Thursday, 8 December 2016

The Oil Circus

So Igor Sechin has been busy in deal-making recently, with a rabbit out of hat today in selling about one fifth of Rosneft.

These have been the big ticket deals recently.
#1. 6 Oct: Rosneft buys Bashneft (50.08% at Rb 300b or about $ 5.3b)
#2. 15 Oct: Rosneft and Trafigura-UCP consortium buy Essar's Indian refining & retail business (98% at $ 6.4b equity valuation, 49% due to Rosneft and 49% to Trafigura-UCP). Parallely India’s state-owned energy companies were investing $5.5 billion to buy stakes in Rosneft’s Vankor and Taas-Yuryakh fields.
#3. 7 Dec: Rosneft sells 19.5% stake to Glencore & Qatar SWF at $ 11.3 b

These are apart from other recurring ones, for example where short term financing was provided by Trafigura to Rosneft on crude oil and diesel exports.

Few observations:
  • #1 was completed just before final announcement of #2 which was long time in making
  • #3 was necessary to fund state budget. The alternate was share buyback by Rosneft which would have been circular logic because how do you fund that? It couldn't be state bank because that would inevitably crowd out local lending, not to say it would crowd out state borrowing for plugging fiscal deficit.
  • #3 could happen only after #1. Such intent was not only clear from Sechin, it was publicly stated by Putin too. So this was with full blessing from the beginning. This also meant steamrolling over domestic opposition, possibly backfiring on the meddlers.
  • Arguably #2 was not needed and proceeds from #3 minus #1 would have gone to state coffers. But Putin-Sechin had other plans probably. Either getting outbid by Saudi was not an appetising prospect, or genuine synergy was seen to invest in downstream, or just getting a footprint in the biggest driver of demand growth was paramount. All of the above apply of course, but there must have been a dominant thought.
  • Rosneft kept minority holding in #2 to help Indian banks not worry about US sanctions. Trafigura may sell their stake to Rosneft at a later date. Presumably this is just hand & glove arrangement or Trafigura were not keen to get dragged into bidding up to a price they are not willing to pay.
  • Likewise Qatar may have arrangement to take Glencore's stake in Rosneft at a later date.
  • Where does #3 leave Trafigura though? Even if Trafigura saw this coming and decided not to participate, it could be perceived as a snub to see your BFF standing you up for a rival trading house and even ready to reduce your pie of long term supply deals.
  • While Glencore gets seen as a winner here, since fair amount of time they have had their own pressures on reducing debts and maintaining cashflow. So it is interesting to see that Glencore's description of the deal is focussing on rights issue and projecting upside at minimal risk, keeping their shareholder guidance consistent.
  • Qatar's participation gives more colour to OPEC-Russia dialog recently, even though action has been missing and genuine mistrust prevails, probably for the right historical reasons. Qatar perhaps risks crossing Saudi and GCC because Russia has earned brownie points for getting Iran & Saudi in talking terms and land the OPEC deal.
  • It also gives an additional flavour to 'each one for his own' policy. Saudi decided in 2014 to pump at will and flood the oil market. Now Saudi wants to IPO Aramco and others are frontrunning them in the capital market. Rosneft deal today is a QIP. US Shale companies have been hedging the heck out of future production. Junk bond yields have fallen again.
In summary oil market today is still each one for his own, with traditional alliances getting tested and new ones being formed only to be tested shortly. To quote, The chess board is shifting rapidly in the region and for oil markets.

Giant disclaimer: All the information cited above is in public domain. Any assumption/presumption is my own, without any special access. I have just tried to connect the dots.

Wednesday, 22 June 2016

Brexit debate - perspective from an Indian Immigrant

Unless you live in a bunker you would surely have heard of the word Brexit in recent days. I started biased towards OUT camp because in general I prefer decentralisation of power, leaving the sinking ship of EU or at least sending a signal of disapproval. Over days of campaigning (and much before the unfortunate murder of Jo Cox) the Leave campaign got too poisonous and the disapproval is perhaps heard in EU, making me sit on fence again.

Regardless I have had numerous interesting conversations with friends, colleagues and business contacts on this. Inevitably there comes a point where we draw comparison to India's unity in diversity. And so this post will often touch on comparison of India to the EU project. Having watched the passions rise in the BBC debate in Wembley over key campaign issues (Economy, Immigration and UK's place in the world) I want to touch those topics and introduce few more. Skip to the end for spoilers.

Full disclosure: I benefit from strong GBP. I (potentially) benefit from non-EU immigration made at par with EU. I may have less personal stake compared to other voters, in UK's long term future. Completely my own personal views.

Economy: I believe in the concept of a trade union because it brings economic benefits for all. The Indian equivalent is the benefits that GST is likely to bring. This creates winners and losers just because it disrupts status quo and therefore there have been oppositions and holdouts to GST, but it is a fundamentally sound economic idea. Now it will be a hard grueling road for UK to renegotiate a trade deal with EU more so than newly negotiate with other countries. Economic interests aside, EU will try to make an example of UK to keep its union from falling further apart. Arguably EU has more to lose in doing so because it has trade surplus with UK but that cost may be imposed over taxpayers as in past bailouts, keeping the political interests supreme. I think Brexit is worse for EUR than for GBP. It can easily set stage for further disintegration and members have no political capital left after fighting bailouts and forced immigration. UK can't move out of the neighbourhood.

Immigration: The debate around this often reeks of politics Shivsena and MNS in Mumbai. Even being a Marathi-speaking local I cannot endorse the ideas of preferring local Mumbaikars over immigrants. I was born in Mumbai, but my parents were not. Even if they were, our ancestors would not have been at some point. By extension we are all Africans. Where do we draw the line? Further in a globally integrated economy if the local job is not efficient, it WILL move to another place. Now the rhetoric has thankfully toned down to celebrating contribution by immigrants but at a cost of distraction from few other key issues. For example why single out Turkey's possible membership? What about Syrian and Iraqi immigrants whose displacement was caused by wars supported by UK in past? A point based system that you claim allows you to control the sectors of employment is only a patchy solution and creates separate problems in my own experience.

What I find missing in the debate is discussions on political narrow interests, lobbying/bullying by business interests, and political vs economic union. Fair enough that campaigners would never speak about these issues, but at least the electorate should be thinking about them.

Political interests: I cannot believe Boris Johnson want to leave EU because he genuinely feels UK is better off that way, rather than him personally. Most of the UK lawmakers have too much at personal stake to exit and disrupt status quo. Farage is a lunatic. Merkel wants UK to stay not because she feels it is better for UK, but because she then continues to enjoy the clout in EU. I can go on. Perhaps power should be decentralised to keep people close to decisions, only unifying strategic interests such as intelligence, security. But should I give backing to a rabid powergrab attempt?

Business lobbying: EU does not do justice to fair trade by having loopholes that allow Dutch ATRs, Double Irish arrangement and so on. Any reform would be unthinkable in the maze of its bureaucracy. On the other side of the channel UK has its own secret tax havens like BVI, Bermuda and wait for it... City of London. Cameron's renegotiation with EU in fact secured the city's interests. Perhaps bigger political block can stand up to big business better. But it cuts both ways. The bigger the union, the easier it is for big businesses to hoard the lobbying power and crowd out small businesses. It is hard to say what is better in this regard, power centers from business and politics will emerge out of any starting condition. It is down to institutions to keep checks and balances. However the institution on both sides is indeed politics held hostage to narrow business interests.

Union/Sovereignty: How far can an economic union go if there is no political union? Of course there are likes of NAFTA and bilateral trade deals where politics does not integrate, but those are negotiated bespoke. How big a union is too big that it becomes one-size-fits-all and it cannot fit all? Indian comparison here is straightforward in political union - the constitution divides topics between union and states. While the Supreme Court can overrule a state High Court but it will still abide by the constitutional division (legal experts- correct me if this is wrong). Likewise in European case ECJ can overrule UK laws but that's where the analogy stops and becomes a patchwork. The Lisbon Treaty which is equivalent of a common constitution is not fully ratified (and certainly doesn't look to be in near future now). In fact UK has renegotiated that it will not have to integrate politically. So till when can this last? What happens if a trade dispute occurs, UK law & EU law interpret the matters differently and there is no commonly agreed constitution about division of subjects? Fundamentally do the politicians have an incentive to lose their power away to the union? Something has to give.

In conclusion I find the head voting for remaining and heart for leaving. India found its togetherness in fighting the British for independence. That sentiment overruled the differences in languages, cultures across regions (helped by Patel's strong-arming). This was an emotional bond. The European Union started based on rational (economic) principles rather than emotional, perhaps that is why I don't find a sense of European-ness in UK which has been Euroskeptic in general. And that's how BoJo's rhetoric of independence day gets a standing ovation because it generates an emotional response.

I will still sit on the fence for another day. Maybe all this is a non-event. In the long run everyone is dead. Meanwhile I will leave you with these questions.

If you are a Bremainer:
  • Do you really believe you can continue to be economically integrated without a political union? If yes how will you bring democratic accountability in EU?
  • If elites (politicians, big businesses) favour IN, isn't there an argument that common person is better off OUT?
  • If the pressures on social systems can be handled from own budget, what was the parliament doing so far and what will change after IN vote?
If you are a Brexiteer:
  • Can you really fence yourself out of trouble if EU falters or worse, disintegrates? UK itself can disintegrate regardless of EU's fate. Do you have thick enough skin taking such blame?
  • EU is a declining power globally, but so is UK. Can you really take control? Why throw a spanner in the wheel if many things are not that bad?
  • Do you not think Leave campaigners are in a desperate power grab attempt? Won't a Leave vote give legitimacy to fringe elements like UKIP?

Sunday, 17 January 2016

SELCO and For-profit Social Enterprise

I have been a fan of the concept of for-profit social enterprise after seeing Prof Trilochan Sastry's work on Commodity Cooperatives (CCD). CCD works for creation of wealth for the poor by acting as a catalyst and as capacity builder and let the poor manage their own affairs. For example farmers in AP districts form a cooperative, operate it and add value to their production by adding collective capability to process their turdal (arhar) in their own daal mill. Another district builds a different cooperative for different crop and purpose.

The most important part for me was the grounded approach, and the philosophy that it's arrogant to tell poor how to improve their lives. One should rather assist them in institution-building and they will manage things better than external agencies can.

Recently I came across an article about SELCO who are also one such enterprise. They sell solar equipment to poor which can improve their livelihoods. The important bit again is the philosophy of respecting the intelligence of poor and providing them systems or commercial business models.

SELCO founder Harish Hande makes quite a few interesting observations in this lecture (Part 1 - starts around 18:30, 2, 3, 4). This article is also a good perspective of his work and thoughts.
  • Business models for poor are fundamentally different than classic business studies and need to be innovated in a decentralised way. Therefore the models for poor cannot fundamentally scale-up (only the abstract principles behind them can scale).
  • Poor pay for energy more than average person - 1/8th of income in the example he gives. So the question of affordability is twofold - low income but also higher cost (last mile delivery, financial risk, contract enforcement and so on). Most often poor are willing to shore up the ability to pay but there are not enough market solutions for the cost part. This is where SELCO found that their solar energy solution can be cost competitive if a financial model can be provided. His favourite example - a fruit vendor could repay Rs 10 a day but not Rs 300 a month.
  • India keeps saying that its energy intensity is very low and development of poor needs coal power, but there is a stark divide in which urban/rich India consumes energy in line with developed economies and the power from coal plants is not reaching the poor anyway. In that sense the rich in India are hiding behind poor to make an excuse for cheap energy.
  • "I went to IIT [only] because 600 million Indians did not write [JEE]". The number is debatable but the point is the uneven field of awareness/opportunities.
  • 'Fortune at the bottom of pyramid' is coming from non-expendable income. Providing a poor person a choice to buy Re 1 shampoo sachet is fine but at what cost is the choice for clean water? The fortune is larger in enabling them instead of selling to them.
  • Microfinance models are often too expensive for asset financing, it may work for working capital.
You can disagree with his overall slant of moral obligation (which is perhaps only a perception because of his style of rhetorical questions and sarcastic remarks) but the points are quite valid. For example I didn't see the moral obligation of us being a product of subsidy and therefore giving back to society is as black and white (perhaps he also doesn't). Those who work for their own or corporate also create value in society. The point remains that the value created by such a social enterprise is better in broader sense than the value created for shareholders. The broader sense can be improving livelihoods, providing economic freedom/dignity, financial inclusion or even macroeconomics (poor have higher propensity for consumption because they are fulfilling needs before wants). It is an individual choice in selecting the value creation.

Coming back to the for-profit part - SELCO are providing the product at a margin which is also shareholder value. But such a shareholder is fundamentally making the choice of making less margin for a longer term to fund such business. The margin part is important for market efficiency and avoiding wrong incentives / behaviours (for example in a subsidised model poor have less incentive to repay). There will be a subjective assessment of how much margin is right - setting the right incentives but not usurious - again there won't be a theoretical solution here.

Overall a very inspiring example - of a for-profit social enterprise creating value for poor and of a person with grounded and no-nonsense views of the world.

Update 20/1: M-Kopa in Kenya also offer such product with additional accessories (Hat-tip: Himanshu). Poor in Kenya have less access to banking compared to India so the company had to finance the sales themselves. On the flipside the mobile payment systems (M-Pesa) is much more widely used in Kenya so collections are easier.