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The Financial Times is reporting today that western sanctions on Russia following the invasion of Crimea are hitting Rosneft, the Russian "state" oil company.

Rather than borrowing from banks, Rosneft has been entering into a series of advance sales agreements to obtain capital for long term investments. A number of western oil companies and, recently China, have provided finance for the investment in, for example, opening new oil fields and building pipelines (in the case of China). While such advance sales are not explicitly part of the sanctions regimens, the oil trader Vitol has shelved a $2billion deal that it was negotiating.

Successive rounds of Western sanctions in response to Moscow’s failure to de-escalate tensions in Ukraine have triggered a sharp outflow of capital and hurt the already struggling Russian economy.

The failure of the Rosneft-Vitol deal is a sign that July’s sanctions, which limit the ability of Rosneft and Novtek, the second largest gas producer, to raise long-term capital, are discouraging western groups from striking new “prepayment” deals. These have become the backbone of Rosneft’s financing in the past two years.

One banker said that even though prepayment deals – whose structure involves the banks lending to a special purpose vehicle – would not directly fall foul of US sanctions, banks were fearful of being seen to help Russian companies sidestep them. Vitol and Rosneft declined to comment.

(Quoted under "fair use" rules although the FT wants you to go to the link to answer a series of somewhat irrelevant questions to be able to view the page.)

The FT explains that Rosneft is highly endebted after borrowing $55bn to purchase the minority shareholders' holdings in TNK-BP. Its debts at the end of June were estimated at just under 1.5 Trillion Roubles (US$42 Billion) with Rbs 1.1T due for repayment by the end of 2015. Igor Sechin, Rosneft’s CEO and Putin's Deputy Prime Minister up to 2012 (when the constitution was changed reverting many powers to the Presidency which Putin then became for his third non-consecutive term) has asked the Russian government (Putin) to buy the Rbs 1.5 T debt using the national pension scheme. That is the equivalent of the US Social Security Trust Fund. Russia has also been ordered to pay $50 Billion compensation to shareholders in Yukos, an oil company absorbed by Rosneft after punative tax demands forced it into bankruptcy. See http://www.ft.com/...

The FT believes the existing debt would be manageable after the deal with China however the flight of capital from Russia following the sanctions and this new development means that there will be no funds for further investment in Rosneft's ambitious development schemes. These include plans to exploit oil resources in the Arctic ocean. The sanctions include oil technology which would mean that even if they found the finances, the plans would still be stymied.

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