Economic Effect of the Deal Between Rosneft and TNK-BP is Highly Doubtful for Russia

The intrigue around the fate of TNK-BP which dated back to last summer is now over. I. Sechin, Head of Rosneft managed to secure V. Putin's support of the idea to buy 100% of equities of TNK-BP.

The above deal is the biggest one in Russia’s latest history and exceeds largely by financial parameters the take-over of Sibneft by Gasprom and that of Yuganskneftegas – the key asset of Yukos – by the same Rosneft.   

As a result of a two-stage deal, BP receives $17.1bn in cash and 12.84% of equities of the new consolidated Rosneft and after that it will buy fr om Rosneftegas – the formal owner of Rosneft – another 5.66% of equities of Rosneft at the same price ($8 per share). Private owners of ТНК-BP will receive around $28bn. However, details of that part of the deal are not quite clear at the moment.  

As a result, the government will spend on that deal a portion of the dividends accumulated in Rosneftegas’s accounts, while the net debt of Rosneft grows from $20bn to $70bn. The above deal does not violate property rights: equities of both BP and Alfa-Group’s shareholders will be bought out with a market premium.

However, with the deal completed the government will control over 50% of Russian oil production (against 36% now) which fact is highly interesting. For instance, on the basis of the 2011 results Rosneft’s dividends amounted to less than $1 a barrel (the dividends of TNK-BP – the company which is to be taken over – were 10 times higher!), the debt to revenues ratio amounted to 25% even before the deal was made and due to the above the debt increased by 100% (with the norm of 10% set for large oil companies), while operating costs amounted to over $40 a barrel which is 50% above the market.    

Also, Rosneft and Gasprom showed no success in development of the shelf wh ere they have been monopolists for the past five years. Thus, the economic effect of the deal is highly doubtful for Russia.  The above was indirectly recognized by V. Putin who explained that the deal was justified not by state interests but the fact that BP and Russian shareholders failed to get along together.

S.V. Zhavoronkov,  PhD (Economics) Senior Researcher of the Center for Political Economy and Regional Development

Tuesday, 30.10.2012