Transneft: Russian state-owned pipeline behemoth or ad hoc investment fund?
Transneft is a Russian state owned company which operates over 70,000 kilometers of trunk pipelines â€“ which thus makes it the world`s largest oil pipeline company, has become the focus of unwelcome attention in other areas, such as, but by no means limited to, the structures by which top ranking Russian officials derive rents from natural resources for their own enrichment.
Aleksey Navalny, a leading opposition politician andÂ financial activist, in 2010 charged that Transneft`s construction costs for the East Siberian â€“ Pacific Ocean Oil Pipeline had been significantly inflated and led to the embezzlement of more than USD 4 bln in state funds. In essence, senior executives of the company had set up bogus contractor firms to bid for construction work related to the pipeline project.
A look at the 2014 annual report reveals that Transneft is also being asked to fulfill another role:
As at December 31, 2014, the company held about RUR 33.5 bln of financial assets whereas it barely held any the year before. Around half of the amount constitute corporate bonds from Russian entities whose maturity dates are over two years; and almost 20 percent,Â – RUR 6 bln, is accounted for by municipal bonds.
The company`s â€śother financial assetsâ€ť has also seen a dramatic increase from RUR 300.9Â bln to RUR 405.8 bln. A considerable proportion of the balance is short term i.e. provided for a matter of months.
Part of the US and EU sanctions agreed upon last year was a curtailment from international capital markets of short term finance exceeding 30 days to Russian companies. Based on the above, Transneft would appear to be employed as part of the solution to this financing problem â€“ making short-term funds available to other Russian entities.
A question arises as to whether Transneft is really equipped to take such decisions given its ostensible purpose in business life is to operate pipelines as opposed to acting as an investment fund cum credit institution. â€śOther financial assetsâ€ť increased further as at March 31, 2015 to RUR 450.8 bln.
Also in October 2014, Transneft acquired 75 percent in OOO Sigma Telecom, whose main activity, unsurprisingly, is telecommunication services. Transneft paid RUR 1.6 bln for its stake. Again no explanation is provided for this diversification strategy.
One further item of interest is Transneft`s 50 percent interest in a Cypriot based entity engaged in financial activities, Omirico Limited. Transneft has also extended a loan to Omirico Limited which amounted to RUR 9.8 bln as atÂ December 31, 2014.
Omirico Limited is under the joint control of Transneft and one of the newly emerging oligarchs, Ziyavudinu Magomedov, who also owns the Summa Group, a conglomerate whose interests range from ports, transport and logistics to telecoms services to oil and gas.
Omirico and Magomedov together acquired a significant stake in Novoport, one of the largest port operators in Russia and which comprises Novorossiysky Seat Port, Novorossiysky Crops Terminal, Novorossiysky Shipyard, NMTP Fleet, Novoroslesexport, IPP and Baltic Stevedore Company.
Indeed, Transneft owns, through Omiricon, 35.57 percent of OAO Novorossiysk Commercial Sea Port. As a reminder to Transneft of its investment skills, this entity has incurred significant losses for Transneft over the last few years.
In 2014, Transneft incurred a loss of RUR 10.8 bln in the year on top of RUR 15 bln loss in 2013 largely due to this investment. As ofÂ December 31,Â 2014, Novorossiysk Commercial Sea Port`s share price was below the minimum level set by the Groupâ€™s secured US Dollar loan agreement with Sberbank . In addition, during the third and fourth quarters of the year 2014 NCSPâ€™s activities were loss-making, which resulted in a breach of another covenant statedÂ in the loan agreement. Furthermore, its current liabilities exceeded its current assets.
Auditors have drawn attention in their audit opinion to the poor financial situation of Novorossiysk Commercial Sea Port and that its ongoing survival is dependent on the goodwill and financial support of the port`s principal lender, Sberbank.
Of concern in the light of the above is how little if any discussion there is of the rationale for the investment choices and decisions made above in the accompanying Management Discussion and Analyses that accompany the financial information presented by Transneft.
In particular, the changes in investments seem to reflect decisions made on high and on an ad hoc basis. Transneft is becoming involved less in its own business activity than as a state means of supporting the market elsewhere for Russian corporate and even municipal bonds. It is becoming a state investment vehicle â€śof last resortâ€ť and it may yet end up becoming hostage less to the fall in oil prices than the continuing ability of other sectors of the Russian economy to overcome the harsh economic recession.
Photo courtesy of JSC Transneft/Wikimedia Commons.