Russia Armors Rosneft Against EU Sanctions

3 MINS READSep 8, 2014 | 21:40 GMT
Russia Armors Rosneft Against EU Sanctions
The wall of the Kremlin can be seen from Rosneft's headquarters in Moscow in July 2006.

The European Union will wait to implement the newly approved sanctions against Moscow until after the Russia-Ukraine cease-fire plays out. In the meantime, Russia will try to protect one of its most important and strategic assets: state-owned energy firm Rosneft. The Kremlin understands it must insulate the company from financial retribution, even if that requires a bailout of nearly unprecedented proportions.

The European Union approved new sanctions Sept. 8, but the bloc will wait to see how Russia and Ukraine abide by the Sept. 5 cease-fire before actually putting them into place, according to European Council President Herman Van Rompuy.

Though details are unclear, the sanctions could add another 20 individuals to the European Union's blacklist. The bloc reportedly will enact other measures that could hurt key Russian energy companies. Brussels is probably considering placing financial restrictions on Transneft, Gazprom Neft and most important, Rosneft. If imposed, the sanctions will curb these companies' ability to buy and sell bonds and equity with maturities of more than 30 days in European financial markets.

Not Just Any Company

So far, the EU sanctions against Russia have been fairly innocuous, though they have lowered investor confidence. Nonetheless, the Kremlin has had to use money from its reserves to bail out companies in peril. For example, it has invested $6.6 billion into VTB and the Agricultural Bank, both of which were targeted by Western sanctions.

Currently, the Kremlin has $644 billion in reserves. While smaller withdrawals are customary, massive financial bailouts such as the one under consideration for Rosneft are rare.

But Rosneft is not just any company. Energy accounts for half of all government revenues. Of that half, 80 percent comes from the oil sector, and Rosneft is the largest oil firm in Russia. Unfortunately for Moscow, the company is also $40 billion in debt, $26.2 billion of which must be repaid by the end of 2015. And of that $26.2 billion, $21.2 billion is due within the next seven months. Most of this debt is owed to U.S., EU and Japanese firms.

Rosneft's Debt Portfolio

Rosneft's Debt Portfolio

In theory, Rosneft could cover most of its debt with the $20 billion it has in the bank. However, half that money came from prepaid loan-for-oil deals with Western trading firms. These firms reportedly have asked Rosneft to return these prepayments and have tried to cancel their contracts in light of the proposed sanctions.

In August, Rosneft petitioned the Kremlin for financial aid, asking for $42 billion to cover all its debts. Russian Economy Minister Alexei Ulyukayev said the Russian state would provide financial assistance, albeit less than the full $42 billion Rosneft requested. In response, Rosneft considered other options. The company is set to receive $63 billion by 2018 as part of a deal with China National Petroleum Corp., but it is unclear how much would be paid in the next six months.

In fact, Rosneft tried to court China pretty aggressively. The company offered China National Petroleum Corp. a stake in the large Vankor oil field, not to mention a 19.7 percent stake in Rosneft itself. But China has balked at similar offers in the past, and it may do the same this time around.

Cognizant of how precarious the situation has become, Russian Prime Minister Dmitri Medvedev recently suggested that the government may help Rosneft climb its way out of debt after all. He said the Kremlin would provide $40.6 billion from its National Wealth Fund over an unspecified period of time. Honoring this pledge would make this one of the largest targeted bailouts ever. It would also armor Rosneft against EU sanctions in the short term. The company could still suffer in the long term, however, if the energy technology export bans remain in place. Either way, the Kremlin knows it cannot let one of its prized possessions remain unprotected against future sanctions, and now it is being forced to proactively bolster Rosneft's defenses.

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