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. Last Updated: 07/27/2016

Glencore's $1Bln Oil Foray Tests Russian Arena

When giant commodity trader Glencore allocated $1 billion to get a foothold in Russia's lucrative oil business, it unwittingly entered an ownership battle that may prove a test case for Western investment.

Swiss-based Glencore, renowned for its connections and trading might, is now working to resolve the fate of midsized oil producer Russneft in a case that will gauge the investment climate for private money in Russia's natural resources sector.

The deal seemed simple: Glencore, which for decades had been trading Russian coal, oil and aluminum, lent more than $1 billion to Russneft from 2003 to 2005 in exchange for stakes in some units of the firm, controlled by billionaire Mikhail Gutseriyev.

But in 2007, Gutseriyev fell from favor. After being accused of tax fraud and seeing his son die suddenly in mysterious circumstances, he fled the country.

This left Glencore without its formerly trusted partner, facing ownership changes that would be a concern to any major lender, and not fully in control of the fate of its investment.

An aluminum magnate who has business links with Glencore briefly bought Russneft from Gutseriyev but had to sell it back.

Now, Russian media report that the fugitive tycoon is returning. Where does this leave Glencore's investment?

"We continue to work with the company and its key stakeholders to help resolve its complex financial situation," Glencore said in e-mailed comments about Russneft, adding that it remained a shareholder in units and a lender to the company.

"We are committed to working with the other creditors and hope to find a reasonable solution for all parties to restructure the company and develop its future production," Glencore said.

Global oil firms such as BP and Royal Dutch Shell have experienced setbacks in Russia in a decade during which the Kremlin has strengthened its grip over the energy sector at the expense of foreign majors and homegrown tycoons.

While foreign investors bemoan political risk, corruption and a weak judicial system, insiders often attribute failed deals by major public companies to a lack of experience and connections in the political and business elites.

But Glencore is different, insiders say.

"Glencore has been present here since the 1970s as Marc Rich," said a top executive with a Russian oil major, referring to the founder of Glencore, who sold his stake to management.

"So if they — with all their experience and contacts — got into this situation with Russneft, what signal does it give to smaller private-money people?

"It is one straight message: not to get involved."

Though modest by Russian standards, Russneft gave Glencore an equity foothold in the world's largest oil nation as part of its strategy to own assets ranging from aluminum smelters to sunflower crushers all over the world.

The deal guaranteed that Glencore would always have Russian oil volumes to trade as major rival Gunvor, co-founded by businessman Gennady Timchenko, grabbed a bigger market share.

Russneft's 300,000-barrels-per-day assets, once valued at more than $3 billion, would also bolster Glencore's own valuation as it takes steps toward a possible stock float.

But investors would want clarity over Glencore's role at Russneft. Insiders say that, as with any major Russian deal, only Prime Minister Vladimir Putin knows the answer.

Putin has never commented on why Gutseriyev, always loyal to the Kremlin, fell out of favor. He was nevertheless allowed to sell Russneft for about $3 billion to Oleg Deripaska, another tycoon seen as loyal to the Kremlin, sources said.

Glencore has a long history with Deripaska and owns a minority stake in his United Company RusAl. But Deripaska, facing major debt problems, was forced to sell Russneft back to Gutseriyev.

Officials have said nothing publicly about why the fugitive tycoon's fortunes have changed. While it is not clear whether Gutseriyev has returned to Russia, he has secured support from telecoms magnate and Kremlin ally Vladimir Yevtushenkov.

Yevtushenkov is buying 49 percent of Russneft — which owes about $1 billion to state-run Sberbank — and has hinted at a merger with his own assets.

Stanislav Bozhenko, a fixed income analyst at UralSib who covers Russneft's only bond, a 7 billion ruble paper maturing in December, says the market already expects Russneft to merge with Yevtushenkov's group, Sistema.

"It is easy to believe that foreigners find it hard to understand the nature of such deals," he said.

"There are many players here, including Deripaska, Sberbank, Gutseriyev, Yevtushenkov and politics. To bring Glencore into the dialogue — you will never reach a deal."

Glencore, however, is working to safeguard its interests. Even some of its rivals are confident that a solution will be found.

"Glencore are hardened fighters. Sometimes it seems it is all over for them, but they resurrect again. They know all about political risks, unlike oil majors," said a senior trader with a large Western oil company.