- Kremlin seeks $7.5 billion from Rosneft share sale for budget
- U.S. and EU sanctions are blocking Russia's Eurobond sale
Russia has picked a top American legal firm to advise it on how to conduct the sale of some $7.5 billion of shares in the country’s biggest oil producer, Rosneft OJSC, which is under U.S. and European sanctions, two people with knowledge of the matter said.
While the restrictions that cover Rosneft don’t prohibit equity investment in the company, the U.S. and Europe have frowned on western banks participating in Russian offerings, so far blocking a Russian Eurobond sale after warning firms in February about the risks of working on the transaction.
This time, Russia has chosen New York-headquartered White & Case LLP, which has a long-term presence in Moscow, to try to find a way to navigate the sanctions-related problem, said one of the two people, who spoke on condition of anonymity because the decision hasn’t been made public. White & Case isn’t in violation of any sanctions laws by advising Rosneft, but it will be challenging for the firm to find a way to get the deal done, according to Gary Hufbauer, a sanctions specialist at the Peterson Institute for International Economics in Washington, who said he didn’t expect any major western banks to take the risk of organizing the share sale.
Sell More Shares
Along with Rosneft, Russia hopes to sell a large stake in oil producer Bashneft PJSC as soon as this year to help shore up public finances hobbled by the collapse in oil prices over the past two years. A funding crunch and the longest economic downturn in a decade and a half are adding urgency to the need to bolster the country’s coffers. The Russian government has said it’s looking for an investment bank to manage the Rosneft sale.
U.S. and European governments warned western banks earlier this year about the reputational risks of working with Russia, where individuals and firms have been hit with a series of measures in response to President Vladimir Putin’s annexation of Crimea and destabilization of eastern Ukraine. Those warnings have so far stymied Russia’s planned $3 billion sovereign Eurobond issue, leaving the government in Moscow searching for other ways to raise cash. The U.S. and European Union sanctions have virtually closed sources of long-term, external funding for many major Russian companies.
The Russian government owns 69.5 percent of Rosneft through a holding company called Rosneftgaz OJSC. A bit more than 10 percent of the oil producer is traded in Moscow and London, according to its web site. Russia plans to sell just less than a 20 percent stake in Rosneft, whose Chief Executive Officer Igor Sechin is personally sanctioned, to raise at least 500 billion rubles (about $7.5 billion). The planned sale would reduce the Russian government’s stake in the company to about 50 percent.
“U.S. sanctions do not prohibit U.S. persons, including law firms, from providing legal advice to the Russian government,” the Treasury Department said in an e-mailed statement. “We have not sanctioned the government of Russia. We would note though that it remains illegal for U.S. persons to facilitate transactions that U.S. persons may not directly engage in.”
Rosneft spokesman Mikhail Leontyev declined to comment, as did Andrew Newsham, a spokesman for White & Case. Russian Economy Ministry spokeswoman Elena Lashkina said Economy Minister Alexei Ulyukayev recently announced the decision to hire a legal adviser for the Rosneft share sale without naming the firm, declining further comment.
“A couple of months ago we saw the U.S. government come down pretty hard on banks looking at underwriting a potential Russian sovereign bond sale,” said Peter Harrell, a former deputy assistant secretary of state for counter-threat finance and sanctions.
“The U.S. government sent the banks a pretty clear message that it viewed underwriting that sale as harmful to U.S. foreign policy interests,” Harrell said.
The U.S. barred Americans from doing business with Sechin two years ago, citing his “utter loyalty to Vladimir Putin -- a key component to his current standing.” Rosneft was added later in 2014 under a program known as “sectoral sanctions” that limits U.S. entities only from some activities with the company, namely providing debt financing for more than 90 days or transferring technology or services for Arctic, shale or deepwater oil exploration or production. The EU has enacted similar measures against Rosneft.
Kremlin economic aide Andrey Belousov said in February that the best option would be to sell the stock to a strategic investor.
Natalia Orlova, chief economist at Alfa Bank, agrees. “I don’t really believe in a market-based privatization,” Orlova said. “The likeliest outcome will be a share sale in favor of inside investors because of sanctions and the low price” that would be paid by outside buyers.
The engagement of White & Case for the Rosneft sale comes amid a broader push by penalized Russian entities -- including the two largest banks, Sberbank PJSC and VTB Group -- to hire U.S. legal and lobbying firms as they seek to navigate around the sanctions minefield. White & Case is also representing Russia in its appeal against a $50 billion award for damages won in The Hague by former owners of Yukos Oil Co.
While the U.S. government won’t make a decision until it has all the details of the Russian plan, it would probably urge western banks to avoid helping the Russian government sell shares, as it did with the planned Eurobond sale, said a person familiar with the government’s thinking.
As with the prior case, aiding the Russian company creates a reputational risk for any participating bank, said the person. Depending on how the sale is structured and what the money is to be used for, the transaction could also run afoul of sanctions rules, the person added.
The U.S. has cracked down on violators of sanctions laws, including the record $8.9 billion penalty paid by BNP Paribas SA in 2014 for banned transactions between 2004 and 2012 involving Sudan, Iran and Cuba.
Still, Russian companies are stepping up efforts in the U.S. In a sign of growing activity by sanctioned entities, since February Sberbank has hired two U.S. lobbying firms: Podesta Group, co-founded by John Podesta, a former chief of staff under President Bill Clinton who is now campaign chairman for Hillary Clinton’s presidential bid, and The Madison Group, Senate lobbying disclosure documents show.
Missi Tessier, a spokeswoman for Podesta Group, declined to comment beyond the firm’s lobbying disclosure document, which says the company "will assist in clarifying scope of sanctions imposed by Executive Order 13660, assessing possible ways to address sanctions relief and monitoring relevant developments applicable to such matters."
Lawyers and Lobbyists
VTB retained law firm Sidney Austin in April 2015 and hired lobbying firm Manatos & Manatos the same month, Foreign Agent Registration Act and Senate documents show. Gazprombank OJSC, a sanctioned lender affiliated with state gas producer Gazprom PJSC, paid $150,000 in the first quarter of 2016 to Squire Patton Boggs, disclosures show, in addition to the $550,000 it spent last year.
“The granting of such contracts is exclusively linked to the promotion of VTB Group’s business interests in the U.S.,” the bank said in an e-mailed statement. Sberbank said by e-mail that “the decision to hire outside consultants is part of standard business practices for us.”
Gazprombank didn’t respond to a request for comment. Voicemail messages left with Madison Group and Squire Patton Boggs weren’t returned.