Little Short-Term Impact From New Sanctions

BMI View: The new sanctions introduced by the US on Russia will have no significant impact on ongoing oil and gas operations. However, the growing divide between Russia and the US and EU, will push the country further east, increasing its dependency on China for finance and technology.

The US has further raised its package of economic sanctions on Russia due to Moscow's continued refusal to play a role in reining in rebels in eastern Ukraine. The US reported that on July 16 2014, around 11,000 Russian troops returned to the Ukrainian border and that weaponry was crossing into eastern Ukraine. The tragic crash of flight MH17 on July 17 has only worsened this situation.

The new set of sanctions imposed by the US is mainly designed to restrict the access of Russian companies from medium and long-term US capital markets ( see 'US Sanctions No Threat To Russia's Trade', July 17). Any new debt issued by Russian companies subject to sanctions will not be qualified on JPMorgan bond indexes. These are the most widely used emerging market debt indexes.

Unaffected
Russia Oil And Gas Production (000b/d, bcm)

BMI View: The new sanctions introduced by the US on Russia will have no significant impact on ongoing oil and gas operations. However, the growing divide between Russia and the US and EU, will push the country further east, increasing its dependency on China for finance and technology.

The US has further raised its package of economic sanctions on Russia due to Moscow's continued refusal to play a role in reining in rebels in eastern Ukraine. The US reported that on July 16 2014, around 11,000 Russian troops returned to the Ukrainian border and that weaponry was crossing into eastern Ukraine. The tragic crash of flight MH17 on July 17 has only worsened this situation.

The new set of sanctions imposed by the US is mainly designed to restrict the access of Russian companies from medium and long-term US capital markets ( see 'US Sanctions No Threat To Russia's Trade', July 17). Any new debt issued by Russian companies subject to sanctions will not be qualified on JPMorgan bond indexes. These are the most widely used emerging market debt indexes.

The implementation of sanctions will restrict some of Russia's largest companies from attaining finance, over the longer term limiting the ability of companies to push forward with growth projects. Rosneft, Novatek and GazpromBank are among the companies targeted, as well as other banks and defence companies. Rosneft shares fell 5% on receipt of the news, while Novatek fell 7.5%. Combined the two companies are responsible for over 9% of Russian GDP and leading some of the largest expansion projects in the domestic oil and gas industry.

Current Operations Unaffected

Apart from knocking the share price of some major companies, the immediate impact of the sanctions will be limited. There is no restriction on US companies or individuals from doing business with Russian companies and we expect operations to continue as normal. The new sanctions are therefore more of a signal that the US is willing to enhance pressure on Russia and that there could be more steps taken if no improvement is made to the situation in eastern Ukraine. We have not altered our Russian oil or gas forecast as a result, though note downside risk over the longer term, particularly as high cost developments may be impacted by the restricted financing ( see 'Credit Crunch Will Prompt Project Delays But Not Cancelations', 20 May).

Unaffected
Russia Oil And Gas Production (000b/d, bcm)

Novatek has said its key project will continue unaffected by the new packet of sanctions. The company is partnered with Total and CNPC on its Yamal LNG project and may be able to find alternative sources of finance for this project if required.

Rosneft is also likely to be unaffected as the company is due to receive a USD63bn payment under long-term crude supply deals over 2014-2018. The money will mainly come from Chinese customers and will cover around 97% of Rosneft's debt over the period.

China And The EU

The EU met in Brussels on July 17 to discuss the further expansion of sanctions on Russia, though it remains to be seen what will emerge from the talks. The EU has far greater trade links with Russia and is more vulnerable to both political and economic disruptions in the country. This will limit the extent of what the EU is practically able to do. That said, if the EU chooses to follow US tactics to restrict debt access, it would have a more significant impact Russian operations. BP has a near 20% stake in Rosneft and around USD15bn worth of finance arrangements for oil related projects. EU sanctions may also impact Total's investment in Yamal LNG.

Such a development could leave Russian companies far more dependent on China, particularly if they choose to press ahead with the high cost Arctic shelf and LNG developments currently planned. While Russian-Chinese relations have become closer in recent years, Russia's dependence on the country - in the face of the growing divide with the EU and US - is also increasing. Chinese banks may be among the few options for Russian companies to raise finance, and knowing that, less competitive rates of interest could be charged.

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Related sectors of this article: Oil & Gas, Projects, Energy Policy
Geography: Russia, China, United States
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