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Tuesday, September 09, 2014

EU divisions delay sanctions on Russia, likely to focus on Rosneft

The EU last night finally reached an agreement on the latest round of sanctions on Russia, although the members agreed to delay implementation for a "few days" to allow time for the ceasefire to take hold and to reconsider the sanctions on the basis of whether the ceasefire holds or not.

This is despite the fact that by almost all accounts fighting has continued in Eastern Ukraine over the weekend and into today. However, for now, all those involved seem keen to maintain the ‘ceasefire’ and suggest the deal agreed on Friday remains in place.

First a couple of thoughts on why both sides are so keen to keep the deal in place, despite seemingly flagrant violations:
Ukrainian government: Kiev is keen to push for stability for a couple of reasons. The upcoming election is weighing on thinking and if it is ever to be seen as viable and legitimate it must take place during a calm environment. Kiev may see the ceasefire as first steps towards this. Furthermore, it seems unlikely to be a coincidence that Ukraine found a renewed vigour for the ceasefire just as the IMF warned that the prolonged fighting could lead to another $19bn bailout for the country next year. Lastly, Ukrainian forces had been suffering heavy losses as Russian forces became more involved and bolstered the rebels – this ceasefire allows Kiev to regroup and plan how to deal with this new resistance.

Russia and the pro-Russian rebels: The ceasefire came at a perfect time for Russian President Vladimir Putin – right in the middle of EU sanctions negotiations and NATO meetings – and played on divisions within the two groups. It turned attention away from what was happening on the ground in Ukraine and the potential Russian influence. It allowed the rebels to regroup and prepare to take back some more of the land they had lost in previous weeks. There also seems to have been an increasing shift towards Mariupol which looks to be a new strategic objective for the rebels.
From the EU perspective, while the official line is that they want to give the ceasefire time, the more likely influence is the concern around the economic impact of sanctions and the potential Russia retaliation. The talks over the past week have reportedly seen the reemergence of significant divisions within the EU over sanctions (although they never really went away).

While the official details are yet to be released, the sanctions have been widely reported. We discussed the options in detail here, but the key points are:
  • Ban European financing with a maturity of over 30 days to Russian state-owned oil and defence firms. This will include Rosneft, Gazprom Neft and Transneft (the main oil pipeline operator). A large number of Russian defence firms are state-owned but few, if any, look externally for funding.
  • Ban European companies from providing services to Russian firms which are associated with oil exploration and production (be it deep water, Arctic or shale).
  • Expand the list of banned high-tech energy and dual use goods which cannot be exported by European firms to Russia.
  • Reduce the allowed level of financing to Russian state-owned banks from 60 to 30 days.
  • One option which is not entirely clear is a potential limit to the syndicated loans to Russian state-owned entities. This would essentially limit loans given by groups of banks (a fairly common practice used to spread the risk of lending over many parties).
Our initial feeling is that this will be a modest increase in the current sanctions. They remain very specific and targeted on a few state-owned firms, and particularly their access to European capital markets. They also remain only forward looking. Below are a few stats to give a feeling of the impact.

Above we have updated a graph we produced previously, which now shows which Russian state-owned banks, defence and oil firms have issued shares on the London Stock Exchange. In this instance, there is only one issuance to be added – the $10.65bn listing by Rosneft in 2006. Let's not forget that Europe gets around 35% of its oil from Russia, and while the global oil market remains much more fungible and varied than the gas sector, hitting Rosneft is probably the main story of these sanctions.

A quick peak at Rosneft’s latest financial statement also hints at why they are so concerned by potential sanctions that they have asked the Russian state for a loan of $42bn (around RUB 1,550bn). Out of RUB 2,179bn ($58.8bn) in loans and borrowings, around RUB 1,536bn ($41.5bn) is in the form of long term bank loans in dollars and/or euros. A significant portion of this is likely to have been provided from foreign banks, meaning Rosneft could face issues rolling over these loans. Furthermore, the amount they have requested almost exactly corresponds to their net debt levels (show in the chart below) with Rosneft even admitting that the main motivation for asking for assistance from the Russia state is to help finance its net debt amid the US and EU restrictions on its market access.

One final point to note here is that the sanctions on syndicated loans could be particularly important for a company such as Rosneft, not least because it is an instrument it has used previously, for example to help finance its purchase of TNK-BP.

As with all these sanctions while the direct impact could be limited it will further add to the indirect freezing of business between the West and Russia. Furthermore, Russia looks set to retaliate once again – with the idea of banning commercial flights from the West from Russian airspace being reheated. All of this could of course be offset by positivity if the ceasefire holds – but that remains a big if at the moment.


Jesper said...


Ignoring the strong language in the linked to article and reading it might be informative.

-The size of the approved loan?
-The ability to repay?
-If money is fungible then the IMF is currently funding a civil war?
-Where did the hard-cash lent to Ukraine end up? Oligarchs who then moved their capital out or?

& why can banks mix casino-banking with regular (boring and safe) banking while it is seen as too dangerous for oil & gas companies to own pipelines?

Rik said...

The main issue is that the financial blackhole (Ukraine) is now a financial blackhole with a rapidly decreasing economy, substantial war costs,and a lot of missing taxrevenue from some of its former largest paying provinces.
In no way the present IMF loans will be big enough (as they are based on completely different assumptions). Furthermore there is a stay together clause in the present IMF loans.

This will mean shortly there will be the need for more finance. Markets are basically closed for the Ukraine, so it will have to come from the IMF. Try to get this approved in 28 EU parliaments.
BRICS there are already urinated off because of the political loans to the Club Med and the votingright issue so this could really be fun.

Probably the gas/winter however will do the job first.

The longer this all takes the less stable the Uraine will get.