IHS: Western sanctions indirectly could hinder Russian oil, gas revenues

Western sanctions imposed against Russian government officials and business executives regarding Russia’s conflict with Ukraine could slow the availability of capital for Russian oil and gas companies trying to launch major new projects, IHS said.

The US and Europe earlier this month strengthened economic sanctions against Russia in response to Russia’s annexation of Crimea.

“While the sanctions so far do not impose any direct restrictions on the Russian energy sector, they undermine investor confidence, impeding Moscow’s efforts to generate economic growth through expanded investment,” said Julia Nanay, IHS Russia and Caspian energy analyst based in Washington, DC.

International sanctions could weaken the ruble, resulting in what Nanay calls “negative momentum for Russian economic growth.”

She said, “The sanctions on Russian officials, as well as ratings downgrades on investment, may negatively impact various big-ticket upstream and midstream projects perceived as vital for the Russian state–including gas pipelines, LNG projects, and offshore exploration.

Oil, gas revenues reliance

Exports of crude oil, natural gas, and petroleum products currently account for more than two thirds of Russia’s total export earnings. Oil is Russia’s top commodity for generating export and tax revenue, Nanay said.

Out of every $10 of Russian hydrocarbon export revenues, $5 are generated by oil, $3 by oil products, and $2 by gas, she said. In terms of federal budget revenue for Russia, almost 70% comes from oil-related taxes and duties, 18% from products, and 12% from gas.

“The Russian economy is stagnating: economic growth has slowed from 3.4% in 2012 to only 1.3% in 2013, and the rate is expected to deteriorate further in 2014 due to the exhaustion of traditional growth drivers, such as external demand and domestic consumption,” Nanay said.

Russia’s government prioritized a goal to attract investment, saying future economic growth is key to creating more manufacturing capacity overall, including petrochemical capacity.

“The Russian currency has been under increasing pressure since the summer of 2013 when investors started pulling out of emerging markets, including Russia,” Nanay said. “From June 2013 until February 2014, the central bank spent $38 billion supporting the currency while the ruble fell by just 9%.”

In an effort to contain inflation rates, the central bank raised its central interest rate by 1.5% to 7% earlier this month.

“The cheaper ruble can spell trouble for Russian industrial producers geared towards domestic markets, especially if much of their inputs, equipment, or technologies must be purchased in more expensive foreign markets,” Nanay said. “The weaker ruble also negatively affects consumer confidence, and therefore, domestic demand.”

Russia downgraded

Standard & Poor’s downgraded its credit outlook on Russia on Mar. 20 to negative amid concerns over possible economic consequences stemming from Russia’s annexation of Crimea.

On Mar. 21, Fitch downgraded its ratings of nine Russian state-owned companies, including OAO Gazprom, to negative from stable. Fitch also revised its outlook to negative from stable on 16 Russian banks.

“Foreign banks are likely to be reluctant to issue new or renew lines of credit, or they might seek higher interest rates driven by the increased risk premiums,” Nanay said. “This may affect the costs and availability of financing for companies in Russia’s oil and gas sector.”

She suggests debt-to-capitalization ratios could deteriorate for some companies. Russian stock values have declined since Feb. 28.

“Sanctions have come at a time when Russian oil and gas companies are implementing major projects of considerable importance to state economic goals, including offshore exploration, LNG development, and major pipelines,” Nanay said.

Current sanctions do not directly target any specific oil and gas company, yet the sanctions could slow the pace of development for many projects.

“The Ukraine crisis has also caused uncertainty for Gazprom’s midstream gas plans as the approval of the South Stream project would be suspended indefinitely and the approval of the agreement reached among the participants on full utilization of Nord Stream’s OPAL pipeline has also been delayed,” Nanay said.

Contact Paula Dittrick at paulad@ogjonline.com.

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