| NEW YORK, July 17
NEW YORK, July 17 President Barack Obama aimed a
direct blow at Russia's economic heart on Wednesday with
sanctions on Rosneft, the flagship oil giant that
generates more than 4 percent of the world's crude and over 8
percent of the country's GDP.
But in a change of tack from previous similar efforts, the
measures were narrowly tailored to slowly starve the state-run
energy firm of U.S. dollar funding, not bar it from doing
business with oil buyers such as BP or stymie
multibillion-dollar ventures with firms like ExxonMobil,
The sanctions against key parts of the Russian energy and
financial industry were intended to serve notice to Moscow that
its refusal to curb violence in eastern Ukraine has
In announcing the sanctions, which also hit No. 2 natural
gas producer Novatek as well as two banks and eight
defense firms, the Treasury Department said U.S. companies were
only prohibited from engaging in any "new debt of longer than 90
days maturity or new equity" with the energy firms and banks.
The measures would not freeze the Russian firms' assets "nor
prohibit transactions with them beyond these specific
restrictions," the Treasury Department said. That marked a
change from many earlier measures that effectively shut down a
sanctioned firm's ability to do any business with U.S. entities.
The result is likely to be an increase in the cost of
financing for Rosneft, which has grown increasingly reliant on
pre-financing oil supply deals with firms including Glencore
and BP. It may need to seek out new banks for loans,
and could eventually slow investment in new projects.
But it will not "directly affect or limit Russia's oil
exports the way that sanctions on Iran were designed to do,"
said Gary Hufbauer, expert on economic sanctions at the Peterson
Institute for International Economics in Washington, DC.
Washington has long barred U.S. companies from investing in
Iran, and more recently has imposed sanctions that have halved
its oil exports over Tehran's nuclear program.
"The U.S. is scaling its sanctions to have a slow increase
in pressure on Russia," Hufbauer said.
To be sure, Wednesday's sanctions will intensify the tension
between the West and Moscow over Russia's role in Ukraine, and
therefore add to broad geopolitical unease across the oil
sector. The impact on a deal to buy Morgan Stanley's
physical oil trading business, which is now pending before the
U.S. foreign investment approval committee, is not clear.
Yet the immediate effect may be less dramatic than in March,
when Obama's first major sanctions sparked a brief wave of panic
among energy traders who feared they may be cut off from key
counterparties such as global commodity merchant Gunvor, whose
founder and then co-owner Gennady Timchenko was targeted.
Washington added Rosneft's chief executive Igor Sechin to
the sanctions list a month later.
The latest sanctions "could have been a lot worse," Douglas
Jacobson, an attorney at Jacobson Burton in Washington and
sanctions expert. "The sectoral sanctions list is extremely
narrow in terms of parties and what it prohibits."
Obama told reporters the measures were "significant" but
also "designed to have the maximum impact on Russia while
limiting any spillover effects on American companies or those of
Thus far, Washington's sanctions have had only a limited
impact on the Russian energy industry, a cornerstone of the
country's $2-trillion economy, resulting mostly in higher
borrowing costs for domestic companies.
Even as the pressure has mounted over recent months,
executives from Total, BP, Statoil and
ExxonMobil have all visited Russia, underlining the importance
they attach to business with the world's leading oil producer
with current output of around 10.5 million barrels per day
(bpd). Rosneft alone pumps about 40 percent of that.
Experts said that Rosneft's business partners would not
likely be in danger of falling foul of the sanctions.
The latest effort "will limit the sources from which Rosneft
can get financing and thus raise the cost of capital for the
firm," according to Jason Bordoff, director of the Center on
Global Energy Policy at Columbia University and a senior White
House energy adviser until late 2012.
"It does not prohibit U.S. firms from doing business with
Rosneft or bar Russian energy supplies from flowing into the
Sechin, speaking at a BRICs meeting in Brasilia, said the
sanctions would not affect Rosneft's current project with
ExxonMobil, but would damage the shareholders of U.S.
companies cooperating with Rosneft.
Exxon has a $10 billion joint venture with Rosneft off the
Pacific island of Sakhalin producing over 100,000 bpd. A
spokesman for the company declined to comment.
A spokesman for BP, which has a 20 percent stake in Rosneft
and a number of large joint exploration projects, said the
company was considering implications of the new sanctions, but
had no additional comment at this point.
A spokesperson for Schlumberger NV, which drills
with Rosneft on the Russian island of Sakhalin, was not
immediately available to comment.
Chevron has a stake in a Russian pipeline and last
fall inked a $10 billion deal to develop Ukrainian shale.
"We are reviewing the sanctions to ensure strict compliance
with the law and we continue to monitor events," Chevron
spokesman Kent Robertson said.
PRE-PAID OIL DEALS?
A larger question may be Rosneft's more than $15 billion
worth of oil-related finance arrangements known as pre-payment
deals, in which loans are repaid through future oil supplies.
Such deals have raised billions of dollars for Rosneft,
which borrowed $30 billion in two separate loans in 2012 and
2013 to help finance last year's $55 billion acquisition of
TNK-BP. In addition to BP and Glencore, Rosneft has done deals
with big global traders Vitol and Trafigura as well.
With pressure over Ukraine mounting, however, some energy
companies had already begun discussing a possible switch to
using other currencies to settle the transactions. While oil is
typically priced in U.S. dollars, in theory deals can be settled
in any currency the counterparties agree on.
Some firms had also begun to back away from dealing with
Rosneft. Part state-owned lender Lloyds Bank pulled out
of a $2-billion prepayment facility with Rosneft announced last
month to avoid embarrassing the UK government, bankers had said.
"I think the Obama Administration is trying to squeeze
Rosneft against continuing to go to the Exxons and BPs and
asking for loans," said Amy Jaffe, international energy policy
expert at University of California, Davis. "Eventually,
everything that limits a big state oil company's access to
financing would have an effect on production, just not right
(Reporting by Joshua Schneyer and Ed McAllister; Editing by
Jonathan Leff and Ken Wills)