Russia introduces counter-sanctions against unfriendly countries. Now large companies from unfriendly countries will not be able to do anything with their assets in Russia. This applies to foreign banks and oil and gas companies. What now awaits the assets of BP, ExxonMobil and Total? And for what purpose are these counter-sanctions being introduced - to punish or still help foreign partners?
Russian President Vladimir Putin signed a decree on special economic measures that prohibits foreign companies from unfriendly countries from making any transactions with their shares in strategic Russian enterprises. This decree concerns, firstly, banks - Russian "daughters" of foreign banks. Secondly, companies of the fuel and energy complex. The government must prepare a complete list within 10 days. But the decree itself already mentions transactions with shares in the Sakhalin-1 project and the Kharyaginskoye field.
For now, restrictions will be introduced until the end of 2022. However, the period can be repeatedly extended. There is one small loophole - a transaction prohibited by the decree can be made only with the special permission of the President of the Russian Federation. That is, the decision to sell will be made individually.
“Foreign investors who want to get out of Russian business will not only be unable to sell their stakes and shares in strategic Russian enterprises, but even donate, exchange or transfer these assets to a creditor to pay off a debt. That is, the shares of public companies will be blocked in the depository, and the transaction for the sale of a stake in an LLC or a joint venture will be invalid, ”explains Natalya Milchakova, Lead Analyst at Freedom Finance Global.
“This was done on purpose, because there are already several precedents when Western companies tried to sell their shares in Russian assets. For example, BP and ExxonMobil. At the same time, ExxonMobil, as the operator of the Sakhalin-1 project, also sharply reduced production. This affected the total volume of oil production in Russia. I believe this has accelerated the adoption of the relevant presidential decree,”
says Alexey Gromov.
Back in April, the project operator Exxon Neftegas introduced a force majeure regime and reduced production. As a result, by the end of July, oil production at the Sakhalin-1 project decreased by 22 times - to 10 thousand barrels per day, Deputy Prime Minister Yury Trutnev said.
Just a couple of days ago, it became known from ExxonMobil's financial report that the company was negotiating the transfer of the Sakhalin-1 project to another party.
The Sakhalin-1 project is being implemented under the terms of a production sharing agreement (PSA). Its participants are ExxonMobil (30%), Rosneft (20%), Japanese SODECO (30%) and Indian ONGC (20%).
Why did Russia adopt such a decree? “The purpose of the decree is to make it as difficult as possible for companies from unfriendly countries with which there is an economic war, a painless exit from Russian assets. Now they cannot sell their shares on market terms. Russia offers them to stay and work as before. And if you don't want to, then transfer your assets to Russian companies free of charge. This is a punishment in response to sanctions against Russia,” says Gromov.
“In our opinion, the President of Russia signed such a decree in order to save the Russian stock market from a collapse that could occur if foreign investors began to leave Russia en masse. Also, apparently, the authorities do not want Russian assets to depreciate if massive sales of shares begin,” Milchakova said.
But perhaps the presidential decree is a desire to help foreign partners keep their business in Russia, which they, in all honesty, do not want to lose. “The owners and management of international companies involved in projects in Russia are under serious pressure. They are forced to withdraw from Russian assets based on direct sanctions or reputational considerations.
The adopted decree may be aimed at ensuring that foreign partners have a “good” reason to continue to remain shareholders in Russian companies”, Philip Muradyan, Senior Director for Corporate Ratings at the Expert RA Agency, believes.
Who will be affected by the new presidential decree? It will probably affect the British company BP, which at the end of February announced the withdrawal of its 20% stake in the assets of Rosneft. However, Gromov does not rule out that special conditions for exiting the Russian business may be agreed upon for this company.
But ExxonMobil is unlikely to make an exception due to the company's production cuts. The adopted presidential decree cannot directly affect oil production. However, Gromov does not rule out that the next step after this decree will be the liquidation of the Sakhalin-1 PSA, a change in legal status and the transfer of the project to a Russian operator, following the example of how it was done under the Sakhalin-2 PSA. “With Sakhalin-2, it was easier to do this, since the operator of the project was Sakhalin Energy, which was controlled by Gazprom, and in Sakhalin-1 the operator is a foreigner,” the expert explains. Recently, the new Russian company Sakhalin Energy became the operator of Sakhalin-2.
“As a result, ExxonMobil will have no choice but to simply leave the project without receiving a cent, or continue to work, but on Russian terms. When control in the Sakhalin-1 project passes to a specially created Russian company, it will already be able to resolve the issue of a collapse in oil production,” - says the expert.
The new decree may affect the share of TotalEnergies (20%), which has been participating in the Kharyaginskoye field project for 20 years together with the Norwegian Equinor (30%). Earlier, Prime Minister Mikhail Mishustin instructed to transfer the shares of these foreign companies in the field to the Zarubezhneft company. Its share after the transaction could grow from 40 to 90%, and another 10% will be retained by the Nenets Oil Company. Unofficially, it was reported that the deal could be cashless.
“The shares in Sakhalin-1 and the Kharyaga PSA will most likely go to specialized Russian investors – Rosneft and Zarubezhneft. The future change of owners will practically not affect the operating activities of these projects,” Milchakova believes.
In the gas sector, the German company Wintershall, which has joint projects with Gazprom in Russia, the Achimovskoye field (part of the Urengoyskoye) and the Yuzhno-Russkoye gas field (35% owned by the German company, 40% by Gazprom and 25% by the Austrian OMV).
However, Wintershall at the end of July 2022 continued to manage its Russian assets, which produce 35 billion cubic meters of gas per year, and was not going to leave them. She also does not intend to leave the Nord Stream operator company Nord Stream. Leaving Russia would be a great gift for the Russian government in Moscow, said company chief Mario Meren. The company has a legal obligation to protect the value of its assets in the country, he said.
As for banks, the intention to sell their assets in Russia was announced by the Italian group UniCredit, the American Citigroup, and the British HSBC. The latter, according to Western media, signed an agreement on the sale of the Russian subsidiary to Expobank, but the deal did not manage to receive approval from either the Central Bank or the government.
“Now the Russian subsidiaries of foreign banks will continue to operate in Russia until the authorities allow these banks to exit Russian business through a normal market transaction. Although it is possible that in some cases foreign banks may be allowed to sell Russian assets to any Russian bank, it is not yet clear what could be the reason for an exception to the rules,” Milchakova argues.