Sanctions May Impact Russian Oil Companies' Debt Securities Placements

By Ivan Shlygin, June 6, 2014

Тhe sanctions against Russia, imposed by EU and the United States, may dramatically change the landscape of debt securities placement by Russian oil companies and their affiliates in foreign trading markets. How is this move going to affect the plans of industry players? Can Russian market compensate the liquidity shortage, which is quite likely to occur under new circumstances?

It’s particularly interesting to see what kind of solution domestic giants Gazprom and Rosneft will come up with in this situation, having traditionally been the most active in attracting foreign funds via debt securities. Evidently, no matter how tough Western sanctions against Russia may be, it would be almost impossible to instantly shut out Russian oil companies as this would hit the largest global investors, too.

“The events in Ukraine, Crimea’s annexation by Russia and the West’s ensuing sanctions against Moscow have temporarily shut down the Eurobonds flotation window for domestic companies,” UFS IC Risk Management and Analysis deputy director Vadim Vedernikov told OGE. According to him, in the past three months the rare placements were mainly made by high-quality issuers representing the banking sector, while in March there were no deals at all. Since the beginning of 2014 there was only one new Eurobond placement when Gazprom on Feb. 19 issued a seven-year Eurobond for 750 million euros with lower margin guidance of 3.6. The issue was organized by Credit Agricole, JPMorgan and Gazprombank with IFC Metropol acting as co-organizer. According to Vedernikov, syndicated loans actively used by banks could have become a real alternative to Eurobonds in the first quarter of 2014, but Russia’s oil and gas industry mostly ignored this tool except, perhaps, Gazprom Neft, which raised a $2.15 billion syndicated loan in March.

So far the impact of sanctions on the local companies’ plans has been rather limited as no radical steps have been taken yet against Russia in general or specific issuers in the oil and gas sector in particular, while sanctions on individuals and a single bank aren’t critically influencing the economics of oil and gas industry, believes ATON investment company credit analyst Rinat Kirdan. “However, in case of tougher sanctions, which seems unlikely but still theoretically possible, the Eurobond market will be closed for all Russian companies for quite a while,” Kirdan told OGE.

Meanwhile, LUKOIL President Vagit Alekperov said in late March that his company didn’t plan to cancel the issue of Eurobonds because of the West's potential sanctions against Russia. Last April, the oil giant placed two $1.5 billion tranches, including five-year bonds at 3.416 percent per annum and 10-year bonds at 4.563 percent per annum. Profitability of the five-year issue reached 255 basis points to mid-market swaps, increasing to 270 points for the 10-year issue. The issue was organized by BNP Paribas and Citigroup. Prior to this, the company had emerged on the Eurobonds market in November 2010 when it placed two 10-year tranches totaling $1 billion, at 6.125 percent per annum.

Asked about the impact of sanctions at a press