Russia Faces New US Sanctions: BP, XOM, MS in Focus - Analyst Blog


The Obama administration stepped up pressure on the Russian government with a fresh round of sanctions on Wednesday. These measures are being viewed as the most aggressive to date and are designed to exert pressure on Russia over the conflict in Ukraine. If these sanctions have their desired effect, they could exert further pressure on the troubled $2 trillion economy.

Faceoff Continues

Following Russia's bloodless seizure of border posts in Ukraine's Crimean Peninsula, President Putin had taken several steps to reduce tensions. Putin ordered the withdrawal of troops from Ukraine in late June and provided support to the short-lived truce. These actions were viewed as positive signals by the U.S. and Europe. Putin also agreed to secure the country's border with southern Ukraine. This was intended to stop the flow of weapons and reinforcements for pro-Russian separatists.

However, the U.S. remains dissatisfied with Russian measures to deescalate the situation, accusing Russia of secretly aiding the separatist movement. The Obama administration has accused Russia of declining to ask separatists to stop their armed conflict. They have also indicated that several separatist leaders are from Russia or have links to the Russian administration. Russia, for its part, has refuted these allegations and has asked the government in Ukraine to hold discussions with separatists to arrive at a truce.

Fresh Sanctions

This has prompted new and more aggressive sanctions from the U.S. These measures are aimed at increasing pressure on energy majors and key banks. Several important Russian defense firms and individuals providing support to the armed separatists have also been targeted.

Under Secretary for Terrorism and Financial Intelligence David S. Cohen said: "Because Russia has failed to meet the basic standards of international conduct, we are acting today to open Russia's financial services and energy sectors to sanctions and limit the access of two key Russian banks and two key energy firms to U.S. sources of financing, and to impose blocking sanctions against eight arms firms and a set of senior Russian officials."

The energy companies which have been targeted are state owned OAO Rosneft, which is the country's largest oil producer and OAO Novatek, the largest independent natural gas company in Russia. The financial institutions facing sanctions are Gazprombank, the banking unit of the country's largest energy company and state owned VEB.

In case of the two Russian banks, equity and debt financing due in more than 90 days will be affected by the measures. Meanwhile, the Obama administration has prevented U.S. institutions from providing new debt with a maturity period exceeding 90 days to the two energy companies.

Stocks in Focus

BP plc ( BP ) is the largest investor in Rosneft and owns a 19.8% stake in the company. BP's total production in Russia in 2013 was 961,000 barrels of oil equivalents per day. BP holds 14.3 billion barrels of reserves and 48 billion barrels of offshore resource potential in Russia. This is around a third of its total global output. In fact, the company is among the biggest foreign investors in Russia's oil industry.

In its 2014 Investor Update, BP spoke of Russia playing a vital role in shaping its future. The company believes there is a significant long-term opportunity in Russia. The company lost nearly $4.4 billion of its market value on Thursday following fresh U.S. sanctions.

However, analysts believe that sanctions may not have an immediate impact on operations. They will only impact Rosneft's ability to secure funds from Western sources and hinder its growth plans. It seems the one way in which sanctions could hit BP is if they hurt Rosneft's ability to pay dividends.

Exxon Mobil Corp. ( XOM ) has also been working on projects with Rosneft. The two companies have entered into a deal valued at approximately $500 billion to explore an oil field in Western Siberia. Exxon has been planning to construct a LNG terminal project in the oil field worth $15 billion. In fact, it also has joint venture projects to explore the Black Sea reserves.

Rosneft Chief Executive Igor Sechin promised he would continue to cooperate with Exxon Mobil. According to Interfax, Sechin said: "We are now in consultation with Exxon's lawyers and tentatively believe that this decision does not affect the implementation of our current projects."

Morgan Stanley ( MS ) has also taken the view that sanctions on Rosneft will not affect an upcoming deal between the two companies. The bank's CFO Ruth Porat said plans to sell its oil trading operations to the Russian company would go ahead.

In Conclusion

It seems that the new sanctions may only have a cursory impact on the Russian economy and stocks with linkages to that nation. However, this may only be a sign of tougher measures in the months to come. Meanwhile, Russian companies will look towards other means to finance growth or continuing operations. Clearly, the standoff over Ukraine and its economic implications are far from over.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: BP , MS , XOM

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