PP RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHMO #3380/01 3290635
ZNY CCCCC ZZH
P 240635Z NOV 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 0848
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 003380
DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HEGBURG, EKIMOFF
EO 12958 DECL: 11/21/2018
TAGS EPET, ENRG, ECON, PREL, RS
SUBJECT: (C) OIL TRADERS: PIPELINE EXPORTS TO EUROPE STILL
OPAQUE; SEABORNE TRADE MORE COMMERCIAL
REF: A. MOSCOW 2880 B. MOSCOW 2632
Classified By: Econ MC Eric T. Schultz for reasons 1.4 (b/d)
1. (C) The oil trading business in Russia has long been opaque, benefiting politically connected firms such as the secretive oil trading firm Gunvor. Contacts tell us, however, that the business has lately become more transparent because seaborne trade is now largely conducted via commercial tenders and terms. They caution, however, that pipeline exports to Europe remain problematic. XXXXXXXXXXX, for instance, told us he believes the recent supply reduction to the Czech Republic (ref A) was politically coordinated. To the extent that a shift toward greater transparency has taken hold, it is another example of the role of international commerce and finance in forcing Russian businesses to behave commercially. End summary.
RUSSIAN OIL TRADING OPAQUE
2. (SBU) Oil traders at major Western companies explained to us recently that the market for physical oil trades is very developed globally and has two segments. One is comprised of major international oil companies who trade oil largely to optimize their own global operations -- to ensure the right amounts of oil are transferred to the right facilities at the lowest cost. The other is comprised of companies such as Glencore, Vitol, and others who serve as intermediaries simply trying to make money buying and selling oil using their marketing, shipping, or risk tolerance advantage.
3. (C) According to these experts, oil trading in Russia has had a reputation for secretive deals involving intermediary companies with unknown owners and beneficiaries. Oil exports from state-owned or state-influenced oil companies have reportedly been funneled through favored oil traders, potentially yielding billions of dollars of profits for these companies. Of particular note in the Russian oil trading business is the Swiss firm Gunvor. The company is rumored to be one of Putin’s sources of undisclosed wealth, and is owned by Gennady Timchenko, who is rumored to be a former KGB colleague of Putin’s.
4. (C) XXXXXXXXXXX estimates that Gunvor may control up to 50% of total Russian oil exports. He and his lawyer told us recently that it is impossible to know the extent of Gunvor’s penetration of the market, however, because the companies involved refuse to disclose this information. (Note: Gunvor claims in its glossy but uninformative brochure that it “handles a third of Russia’s seaborne oil exports.” End note.) As XXXXXXXXXXX has discovered, verifiable information on the volumes and terms of oil trades is very difficult to come by.
BUT BECOMING MORE COMMERCIAL
5. (C) Managers at two western oil companies, however, explained to us recently that oil trading in Russia has taken a welcome turn toward greater transparency thanks to open tenders for seaborne exports. XXXXXXXXXXX told us in a recent meeting that oil trading via Russian seaports is now, in his view, “completely commercial.” XXXXXXXXXXX explained that during the last year and especially since Medvedev’s inauguration, there has been a deliberate and successful push by the state to ensure transparency and commercial terms for most of the oil exported from Russia via ports.
6. (C)XXXXXXXXXXX claimed his view is not just conjecture. He said it comes directly from hard numbers and evidence that he sees from his participation in tenders by Rosneft, Lukoil, and other major Russian oil companies. He said that while
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Gunvor rose based on the “administrative support” of the GOR, the government came to realize it could no longer promote Gunvor at the expense of, for example, state-owned Rosneft and Gazpromneft. XXXXXXXXXXX said he believes the trend toward greater transparency in seaborne exports will continue XXXXXXXXXXX.
7. (C) XXXXXXXXXXX painted a similar picture of oil trading in Russia, calling seaborne trade “open and transparent.” He added that domestic trading, while depending on middlemen, is now also largely commercial. XXXXXXXXXXX told us the Russian oil trading market is among the most difficult in the world, but that it also offers good opportunities and that XXXXXXXXXXX has built a “healthy business” here. He said he has seen great changes in the 1 1/2 years he has been in his current job, and suggested that much of the change has come as a result of the government’s push for greater transparency in the economy as a whole. He added that he believes this push has largely been driven by the financing needs of the state-owned companies.
8. (C) XXXXXXXXXXX was less impressed by the degree of transparency in the business, even for seaborne oil exports. He told us recently that while there are more open tenders and more participants for seaborne exports, “the same firms seem to often win.” He suggested that favored firms may get inside information and a “second chance” to bid. XXXXXXXXXXX agreed, however, that there has been a trend toward greater transparency, but cautioned that it is far from an “open and commercial” market. He highlighted Rosneft as a company that has evolved toward greater transparency, and Surgutneftegaz (another reported source of Putin’s illicit wealth) as a company that has not.
PIPELINE EXPORTS TO EUROPE STILL A PROBLEM
9. (C) All three company representatives noted, however, that the trend toward greater transparency stops with seaborne trade. They all said Russian oil exports to Europe through pipelines, especially through the southern Druzhba pipeline, is still a very opaque business. XXXXXXXXXXX said pipeline exports, in general, are inherently more political than exports from ports, and that the trade through southern Druzhba is so opaque that “no one knows who is getting what.” XXXXXXXXXXX said many in the business “wonder what goes on between buyers and sellers” along that route.
10. (C) As an example, XXXXXXXXXXX specifically cited the recent oil supply reductions from Russia to the Czech Republic (ref A). He said that despite claims by officials that “middlemen” were the problem, he did not believe that to be the case. He said producers generally offer their oil using formulas that include some premium on top of a base price, depending on the export market. He explained that just prior to the supply reduction to the Czech Republic (where Shell has a stake in a refinery), all producers demanded the exact same premium, $1.25 per barrel, which he said was 4 to 5 times the previous figure for that route. He believed this price increase was coordinated, and resulted in the re-routing of oil exports away from the Czech Republic.
11. (C) XXXXXXXXXXX said that in the case of the Czech Republic, the refineries involved had access to other supplies, but that there was indeed an additional cost associated with obtaining alternate supplies. He said similar demands for higher premiums have occurred with regard to deliveries to a German refinery partly owned by Shell, but that the refinery had more limited access to alternatives. In such cases, XXXXXXXXXXX explained, managers have to decide whether to run refineries at sub-optimal levels, or pay the higher costs.
12. (C) XXXXXXXXXXX also noted that oil exports to Hungary, by Transneft decree, must go through “a certain intermediary” (Gunvor), which adds one dollar to each barrel. He said in a competitive market, by contrast, an oil trader might add anywhere from five to 20 cents “maximum” to the price of a barrel of oil.
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13. (C) Oil traders play an important role in the market, helping provide liquidity and optimizing the operations of oil refiners and producers. However, while it appears that the GOR has realized that the more transparent and commercial the trading business, the better it is for Russia’s oil sector, it unfortunately has not decided to apply this realization uniformly. Greed, corruption, and geopolitical concerns still trump efficiency, especially with regard to certain export routes to Europe and with regard to certain connected oil traders, such as Gunvor. End comment. BEYRLE
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