Qatar's big oil deal with Moscow

Qatar's big oil deal with Moscow
In-depth: The surprise deal to buy into Rosneft, Russia's state-controlled oil giant, raises many questions, reports Stasa Salacanin.
6 min read
02 January, 2017
The $11bn deal has forced open the Kremlin's door [AFP]

In the beginning of December the Russian Federation, which directly owns 50 percent of Rosneft, sold 19.5 percent of its stake in the company to Qatar's sovereign wealth fund and commodities trader Glencore for $11.3 billion.

According to the Financial Times, Swiss-based oil trader Glencore - of which Qatar already owns nine percent - and the Qatar Investment Authority (QIA) are setting up a 50-50 joint venture, with Glencore committing "just €300 million ($314m) in equity with the rest of the money being provided by QIA" and a European bank, thought to be Intesa Sanpaolo.

Good economics

The Russian leadership proclaimed the Rosneft-Qatar-Glencore agreement to be the largest global energy sector deal of 2016, and it appears beneficial for all parties involved.

Chris Weafer, senior partner at Macro Advisory Ltd, a Moscow-based consultancy, indicates that the deal is "close to the full market value of the shares".

"That valuation is 60 percent higher since the start of 2016. That's good economics," he told The New Arab.

Read more: Qatar, Glencore buy $11.3 billion share in Russia's Rosneft

The deal was a warmly welcomed early Christmas present for Russia, which has been struggling to find a suitable partner for the privatisation of Rosneft for some time.

Moscow badly needed to narrow a budget gap resulting from low oil prices; even though it pumped close to record volumes of oil this year, exports dropped in value terms by 27 percent year-on-year in January-August 2016 to $46 billion, according to the Federal Customs Service.

Moreover, the deal has symbolic political connotations for Russia, demonstratinganother Russian foreign policy success in breaking the chains of West-imposed sanctions.

According to Lilia Shevtsova, an associate fellow of the Russia and Eurasia programme at Chatham House, the Rosneft deal shows "the fact that there are some forces in the world that are ready to help Russia to circumvent the sanction regime".

"But this does not mean that the West is ready to abrogate sanctions and that investments will start to pour into Russia," she told The New Arab.

Weafer maintains the deal would still have happened even if sanctions were tougher. "It is a unique asset and a unique opportunity for Qatar," he said. "Rosneft produces over 4.3 million barrels daily, when subsidiaries are added. There are very few such investment opportunities in the world today."

Many have jumped to the conclusion that the deal could have wider geopolitical consequences in the Middle East and beyond - and that it represent a shift toward warming Russia-Qatarrelations. The involvement of Qatar in a Russian privatisation deal may come as a surprise to many analysts, especially given years of tensions over Syria.

But it is obvious that both countries have managed to separate their foreign and economic policies and both governments have obviously invested a lot of effort into reaching the deal.

In Russia we have a marriage between power and business

Although Kremlin claims that the Rosneft deal was purely commercial and had nothing to do with politics, that is hardly the case in any such deal on this scale.

"In Russia we have a marriage between power and business, and that is why all important economic deals need approval and the endorsement of the authorities," said Shevtsova. "This was a very serious commercial deal that hardly could have succeeded without the direct involvement of the Kremlin."

Moscow analyst Weafer noted that the best deals for Kremlin "are those which combine good economics and good politics".

"This deal certainly falls into that category."

'Good politics'

This is why many assume that this deal may pave the road toward new geopolitical and economic arrangements between Russia and Qatar. Although Russian troops closely cooperate with Iran in Syria, Moscow does not want a confrontational relationship with the Gulf states.

Weafer believes this deal is one way in which Russia is looking to strengthen its political and investment relationships in the Arab world, coming as it does shortly after close cooperation with Saudi Arabia to secure the oil production deal.

"It means that Moscow has the opportunity to be some sort of mediator between the Arab states and Iran in the future. That's good politics," he said.

Read more: 'Historic' OPEC deal allows Iran to boost oil production amid cartel's cuts

Therefore, according to Robin Mills, CEO of Dubai-based Qamar Energy, and non-resident fellow for energy at the Brookings Doha Center, we can expect some big new deals and investments, probably in LNG sectors.

The relationship with the QIA will help Rosneft with its LNG expansion and, possibly, also allow the Russian giant to diversify geographically into more oil and gas projects in the Middle East and elsewhere.

The deal may have been also attractive to Qatar which is seeking to improve its relations with Russia, Mills noted. It is likely that a Qatari stake in Rosneft could decisively strengthen Doha's position towards Moscow providing it broader manoeuvring space on a range of issues.

The deal allows Qatar to diversify away from gas and its dependency on Asia as a buyer

Finally, the deal allows Qatar to diversify away from gas and its dependency on Asia as a buyer. Future cooperation with Rosneft will allow for diversification opportunities in the oil sector and in European markets, said Weafer.

While this is true, both countries still have political differences. They're major rivals in global natural gas supply, and both have been ramping up their influence across the Middle East. 

Guy Caruso, senior adviser in the Energy and National Security Program at the Center for Strategic and International Studies (CSIS), does not think the Rosneft investment will be a harbinger of new Qatari-Russia deals.

"My guess is the Qatari sovereign wealth fund will assess each deal on a case-by-case basis and only move when they believe the return on investment is high enough to outweigh the risks," he told The New Arab.

Geopolitical rivalry remains

So we should remain realistic about the range and nature of any future cooperation. Shevtsova explained the two states could have a situational convergence of tactical interests, but their strategic interests remain different.

What about speculations over the possibility of Russia joining a pipeline project connecting Qatar, Saudi Arabia, Syria, Turkey and the EU? All the experts we contacted ruled out such a scenario. Shevtsova called it a pure fantasy, while Mills noted that such a pipeline has no commercial logic and would face political opposition from Saudi Arabia.

Russia and Qatar compete in the European gas market, however they may seek to cooperate in LNG in other markets.

Weafer remains adamant that the Kremlin's priority is to secure Gazprom's long-term market share in Europe, and to bypass the Ukraine transit route.

Gazprom is currently working with Germany to construct the next phase of the Nord Stream gas pipeline and with Turkey to build the Turkish Stream pipe to southern Europe.

That pipeline is also probably a non-starter, so long as Iran has political influence in Damascus. Iran wants to eventually build a major gas pipeline to Europe via Turkey and would not be willing to allow Syria to host a competing pipeline from Qatar.

Moscow will of course never say publicly it is opposed to it. That would be bad politics. It simply will not support it in Damascus or Ankara. That's good economics, as Weafer said. But even though the geopolitical chess game in the Middle East is continuing, Qatar has cleverly forced open the heavy door of the Kremlin - just by a crack. That's good politics too.

Stasa Salacanin is a freelance journalist who has written extensively on Middle Eastern affairs, trade and political relations, Syria and Yemen, terrorism and defence.