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Trafigura puts €1.5bn of own cash on line to cement Rosneft ties

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Western companies know partnering with Russia’s state-backed oil and gas producers carries political and reputational risks that must be weighed against gaining access to the country’s bounty of natural resources.

But for Trafigura, becoming Rosneft’s go-to commodity trader has a more concrete expense: €1.5bn of its own cash, injected into a €7.3bn deal for a 10 per cent stake in a gargantuan Arctic oil project backed by President Vladimir Putin.

The full extent of Trafigura’s investment in Vostok Oil, its largest ever, illustrates the lengths to which it will go to cement its relationship with Rosneft and secure millions of barrels of crude for its huge trading business.

As US sanctions have squeezed the Russian group’s access to credit, Trafigura has vied with rival Glencore to become the favoured partner of the world’s second-largest oil producer and win prized supply agreements.

But investing in a vast project in an environmentally sensitive area, at a time when Trafigura faces pressure to adapt its business model as developed economies start the long transition away from fossil fuels, has raised questions.

It comes as the company, which is owned by 850 employee shareholders, is planning a multibillion-dollar push into renewable energy with an Australian partner and has just announced its first emissions targets. But it is far from turning its back on the oil trade.

“When traders look to buy equity in a project it’s normally to create a degree of ‘stickiness’ with the commodities it produces and the partner,” said Roland Rechtsteiner at consultancy Oliver Wyman. He added that there had been “a growing trend of buying into assets” to secure “offtake” supply deals and “long-term relationships with the largest oil producers”.

“The offtake is where the money is,” said one senior commodity banker, noting that while Trafigura’s investment was “a big number . . . the deal washes its face on profit from the offtake volumes”.

Column chart of Metric tonnes per annum (m) showing Trafigura is the biggest handler of Rosneft-supplied oil

Vostok Oil will develop a new oil-producing region on Siberia’s Taymyr Peninsula to rival the US Permian Basin and Saudi Arabia’s Ghawar oilfield. It will pull together existing production of about 370,000 barrels per day and exploration assets and link them to markets in Europe and Asia via the Northern Sea Route, a fair-weather shipping lane between the Atlantic and Pacific oceans.

“This is a long-term investment for the group in an exciting oil and gas company with a resource base for liquid hydrocarbons of 6bn tonnes, including confident recoverable reserves of about 3bn tonnes,” a Trafigura spokesperson said. “The oil production potential of the project’s open and promising deposits is comparable to the largest projects in the Middle East.”

The project, which will cost up to $150bn to develop, includes the construction of 15 towns to house the thousands of workers needed to drill the oil wells and operate the infrastructure.

But it is expected by analysts to produce 1m barrels of oil per day by 2028 and more than 2m b/d by 2035 — the equivalent of roughly 2 per cent of global supply — while favourable tax conditions should boost returns.

Vostok Oil’s planned development on Siberia’s Taymyr Peninsula

Trafigura is the first investor but Rosneft is also expected to seek support from China and India at a time when US sanctions have restricted its access to western financing. Having a large international trader such as Trafigura onboard is seen as one step to boost the project’s appeal. Other trading houses approached by Rosneft have been cautious about investing.

Trafigura already has a strong relationship with Rosneft, which has been the subject of US financial sanctions since 2014, having helped it raise funds through permitted short-term prepayment oil deals. It was also part of the Rosneft-led consortium that in 2017 took control of Nayara, formerly Essar Oil, including a big refinery in India.

Data from Petro-Logistics SA, a consultancy that monitors oil flows, show that Trafigura shipped roughly 400,000 barrels a day of Rosneft’s crude in 2019 and 250,000 b/d last year, compared with 280,000 b/d and 140,000 b/d respectively for Glencore. Trafigura declined to comment on the numbers.

Nayara’s Vadinar refinery in Gujarat, India. Trafigura was part of the Rosneft-led consortium that took control of Nayara in 2017 © Dhiraj Singh/Bloomberg

While the investment in Vostok Oil is permitted under existing US sanctions Jason Hungerford, a partner at law firm Mayer Brown, said there was a risk that the incoming US administration of Joe Biden could take a more hawkish stance towards Russia.

“The US has always avoided directly sanctioning Rosneft’s oil exports because of the disruption it could cause in global energy markets,” Mr Hungerford said. “But the direction of travel suggests that stricter sanctions in the future are possible.”

He added that “it might only take one incident — like the arrest of [Alexei] Navalny this week — to raise the temperature between Washington and Moscow, and Rosneft is clearly seen by the US as a pressure point it can target”.

Trafigura made its investment through a Singapore-registered special purpose vehicle called CB Enterprises, financing the deal with debt and equity.

Corporate filings in Singapore show the €5.775bn syndicated loan facility was organised by Credit Bank of Moscow, a fast-growing lender with ties to Rosneft and its chief executive Igor Sechin — one of Mr Putin’s closest allies.

The loans, which are non recourse, have a maturity of 13 years and have a five-year grace period on repayments. They would be paid back through the dividends generated by Vostok Oil, Credit Bank of Moscow said in a statement.

Column chart of JPMorgan projection, barrels per day (m) showing Vostok Oil's estimated output for Taymyr Peninsula project

In addition to the loan, Trafigura said it was investing €1.5bn of its own cash,

That makes it the largest acquisition in Trafigura’s 27-year history and values Vostok Oil at almost €73bn. To put those figures in perspective, Trafigura’s group equity was $7.8bn (€6.4bn) at the end of September while Rosneft’s market capitalisation is $70bn (€55bn).

The investment follows a blockbuster year for Trafigura, which cashed in on the market chaos unleashed by the coronavirus pandemic to report record earnings before interest, tax, depreciation and amortisation of $6bn, up from $2.1bn in 2019.

That cut Trafigura’s adjusted total debt to $2.76bn from $5.3bn, giving it the confidence to push ahead with the deal, according to people with knowledge of the deal.

The transaction has some similarities with the 2016 deal in which Glencore and Qatar’s sovereign wealth fund joined forces to buy an $11bn stake in Rosneft. But while Glencore disposed of its stake after 20 months, holding on to a five-year, 220,000 barrel per day supply agreement, Trafigura has no plans to flip its stake in Vostok Oil.

The key prize will be increased access to Rosneft’s crude, including low-cost barrels from the Arctic development. This would be a light, sweet crude with a relatively low carbon footprint that will not require any domestic blending, analysts said.

Rosneft chief executive Igor Sechin, right, at a meeting with Vladimir Putin in May last year © Sputnik/Alexei Druzhinin/Kremlin/Reuters

Trafigura declined to comment on the size of the supply deals but bankers think the volumes are significant — an initial 10m barrels of oil per month (about 330,000 barrels per day) and more once production from Vostok Oil ramps up. That would cement Trafigura’s position as the dominant exporter of Rosneft’s crude.

Trafigura sees Vostok Oil as an important project for an industry that has been starved of investment because of low prices and the pivot to renewables by western oil majors.

“We expect that new, low-cost sources of oil will continue to be required to support essential human needs for some time,” Jeremy Weir, Trafigura’s chief executive, said this month.



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Europe

German regulator steps in as Greensill warns of threat to 50,000 jobs

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Germany’s financial watchdog has taken direct oversight of day-to-day operations at Greensill Bank, as the lender’s ailing parent company warned that its loss of $4.6bn of credit insurance could cause a wave of defaults and 50,000 job losses.

BaFin appointed a special representative to oversee Greensill Bank’s activities in recent weeks, according to three people familiar with the matter, as concern mounted about the state of the lender’s balance sheet.

The German-based lender is one part of a group — advised by former UK prime minister David Cameron and backed by SoftBank — that extends from Australia to the UK and is now fighting for its survival.

On Monday night Greensill was denied an injunction by an Australian court after the finance group tried to prevent its insurers pulling coverage.

Greensill’s lawyers said that if the policies covering loans to 40 companies were not renewed, Greensill Bank would be “unable to provide further funding for working capital of Greensill’s clients”, some of whom were “likely to become insolvent, defaulting on their existing facilities”.

In turn that may “trigger further adverse consequences”, putting over 50,000 jobs around the world at risk, including more than 7,000 in Australia, the company’s lawyers told the court.

A judge ruled Greensill had delayed its application “despite the fact that the underwriters’ position was made clear eight months ago” and denied the injunction.

Greensill Capital is locked in talks with Apollo about a potential rescue deal, involving the sale of certain assets and operations. It has also sought protection from Australia’s insolvency regime.

Greensill was dealt a severe blow on Monday when Credit Suisse suspended $10bn of funds linked to the supply-chain finance firm, citing “considerable uncertainties” about the valuation of the funds’ assets. A second Swiss fund manager, GAM, also severed ties on Tuesday. Credit Suisse’s decision came after credit insurance expired, according to people familiar with the matter.

While the bulk of Greensill’s business is based in London, its parent company is registered in the Australian city of Bundaberg, the hometown of its founder Lex Greensill.

In Germany, where Greensill has owned a bank since 2014, BaFin, the financial watchdog, is drawing on a section of the German banking act that entitles the regulator to parachute in a special representative entrusted “with the performance of activities at an institution and assign [them] the requisite powers”.

The regulator has been conducting a special audit of Greensill Bank for the past six months and may soon impose a moratorium on the lender’s operations, these people said.

Concern is growing among regulators about the quality of some of the receivables that Greensill Bank is holding on its balance sheet, two people said. Regulators are also scrutinising the insurance that the lender has said is in place for its receivables.

Greensill Bank has provided much of the funding to GFG Alliance, a sprawling empire controlled by industrialist Sanjeev Gupta.

“There has been an ongoing regulatory audit of the bank since autumn,” said a spokesman for Greensill. “This regulatory audit report has specifically not revealed any malfeasance at the bank. We have constructive ongoing dialogue with all regulators in all jurisdictions where we operate.”

The spokesman added that all of the banks assets are “unequivocally” covered by insurance.

Greensill, a 44-year-old former investment banker, has said that the idea for his company was shaped by his experiences growing up on a watermelon farm in Bundaberg, where his family endured financial hardships when large corporations delayed payments.

Greensill Capital’s main financial product — supply-chain finance — is controversial, however, as critics have said it can be used to disguise mounting corporate borrowings.

Even if an agreement is struck with Apollo, it could still effectively wipe out shareholders such as SoftBank’s Vision Fund, which poured $1.5bn into the firm in 2019. SoftBank’s $100bn technology fund has already substantially written down the value of its stake.

Gupta, a British industrialist who is one of Greensill’s main clients, separately saw an attempt to borrow hundreds of millions of dollars from Canadian asset manager Brookfield collapse.

Executives at Credit Suisse are particularly nervous about the supply-chain finance funds’ exposure to Gupta’s opaque web of ageing industrial assets, said people familiar with the matter.

The FT reported earlier on Tuesday that Credit Suisse has larger and broader exposure to Greensill Capital than previously known, with a $160m loan, according to two people familiar with the matter.

Additional reporting by Laurence Fletcher and Kaye Wiggins in London



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FT 1000: Europe’s Fastest Growing Companies

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The latest annual ranking of businesses by revenue growth. Explore the 2021 list here — the full report including in-depth analysis and case studies will be published on March 22



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EU plans digital vaccine passports to boost travel

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Brussels is to propose a personal electronic coronavirus vaccination certificate in an effort to boost travel around the EU once the bloc’s sluggish immunisation drive gathers pace.

Ursula von der Leyen, European Commission president, said on Monday the planned “Digital Green Pass” would provide proof of inoculation, test results of those not yet jabbed, and information on the holder’s recovery if they had previously had the disease.

“The Digital Green Pass should facilitate Europeans‘ lives,” von der Leyen wrote in a tweet on Monday. “The aim is to gradually enable them to move safely in the European Union or abroad — for work or tourism.”

The plan, expected to be outlined this month, is a response to a push by Greece and some other EU member states to introduce EU “vaccination passports” to help revive the region’s devastated travel industry and wider economy. 

But the commission’s proposed measures will be closely scrutinised over concerns including privacy, the chance that even inoculated people can spread Covid-19, and possible discrimination against those who have not had the opportunity to be immunised.

In an immediate sign of potential opposition, Sophie Wilmès, Belgium’s foreign minister, raised concerns about the plan. She said that while the idea of a standardised European digital document to gather the details outlined by von der Leyen was a good one, the decision to style it a “pass” was “confusing”. 

“For Belgium, there is no question of linking vaccination to the freedom of movement around Europe,” Wilmès wrote in a tweet. “Respect for the principle of non-discrimination is more fundamental than ever since vaccination is not compulsory and access to the vaccine is not yet generalised.”

The travel sector tentatively welcomed the news of Europe-wide vaccine certification as a way to rebuild confidence ahead of the crucial summer season, but warned that regular and rapid testing was a more efficient and immediate way to allow the industry to restart.

Fritz Joussen, chief executive of Tui, Europe’s largest tour operator, said “with a uniform EU certificate, politicians can now create an important basis for summer travel”. But he added that testing remained “the second important building block for safe holidays” while large numbers of Europeans awaited a jab.

Marco Corradino, chief executive of online travel agent Lastminute.com, said he feared the infrastructure needed would not be ready in time for the summer season: “It will not work . . . at EU level because it is too complicated and would not be in place by June.”

He suggested that bilateral deals, such as the one agreed between Greece and Israel in February to allow vaccinated citizens to travel without the need to show a negative test result, had more potential.

Vaccine passport sceptics argue it would be unfair to restrict people’s travel rights simply because they are still waiting for their turn to be jabbed. 

Gloria Guevara, CEO of the World Travel and Tourism Council, said it was important not to discriminate against less advanced countries and younger travellers, or those who simply cannot or choose not to be vaccinated. “Future travel is about a combination of measures such as comprehensive testing, mask-wearing, enhanced health and hygiene protocols as well as digital passes for specific journeys,” she added.

A European Commission target to vaccinate 70 per cent of the bloc’s 446m residents by September means many people are likely to go through summer unimmunised.

While some countries around the world have long required visitors to be vaccinated against infectious diseases such as yellow fever, a crucial difference with coronavirus is that those inoculations are available to travellers on demand. 

Questions also remain about the risk of people who have already been vaccinated passing on coronavirus if they contract the disease.

 





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