Sanctions hurt Russian credit rating, energy firms

Sanctions hurt Russian credit rating, energy firms
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With the situation in Ukraine entering its most difficult pre-election stage, the growing rift between Russia and the West is starting to affect everyday business.

Following the ineffective Geneva Agreement and continuation of conflict in eastern Ukraine, the United States and the EU decided on April 29 to impose a fresh round of sanctions on Russia, focusing primarily on the energy sector – Kremlin’s major source of income. Energy companies active in Russia will inevitably be affected, although it is still too early to fully grasp the potential costs for their businesses.

The chief victim of the latest round of sanctions is Igor Sechin, the CEO of Russia’s largest company Rosneft and a close associate of President Putin. Although the company itself is not affected, there are mounting signs that the sanctions are beginning to bite into its everyday business. As an immediate effect, the rating agency Standard and Poor has slashed Rosneft’s credit rating from BBB to BBB-.

According to Reuters, the company is struggling to get prepayment loans worth up to $4 billion in order to finance its oil purchase deals with the BP and Swiss energy trader Vitol. At the same time, sanctions might postpone Rosneft’s plans to buy physical oil trading operations from the Morgan Stanley bank.

Sanction fallout in the West

In spite of the relatively mild measures, the sanctions are slowly but surely starting to erode business confidence and eat away at Russia’s economy. They also show differences in attitude between the Western political and business elites. British foreign secretary William Hague recently argued that any damage from Russian sanctions to the UK economy is a “price worth paying.”

The heads of Western oil companies would probably disagree. BP is a good example: with around one-third of its global oil production linked to Russia, and 20% stake in Rosneft’s ownership structure, the company could be one of the largest collateral victims of Russia’s clash with the West. Tougher sanctions could also affect other energy giants, such as Exxon Mobile and Royal Dutch Shell, with their large operations in Russia.

Specific targeting of the country’s oil sector is a tactic to cripple Kremlin’s key source of income without directly endangering European energy supplies since Europe does not exclusively depend on Russia’s oil, and it can get it relatively quickly from other sources. This would explain the fact that Gazprom’s CEO Alexei Miller was omitted from the latest round of sanctions, considering the company’s prominent role in European natural gas supplies.

Events on the ground could accelerate response

However, all of this might soon change as politics continues to dictate events. As the conflict in Eastern Ukraine intensifies with the approach of the Ukrainian presidential elections set for 25 May, the potential for a new round of Western measures against Russia is closer than ever. Furthermore, according to Western officials, they will target entire sectors of the Russian economy, including the energy, financial and defence sectors.

This might turn Moscow into a hostage of its own bellicose rhetoric, and force it to make some difficult decisions. Further attempts by Russia to destabilize the country and disrupt presidential elections, either by continuing to support pro-Russian separatists in the east and south of Ukraine, or by military incursion of any type, will force a wider array of Western sanctions and plunge the country into deeper economic and political isolation.

On the other hand, the interim government in Kiev will almost certainly try to establish its authority in the rebellious eastern and southern counties, even by force if necessary. Without direct help from Russia, it is unlikely that pro-Russian forces in Eastern Ukraine can resist well-organized military action of the Ukrainian security forces.

Consequently, the restoration of Ukrainian authority over disobedient provinces and a successful outcome of the May elections will significantly reduce Russia’s ability to direct events and influence Ukraine’s future.

In that sense, the following fortnight will be crucial for Ukraine, but also for the future of Western relations with Russia. The Ukrainian crisis has already dramatically changed the dynamics of Russia’s post-Cold War interaction with the West in political and security terms, therefore business cannot simply remain immune to these new realities.

Categories: Europe, Politics

About Author

Ante Batovic

Ante was previously a lecturer in International History at the University of Zadar where he specialised in Cold War and East European history. He was also a visiting fellow at the LSE IDEAS centre and the fellow of the Robert Schuman Foundation in the European Parliament. He holds a master’s degree in Global Politics from the London School of Economics and a PhD from the University of Zadar.