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Glencore’s $11 Billion Russian Deal Raises More Questions Than It Answers

Rosneft CEO Sechin (r.) has been the power behind Putin's throne for a decade.ALEXEY DRUZHININ AFP/Getty Images

When the news broke late on Wednesday in Moscow, Russian and western media trumpeted it as the energy deal of the year: Glencore (GLNCY), the world’s biggest commodities house, and the Qatar Investment Authority had agreed to buy a 19.5% stake in Rosneft, Russia’s national oil champion, for 10.5 billion euros ($11.1 billion).

Glencore–so the narrative went–was returning to its dealmaking roots, starting to grow again after two years of brutal retrenchment to cut a crippling debt burden. (For more on that retrenchment, read this recent Fortune feature.) Russia, meanwhile, had broken its international isolation by attracting major foreign investors, filling a gaping hole in its budget.

But while the numbers are certainly big enough to justify the billing, the deal is almost certainly not what it appears at first sight–and the still-murky reality of it most likely has as much to do with geopolitics as with business.

For starters, the two sides of the deal are saying very different things about it. In a televised excerpt of a meeting between the two, President Vladimir Putin “congratulated” Rosneft’s powerful CEO Igor Sechin on the “completion” of a deal worth 10.5 billion euros. (Sechin has been the power behind Putin’s throne ever since he orchestrated the Russian government’s seizure of Yukos from the oligarch Mikhail Khodorkovsky 13 years ago.)

However, Glencore yesterday said it is only in “final-stage negotiations”of a deal that it expects to close in mid-December, and that the value is only 10.2 billion euros.

Sechin told Russian media that the two buyers would contribute equally to the deal. But Glencore, under London Stock Exchange reporting obligations, said it would only contribute 300 million euros in equity (taking a tiny equity interest of 0.54%, and even that only “indirectly”), while the rest of the money was provided by “QIA and by non-recourse bank financing,” the latter being a loan that effectively insulates Glencore against most of the risks of owning Rosneft shares.

What is clear is that one part of the deal–a five-year agreement to trade 220,000 barrels a day of Rosneft’s oil–will restore Glencore to the position of the world’s biggest trader of Russian crude. Analysts at Bank of America Merrill Lynch, in a back-of-the-envelope calculation, speculate that, if it can make $1 a barrel on that flow, Glencore will earn $400 million over the five years–”a very compelling return on $323 million in equity.”

One oil trading executive that Fortune spoke to reckoned that such a profit margin “sounds high,” but that everything depended on the deal’s pricing formula. Either way, he noted, securing such huge volumes of oil for its trading operations was a “huge” achievement for Glencore.

But if Glencore isn’t providing the 10 billion euros, who is? QIA hasn’t commented and didn’t respond to a request for comment from Fortune. Neither did Italy’s Banca Intesa SanPaolo, which Fortune understands to be the arranger of the financing.

In recent weeks, Moscow bankers had speculated that Rosneft would have to buy the shares from the government’s holding company itself, because it wouldn’t be able to find a foreign buyer. And indeed, Rosneft this week raised some $9.4 billion through the sale of local currency bonds, at a time when it has no other conceivable use for such a huge pile of cash.

No-one at Rosneft was available to comment Friday. (Fortune will update this article to reflect any later responses from the parties involved.)

Cynics suspect that the investors who took Rosneft’s paper are just other state-controlled Russian institutions who will dump the bonds at the Central Bank in due course. If the Central Bank creates money to refinance the bonds, then it will, effectively, be printing money to fund the government’s budget deficit. But the Kremlin is afraid of doing that openly: the ruble nearly collapsed two years ago when Rosneft used a similar trick to refinance its $55 billion acquisition of TNK-BP.

A Central Bank spokeswoman told Fortune Friday that its board hasn’t yet approved Rosneft’s bonds as eligible collateral for its credit, and that it’s not clear when it will take any such decision.

But it’s unthinkable that anyone in Russia will try to stop the deal going through. Only a month ago, Economy Minister Alexey Ulyukayev was sensationally arrested after trying to stop Rosneft buying another oil producer, Bashneft. Ulyukayev has been accused of extorting a $2 million bribe from Rosneft to approve the deal.

One final aspect of the deal also has heads spinning. Moscow has accused Qatar and other Gulf governments (notably Saudi Arabia) of supporting “terrorists” in Syria and rebels in other countries affected by the Arab Spring. That Moscow would sell a big chunk of its crown jewel (below market) to such a buyer illustrates how badly it needs the money.

“Qatar and Russia may have been opposing sides on the battlefield in Syria but have significant mutual interests elsewhere, including gas production in particular,” said Emad Mostaque of the London-based consultancy Ecstrat. “Russia is stepping into the vacuum left by the U.S. in the Middle East, and it makes sense for Qatar to build stronger relationships as a result.”