Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Self-actualization is the process of realizing one's full potential. Self-privatization is how Rosneft helps the Kremlin pay its bills.

Rosneft, the London-listed Russian oil champion roughly 70-percent owned by the state, is on a privatization binge -- albeit one with peculiar characteristics. It announced on Thursday it had paid about $5.2 billion for a majority stake in Bashneft, a fellow Russian oil and gas company, previously owned by the government. Meanwhile, CEO Igor Sechin has been pitching close ally President Vladimir Putin about the government's plan to privatize a 19.5 percent stake in Rosneft, worth roughly $11.7 billion at current prices.

Sechin's ingenious plan: Let Rosneft buy the stake itself.

Rather than images of clapping executives ringing bells on stock-exchange floors, this privatization conjures up an animal eating its own tail. At least the roadshow should be easy.

If, as seems likely, Sechin's plan is approved, the government will end up owning 50 percent of Rosneft and, directly and indirectly, about 35 percent of Bashneft -- although, as the Kremlin will still control Rosneft, it will retain effective control of Bashneft anyway. In exchange, the government should get roughly $17 billion -- albeit from a company it still controls and which, producing more than 40 percent of Russia's oil, really is too big to fail.

Remarkably, Rosneft can afford it. Based on figures compiled by Bloomberg, the company's pro-forma net debt would rise from $23 billion to about $40 billion. So net debt to trailing Ebitda would rise from 1.4 times to 2.1 times -- higher, obviously, but not enormous and likely to fall within a year if oil prices continue to rise. Moreover, with Bashneft's output jumping by double-digit percentages in the past two years, Rosneft likely needs the deal to offset declines at existing fields and bolster slowing production growth.

Siberian Hamster-Wheel
Rosneft's output jumped past Exxon Mobil's in 2013 due to a big deal but rose by just 1 percent last year
Source: Bloomberg

Yet the Russian government's apparent decision to further consolidate the country's oil sector under Rosneft -- and, thereby, itself -- is telling. For one thing, it represents another setback to persistent, yet fruitless, hopes of economic reform besting short-term expediency. Should Saudi Arabia deliver on pledges to IPO its own oil champion, Saudi Aramco, then Moscow's approach will be thrown into even starker relief.

Such short-termism is echoed in Russia's budget-setting process, which is wrapping up at the moment. Government finances have obviously suffered as result of the crash in energy prices, as evidenced in the ruble's slump and the decline in Russia's foreign exchange reserves.

Russian Cushion
Russia's reserves have been dropping since late 2013, roughly a year before the oil-price crash took hold
Source: Bloomberg, International Monetary Fund

It now looks like the government will approve plans to spend about 16.2 trillion rubles in 2017, up from earlier pledges of a more austere 15.8 trillion and blowing the target of limiting the budget deficit to 3 percent of GDP (this would be even worse without the privatization proceeds from Bashneft and Rosneft). Much of the extra spending will be on defense, as Russia's military commitments have ramped up from Ukraine to Syria (which in itself has provoked sanctions stymieing such investment goodies as Exxon Mobil's strategic partnership with Rosneft). Spending is supposed to ease up from there. But with presidential elections due in 2018 and relations with the U.S. and some European countries deteriorating further, don't count on it.

One set of observers who should be taking note of all this: OPEC's members.

In defiance of a long history of disappointment, as well as some decidedly mixed messages from Putin and Sechin over the past week, hopes have risen again that Russia will contribute something meaningful in terms of cutting oil supply in coordination with OPEC to support prices.

In theory, placing more of Russia's oil output under Kremlin control should make it easier to do that. In practice, acquiescence to Sechin's plan in the wider context of fast-shifting budget priorities and persistent deficits should be a warning that the Kremlin's overriding priority is raising cash.

When it comes to oil, Russia could well contribute a cut of maybe 100,000 to 200,000 barrels a day quite easily, especially as production hit a post-Soviet high in September. Cutting less than 2 percent of production in exchange for an agreement with OPEC that has already, merely as a possibility, added 10 percent to oil prices in the past month alone is an economic no-brainer (in the short term at least). That is especially so if the jolt to sentiment helps with upcoming bond sales to finance the deficit and bolstering Rosneft's standing as it prepares to stretch its balance sheet.

But Russia's preferred approach has always been to free-ride on OPEC's cuts, reaping the full benefit itself. And as Moscow looks around, it can see other producers in far worse shape, which may deliver the necessary cuts by default (exhibit A: Venezuela). So neither OPEC nor other oil bulls should be surprised if Russia's pledges to cut prove symbolic or short-lived. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net