar bought into Rosneft as a quid pro quo to get the Russians to sign off on OPEC's production cuts which were being pushed hard by the Saudis.
Moreover, Qatar would have also had to convince Putin that they were no longer funding al-Qaeda affiliated groups fighting the Assad government in Idlib. After this deal was announced, resistance in northwestern Syria began to crumble, and Qatar needed to find bigger friends fast or be hung out to dry later.
Saudi Arabia couldn't convince Putin to agree to the cuts because they didn't benefit Russia at all. Remember, the ruble floats freely now while the Saudi Riyal does not which is why the Saudis are in financial and political turmoil, and the Russians are exiting a recession that would have crippled them had it not floated the ruble back in November of 2014.
So, Qatar stepped in to broker the deal, as reported by Bloomberg and the Financial Times last year and gave Putin what he needed to sign off on the production cut. Rosneft gets a boatload of cash, Qatar gains an ally in Russia, the oil price stabilized, Glencore gets a good deal trading Russian oil.
Everyone wins.
Fast forward to today, and Qatar is suffering under heavy pressure from the Saudis blockading their business, the U.S. put stringent sanctions on European banks doing business with the Russian oil and gas sector, and China is being targeted by the Trump administration on multiple fronts. So, while the economics of this deal vis-à-vis Rosneft's current share price do not make much sense, as Mr. Pirro pointed out, there is a lot more at stake for all involved then simply a few hundred million in share arbitrage that could change in a few days.
China's Answers
China is stepping in here to save not only Intesa, the Italian bank that floated most of the financing for the deal, but also Qatar which gets a major cash infusion in much-needed dollars. Russia further integrates into China's oil trading system in Shanghai, including the much-discussed futures contract convertible to gold. This disentangles the deal with respect to the new round of U.S. sanctions. In fact, this is a perfect pivot away from those sanctions. Remember, Treasury Secretary Steve Mnuchin made a not-so-veiled threat the other day towards China's banks and expulsion from the SWIFT system.
It was over North Korea, but it was intimately tied to Chinese sales of oil. That threat is credible against Qatari banks. Russia and the U.S. already do so little business that exchanging dollars is irrelevant in the grand scheme of things. Russia is already replacing Visa (NYSE:V) with its own internal credit payment system called Mir. China already has UnionPay.
But that threat is simply not credible against China, the U.S.'s largest trading partner. It would be an act of willful destruction of order within the global capital markets. Moreover, it would test whether or not China's Interbank Payment System (CIPS) is capable of scaling to levels needed to clear and settle China's trade. CIPS is SWIFT-compliant at the protocol level.
What this deal does is further solidify that China and Russia are strategic allies that is growing closer and more meaningful with every attempt to punish them for pursuing what both feel is in their national interest. It also underscores China's commitment to Qatar. China is a major trading partner with Qatar. And, this deal is an important statement to the Saudis that China is willing to step up to defend a major energy supplier and dictate terms.
At some point, China will stop offering Saudi Arabia dollars for its oil. With every move to secure sources it can pay in yuan for, the Saudi dollar peg weakens. For Rosneft, this deal is neutral. It is simply the vessel for larger geopolitical moves to be made. For Qatar, it is a net positive as this is an obvious quid pro quo for making the original investment in December. It buys them a few months of resistance to Saudi economic pressure before making a decision on floating its currency.
For China, the deal is a net win because it ensures a larger flow of Russian oil into its oil-trading markets to continue building investor trust and confidence over time. And, that is really the ultimate win for them.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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