The Strange World of Russian Sanctions Levies Uneven Penalties

by Stephen Bierman

A worker overseas the loading of oil supplies into freight wagons at the Lukoil-Nizhegorodnefteorgsintez oil refinery, operated by OAO Lukoil, in Nizhny Novgorod, Russia, on Thursday, Dec. 4, 2014. The share price at OAO Lukoil, Russia’s largest private sector oil producer, has gained 20 percent this year even in U.S. dollar terms because of the positive outlook for the company’s costs. Photographer: Andrey Rudakov/Bloomberg

(Bloomberg) -- The economic sanctions against Russia are producing a tangled web that often hurt Western companies more than Russian exporters.
More than six months after their initial imposition by North American and European nations in response to the Ukraine crisis, the way the measures have hit home is highly uneven with many Russian companies virtually unaffected.
In energy, for example, sanctions on the export of equipment and services involving deepwater drilling, shale development and offshore Arctic fields deny western companies the opportunities to profit from their unique technology. It’s having very little effect on day-to-day
operations for Russian producers though and oil output remains close to a post-Soviet high above 10 million barrels a day.

What’s proving more significant are the limits on state oil company OAO Rosneft from accessing U.S. capital markets. A measure that’s made almost all U.S. and European banks leery of Russia’s entire oil and gas sector.
“There are two directions for sanctions,” said Artem Konchin, an oil and gas analyst at Moscow-based brokerage Otkritie. “One is technology. It’s not important today but tomorrow it may hurt. The other is funding, which is a more immediate issue.”
One prominent victim: Yamal LNG, a $22 billion gas-export project backed by Russian gas producer OAO Novatek, Total SA, France’s largest energy company, and China National Petroleum Corp. The partners had expected to secure financing last year, now it’s aiming for the middle of 2015. As U.S. and European banks stay on the sidelines, the money is likely to come from the Russian government, export-credit agencies and Chinese lenders.

Project Financing

“The Chinese banks will be among the largest supporters of the project financing that we’re putting in place,” Total Chief Executive Officer Patrick Pouyanne said last week.
Beyond the patchy impact on the oil and gas industry, it’s striking that whole swathes of Russia’s business world remains relatively unscarred by sanctions.
United Rusal Co., the world’s largest aluminum producer, said last month it’s looking to refinance borrowing from Russian banks because it expects to get better rates from international lenders.
OAO GMK Norilsk Nickel, a miner controlled by Russia’s fifth-richest man, Vladimir Potanin, said last week funding from international bank remains affordable.

Ruble Slump

Unbundling the results of sanctions is also tricky because it takes place against the backdrop of the crash in crude oil prices and the accompanying slump in the ruble. That’s actually been a benefit for Russia’s oil exporters because while they’re getting less for their crude, their costs are plunging in local currency terms.
In dollars, costs at Russian oil fields have fallen to $2 to $8 a barrel, close to Saudi Arabia’s level of $2 to $6 a barrel, according to analysts from OAO Gazprombank, Alfa Bank and UralSib Financial Corp.
“Ruble-based lifting costs and transportation expenses dropped in dollar terms, helping Russian oil producers weather international sanctions,” said Alexander Kornilov, an oil and gas analyst at Alfa Bank.
The share price at OAO Lukoil, Russia’s largest private sector oil producer, has gained 20 percent this year even in U.S. dollar terms because of the positive outlook for the company’s costs.
Sanctions on offshore projects won’t prevent it from proceeding with the start of its Filanovsky project in the Caspian Sea this year.

Dollar Obligations

The story’s a little different at Rosneft, headed by Igor Sechin, a long-time associate of Vladimir Putin and a direct target for sanctions. It entered the crisis as one of Russia’s most indebted companies and has had to scramble to meet dollar obligations, borrowing in rubles and asking buyers to pay in advance for oil supplies.
Lower profits, specifically no profit in the third quarter its latest reported period, has knocked on to financial results of BP plc, which owns a 20 percent share in the Kremlin-led company.
It repaid $7.1 billion last week and has now met more than half its obligations of the year, it said.
The other impact has been on Rosneft’s plan for exploring the Arctic Ocean in partnership with Exxon Mobil Corp. The largest U.S. oil company was forced to withdraw from the venture after the first well made a large oil discovery in the Kara Sea.

Impact Builds

That setback points to the fact that the impact of sanctions will build over time, mixing with lower oil prices to hold back the development of new fields needed to replace aging deposits in Russia’s crude-producing heartlands in Siberia.
“Russia is in trouble because of the combination of low oil prices and Western sanctions,” Laszlo Varro, a division head at the International Energy Agency in Paris. “U.S. sanctions have an immediate effect on Russia’s ability to raise capital.”
Longer-term, “Russian companies have ambitious plans that rely on Western technology” for developments of liquefied natural gas, unconventional oil and the Arctic, he said.