Any response would likely boomerang on Russia – the partnership between Rosneft and ExxonMobil is a case in point. The United States has hit Russia with a third round of sanctions. This time the Americans went with a higher caliber weapon, targeting Russia’s biggest energy companies (Rosneft and Novatek) and banks (VEB and Gazprombank).
Any response would likely boomerang on Russia – the partnership between Rosneft and ExxonMobil is a case in point.
The United States has hit Russia with a third round of sanctions. This time the Americans went with a higher caliber weapon, targeting Russia’s biggest energy companies (Rosneft and Novatek) and banks (VEB and Gazprombank).
Previous rounds of sanctions went after individuals rather than companies and could not seriously disrupt the Russian economy. Now the sanctions are being ratcheted up. But while there are powerful emotions surrounding sanctions and events in Ukraine in general, it is important to focus on the facts.
And the fact is that the sanctions against Rosneft, Novatek and Gazprombank are weaker than those that were imposed earlier on AB Rossiya, Stroytransgaz and various Russian defense companies. Typically, when the US sanctions an individual or company it means they are added to the SDN List (Specially Designated Nationals List), which freezes any assets held in the US or under the control of US citizens and bans any US representatives from doing business with the names on this list.
Thus, SDN listing would deny Rosneft the ability to sell oil for dollars, while Gazprombank would not be able to perform dollar transactions for its clients. Obviously, this would be a heavy blow to their bottom line. But neither Rosneft, Novatek, VEB nor Gazprombank were added to the SDN List and all can still perform routine commercial transactions. Rather, under the latest sanctions, US citizens are prohibited from taking part in any transactions with these companies that involve new loans to be repaid over 90 days, or any operations involving new stock capital, property or related shares.
The main problem posed by restricted access to foreign loans is not that these companies cannot issue securities in the United States (although they won’t be able to under the circumstances). The main problem is that American investors and asset management companies will not be able to buy corporate debt or obtain syndicated loans from them, no matter where the securities are issued or what bank is in charge of the syndicate.
Recently BNP Paribas agreed to pay nine billion dollars in fines for a similar infraction. Now banks are choosing to show caution rather than risk annoying the US Treasury Department. This is significant, as American companies are key players in most segments of the financial markets. As of late 2013, US asset management companies handled $40 trillion worth of assets or over 60% of the entire world market.
Now they will be unable to invest these funds in the bonds of Russian companies on the SDN List, which means that the cost and terms of lending will become considerably worse. On Thursday, after the sanctions were announced, the market return on Rosneft corporate dollar bonds went up by almost one percentage point. After the initial sanctions in March and April, the market return on the Eurobonds of Russian fuel companies increased by 150-200 basis points. “Pinpoint” sanctions against companies are likely to cause similar or even bigger spikes in interest payments. Companies will have to pay more to service their debts, which will eat into their profits.
It will also become much more difficult to secure financing in dollars, as US financial institutions would be involved in any transaction even if they are not the lenders themselves. At the end of the second quarter, the four targeted companies had bonds and dollar-denominated loans worth almost $90 billion, including Rosneft’s $61.7 billion and Novatek’s $3.8 billion.
Rosneft is carrying significant debt, though it mostly consists of long-term syndicated loans or advance payments from customers.
US sanctions apply to new debt, but that also complicates refinancing of existing debts. In 2015, the four companies are expected to refinance $16.5 billion of their debt, of which Rosneft accounts for $14 billion. However, Rosneft has already set aside $20 billion for this purpose and can borrow from its Chinese clients.
This is why the sanctions do not threaten the financial security of the blacklisted companies. There is no direct risk of default, though ambitious investment projects will face additional hurdles.
Rosneft, for instance, works closely with international companies, including its strategic partner ExxonMobil. In recent years they have set up several joint ventures that are supposed to implement new projects. In 2013 they signed a contract allowing ExxonMobil to assist in developing seven sections on the Russian shelf. The company plans to invest billions of dollars in exploration under the contract, with $3.2 billion earmarked for exploration and development in 2011 alone. The first well is supposed to be drilled this year on the shelf of the Kara Sea. Last year the two companies signed an agreement to form the Arctic Center, with ExxonMobil providing $450 million in funding.
Will the sanctions against Rosneft mean that ExxonMobil will not be able to fund these joint ventures? It’s not entirely clear. A full legal analysis of the agreements and US laws on sanctions will be required, as the United States has never before resorted to sectoral sanctions that limit access to financing.
But even in the best case scenario, it will mean delays in launching new projects and additional costs for all participants.
Everyone is debating whether Russia should make a “symmetrical response.” But Russia has extremely limited capabilities in this regard and there is no point in using them. And the boomerang effect would inflict more pain on Russia than the United States. It would be a huge mistake to run ExxonMobil out of Russia to retaliate against the US government. Sanctions aside, Rosneft’s cooperation with ExxonMobil promises to yield benefits for decades to come.