Bank loans boost the state colossi

by Simon Pirani

Two landmark bank bank loans, now in preparation, will reinforce the dominance in Russia’s oil and gas sector of two state-controlled colossi – and fuel rivalry between them.

The state holding company Rosneftegaz is talking to banks about a $7.3 billion loan, to finance its purchase of 10.7% of Gazprom. The loan is intended as a bridge to placement on western markets of shares in Rosneft, the state oil company that aims to become Russia’s no.1 oil producer with the help of assets that once belonged to now-bankrupt Yukos. Rosneftegaz’s only asset is 100% of Rosneft’s shares.

A second loan could finance Gazprom’s purchase of a majority share of Sibneft, the oil company controlled by “oligarch” Roman Abramovich.

Talks surrounding both transactions are complicated by intra-Kremlin politicking, in which a group around Igor Sechin, deputy head of the presidential administration and Rosneft chairman, is at odds with a group around Dmitry Medvedev, head of the presidential administration and chairman of Gazprom.

Stephen O’Sullivan, oil and gas analyst at United Financial Group in Moscow, says this type of competition between two state-owned companies is “perhaps unique to Russia”. “Both sides are lobbying for their interests inside the administration.”

The acquisition by Gazprom late last month of 3% of Sibneft’s shares on the open market was interpreted as an attempt to prevent Rosneft obtaining a blocking minority stake in Abramovich’s company.

Another 5% of Sibneft shares are in free float, 72% are owned by Abramovich’s vehicle Millhouse Capital, and 20%, acquired by Yukos during its aborted merger attempt with Sibneft in 2003, are frozen by a Moscow court.

A Moscow-based banker said: “If you want to know which way the wind is blowing in the Kremlin, keep an eye on whether these shares remain frozen.” If they do, they may be transferred to Rosneft in payment of a $3.2 billion Yukos debt to the company – a possibility publicly mooted in July by Rosneft ceo Sergei Bogdanchikov. If they don’t, Gazprom could buy them, along with Millhouse’s other 72%.

When Rosneft bosses have clashed previously with their colleagues at Gazprom, the latter have been overruled – notably, when the Kremlin opted to sanction the purchase late last year by Rosneft, rather than Gazprom, of Yukos’s largest production subsidiary, Yuganskneftegaz. Last month Russian newspapers published evidence that state-owned Vneshekonombank purchased billions of dollars’ worth of Rosneft promissory notes to help finance the purchase.

O’Sullivan at UFG says investors will watch the price paid by Gazprom for Sibneft closely. “If there is more than a 10% discount on the market price, that would be seen as a market-distorting intervention.”

ABN Amro, JP Morgan Chase, Morgan Stanley and Dresdner Kleinwort Wasserstein are leading talks with Rosneftegaz on the $7.3 billion deal. An interest rate, Libor + 1.55%, has been agreed, but discussions on collateral are continuing. Minister of economic development German Gref said last week that a non-controlling share of Rosneft would be used. BNP Paribas was previously active in the talks, but will not take an arranging role.

ABN Amro and Barclays were last month closing senior syndication on a separate $2 billion five-year pre-export finance facility, at Libor + 1.8%, for Rosneft.

ABN and Dresdner are also understood to be leading talks with Gazprom on a loan of up to $10 billion.

This article appeared in Euromoney magazine, September 2005.
Posted June 2006; © 2006 Simon Pirani

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