BP-Rosneft Deal Has Russia Ceding Control, Shuvalov SaysScott Rose and Ryan Chilcote
BP Plc raising its OAO Rosneft stake shows Russia’s willingness to surrender control over the country’s largest oil producer as the state cuts its business holdings, said First Deputy Prime Minister Igor Shuvalov.
“Once we have BP as a major shareholder, a private international company, the whole picture changes,” Shuvalov said about state-run Rosneft. “I don’t think it is possible having BP as a shareholder to say, ‘We do what we want.’”
Rosneft, headed by former Deputy Prime Minister Igor Sechin, is poised to become the world’s biggest publicly traded oil producer by volume as it buys the TNK-BP venture from BP and its billionaire partners for $55 billion in Russia’s biggest-ever acquisition. BP will end up with 19.75 percent of Rosneft in the deal, while the state retains almost 70 percent, according to information on the Russian company’s website.
Late this year or in 2014, Russia may sell at least 5 percent of Rosneft on the market, or more if a strategic investor shows interest and helps make the company a global competitor to major producers such as Exxon Mobil Corp. and BP itself, Shuvalov said in a Jan. 18 interview. By 2020, the government wants to cut its stake to less than 50 percent, he said.
“We need first-class investors for Rosneft and we would like that Rosneft develops itself as a multinational company,” Shuvalov said Jan. 18 on train ride to Moscow from Kaluga, 100 miles southwest of the capital. The government is looking for a price above the $7.55 a share raised in Rosneft’s 2006 initial public offering.
The changes happening at Rosneft are “very, very healthy,” and the government would like to see additional asset swaps or direct share sales as it continues to reduce it’s stake, he said.
BP will get $17.1 billion in cash and 12.8 percent of Rosneft for its half of TNK-BP, and use some of the proceeds to buy 5.7 percent more from the state at $8 a share. That will add to its current 1.25 percent holding in the Russian oil company. Rosneft closed at $8.63 on Jan. 18 in London, 14 percent above the IPO price. The stock advanced 35 percent in London last year, beating a 13.5 percent gain for the FTSE Russia IOB Index of 15 stocks that trade there, according to data compiled by Bloomberg.
The “majority” of Russian shares are undervalued, Shuvalov said. Investors should consider buying shares in Rosneft, OAO Gazprom, OAO Lukoil and OAO Gazprom Neft, he said.
“They’re very effective,” Shuvalov said of the energy companies. “I think their shares will be trading higher in the future.”
The ruble-denominated Micex Index of 50 stocks trades at about 5.7 percent estimated earnings. The MSCI Emerging Markets Index is valued at a multiple of 11.
“I know that people speculate about shale gas and that Gazprom will suffer,” Shuvalov said. “At the moment, I think the shares are still very attractive.”
Gazprom’s sales in the European Union have been squeezed and the company has had to offer discounts to some customers as the U.S. shale gas boom freed up coal supplies for EU markets, competing with Russian gas exports. Gazprom shares lost 16 percent in Moscow last year.
“It’s a question not of our ego,” Shuvalov said. “It’s a question of how we can balance the global need for gas, global need for energy.”
Europe depends on Russia for about a quarter of its gas, while the Russian government relies on the oil and gas industry for half of its revenue. The budget deficit was 0.02 percent of gross domestic product last year, according to preliminary data from the Finance Ministry.
Asset sales will proceed as announced last year, with a target of at least $10 billion this year, Shuvalov said. The government sold 217 billion rubles ($7.2 billion) of shares last year, according to the Federal Property Management Agency, compared with the Finance Ministry’s earlier plan of 300 billion rubles.
“If we can sell more, we will,” Shuvalov said. “There is not any hurry. We have sufficient funds to cover some turbulence if it occurs, but we need to sell anyway for structural purposes.”
Shuvalov said he would like to see BP’s partners in TNK-BP invest all the proceeds in Russia or buy shares in Rosneft, while saying neither move is likely. Rosneft agreed to pay $28 billion for the half of the venture held by Mikhail Fridman and German Khan’s Alfa Group, Len Blavatnik’s Access Industries, and Viktor Vekselberg’s Renova Group.
‘Free to Act’
“They are free to act with this cash as they want,” Shuvalov said. The government “won’t impose any limitations.”
Putin, who started a third term as president last year and has urged Russian business leaders to invest domestically, said during a televised news conference last month that he “hoped” AAR, which represents the billionaires’ interest in TNK-BP, would invest “a significant part” of their sale proceeds into the Russian economy.
Preventing deals such as the TNK-BP sale isn’t the intention of Putin’s call for a return of capital to Russia, or the “de-offshorization” of the economy, Shuvalov said. The government estimates that businesses attempting to hide their money accounted for about $20 billion last year, or no more than a third of total net capital outflows last year, he said.
“We are very comfortable if people just want to keep their assets or their cash in different currencies,” Shuvalov said. “We need to see, we need to understand it but once they pay all their taxes, we’re fine.”
Russia probably won’t see tax revenue from the $28 billion Rosneft pays for the 50 percent stake held by the billionaires if they’re selling the TNK-BP entity that is registered offshore, Shuvalov said.
“Our task now is to provide sufficient comfort to invest this money in Russia,” Shuvalov said. “There is no administrative push. We will talk. Maybe they will see interesting areas for them to invest and we will provide as much support as we can.”
Russia is trying to bring in investment by improving its financial infrastructure and gradually offering more shares sold in state asset sales in Moscow, rather than in London and New York where many have been primarily based, Shuvalov said.
“We’ll sell in New York, London and Moscow,” he said. “Ideally we’d like to see Moscow selling more and more from deal to deal, and Moscow being able to raise more capital, but it takes time.”