The US government has once again snared a “big name” in its efforts to effect regime change. However, what “real world” impacts will the Rosneft sanctions have?
The nitty-gritty
Headlines such as “U.S. Sanctions Rosneft Unit for Ties to Venezuelan Oil Trade“ are likely to cause heart-failure/tea spluttering in almost all shipping and commodity-related compliance departments. PJSC Oil Company "Rosneft” is one of the world’s largest oil producers, and very few large-scale traders and shippers of oil products would be unaffected by significant sanctions against this group.
However, this week’s move was specifically against Rosneft Trading SA, its subsidiaries (companies in which it owns, directly or indirectly, a 50 percent or greater interest) and chairman, and specifically excluded its parent PJSC Oil Company "Rosneft” and the latter’s other subsidiaries. Companies also have a 90-day “winding down” period, which would allow almost all current counterparties time to reduce their exposure to the affected unit, and potentially transfer business to other, unsanctioned, Rosneft group entities.
So what for Rosneft?
While Rosneft Trading SA is understood to have been a key vehicle for selling Urals crude (some reports suggest circa 20% of the group's exports), and sourcing crude for the group’s global refineries (in particular, we understand, Nayara Energy’s Vadinar refinery), PJSC Oil Company "Rosneft” maintains numerous subsidiaries involved in international trade. Some, such as RN-Foreign Projects LLC, invest in companies that don’t maintain the “Rosneft” style, but are very much involved in the group’s international commodity flows. While more complex from a financing point of view, it is easy to imagine PJSC Oil Company "Rosneft” being able to route business through other parts of the group, even in different currencies.
Financially, PJSC Oil Company "Rosneft” is no PB Tankers SpA or even COSCO Shipping Tanker (Dalian) Co., Ltd. It is a sprawling multinational, closely integrated with Russia’s political establishment, generating annual net profits of USD 13bn on revenues equivalent to USD 140bn and with a balance sheet containing total assets of USD 209bn and equity of USD 83bn.
Although key traders have already been reported to have distanced themselves from the sanctioned entity, PJSC Oil Company "Rosneft" clearly has the means to absorb the current sanctions and move trades elsewhere in the group. It would have a much harder time dealing with any widening of the sanctions to include PJSC Oil Company "Rosneft" itself, although the political impact of such a move, over and above the existing Crimea-related financial sanctions, would be significant, not least due to the Rosneft group’s existing sales to the United States. For the time being, the parent company shows no sign of backing down, making strong statements to the effect that the group's actions in Venezuela have been "in strict compliance with rules of international and national laws", and it has no intention of withdrawing from the Venezuelan market.
So what for oil prices and traders?
The US Government’s action has come at a time when the global oil markets have experienced a sustained fall due to the impact of the Coronavirus on Chinese demand, with WTI Crude prices falling circa 16% to date in 2020 (Brent by circa 13.5%), and OPEC+ seeking to limit production. The potential removal of Venezuela’s circa 730,000 bpd of supply to this market is expected to have a very limited impact. Oil traders, however, face a more complex task of establishing exactly what can, and cannot, be done here. While dealings with PDVSA have long been sanctioned, PJSC Oil Company "Rosneft”'s position as an intermediary for Venezuelan crude sales and product purchases was well known in the market, with Rosneft Trading SA's banking and trading partners clearly believing that they were on safe legal ground. Oil traders will have to look for other options, although as stated above, these could very well be other Rosneft entities. This process will not be easy, and it is likely that, as usual, traders will look to the banking community to take the lead on what can, or cannot, be "touched".
How will the tanker market take this?
While Venezuela has been made a pariah state by the US Government, this has not prevented compliance departments signing off on trades to and from the country. PJSC Oil Company "Rosneft”’s facilitation of the trade, and its to-date clean sanctions bill of health has seen numerous well known tanker operators and owners fix crude and products tonnage to carry such products to and from the country, in the knowledge that they are not transacting directly with any sanctioned entity. This will become harder, and the tanker market (suffering from its usual seasonal downturn, exacerbated by demand issues related to coronavirus) needs the additional compliance burden, the removal of longer-haul voyages, like a hole in the head.
Who next?
While PJSC Oil Company "Rosneft” is reported to have been one of the largest buyers of Venezuelan crude (recent reports suggest buying as much as 70% of exports), and supplier of products, it is not the only company doing this. Chevron has a well-reported waiver on its existing Petroboscan joint venture with PDVSA, and while China’s CNPC is understood to have much-reduced its appetite for Venezuelan crude over the last two years, China as a whole has continued to buy Venezuelan crude (presumably through intermediaries), and support its troubled Sinovensa joint venture. India’s Reliance and Spain’s Repsol are also reported to have legitimately continued to trade with PDVSA as a means to reduce outstandings owed by the company/Venezuela. It is far from clear whether these trades, which further complicate an already-complex picture for traders and shippers alike, will be allowed to continue given the apparent precedent set by the US government against Rosneft Trading SA.
How does a risk manager get a handle on this situation?
Obviously a thorough read, and understanding of the legal consequences, of the US Government’s missive is required. Avoiding sanctions against PDVSA is a skill that has been perfected over time (with the aforementioned transactions by major oil companies showing a level of legal certainty as to their position), but adding Rosneft Trading SA to this mix is a more complex task. As discussed, PJSC Oil Company "Rosneft” is a very sizeable participant in the oil trading market, and a “blanket avoidance” is clearly not practical or desirable, although the hard line taken by PJSC Oil Company "Rosneft” to date may inflame matters.
Discerning what is, and what is not, linked to Rosneft Trading SA by ownership will take extensive due diligence. In addition, the intensifying sanctions regime will create opportunities for some to seek to breach these sanctions and pocket the risk premium, either “off the radar” or by acting as, on the face of it, legitimate intermediaries. Analysts will need to ensure that the potential counterparty proposed doesn’t embroil their company in an awkward, and potentially reputationally damaging, transaction. This won’t necessarily be a cheap, or short, process, a position somewhat alien to the fast-moving trading world we inhabit. Short-cut at your peril.
