Underwriting Putin's Oil

Lured by future fees, Western banks are funding the Kremlin's energy deals

Ever since the kremlin launched its crackdown against the private oil company Yukos, the Russian state has been steadily reasserting its control over the country's vast energy resources. The policy has been greeted with groans by many critics of the Kremlin. But one group that isn't griping is foreign bankers. Instead, they're queuing up to lend money to the state energy giants.

In the latest deal, Gazprom, Russia's giant national gas concern, is looking to expand by acquiring Sibneft, Russia's No. 5 oil producer, which is mainly owned by Russian tycoon Roman Abramovich. To make it happen, a consortium of six commercial and investment banks -- Dresdner Kleinwort Wasserstein, ABN Amro (ABN ), Morgan Stanley (MWD ), Citigroup, Goldman Sachs (GS ), and Credit Suisse First Boston (CSR ) -- are stepping forward to lend Gazprom $12 billion, or $2 billion each. And on Sept. 8, a group including some of the same banks signed up to lend $7.5 billion to Rosneftegaz, a holding company set up by the government, to finance its acquisition of a 10.7% stake in Gazprom. It's all part of Russia's plan to raise its share in Gazprom to a majority 51%. Rosneftegaz's main asset is Rosneft, the state oil firm, whose shares provide collateral.

The loans will not be particularly lucrative -- the Rosneftegaz loan is priced at just 1.55% over the London interbank offered rate (LIBOR) -- and they are not risk-free. Elena Anankina, a credit analyst at Standard & Poor's in Moscow, points out that Gazprom's balance sheet is already highly leveraged, with $22 billion in debt. And Rosneft has $14 billion in debt, against earnings last year of just $1.56 billion. A big plunge in oil and gas prices would be a blow to their finances.

What's going on? The fact that so many of the lenders are investment banks is a clue. They're coughing up billions in the short term, bankers say, in an effort to get an inside track on other business later. For instance, the Russian government aims to repay the Rosneftegaz loan by floating 49% of Rosneft in a stock issue by the end of next year. With Rosneft's potential market cap estimated at $30 billion, the initial public offering would mean fat fees for the banks selected to underwrite it. Likewise, Gazprom is expected to refinance part of its mega-loan through bond issues. "International banks are going to make a substantial amount of money, particularly on projects and companies that are linked to the state," says Chris Weafer, research head at Russia's Alfa Bank. Little wonder Western bankers are so free with their cash -- and reluctant to question the wisdom of the renationalization policy.

By Jason Bush in Moscow

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