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



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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Numis sets out EU ambitions after record results




Numis has picked Dublin for its new EU office to target European clients cut off by Brexit rules after the London-based broker posted record results for the first half of its financial year.

Numis said initial public offering volumes over the six months to the end of March were at their strongest level “for many years”, helping to more than double revenues in its investment banking division to £82m. The company advised on flotations including Moonpig and Auction Technology Group during the period. 

Overall revenue rose almost two-thirds to £115.4m, while pre-tax profit increased more than fivefold to £39.3m. 

Numis said mergers and acquisitions had also started to recover, driven by domestic and international buyers identifying attractive investment opportunities as the economic impact of the pandemic on the UK market eased. The broker is advising property group St Modwen on a £1.2bn takeover approach from Blackstone announced on Friday morning.

Alex Ham, co-chief executive, said activity for the rest of the year looked strong, with a number of IPOs and deals expected.

Some of these are likely to be European IPOs, despite the fact Numis has been unable to market to EU clients since the UK left the trading bloc. 

Numis has relied on so-called reverse solicitation — in effect, requiring EU clients to approach the broker for help — but plans to open a Dublin office next year to ramp up growth across Europe. Brexit had caused a reduction in institutional income from EU-based clients over the six-month period, it said.

“This is a departure for us in expanding beyond the traditional UK market,” said Ross Mitchinson, co-chief executive. “Dublin is a real focus for us to much better attack the European market.”

Mitchinson said EU regulators were being “tough but fair” about requirements on opening the office. “They want to see a well-capitalised business.”

The UK government and regulators have launched a series of consultations and proposals to deregulate and streamline rules to help British financial services groups after losing easy access to EU markets and clients.

But Mitchinson said these had not made much difference so far to Numis, adding that he did not “see the point” of a recent push to reduce the impact of Mifid II rules on research for small companies. “Institutions will not take a different approach,” he said. 

Numis will move to a new London office in September, which has been reconfigured with additional “Zoom rooms” to reflect the push for more flexible working in a future split between the office and home. 

Ham said he expected Numis staff to aim for two to three days a week in the office, with less need for international travel. But he added that many at Numis would be led by the needs of their clients, rather than any prescriptive working arrangement.

The average market capitalisation of its clients has almost doubled, in part owing to the rebound in the FTSE and a focus on “growth stock” clients such as Asos and Ocado. Numis also stopped working for businesses in the natural resources sector last year — partly owing to environmental, social and governance concerns about mining and oil — but these also tended to be smaller clients.

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Angela Merkel rejects US move to waive patents on vaccines




Angela Merkel has expressed opposition to the Biden administration’s proposal to suspend intellectual property rights for Covid-19 vaccines, saying it would have “serious implications” for vaccine production worldwide.

The German chancellor said the limiting factors in vaccine supply were “production capacities and the high quality standards, not the patents”.

“The protection of intellectual property is a source of innovation and it must remain so in the future,” she added.

Merkel was responding to President Joe Biden’s top trade adviser Katherine Tai who said that while the US “believes strongly” in IP protections, it would support a waiver of those rules for Covid-19 vaccines.

A waiver would allow any pharmaceutical manufacturer in the world to make “copycat” vaccines without fear of being sued for infringing intellectual property rights.

“This is a global health crisis, and the extraordinary circumstances of the Covid-19 pandemic call for extraordinary measures,” Tai said in a statement on Wednesday.

The US would “actively participate” in negotiations at the World Trade Organization to hammer out the text of a waiver, she added, noting that those discussions would take time given the complexity of the issues involved.

Washington’s proposal has put the EU on the back foot. In recent months the bloc has resisted a push led by India and South Africa within the WTO for a vaccine patent waiver.

The US move received a cool response from Ursula von der Leyen, European Commission president. She said the EU was “ready to discuss” how the proposal could help address the current crisis “in an effective and pragmatic manner”.

But she also insisted the priority was for vaccine-producing countries to lift barriers to exports and address supply chain interruptions.

Von der Leyen contrasted the EU’s approach with that of some allies: “Europe is the only democratic region in the world that exports vaccines on a large scale.” The US, a large vaccine-producing country, has reserved most of its homegrown jabs for domestic use.

The US proposal received a more positive response from Vladimir Putin, who said Russia, which manufactures the Sputnik V vaccine, would support the move. “A pandemic is an emergency situation . . . No doubt, Russia would support such an approach,” the Russian president said.

China’s foreign ministry said it looked “forward to having active and constructive discussions with all parties under the WTO framework in order to reach an effective and equitable agreement”.

Emmanuel Macron, the French president, said he was open to the idea of a waiver of IP rights, but “the reality is that the bottlenecks today are not price, or the patents”.

“You can transfer the intellectual property to pharma companies in Africa but they have no platform to make mRNA vaccines,” he said.

The idea of a waiver is also opposed by BioNTech, the German start-up whose joint venture with Pfizer brought the first messenger RNA-based vaccine to the market. The company said it would not ease current supply shortfalls and warned of the risks of opening up manufacturing to producers with no mRNA experience.

“Together with Pfizer, we are also working with various organisations to support the supply of vaccines to populations worldwide. And we will continue to provide low or lower middle-income countries with our vaccine at a not-for-profit price,” BioNTech said in a statement on Thursday.

“However, patents are not the limiting factor for the production or supply of our vaccine . . . The manufacturing process of mRNA is a complex process developed over more than a decade.”

Stéphane Bancel, Moderna’s chief executive, said the vaccine makers would have vastly expanded their capacity before any new players could make a real difference to supply. 

“If you were to start today, you’re going to have to start by hiring people. Those vaccines don’t fall from the sky,” Bancel told the FT US Pharma and Biotech Summit on Thursday. “There is no mRNA industry . . . When we hire people that come from traditional pharma, we have to train them in the art of mRNA.”

Matthias Kromeyer, a general partner at the venture capital firm MIG, one of BioNTech’s earliest investors, said a patent waiver would discourage future investments in the sector.

“If the US/EU/WHO suspend patent protection, they will lose a lot in the long run — namely the willingness of private investors to invest in such companies, many years before it is clear whether their technologies will succeed or not,” he said.

“This would mean the collapse of an entire industry that has just demonstrated it is the only one that can deliver a sustainable solution for this global medical, economic and social crisis. Without private investors, this innovative power will no longer exist in the future — what will we do then?”

The chief executive of Bristol Myers Squibb described the US government’s support for waiver as “very concerning” during an interview at the FT US Pharma and Biotech Summit on Thursday.

“Our industry depends on intellectual property protection in order to invest in R&D and make the investments needed to address crises like Covid,” Giovanni Caforio said. “The developments of the past 24 hours are very concerning and disappointing.”

As well as being important during the coronavirus crisis, Caforio said that IP protection is “critical for some of the areas of higher medical need where BMS invests like cancer care”.

Additional reporting by Leila Abboud in Paris

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UK ends damaging post-Brexit clash over status of EU envoy




UK foreign secretary Dominic Raab has finally ended a corrosive diplomatic dispute over the status of the EU’s ambassador in London, a stand-off that had added to post-Brexit tensions.

Raab had previously refused to grant João Vale de Almeida full diplomatic status after Brexit took effect on January 1, arguing the EU was an “international organisation” not a state.

Brussels retaliated by shutting Britain’s head of mission to the EU, Lindsay Croisdale-Appleby, out of key meetings with EU officials, adding to Brexit tensions on trade and Northern Ireland.

But on Wednesday the issue was settled after a meeting between Raab and Josep Borrell, the bloc’s foreign policy chief.

Officials briefed on the deal said Vale de Almeida would now receive the same diplomatic recognition as his counterparts in EU missions in all other world capitals, including Washington and Beijing.

In a joint statement, issued at a G7 meeting in London, Raab and Borrell said they had reached an agreement based on “goodwill and pragmatism” on an establishment agreement for the EU delegation to the UK.

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While Vale de Almeida will enjoy full ambassadorial status, British officials said Raab had secured a deal “which gives us some of what we want” regarding the legal situation of EU staff in London.

EU officials will enjoy a largely similar status to other diplomats but with some downgrades: notably, under the agreement, they will not have immunity from prosecution for road traffic accidents.

Raab insisted on this carve-out following the death of Harry Dunn, a British motorcyclist killed in 2019 in a collision with a vehicle driven by Anne Sacoolas, the wife of a US diplomat. She returned to the US claiming diplomatic immunity. 

But many British diplomats were dismayed at how long it had taken to resolve the dispute. “It was a stupid thing to do in the first place and we’ve had to back down,” said one former ambassador.

The diplomatic rapprochement was hailed in Brussels as a sign of a “new cycle” in UK-EU relations following the European parliament’s formal ratification last month of the trade deal between the two sides, which took effect on January 1.

There has also been a thawing in relations over the management of tensions in Northern Ireland, as London and Brussels look for ways to soften border checks on goods coming from the British mainland to the region.

Vale de Almeida will now get to present his diplomatic credentials to the Queen — an honour not available to the heads of international missions.

Boris Johnson has never recognised the EU as equivalent in status to a national government but Number 10 insiders insisted that the Foreign Office — not the prime minister — was responsible for the diplomatic dispute.

Meanwhile, Ireland and the UK announced plans for the first meeting in two years of the British-Irish Intergovernmental Conference, a structure created under the 1998 Good Friday Agreement for the two countries to liaise on issues around Northern Ireland. 

“We are aware that there are sincerely held concerns in different communities in Northern Ireland in relation to a number of issues and firmly agree that the best way forward is through dialogue and engagement,” said Northern Ireland secretary Brandon Lewis and Ireland’s foreign affairs minister Simon Coveney in a joint statement after they met in Dublin on Wednesday afternoon.

The meeting will take place in June, ahead of the July marching season in Northern Ireland, which could inflame tensions between unionists — who feel that their region’s status in the UK is under threat from post-Brexit trading arrangements — and nationalists, who are pushing for a vote on a united Ireland. 

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