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Rosneft sanctions will increase reliance on China loans for oil

ELENA MAZNEVA

MOSCOW (Bloomberg) -- OAO Rosneft, the world’s biggest publicly traded oil producer by volume, will rely on deals with China to withstand the latest U.S. sanctions against Russia.

The state-run company is scheduled to receive $63 billion of advance payments under long-term crude-supply contracts from 2014 to 2018, mostly from the Chinese clients, Andrey Polischuk, an energy analyst at ZAO Raiffeisenbank in Moscow, said by phone. That covers almost all of Rosneft’s $65 billion in debt, he said, after sanctions announced yesterday, July 16, limited the producer’s access to the U.S. debt markets.

“Rosneft would never have received such generous funding without China,” Polischuk said. “It’s an obvious dependence. There are few other alternatives.”

The most aggressive U.S. sanctions yet will prevent Rosneft from accessing U.S. equity or debt markets for new financing with a maturity beyond 90 days. They don’t otherwise prohibit U.S. companies or individuals from doing business with sanctioned Russian firms, which also include gas producer OAO Novatek and OAO Gazprombank.

Shares of Rosneft dropped as much as 6.2% in Moscow, the biggest intraday decline in six weeks, while its Eurobonds maturing in 2022 plunged the most on record.

Rosneft and China National Petroleum Corp. signed a $270-billion, 25-year supply agreement last year to diversify exports to the world’s second-biggest crude-consuming nation as European demand fell. The deal includes prepayments estimated by President Vladimir Putin at about $70 billion. In October, Rosneft also agreed to an $85-billion, 10-year oil-supply deal with China Petrochemical Corp.

Follow Suit

The major threat is that Europe “may follow suit and impose the same limitations on borrowing from European banks,” Alexander Kornilov, an Alfa Bank analyst in Moscow, said in an emailed note. Rosneft has the highest debt burden among the Russian oil companies, he said.

The sanctions are illegal because Rosneft has no role in the Ukraine crisis, Rosneft’s CEO Igor Sechin told reporters in Brasilia. They will damage U.S. banks cooperating with Rosneft without having an impact on the Russian producer, he said.

Rosneft can afford “not to attract emergency loans” to finance projects, according to Sechin.

Rosneft should get about $143 billion of operating cash flow in the next five years excluding prepayments, Polischuk said. Its five-year investment program and about $21 billion in dividend payments “could both be easily covered,” he said.

07/17/2014

 

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