New U.S. sanctions
On July 16, the U.S. imposed additional sanctions against Russia for their continued support of pro-Russian separatists in Ukraine. These sanctions primarily target the Russian economy and flow of investments into it. They’ve mainly been issued against companies in Russia’s defense industry and energy industry. They’ve also been issued against important Russian banks and individuals.
Since the U.S. revealed its new list of sanctions on July 16, U.S. listed exchange-traded funds (or ETFs) investing in Russia such as the VanEck Vectors Russia ETF (RSX), the iShares MSCI Russia Capped Index Fund (or ERUS), and the SPDR S&P Russia ETF (or RBL), which are heavily invested in top Russian firms like energy giant Gazprom (or OGZPY) and Rosneft Oil Co. (OJSCY), have seen their prices slump. These ETFs have seen a price decline of 7.48%, 7.52%, and 7.68%, respectively, from July 16–25.
Sanctions imposed against Russian energy companies
The U.S. has issued sanctions against two of Russia’s major energy companies. The sanctions prohibit new debt with more than 90 days maturity from U.S. institutions for OAO Novatek and Rosneft.
Novatek (NOVKY) is a key energy company for Russia. It’s the second-largest producer of natural gas in Russia. A close associate to President Putin, Gennady Timchenko, who was already put on the sanctions list this year, owns a 24% stake in the company.
Rosneft (OJSCY) is a titan in the global energy industry. It had sales of $40 billion in the first quarter, which is roughly 8.6% of Russia’s gross domestic product (or GDP). It supplies virtually every major international oil company and has joint projects with many of them. It’s run by Igor Sechin, another close Putin ally who was targeted in a previous round of sanctions. Rosneft is the world’s biggest oil company listed on a stock exchange in terms of output. It single-handedly produces 4% of the world’s oil, pumping about 4.1 million barrels per day—more than any Organization of Petroleum Exporting Countries (or OPEC) country apart from Saudi Arabia. There was no mention of disruption to production by Rosneft in the sanctions. However, a number of Russian energy deals have come to light with the imposition of sanctions on additional medium- to long-term financing.
- Rosneft’s $1.5 billion deal with British Petroleum (BP) is perhaps the most eye-catching. Rosneft accounts for around a quarter of production for BP, which owns 20% of it.
- Rosneft is also in the midst of a deal to buy the oil trading assets of the U.S. investment bank Morgan Stanley (MS).
- ExxonMobil (XOM), along with Norway’s state-owned Statoil and Italian oil giant ENI, has a major agreement to explore Russia’s Arctic with Rosneft.
While the markets are yet to see the extent to which the U.S. sanctions could impact these energy majors, let’s move on to assess how well the sanctions imposed by the U.S. against banks and individuals in Russia might fare.