Glencore plans to convert shares in subsidiaries of Russia’s Russneft into a 49% stake in the company

Swiss mining giant Glencore (ticker: GLEN) plans to take a 49% stake in Russian oil producer Russneft (ticker: RUSN) by exchanging Glencore’s shares in Russneft’s subsidiaries for shares in the holding company, according to a release from the Swiss company. This news comes in spite of fears of expanded sanctions against Russian companies by the West. Russneft, one of Russia’s largest refining companies, is not to be confused with Rosneft – a giant integrated oil company owned by the Russian government.

Glencore started as an oil trading company and remains one of the top three crude traders in the world, reports Reuters. In 2013, the company merged with Xstrata, turning the company into a mining giant, but its production assets in the oil industry remained relatively small compared with the amount of oil it trades.

After its consolidation, the Russneft group will be producing 360 MBOPD, according to Mikhail Gutseriyev, Chairman of Russneft, making it comparable in size with Russia’s sixth-largest oil producer, Bashneft (ticker: BANE.MM), which has a market cap of $6 billion.

No cash will change hands as part of this deal, but Glencore will get several seats on Russneft’s board after the deal is complete, a person familiar with the agreement told The Wall Street Journal.

“This deal (Russneft) highlights that oil is clearly something that Glencore is committed to in the longer term,” said Bernstein Research analyst Paul Gait. “It also shows they are prepared to take greater political risk where others would be slightly more cautious.”

Concerns over sanctions

With political ties continuing to deteriorate between Russia and the West, some wonder why the Swiss company would make this deal now, with more sanctions possible in the future. Last week, the U.K. government threatened not to approve the sale of Germany’s RWE utility company to LetterOne because the company is headed by Russian businessman Mikhail Fridman, citing concerns over future sanctions.

“Glencore has long sought to venture into upstream just like some of its rivals,” Alexei Kokin, an analyst with UralSib brokerage in Moscow, told Reuters. “The fact is – there are no sanctions against Russneft.”

It is possible that the deal is a way for Glencore to exercise more control in Russneft. “It’s easier to exercise control if one can do it through a single entity rather than through indirect ownership through multiple entities,” said Gait. The move would also allow Glencore to sell its Russneft holdings more quickly if it felt the business became too risky.

Speaking in an interview on the Rossiya 24 TV channel, Gutseriyev said the deal was awaiting approval from the Russian competition regulator.

Russneft owes Glencore $984 million, but the Swiss company said in its press release that “no conversation has taken place of any of Russneft’s outstanding loan commitments to Glencore.”

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