* Ongoing oil deal highlights interdependence
* Russian companies' and banks' external debt tops $650
* European exposure makes EU wary of sanctions
* Slowing investment, capital outflows will hurt Russia
By Dmitry Zhdannikov and Vladimir Soldatkin
LONDON/MOSCOW March 11 To understand Western
unease about the idea of imposing wide-ranging sanctions on
Moscow over its intervention in Ukraine, consider an ongoing
deal by one of the Kremlin's corporate giants.
Russian state oil company Rosneft is working to
obtain up to $5 billion from oil major BP, which owns a
fifth of Rosneft, in exchange for oil supplies over five years,
three banking and trading sources familiar with the details
BP is in turn syndicating the money from a consortium of
banks including Lloyds, partially owned by the British
government, and Germany's top bank Deutsche.
The banks and BP declined to comment on the deal, the latest
in a string of similar arrangements between Rosneft and oil
firms and traders such as Glencore and Vitol.
Rosneft said it was working on two deals with "long-time
reliable partners" and that terms have yet to be agreed.
While Russia is generally perceived as a country with very
little state foreign debt, its external corporate debt of more
than $650 billion has made its companies, a lot of them
controlled by the Kremlin, and the Western financial system
"Interdependencies are key: Russia depends heavily on oil
and gas exports to balance its budget, Europe depends upon
Russia energy and has significant financial exposure to Russian
companies," says Nic Brown from French bank Natixis.
The usual format of sanctions is to block trade and capital
flows, which then cause damage to the economy and undermine
support for the government.
Many U.S. and European politicians have pointed out that
this strategy has worked well in such countries as Iran and
would be equally efficient to put pressure on Moscow to change
its course with Ukraine.
"Placing Iran-style sanctions on exports, or even the
mechanisms by which exporters get paid for their product, would
quickly result in a sharp rise in commodity prices and damage
the still fragile global recovery prospects," says Chris Weafer,
a veteran Russia analyst and founder of independent Macro
Stricter U.S. and EU sanctions have more than halved Iranian
oil exports since 2012 while creating no major cross-border debt
problems since most of the financial activity between the West
and Iran was already subdued for years.
So far, EU member states have agreed to suspend talks with
Russia on visas and trade. The U.S. State Department is working
on visa bans for those deemed complicit in violating the
territorial integrity of Ukraine and on freezing their U.S.
"Elite sanctions, asset freezes and trade restrictions could
make it very difficult for Russian banks and corporates to
secure external financing and roll over debt liabilities," said
Tim Ash from Standard Bank.
KREMLIN CORP BOOSTS DEBT
Russian state foreign debt has fluctuated at around $30-35
billion since 2008, amounting to just 2 percent of GDP.
During the 2008 global financial crisis, it was the heavy
external debt of private Russian companies, of around $400
billion, which almost paralysed the economy.
Fast forward five years, and the country's total foreign
debt rose to $732 billion as of January 1, 2014, from $636
billion a year earlier and $464 billion at the start of 2008,
according to the country's central bank, with the bulk of new
debt raised by Russian state companies.
According to Nomura, Russia's external debt stands at 34
percent of GDP and only Singapore and China, with $1.2 trillion
and $812 billion respectively, have a higher debt among emerging
The debt of the Kremlin oil and gas majors Rosneft
and Gazprom stands at a combined $90 billion and four
state banks Sberbank, VTB, VEB,
Rosselkhozbank have at least $60 billion in foreign credits.
According to ratings agency S&P, Rosneft alone faces
maturities of $15.9 billion and $16.2 billion this year and
A Kremlin aide warned last week that Moscow might refuse to
pay off loans to U.S. banks as a retaliation measure against
Mikhail Yemelianov from pro-Kremlin party A Just Russia went
even further: "If they (the West) freeze our assets, then our
companies could stop paying foreign debts. The Russian corporate
debt exceeds $700 billion".
Barclays, which features among top lenders to Russia, last
week downgraded Russian sovereign credit to underweight in its
Global emerging market Credit portfolio.
"For the Russian credit complex, we think that the threat of
restrictions to export markets is a clear credit negative.
Overall, we see Rosneft and Gazprom as most vulnerable given
recent developments," it said.
Regulatory filings by the top four U.S. commercial banks -
Citigroup, Bank of America Corp, JPMorgan Chase
and Wells Fargo - show they have around $24
billion in exposure to Russia.
For most of them it is tiny compared to the much heavier
exposure of European banks. Some of the debt is traded on the
secondary market so can be held by institutions ranging from
hedge and insurance to mutual and pension funds.
"Europe is in a tough spot since its economy is so
interlinked with the Russian economy," said oil consultancy
Russia gets over half its budget revenues from energy
exports, the world's largest. It supplies Europe with a quarter
of its oil and almost a third of its gas. Russia is also the
largest exporter of metals and a significant supplier of wheat.
But the country is also a fifth largest consumer market in
the world, falling just behind Germany. Last year, it imported
almost $350 billion worth of consumer goods, food, medicines and
machinery. About half came from the European Union.
"Perhaps the current conflict will also make it clear to all
sides how much they depend on each other and that this makes it
necessary to compromise," says Commerzbank.
Weafer argues there is no need for additional sanctions to
undermine economic growth as that is happening already anyway.
The Russian economy is showing its slowest growth since the
2008 crisis. Capital flight was $62.7 billion in 2013 and since
2008 outflows have reached $420 billion.
"The real potential damage to Russia's economic future is
self inflicted. The real fallout from a prolonged conflict in
Ukraine, or even of a worsening of the already negative
international perception of Moscow's role in the affairs of its
neighbour, may be to radically slow the inflow of much needed
investment capital while capital outflows accelerate," he said.