President Trump signed an array of sanctions against Russia, Venezuela, and North Korea, with those against Russia specifically targeting the country's energy industry. The idea of sanctions, theoretically, is to pressure a government into changing its behavior. In reality, U.S. sanctions on Russia do not seem to be having the desired effect, and it's business as usual for Russian oil and gas, according to a Reuters report citing a number of local industry insiders.
Russia's oil industry has been the target of U.S. sanctions since 2014, with punitive measures including a cutoff of E&Ps' access to foreign lenders, which constituted a major source of funding prior to the Crimea annexation. Oil industry insiders, however, claim to have found a way around this by reaching into their own pockets and the pockets of Russian banks.
Now, the biggest challenge, according to Reuters, is to find a way around a reduction of the period over which U.S.-based entities can supply Russian energy firms with funding. Up until August 2, this period was 90 days, which gave traders ample time for trade financing, a common practice in the oil industry that involves oil traders as third parties that pre-pay a cargo to the seller, to keep liquidity gaps under control, Reuters authors Katya Golubkova and Gleb Gorodyankin explain.
Now, this period has been cut to 60 days, which will make trade finance more challenging. In addition to using their own cash reserves or selling assets to fund trades, Russian energy companies might opt for collecting funding in small increments, which would involve more participants in a deal and will increase these companies' operating expenses. Despite this, Reuters' sources say, the industry will adapt to the new sanctions just like it adapted to the initial ones.
One recent report supported the suggestion that asset sales are on the table as a source of cash. Lukoil said it will sell its Swiss-based trading arm, Litasco, with Reuters quoting industry sources as saying the sale plan was in response to the new U.S. sanctions. However, Lukoil announced last year that it was considering the divestment of its downstream assets in Europe to focus on its exploration and production operations at home, so it might be a bit of a stretch to draw a causal link between the sale of Litasco and the new sanctions.
Gazprom also seems unfazed by the new round of sanctions. Yesterday, a company official said at a conference call that Nord Stream-2 will continue as planned because the formulation of the new sanctions allowed for more than a single interpretation.
Nord Stream-2 is a target of the sanctions, as they include measures against foreign companies funding Russian energy projects. Nord Stream-2 is a partnership between Gazprom and five European companies including Shell, Austrian OMV, German Wintershall and Uniper, and French Engie. Each of these companies will supply 10 percent of the new pipeline's cost.
European companies—and governments—are not too happy with the new sanctions. Last month, the French Foreign Ministry warned the new sanctions were illegal and could affect European entities and people. So did Germany's Economy Minister Brigitte Zypries. Russia's Prime Minister Dmitry Medvedev equated the new sanctions to a trade war, adding that the country will cope – and by the looks of things, it is.
By Irina Slav for Oilprice.com